E*Trade's Portal Strategy: One-Stop Financial Shop
Yesterday, E*Trade (EGRP) reported earnings exactly in line with analysts expectations.
But reading between the lines, E*Trade's strategy for the future can be seen. As we noted in our Story Stock After The Close yesterday, E*Trade's press release reads more like a search engine company's than a brokerage firms.
Clearly E*Trade wants to be seen as more than an online brokerage. Although that's all they are, currently, they have begun to position themselves as a complete one-stop financial shop.
Why take this direction? First of all, the market loves it. Secondly, if successful, it is a gigantic success. But most importantly, if viewed as only a "transactions" based shop, E*Trade has a problem.
For four straight quarters, E*Trade's earnings growth has been essentially flat. In Q4 97 (quarter ended September, 1997), E*Trade made $0.15 per share, and made only one penny more than that this past quarter.
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Normally, this would be cause for concern for a growth company. However, E*Trade has successfully convinced the market that their future is more than just online-brokerage. First introduced at the Hambrecht and Quist conference in May (which Briefing reported on live, at the time), E*Trade's strategy for the future is to become a "financial-portal."
The portal strategy for E*Trade consists of making E*Trade a one-stop shop for all financial services. This includes adding the following additional features to the E*Trade services
International equity offerings
Internet bill payment and money wire capabilities
Debit cards and credit cards, with automatic linking to E*Trade accounts
Fixed-income investments (Treasury and corporate bonds)
Mortgage originations
Financial planning services
Financial games (educational)
The purpose behind all of this is to offer additional financial services to the existing customer pool.
Wall Street loves this concept. Selling current customers additional products is the rationale behind the extreme valuations of Yahoo, AOL, and Amazon. Bring on the portals!
But will it work for E*Trade? Does the Internet somehow make a one-stop financial service work when the non-internet equivalents haven't yet? Certainly cash management accounts are popular, and credit cards linked to brokerage accounts are widespread. Buying bonds directly from E*Trade may also be appealing to E*Trade customers.
But bank mutual funds have been a dismal failure, in general. Mixing providers of debt with investment houses simply hasn't worked in the past. How many people get their mortgage from the same bank they use for checking, much less from their brokerage house?
In other words, will E*Trade be able, by virtue of being an Internet-based company, to make one-stop financial shopping appealing, when brick-and-mortar one-stop financial shopping hasn't succeeded on a wide scale?
We'll find out over time. E*Trade's first steps in this direction have only just recently been taken, with the rollout of a Platinum VISA card at the end of June. Full implementation of this strategy may take some time however, as the new E*Trade site, "Destination E*Trade" was recently delayed for general rollout until September.
E*Trade won't be alone in this endeavor however, as Intuit is working towards essentially the exact same goal, but without brokerage services (currently).
Other Directions
E*Trade is, not however, banking solely on the financial portal strategy. Just two weeks ago, E*Trade announced the acquisition of ShareData, Inc. ShareData is the leading vendor of software for corporations that offer stock options, with 2,500 client companies. ShareData gives E*Trade a foothold into the corporate market for financial services.
In addition, E*Trade has recently made investments in three technology companies with whom it has alliance relationships. The three companies are:
Digital Island: a developer of IP applications network software, already in use by E*Trade
Critical Path: an provider of outsourced email services
Third Age Media: a content provider for baby boomers (kind of an AARP for 50 year olds).
The first two of these alliances do not appear necessary for the financial portal strategy. Is E*Trade expanding its strategy? It isn't clear yet, and E*Trade hasn't elaborated on these investments.
Plenty of Money
Recently, Softbank Holdings made a $400 million cash investment in E*Trade. With $200 million already in the bank, E*Trade has nearly $600 million at its disposal. CFO Len Purkis, in response to inquiries about what E*Trade would do with the money stated "It's really a war chest ... to use either stock or cash for strategic acquisitions. It enables us to look at consolidation possibilities in the brokerage business but also at companies that complement our business."
What this means is E*Trade is now in a strong financial position to implement whatever strategy they choose. It is just a matter of choosing the right direction.
A Winning Concept?
We aren't entirely sure about the financial portal concept. Certainly E*Trade will be able to expand its offerings. With an extensive offering of free material coming, they will surely attract more traffic. But will the increased traffic mean sales of the new financial products? It might, but it is by no means certain.
We leave it to you to make up your own minds on this one. Do you want to be able to pay bills right out of your E*Trade account? Do you want to apply for a mortgage over the Internet with a one-stop vendor? Do you want a single institution to be the center of your financial activities, even though it doesn't have a branch office in your town? If you do, and you think there are plenty of others like you, then E*Trade may be on the right track.
But don't take delivery of your stock certificates, because there aren't any safety deposit boxes on the Internet.
Note: Briefing.com has a business relationship with E*Trade. All opinions expressed are solely the responsibility of Briefing.com.
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