Hi E-Man,
Yes, some people like Stan are short sighted. Anyways, I'm back from a long trip. Has anyone seen this? I hope I'm not posting old news:
df
From Fortune Magazine's latest issue
E*Trade's Plan For World Domination
Being the second-biggest online brokerage is only the beginning. Now E*Trade wants a piece of every financial transaction.
Mitchell Caplan had to go to California anyway. The CEO of Telebanc, the largest online bank, Caplan was flying west from his Arlington, Va., headquarters to discuss ventures with Yahoo, among others, and figured he'd work in a meal with Christos Cotsakos, CEO of online broker E*Trade. But after 15 minutes of chat over a sushi dinner, Caplan found out that Cotsakos' plans for the meal were anything but casual. "Look, we want to cut a deal. Here's what we think should work," Cotsakos said, laying out the rudiments of a stock-for-stock buyout of Telebanc. "And," he added, "I want to do this in a week." Eight days later, on June 1, E*Trade announced that it was spending $1.8 billion--the biggest e-commerce acquisition to date--to buy Telebanc.
One week down, 72 to go. Propelled by the driving ambition and gargantuan goals of tough-talking Vietnam vet Christos Cotsakos, E*Trade has given itself just 18 months to morph from stock hawker to superbanker. Already, in the past six months, Cotsakos has bought 28% of E*Offering, an online investment bank, 18% of electronic market maker Archipelago, and 2% of online loan matcher E-Loan. He's started an E*Trade mutual fund family, added bond trading to his site, and bought ClearStation, a Website with original financial news and 250,000 loyal users. He's launched local websites in Australia, Canada, France, and Sweden, and has plans for 16 other countries. And that's just the beginning. Like the rest of the dot.com world, Cotsakos is using his hypervalued stock to buy his way bigger. But unlike his peers, he's also got almost $1 billion of cash in his war chest--thanks partially to a $400 million investment by Softbank last August.
He'll probably need all of that--and maybe more--to succeed in doing everything he says he'll do. Cotsakos is not just trying to create a successful financial supermarket (something the banking and brokerage businesses have been attempting to do for a good 25 years). He's trying to create something greater still--what the E*Traders term a "digital financial media company." In essence, Cotsakos wants every piece of every financial transaction, and he wants it done without any human interaction. He wants E*Trade to tell you how to invest, what it means to invest, and where to invest, and then take a cut from both you and the market maker. He wants to take your company public, insure your car, manage your employees' options, and sell you books about golfing. He wants E*Trade, already the second-largest online broker, to rival CNBC in business news and Amazon in e-commerce. He wants it done over your PC, your WebTV, your Palm VII, your wireless phone, or whatever else may come. But he wants it done fast.
There are plenty of skeptics. "Who is E*Trade trying to serve?" asks James Punishill, an analyst at Forrester Research in Cambridge, Mass. "It's probably mainstream America, but their business model doesn't match the mainstream. Only a niche group of people is going to be willing to live in an Internet-only environment." Others say he appears to be overpaying for some of those acquisitions. With Telebanc, Cotsakos shelled out about 845 times trailing earnings at a time when most thrifts (and that's what Telebanc is, a cyberthrift) go for about 20 times.
Cotsakos dismisses both complaints. Market watchers and old-economy competitors, he thinks, just don't understand where the world is going. He does, and he wants to be there first. "We pay big money for intellectual capital and speed," says Cotsakos, leaning back in his cubicle office decorated with framed Star Wars posters (still waiting to be hung). "One of the things I learned from my experiences in Vietnam is that if you go in halfway, you can't win. You've got to have not only ground cover but air cover. You've got to bring in the heavy artillery. You've got to go out and say, 'I'm here, I've arrived, and I'm not going to be messed with.'"
Not your standard Silicon Valley wonkspeak, but then, Cotsakos is no standard Valley executive. There are no degrees from Stanford gracing his walls, no years of slaving under the glow of a workstation monitor on his resume. The son of a New Jersey short-order cook, Cotsakos enlisted in the Army after high school and came back from Vietnam with a Purple Heart and a Bronze Star for valor. After graduating from tiny William Paterson University in New Jersey, he moved to Los Angeles and talked his way into a job as a cargo handler with a then little-known outfit called Federal Express. Nineteen years later, and by then running European, Middle Eastern, and African operations for the shipping giant, Cotsakos left to join A.C. Nielsen, where he became co-CEO.
The best reason to take Cotsakos' Patton-like pronouncements seriously is to look at what he's already accomplished at E*Trade. In 1996, when Cotsakos joined, the company was a small discount broker operating mostly over the phone and America Online. Cotsakos moved the company to the Web and started branding E*Trade as the alternative to overpriced brokers. But even then he had bigger plans. In Cotsakos' first talk with investment bankers Robertson Stephens in 1996, recalls Sandy Robertson with a laugh, Cotsakos wove such a convincing story about E*Trade's future that Robertson semi-jokingly told his staff afterward that they were taking public the company that would put them out of business.
These days, that doesn't seem at all like a joke. E*Trade now has a $9.5 billion market capitalization, and it controls 14% of the online market. (Schwab, with 28%, is No. 1.) Even without the Telebanc merger, analysts expect E*Trade's revenues to almost double, to $523 million, for the fiscal year ending this September. In the past two quarters alone, Cotsakos has found 365,000 new users willing to keep about $25,000 on account with E*Trade. That's 14% more than the number of accounts E*Trade added in all of 1998.
Cotsakos got where he is by working frenetically, and he expects those under him to do the same. Kathy Levinson, E*Trade's president and COO, says she sleeps about four hours a night. Cotsakos says he sleeps less. He often phones subordinates before dawn with questions. (They don't mind being awakened, he insists: "If you're really jazzed about what's going on in your life, it doesn't matter how hard you work," he says. "In fact, you're not really working. It's more of a hobby.") And when they're awake, he likes to keep them uneasy. While showing a visitor around E*Trade's Menlo Park headquarters recently, Cotsakos collared his assistant as she passed. "Hey, kiddo, call Bob [Luca, director of corporate security], and tell him that there is a security breach he didn't know about. Now, there is no security breach, but don't let on. We'll test to see how much he knows about the system." Turning to the visitor he explains: "The important thing is keeping everybody on their toes."
He's perfectly willing to put his own toes on the line. Cotsakos came up with his digital-financial-media vision in late 1997. As an interim step, he proposed to his board of directors that E*Trade become a financial portal. The price of doing so, he warned, would be E*Trade's record of seven straight profitable quarters, an accomplishment still rare among Internet companies. Reluctantly, the board agreed to go along. Cotsakos quickly pushed the company into the red. Since then he's spent $250 million--about 1998's total revenue--revamping E*Trade's computer system, and $150 million hyping the new portal, called Destination E*Trade. The remodeled site launched in September and features--in addition to stock trading--financial planning information, 4,500 mutual funds, a stock-trading game, chat rooms, and free real-time quotes for registered users.
Cotsakos has also pushed the E*Trade brand everywhere--from sports sponsorships to movie tie-ins to edgy ads over traditional media ("If your broker is so smart, why is he still working?" wonders one). The ads don't tout groundbreaking features or prices. Indeed, at $14.95 for a market order, E*Trade is more expensive than either Datek or Ameritrade. Yet the effort pulled in viewers. The results? Since September the number of visitors to E*Trade's Website has more than doubled. And by May business surfers were spending an hour a month on average on the Destination E*Trade site, longer than they spent on Fidelity and CNN.com combined.
But think of a place where people spend a lot of time without spending any money, and you get a library, not a supermarket. There are no hot library stocks. Cotsakos' trick now is to take Destination E*Trade freeloaders and turn them into paying customers. Only 7% of people with brokerage accounts are trading on the web, according to Forrester Research. And since most of the lucrative day traders have already been snared by a site, he will now have to capture the mainstream investor.
That's where the acquisitions and alliances come in. Each piece fills out some area designed to attract a certain kind of customer. With its current 95% retention rate, Cotsakos thinks that once E*Trade's got a customer, it's got him for life. E*Trade can then hawk its other products. The day after the Telebanc deal was announced, for example, E*Trade and Telebanc whipped up a one-year, 6.5% certificate of deposit--a huge 208-basis-point premium over the national average--available exclusively to E*Trade customers. In national newspapers, Cotsakos ran full-page ads gloating, "Sorry, bankers, but the brokers should have warned you." Within three weeks, Telebanc had 6,000 responses--and 6,000 potential customers-for-life. It's that kind of cross-selling ability that has Cotsakos excited. He says he has about 40% of his digital financial empire in place, but that plenty more is still to come.
The traditional competitors aren't about to surrender. Unlike booksellers or auction houses, banks have been quick to adopt the Web. A recent study by the TowerGroup found that North American securities firms had increased their IT spending more than 26.5% a year since 1996. In late June, Bank One started its own Internet-only bank, called WingspanBank.com, which will offer FDIC-insured checking (what Telebanc brings to E*Trade) as well as online trading and insurance. Online brokers like Schwab can't boast FDIC insurance, but Schwab already offers interest-bearing checking accounts along with access to 2,000 mutual funds. Even the smaller brokers are fighting back. Ameritrade recently announced plans to spend $200 million marketing itself.
But Cotsakos insists that none of the other players has his sense of urgency. "In business, those who know should be the ones that innovate the next iteration. Yet it never seems to happen that way," he says. "Why was E*Trade ever allowed to be born? Why wasn't it somebody out in the industry already?" While traditional competitors may be gunning for him, there is one thing Cotsakos really fears: "Two kids in a garage. That's who we're most worried about."
"Destination E*Trade" brings them in...
Then the cross-selling begins
E*Trade's key aquisitions, investments, and alliances
% OWNERSHIP
COMPANY NICHE FILLED OR ALLIANCE
Telebanc (pending) Retail banking 100%
Archipelago Electronic trading 18%
E-Loan Loans 2%
ShareData Corporate services 100%
OptionsLink Corporate services 100%
Bond Exchange Bond trading Alliance
First USA Credit cards Alliance
InsWeb Insurance Alliance
E*Offering Investment banking, research 28%
BancBoston Research Alliance
Roberston Stephens
Briefing.com Research Alliance
ClearStation Financial news, community 100%
Bridge Information Financial news Alliance
TheStreet.com Financial news Alliance
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