$1-Million Prize! Free Cars! Online Brokerages’ Ads Go for Broke
Free cars and computers. One million dollars for forecasting stock market returns. Free stock trades for life.
These are some of the flashy prizes that online brokerages are doling out in an unabashed scramble for customers. But you’d be forgiven for mistaking the giveaways for the second coming of the Publishers Clearing House sweepstakes.
For the last couple of years, online brokerages have trotted out a barrage of colorful and sometimes controversial ads aimed at luring the growing ranks of online Americans to use the Internet for investing.
The ads have worked, as the number of online investors has surged. But now, with major brokerages such as Merrill Lynch and Morgan Stanley Dean Witter jumping into the electronic fray, online firms are going to ever more extreme marketing lengths to distinguish themselves.
In addition to their ubiquitous ads--for which the industry plans to shell out a whopping $1.5 billion in the next 12 to 18 months--online brokers seem to be unveiling hokey promotions by the day.
Take, for example, E-Trade Group Inc.’s plan to award $1 million to the investor who most closely predicts the closing price of the Dow Jones industrial average on Dec. 31.
Fidelity Brokerage Services, meanwhile, is giving away free trades for life to 90 investors chosen in random drawings.
“As more and more competitors are spending [on ads], you’ve got to find ways to draw attention to yourself,” said Greg Smith, an online brokerage analyst at Hambrecht & Quist Inc. in San Francisco.
Some marketing pitches are getting a bit nasty. A new E-Trade ad takes the uncommon step of naming a competitor. Referring to Morgan Stanley Dean Witter’s revamp of its Discover Brokerage unit and plan to raise trading commissions, the E-Trade ad chortles, “Funny how Discover Brokerage never ran a ‘we’ll be absorbed by a traditional broker and your rates will double’ TV commercial.”
As the stakes increase, companies may increasingly target one another. Indeed, Charles Schwab Corp. and Merrill Lynch engaged in a surprisingly public spat this week after a Schwab official criticized Merrill’s new online service.
The marketing blitz is being fueled by projections that the number of U.S. households trading online will swell to more than 20 million by 2003 from 3 million to 4 million today.
The rush to grab accounts is particularly intense now because newcomers, once they’ve signed with a brokerage, tend to remain with the firm for years. And as the investors’ assets grow over time, the firms hope to sell them products ranging from credit cards to mortgages.
The online firms are trying so hard to build name-brand recognition in part because stock trading has become a commodity business, analysts note. “At the end of the day, what really is the difference between E-Trade and Ameritrade?” said Jaime Punishill, an analyst at Forrester Research.
As active investors flocked to online trading in the last five years, firms cut commissions to lure customers, said Dan Burke, a senior analyst at Gomez Advisors, a research firm in Concord, Mass. But commission rates now hover between $10 and $30 per trade. And today most newcomers are mainstream investors who trade less frequently and are unmoved by price cuts, he said.
Despite the continuing marketing frenzy, online transactions slipped 7.8% during the third quarter from the second quarter as the stock market weakened, U.S. Bancorp Piper Jaffray said. But online firms say volume is always weak during the summer and should pick up as stocks rebound.
To lure customers, online brokerage advertising is venturing beyond newspapers and television business shows to events such as the World Series and Super Bowl.
Some of the ads have won praise for their humor and originality, including a Discover Brokerage commercial in which a tow truck operator sheepishly admitted to purchasing a tropical island with his stock market proceeds.
However, the campaigns have stirred concern among regulators. Securities and Exchange Commission Chairman Arthur Levitt has fretted that some ads “step over the line and border on irresponsibility” in suggesting that online trading is a no-lose game.
It remains to be seen what regulators will say about the latest promotions.
E-Trade has been the most aggressive, unveiling last month the plan to shell out $1 million for the most accurate Dow prediction. The promotion also includes giving away six Oldsmobile cars.
E-Trade will spend a massive $450 million on advertising in fiscal 2000, while Schwab shells out $250 million, according to Putnam, Lovell, de Guardiola & Thornton Inc.
Is the marketing paying off?
Last quarter, E-Trade added 310,000 accounts at an average cost of $198, it said. That was down from an average of $424 a year ago.
Among competitors, DLJdirect Inc. spent $724 for each new customer last quarter, by contrast.
But E-Trade’s average account holds assets of about $18,000, far less than the industry average of about $30,000. That is an indication that less affluent customers are signing up with E-Trade, and raises questions about the accounts’ profitability in the long run.
E-Trade said it expects the average account size to grow over time. For now, it’s critical to lure customers, the firm said.
One thing is sure: With online brokerages raising $1.7 billion in capital this year, there’s plenty of money for promotion.
“That’s a lot of million-dollar giveaways, a lot of cars, a lot of free computers and some good entertainment on TV,” said Russell Keene, Putnam Lovell’s brokerage analyst. “There’s so much money to be spent from here through the next year, nothing would surprise me at this point.”
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Trading Online
A new survey of 1,507 investors by the Securities Industry Assn. shows the percentage of investors trading online rocketed this year, after rising incrementally in recent years. Percentage who say they have ever traded over the Internet:
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Source: Securities Industry Assn.
