DLJdirect

1. DLJdirect internet business models text and cases Donatas Sumyla

2. Content • Overview of the company; • Goals & strategies; • Competitors; • Primary stakeholders; • GBF;

3. Overview of the Company • DLJdirect is an online brokerage company; • Blake Darcy is the CEO; • Trade 4% of online brokerage trades; • High profile deals led by DLJ include Fleet’s $16 billion acquisition of BankBoston, Olivetti’s $65 billion hostile takeover of Telecom Italia, TCI’s $69 billion merger with AT&T;

4. Some history • Donaldson, Lufkin & Jenrette, Inc. was founded in 1959; • Initially a boutique investment bank known for outstanding institutional equity research; • Went public in 1995; • At year-end 1998 DLJ was 72% owned by French insurance giant AXA;

5. Goals & Strategies • The goal was to attract affluent, self-directed investors who would value access to DLJ’s equity research and to IPOs underwritten by the parent company’s investment bank.

6. ? Over company’s goals Such customers were highly profitable, yet Darcy wondered if this target market was too narrow. Was the company forfeiting opportunity by not aggressively pursuing day traders and/or less affluent mainstream investors?

7. Earlier Strategies • DLJ pursued an aggressive strategy to break into the “bulge bracket” of leading Wall Street firms during 1990s. • Also accelerated the expansion of its investment banking ad trading operations into international markets; • During the second half of the 1990s, DLJ’s Banking Group continued to serve smaller companies in need of high-margin equity and debt financing and merger advice, but gradually broadened its client base to include larger corporations.

8. Earlier Strategies • These strategies resulted in: • Significant growth in revenues, profitability, and shareholder value; • For fiscal 1998, the company’s net revenues were $4.0 billion and net profits were $370 million; • By mid-1999, the market value of the firm’s equity was worth nearly $9 billion; • As of June 1999, DLJ was ranked #1 underwriter of U.S. high-yield debt issues.

9. Pershing Division • In 1977, DLJ, Inc. diversified into securities clearing business through the acquisition of Pershing & Co. • Clearing agents provided a range of trading and “back office” processing services that allowed their clients to complete customers’ transactions; • By year-end 1998, Pershing served over 550 correspondents with a total of 2.5 million customers and account balances of $ 279 billion; • It was a significant profit generator for DLJ;

10. Entering the Online Brokerage Business • Prodigy was a mass market online service created during mid-1980s by a joint venture between IBM and Sears; • Prodigy’s managers decided to offer an exclusive online discount brokerage service and approached established brokerage companies for help in creating the service; • Nobody was interested, except Pershing;

11. Entering the Online Brokerage Business • Why Pershing?: • It was consistent with its entrepreneurial corporate culture; • Every year the division launched a few new businesses to serve the rapidly evolving needs of its correspondents; • Pershing had successfully confronted channel conflicts before;

12. Entering the Online Brokerage Business • The new venture was named PC Financial Network, avoiding an obvious brand affiliation with either Pershing or DLJ; • The management could experiment with business strategy; • PCFN offered discounted commission rates; • Had minimal marketing and customer acquisition costs; • Relied on e-mails to existing Prodigy customers;

13. Entering the Online Brokerage Business • Despite PCFN success, the new unit struggled inside Pershing to secure resources to build the data processing systems required to support its growth; • Management decided to abandon the Prodigy exclusivity model and pursue a multiple-channel distribution strategy instead (partnership with AOL).

14. PCFN becomes DLJdirect • PCFN was pressured by competitors’ lower commission rates; • Another source of pressure came from its parent company; • If PCFN to became DLJdirect, they would have the access to the parent company’s research and to IPOs underwritten by its investment bank;

15. DLJdirect • DLJdirect’s management decided to lower its commission rates to $20; • Temporary revenue slippage in 1997, but by 1998 commission revenues increased by 55% over 1997, active accounts grew by 46%, and total transaction volumes rose by 84%; • The next challenge: • How to respond to its competitors’ marketing campaigns? • Darcy felt that DLJdirect had to increase its commitment to marketing and customer acquisition efforts in order to prevent further market share erosion;

16. DLJdirect • DLJdirect lacked its competitors’ spending power; • Options: • Sell its online brokerage business, and let someone else fund its growth; • It could be separated completely from the parent company through a spin-off or the parent could retain management control and partial equity ownership of the online brokerage through a separately valued tracking stock;

17. DLJdirect • After weighing all the concerns, DLJ management decided to proceed with a tracking stock IPO, with DLJ, Inc. retaining 84% of DLJdirect’s equity; • The tracking stock was issued in May 1999 at $20, valuing the online unit at $2 billion;

18. Online Brokerage Industry • Mostly technologically-savvy, aggressive investors; • Held multiple accounts with different brokerages; • A tremendous growth in the online brokerage business was based on few factors: • Falling computer prices; • Development of faster modems that made timely online trading possible; • Growing acceptance of the Internet as a legitimate channel for retail purchases; • Financial services were well suited for the Internet;

19. Customer segmentation • Retirement by the Book (RBB) • Moderate risk tolerance, looking to invest for a comfortable retirement; • Interested in reliable trade execution, user-friendly interfaces, and variety of financial offerings; • Portfolio Cruise Control (PCC) • Average total assets of over $350,000; • Most wealthy and oldest customer segment; • The most important feature was advice and quality information;

20. Customer segmentation • Aggresively Affluent (AA) • The most common segment among Internet investors in the late 1990s; • High-net worth individuals who traded more than 10 times a year; • AAs sought timely execution and low trading commission fees, and typically were willing to pay a modest premium for consistent high-quality service; • Get Rich Fast (GFF) • “Day traders”; • The most visible clients of online brokers; • Young individuals with modest net worth; • Made frequent, small trades in the hopes of accumulated gains related to minute-by-minute fluctuations in stock prices;

21. Competitors • Schwab; • E*Trade; • Fidelity; • Merrill Lynch; • Datek; • Schwab and E*Trade were dominant competitors in the online brokerage industry. Spending heavily on marketing and customer acquisition. Result: strong brands, controlled over 40% of the market between them (1999).

22. DLJdirect’s Operations • Customer focus; • Web site and client offerings; • Marketing strategy; • Clearing and customer service operations;

23. Customer focus • Focused on customer acquisition efforts; • Targeted self-directed, sophisticated online investors, who on average have higher account balances than other investors; • Specifically sought customers in the “Aggressively Affluent” segment; they were more likely to buy large blocks of stock, trade of margin, and own a diverse array of financial investments; • Many of them were customers of DLJdirect’s competitors, seeking to move to a higher end online broker;

24. Web site and client offerings • Web site contained the full range of information and transactional services that online investors had come to expect from the industry; • The site offered free access to news feeds and stock quotes and portfolio tracking services that provided alerts when share prices moved outside of a specified range; • The only brokerage firm to offer new customers the ability to apply online and begin trading immediately without forwarding cash to cover initial investment; • DLJdirect’s customers who maintained asset balances in excess of $100,000 had access to DLJ research; • DLJdirect provided tiered service levels for accounts with high asset balances; • DLJdirect was ranked near the top of the industry in terms of speed of execution;

25. Marketing strategy • Pursued high end customers with a variety of marketing slogans; • In 1997 $13 million spent on marketing – 19% of total revenue; • 1998 increased marketing budget to $25 million; • In 1999 DLJdirect planned to spend $65 million on marketing; • 30% of the budget was spent online, including $12.5 million per year for a two year distribution deal with AOL that featured DLJdirect as one of four online brokers within AOL’s proprietary service;

26. Clearing and customer service operations • DLJdirect had a partnership with Pershing; • It was beneficial because it reduced the need to invest in technical support, personnel, and infrastructure; • It also benefited from order flow rebates from Pershing; • On the other hand this relationship was costly; DLJdirect was the only major online brokerage that didn’t clear its own trades; • Customer service was critical to company’s high end customers; • Telephone support was provided 24/7, free of charge;

27. Primary Stakeholders • Customers; • Businesses;

28. GBF • Network effects • Medium to Strong; • They were focusing on client exclusivity; • Economies of scale • Strong; • Costs are fixed; • Customer retention rates • “Stickiness” is important; • High CR rates;

29. Success or Failure? • A big question mark ?. • It depends on many factors: • Marketing strategy; • Network effects implementation; • Customer retention rates; • Latest update: • DLJdirect as acquired by TD Waterhouse. The web site is no longer available;

30. Questions???