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TMF Interview With Ameritrade Holding Corp. Chairman and CEO Joe Ricketts
January 14, 1999

With Brian Graney (TMF Panic)

Based in Omaha, Nebraska, Ameritrade Holdings Corp. (Nasdaq: AMTD) has been in the discount brokerage business since 1975. It's Accutrade unit was the first to offer touch-tone phone trading in 1988. In 1997, the company launched Ameritrade Inc., which offers deep discount brokerage services over the Internet. We spoke with Chairman and CEO Joe Ricketts about the company's growth strategies and the general outlook for the online brokerage industry.

TMF: You're based in Omaha, which also happens to be home to a couple of other widely-admired companies here at the Fool, such as Berkshire Hathaway (NYSE: BRK.A. and BRK.B) and Peter Kiewit Sons, now Level 3 (Nasdaq: LVLT). What are the benefits of doing business in Omaha instead of in a big financial city like New York? Are there any drawbacks?

Ricketts: The benefits are costs of operations and that comes to us in rents and compensation for employees. That's about it, but those are big. In New York, there's a concentration which makes the rents higher and the salaries higher because the costs of living are higher. The disadvantages are for talent that you want to find in a particular area, which may not reside here in Omaha but on the East Coast or the West Coast. It's a little bit awkward for them to think of Omaha as a step in the career ladder. So it's difficult sometimes to recruit talent to Omaha.

TMF: Has that been a big problem for Ameritrade over the past couple of years?

Ricketts: It really hasn't been a big problem, no, because we can work around it so very easily. We're in the process of putting in other locations in other parts of the country for various reasons, disaster recovery and things of that sort. So it's a small problem. It's not big at all.

TMF: One of your largest rivals, E*Trade (Nasdaq: EGRP), is expanding out of brokerage services and into other realms, such as mutual funds, and, just this week, announced that it will move into the underwriting business. Does Ameritrade plan on offering these kinds of value-added services down the road as well?

Ricketts: We offer approximately 7,000 mutual funds now and we have for years. So the mutual fund part of it is part of the discount brokerage operation. We do mutual funds on a retail business as agents, just like we do the stock trades. But, moving out of what we do well and into other areas is not on our calendar, it's not on our agenda. We are experiencing very large rapid growth and we want to focus on an area where we do well, both for our customers and for our shareholders. So the expansion outside of our area is being done in another company called OnMoney.

"...we're growing about as fast as we can, both in terms of number of new accounts and the number of trades we do on a daily basis."
OnMoney is being funded by Ameritrade and it will be a website where individual investors can find anything and everything they may want or need for their investments and private money management. [It will offer] a consolidated statement among financial service vendors that will be interactive with the financial plan and things of that sort.

TMF: So in the future, do you see the online brokerage industry's profitability driven more by the ability to execute trades quickly and accurately rather than offering these value-added services?

Ricketts: What the Internet does is democratize the communications system of financial services and put the customer in control. So all of the services that the customer needs are going to be able to be delivered easier, more conveniently, at a lower cost than ever before because of the low cost of the computer chip as well as the low cost of the communications that comes with the Internet.

So there is a new change, there is a paradigm shift that is extremely important. And this new area, which is the cost of the chip as well as the cost of the communication, is probably just as important to the country as the Industrial Revolution was 200 years ago. It will change dramatically the way things are done. I don't know if that answered your question.

TMF: The thing we're really interested in is how online brokers are going to use their substantial user base to gain more than just online brokerage fees.

Ricketts: Outside of online brokerage, we're going to introduce our online brokerage customers to OnMoney.

TMF: In past interviews, you've said that one of the company's biggest challenges for this year will be fixing the technology glitches that have hampered your trade execution ability over the past year or so. Could you tell us a little bit about what you are doing to fix these problems? And what effect have these problems had on your near-term growth prospects?

Ricketts: First of all, we're growing about as fast as we can, both in terms of number of new accounts and the number of trades we do on a daily basis. That you can follow in our quarterly reports where we make public the business in the last quarter as we achieve it. We're going into a new digital world, so the technology that we're using today is going to be completely different in a couple of years. And we have to migrate and evolve to that new technology. So that's the challenge that we've got.

TMF: Is it really a big deal? I know it really has caught the media's attention during times of market volatility.

Ricketts: The media has overblown [the technology problems]. There's a spot on the Web where the availability of brokers and their speed of response is published each week. So anyone can go to this address and look and see how the various brokers shape up and compete against each other. The address is http://www.keynote.com/measures/brokers/. It's the Keynote Web brokerage index.

"I think the time to become a powerhouse in this market segment has already come and gone."
They put it out every week and it gives you the past two weeks, basically. It can help reporters really focus in on what is newsworthy and what is not.

TMF: You've placed a lot of emphasis this past year on advertising and attracting new clients. How successful have your ad campaigns been? And how do you determine at what point your marginal spending to add clients tops out and becomes less important to your growth?

Ricketts: We're a long ways from marginal right now. We're going to report next week our first quarter results. And the results that we reported last year in October for the end of September came out wonderfully well. We tripled the number of core discount brokerage accounts at a cost that was very attractive, at $194 per new account. That has a net present value of about $700 and that's better than mining gold. Of course this all history. The last quarter that we're going to report next week continues along that same line.

So advertising or opening up accounts at a cost-effective price is critically important to shareholder value. The only way that we really bring shareholder value is with earnings, and that's on a near-term basis. Now, we can take those earnings and put them into additional advertising dollars, which increases our expenses, and bring our shareholders value from a longer-term point of view. When we can open accounts for less than $200 with a net present value of $700, we ought to spend every dollar on advertising that we can. And that's the current environment that we're in.

"There's a definite distinction in the market between the people that want to use an online broker and the people that want to use a full-service broker. The whole world does not want to use an online broker."
We're going to have a larger advertising budget this year, and we'll determine that budget as we go through each quarter. In the last conference call that we had, we gave the press and the analysts direction for the current quarter of advertising expenses being between $20 and $30 million. It's going to come out to the lower side of that figure, the way things look right now, because the number of new accounts that we're opening on a daily basis is really quite wonderful.

TMF: How do you see the online brokerage industry evolving over the next few years? What will separate the powerhouse firms from the also-rans?

Ricketts: I think the time to become a powerhouse in this market segment has already come and gone. The amount of money that you have to spend on technology and marketing and infrastructure to be one of the major online brokers is so high at the current time that it would probably not bring profits high enough to make it worth the investment. That's the way it appears right now. Right now, we've got over 100 online brokerage firms and that's going to continue to grow. Everybody is going to use online, just like everybody used the telephone in the past. But to become one of the major players, it's going to be much, much more expensive than it was 24 months ago.

TMF: Finally, I'd be interested to hear your views on the outlook for the full service brokerage industry. In five years or so, will there be anything that a full-service broker can offer a client that an online broker can't also offer?

Ricketts: Now this is an area, where people get the wrong image because they concentrate so much on the online brokers. If you pay attention to the full-service brokers, they're doing better than they've ever done before. The fact that the online brokers are doing well doesn't take away from the benefits that the full-service brokers are receiving.

There's a definite distinction in the market between the people that want to use an online broker and the people that want to use a full-service broker. The whole world does not want to use an online broker. Full-service brokers are doing wonderfully well and they will continue to do wonderfully well. There's a large segment of the population that prefers not to get too involved in their investments. Those are the people that want to play golf on Saturday morning, they find investing boring, they find investing complicated, they view it as one of those necessary things they do in their lives. And full-service brokers are always going to be a wonderful help to that part of the marketplace.

The other part of the marketplace is the part that we service and those are the people that want to do it themselves. And that's a growing segment of the market also. Now, it used to be that 25% to 30% of the market wanted to do their own thing. With the Internet now being able to deliver so much information so conveniently and so inexpensively to these people, that segment of the market is growing. I don't know how big that segment of the market might be, but it may well get to be 40% or 50% of the individual investors. I don't know.

But I'm quite confident when I say that 100% of the market will not always want to use discount brokers online. There's always going to be a big segment of the market that is going to want to have all of the infrastructure resources that a full-service brokerage brings and I think that they are going to continue to do as well as they have in the past. They had a record year last year, so they can't complain

TMF: Thanks again for taking the time to talk with us today.

Ricketts: I appreciate it.

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