Online Brokerage: The Case of Ameritrade AMTD

This case teaches the student how to apply economic and NPV analysis to the fundamentals of a B2C transactional e-commerce business. It uses as an application how a new entrant online broker such as Ameritrade attacks incumbent financial service providers in the U.S. by unbundling its services, offering prices close to marginal production costs, and by expanding consumer choice and convenience, all supported by intensive investments in aggressive advertising. It analyses marketing expenses as an investment in the acquisition of customer accounts and deepens the understanding of the profit model of this B2C activity, reflecting on the relative importance of net income from transactions versus net income from margin loans and on the relevance of transaction costs and trading volumes. The emphasis of the case is on the particular free cash flows economics of many B2C business and the annuity free cash flow income stream to be collected from a customer. It allows estimating NPV and IRR of the marketing investments. It provides an opportunity for students to study the sensitivity of this NPV to the different account value drivers. This gives students an insight into the strategic threats and opportunities of the business, and into the economic reasons for the high volatility on Internet stocks during a period in which contenders compete intensively to gain significant first mover advantages and to be ahead on the power curve in order to attain a winner take all position.

The purpose of this case is to provide a framework, which will help MBA students to develop a deeper understanding of the e-commerce business model and concept of NPV and IRR by analysing the fundamentals of an on-line business under certain terms. Some of these being to help students think about marketing expense as an investment, to estimate relevant case flows and to identify the main sensitivity elements and assess their impact. Students will also familiarise themselves with the basics of retail online brokerage as the new wonder boy of retail financial services. The main questions for student analysis are: What is the short-term economic model of online-brokerage as a generic e-commerce business? How important are transactions per account, transaction fees, interest margin on margin loans, fee revenues per account, and marginal cost per transaction in driving account profitability? What are the IRR and NPV from a marketing investment in acquiring an additional retail brokerage account for Ameritrade? How sensitive is this NPV to its value drivers?