The harder you work, the luckier you get!

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Today marks the drop of Joe Ricketts’ memoir, The Harder You Work, The Luckier You Get, a book to which I contributed and within which I am portrayed.

Joe Ricketts is the founder of Ameritrade, and he was my boss. I was initially hired to run marketing but was quickly moved to the more historically interesting job of leading the company to the Internet (with a capital I, because back then it was spelled that way). During the creation of this book, I was interviewed several times and it’s hard to remember everything I said, but I do think the following story will be new.

In the fall of 1995, we launched the world’s first internet trading site under the brand, Aufhauser. Aufhauser was a scrappy New York based brokerage which we had recently purchased – I think largely to provide us some NY street cred which as Omaha “bumpkins”, we were in desperate need. Aufhauser had been uniquely using the internet as a platform for messaging between clients and brokers.

Understand that at this time, no one had ever traded stocks on the internet. In fact, No one had ever paid a bill on the internet, transferred money on the internet, or even viewed a statement on the internet. We were the absolute first financial services company to have a functioning website! We may have been the first to have any website, but I am not certain of that.

From a technical perspective, it wasn’t that difficult. We already had a call-and-response system (an API) created for our touch-tone phone application so we could get the information to the client’s web page. The real challenge was navigating the unexpected objections of just about everyone!

One of my favorite brouhahas from the period involved the exchanges (The New York Stock Exchange and NASDAQ), the regulators, and our compliance team. They all hated me, and I like to think Arthur Levitt, Chairman of the SEC at the time, may have even known my name (but he probably did not). The issue, which has been thoroughly eliminated since, was real-time verses delayed stock quotes.

Randolph and Mortimer Duke. Old-timey Brokers.

You see, the exchanges did not want regular-guy investors to have access to real-time stock quotes. Old-timey stockbrokers (think: Randolph and Mortimer Duke, left) were big clients of the exchanges and access to real-time quotes was one of the reasons people had brokers. Every time that phone rang, the broker had a chance to push another transaction and trade commissions were hundreds or even thousands of dollars per trade. As a result, financial service companies who wanted to share stock prices electronically did so by delaying the quotes by 20 minutes.

But the regulators – the people from the executive branch of the government who enforce laws – required that every trade be preceded by the presentation of a real-time quote. Even if an investor wanted to buy a stock and hold it for 20 years, he had to see the actual price at the time of purchase.

Previous electronic systems such as Ameritrade’s touch-tone trading and clunky Accutrade for Windows had located a compromise wherein real-time prices would be delivered at trade-time and delayed prices would be used everywhere else. This was the model we were following when we launched. Business was slow at first, but within a few months people started to take notice, and I got a call from compliance.

Um, yeah…

I don’t remember who worked in compliance or who called me, but over the years I have inserted Bill Lumbergh into my recounting of the story. “Um, yeah”, drawing out that second word as long as possible, “we are going to need you to stop using real-time quotes on the internet.”

Compliance was the organization in our company – any company – that ensures that laws are being followed down to the letter but also that contracts are being adhered to. They watched our every move and scrutinized every application we built. The internet was untested territory and, although I am speculating, our recent success had been noted by brokers who were pressuring the exchanges to keep professional tools out of the hands of retail investors. The exchanges were very clear that this violation put our service with them in jeopardy. In no uncertain terms: to continue would risk our access to real-time quotes altogether and threatened our ability to stay in business.

Adhering to their request required choosing between two untenable options. We could provide delayed quotes at trade time – and be in violation of the law, or we could stop allowing trades over the internet all together. I thought hard about this before going to Joe Ricketts with my thoughts. Joe and I had a great relationship at the time. I had shown him I was capable, I had made a positive impact, and he gave me more than enough rope to hang myself and the whole company.

I returned to my team with the news. “Fuck it, we are moving forward as is.” I expect that, at the same time, Joe was on the phone warning compliance to buckle up because the next week was a bull ride worthy of a rodeo. Compliance was fighting with exchanges, exchanges were fighting with regulators, and regulators were trying to figure out how they had gotten stuck in the middle of this. I took calls from all sides, received an earful, and was called an upstart (maybe more than once). But at my core I knew that efficiency always prevails over the objections of those profiting from that efficiency. Our business depended on exactly one outcome, and I was confident it would come.

And it did. The law won out, and the exchanges agreed to allow real-time quotes in certain situations and in return for a hefty sum every time one was presented.

I remember a year following this event, Amazon announced that for the first time, they had surpassed $1 million dollars in a single day. No one called us for that story, but we had been doing 100 times that for months. According to a recent story on NBC, TD Ameritrade now processes nearly 1 million trades (and an estimated total value of $1 billion) per day.

This story started off as a classical example of the exchanges’ channel conflict – one company profiting from two clients who had competing business models. In retrospect, the resolution was the moment when the new disrupted the old, the tipping point was reached, and the paradigm shifted. When that happened, every obstacle to internet trading had been eliminated, the industry was allowed to rush forward, and it did. I am proud to have been there.

Is “Share of Box” good for Amazon’s brand?

It used to be that Amazon worked on a very simple and expected principle: customers ordered product, paid for shipping and it arrived a half a week or so later. Prices were comparable to the stores, and users avoided tax, so they could handle to wait a few days for their copy of Braveheart to arrive because they saved a little money and gained convenienceA pile of DVDs.

Then Amazon added Amazon Prime and everything got better. This change allowed users to pay $69 once a year, place their orders, and product arrived the next day. At first there was still no tax, but even after they did away with that, the taxes paid were still lower than they would be at a local retailer. So now customers were saving money and getting product insanely fast.

Initially it was DVDs, CDs and home goods, but people soon realized that this worked for lightbulbs and toilet paper too – things that cost more to ship than they offered in margin. Amazon – and more importantly their competitors – realized that shipping things that had no sense of customer urgency through their regular speedy channel meant they were leaving money on the table.

So Amazon started dabbling with customer-directed shipping alternatives. Some products became add-on items. If you really wanted that $1 roll of tape, you needed to order an additional $10 worth of other stuff. They offered bulk items on subscription where you could only get the lowest price if you promised to buy them every month. And they started offering Prime customers the ability for forego the speedy shipping in return for a $1 credit on digital media –  the one product they offer that doesn’t incur a shipping cost.

But it wasn’t hard to work around the add-on restrictions, users eschewed subscriptions and continued to order their diapers when they needed them, and the whole digital credit thing didn’t appeal to a lot of people. Meanwhile customers continued to place single item orders for dog food or bubble bath continuing to thwart Amazon’s intentions.

And then along came a new company called Jet and with it the concept of “share of box.” Jet is a new start-up taking on Amazon that has reportedly raised $750 million. This is a true incentive to buy the dog food, bubble bath, tape, and diapers all at once and have them shipped together. Where Jet fails, is that they still ship everything separately and from different vendors, their selection is paltry, and they augment prices with the funds they have raised from Investors. A recent order showed that Jet paid $55 to buy products from a third party and sold them for $38. They claim that these practices will go away once they negotiate more inventory from additional vendors but obviously no company can sell product for less than they pay for it for too long.

Amazpdp_img1on has responded with yet another new service called Prime Pantry. Prime pantry charges customers $5.99/box for shipping and then allows users to “fill” the box with as many non-perishable groceries, pet supplies, and sundries as will fit. Each item comes with a price and a percentage number that represents how much of the box it will fill. A bag of dog food may take up 7% of the box where a tube of toothpaste takes up only ½%. Even though inventory limitations currently make it difficult to completely fill a box, this service works well. A few days after placing an order, a single, sturdy, handled box arrives with all the pantry items packed neatly together. Clearly Amazon is also trying to tackle the “share of box” issue and seems to be doing a better job of it.

But what cost is Amazon paying? Returning to my opening points, Amazon used to be simple and Amazon Prime was even simpler. Now customers have to wade through Prime pricing, Add-on items, Subscription services, the Prime pantry store, third party vendors, and Prime Now service (same day delivery). Meanwhile, Prime membership has increased to $100. I appreciate Amazon’s need to remain competitive but I fear that all this effort to gain one more customer, is straining their relationship with core customers.

I don’t have a solution to offer them, but I might suggest they wait and see how this whole Jet things turns out. Jet may be getting a lot of attention and financing, but their business model is spurious, their first major revenue pivot came after only two months of operations, and their value proposition is not yet being delivered. Meanwhile, Amazon seems to be forgetting that simplicity was a big part of the “Prime” brand, and this complicated smorgasbord of delivery options may be costing more in brand erosion than it is gaining in incremental revenue.