E-Files: Trading places

Share brokers, travel agents and music vendors are ready for the arrival of online trade, but there will be no overnight revolution, they say.

Share brokers, travel agents and music vendors are ready for the arrival of online trade, but there will be no overnight revolution, they say.

Despite what you may have heard there is no real online share trading in this country.

The New Zealand Stock Exchange's Faster trading system has no direct interface into the Internet - unlike the US and Australia - so all online trades must still be processed manually, says Ord Minnett Jardine Fleming senior analyst Arthur Lim.

Hesketh Henry e-commerce team member Frank Chan says: "There's still to be a see-through system where people can place orders directly."

A direct online link is expected this year, though such a move involves setting up a rigorous system for credit and stock checks, says Lim. The NZSE's managing director, Bill Foster, says "certain direct connections through a defined interface" to Faster are likely to be possible some time around the middle of the year.

So will online share trading, when it arrives, be a threat or an opportunity for existing brokers?

They probably see it as a bit of both, says Chan. But the lower fees likely to arrive with online trading may see brokers restructuring their service structure. "If people feel they don't want the advice or expertise ... then it becomes pretty much like the TAB," says Chan.

Already Access Brokerage charges $29.50 regardless of trade value, as opposed to the more common percentage fee; ASB Securities charges a minimum $24.95. DF Mainland offered free trading during November, says Chan.

Datek in the US is offering $US10 trades. Lower fees "can only encourage people to trade", says Chan.

Like any challenge, brokers see online trading as a competition, he says.

"They are asking themselves how do they justify their existence. Which is a good thing."

Web sites comparing broker fees and performance are proliferating overseas.

ASB Securities managing director Tim Preston says online trading brings share trading within reach of everyone and makes it more visible.

"The whole broking industry has changed and online trading has enabled lots of traditional services to be unbundled. In the past people often paid for research they never read and services they didn't need. Now they pay for what they use. It's taken the power away from the brokers and put it back in the hands of the investors."

Perhaps. Local brokers appear keen, but wary of moving too quickly into an immature market.

In a survey of brokers conducted late last year, Chan found that brokers' caution in entering the online market seems to be because of a lack of demand rather than a lack of opportunity.

However, more than 80% of the registered sharebrokers who responded to the survey indicated that they planned at some time in the future to accept orders from clients via a Web site.

Ord Minnett will offer online broking in future, says Lim, as it recognises there is a "pool" of investors who have already decided on their trades and don't need the "full service" that it traditionally offers.

But Lim believes the bulk of clients will prefer full service because they value the advice on offer and get better access to "goodies" such as share float allocations.

New Zealanders are also relatively conservative share traders, he says.

Unlike music or basic travel, where customers are looking for the cheapest deal, share broking involves "a very high level of risk", says Lim.

Currently, securities traded online by retail investors in all Asia-Pacific markets amount to one percent of volume, says analysts, Gartner Group. By 2003, this will be at least 20%.

The potential rewards are great. The US online trading market has exploded since its birth in 1997. Online brokerage Charles Schwab & Co is now worth $US415 billion, and that figure is expected to grow more than sevenfold to $US3 trillion by 2003.

The boom in the number of online traders has been fuelled particularly by online-only brokers.

Among share speculators are the so-called day-traders who buy volatile stocks then (hopefully) sell them for a profit in the same day.

While day-trading is unlikely to take off in this country because of the small and relatively stable nature of the NZSE, and its far fewer technology stocks, customers will doubtless be attracted online by lower brokering fees and the ability to place trades at any time of day.

Online trading may increase the liquidity and volatility of the NZSE, says Lim, though it is unlikely to match the US or Australian market.

"The IT sector here is a minnow, an amoeba, compared to the US market."

There are six IT stocks, as opposed to hundreds in the US and Australian markets, which are driven by a public float "avalanche" which attracts new traders.

A recent television report found that more than 50% of Australians owned shares or investments in managed funds.

The New Zealand government often "stuffs up" share floats here by initially selling large chunks to overseas investors, says Lim, and he notes some companies, such as Telemedia, choose to list in Australia because of its bigger market.

However, he says the volume of business brokers are conducting in overseas markets has increased markedly in the past two years, and a new capital market is due be launched. Perhaps the mountain will come to Mohammed after all.

While share trading through the Internet in New Zealand is tiny, brokers that offer online trading, such as DF Mainland and Access Brokerage, have gained some early mindshare, though, as Chan points out, whether new companies such as ASB Securities or larger brokers will "steam-roll" them as growth picks up, remains to be seen.

Music makers

Although there is a widespread expectation of cheaper prices on the Web, music companies tend to leave it to the retailers, though Sony Music managing director Michael Glading finds it hard to understand how online outlets like CD Star can sell CDs for $NZ24.95 at a profit.

"I don't see the point in being in business if you can't make any money out of it," he says. He believes it will be hard for companies like CD Star to move to a more "favourable" price such as $NZ30.

Online retailers may be able to attract customers from companies like Amazon and CDNow at that sort of price through service and delivery speed, he says. Music isn't separated out, but International Data Corporation's latest report, "Internet Commerce Outlook 1997-2004", estimates New Zealand online commerce during 1998 was $US39 million.

One high street music retailer, Sounds, set up a web site in December. "The best form of defence is offence," says Mark Tierney of Web design company Hyperactive, who was closely involved in setting up the site. Sounds thought it best to have its own brand in cyberspace, as both preparation and precaution.

Tierney says if the "licence-holders" - music and video companies - come to regard the Internet as the better business model and perhaps more profitable, then Sounds can say it is a digital delivery business as well. He expects lots of technology trials over the next two years, and says Sounds head Sean Coleman and himself have been to US conferences to keep track of retail developments.

After eight weeks of operation, sales have been "negligible", says Tierney, so it is hard to know what online will do for or to existing business. He says Sounds hopes to "steal" sales from US sites but expects online sales to increase the size of the market.

Says Tierney: "It can't help but help the market." Glading agrees. Industry research suggests many older people see music stores as places for "youth culture" and older people may be intimidated, he says. For them the Internet may be a perfect medium through which to purchase music.

Tierney and Glading also agree that MP3 is no great threat to the music industry as it stands. "It's only a threat in terms of illegitimate files," says Glading.

Legitimate recordings by unknown bands are good for the industry as a whole, and if a track is particularly successful Tierney says the band will find some way to eventually charge for it. "You always have to pay for quality." Glading admits to the unspoken truth that it's actually record companies that create demand.

A real threat to the music business for Tierney - himself once a member of techno band Strawpeople - is licence holders turning themselves into retailers. Tierney says only EMI has succeeded in retailing with HMV.

Will direct digital downloads happen? "There is no doubt about that," says Glading, though he notes it requires technological development to the degree that music can't be pirated and payment is assured. He doesn't know how far away this is, suggesting anywhere from 12 months to five years. Glading says the Warner/AOL merged entity are predicting about two years.

But this won't replace music stores, says Glading, and technology enabling "the drastic stuff" - large staff cuts - is years away, if it happens at all. Though he expects some cannibalisation of business from existing outlets when such downloads become second nature to the next generation of music buyers.

At the moment Sony Music's Web site is a marketing tool, but may be used to sell "at some point", perhaps two to five years down the track. This may not happen, Glading says, if stores continue to provide the best sales channel.

Travel bugs

The travel agency market is undergoing a lot of reorganisation and amalgamation, says Gullivers Pacific's general manager of technology, Kathy O'Connor, partly due to technology. Many smaller and rural outfits without strong business tie-ups are struggling, she says.

Meanwhile, many overseas online travel sites are yet to turn a profit. "Most of them make their money through their floats."

Several sites in New Zealand now offer online travel booking including Travel online.co.nz (part of Ihug-Force), Travel forless.co.nz and NZtravel.com and those of airlines such as Air New Zealand and Qantas.

Gulliver Pacific's operations, which include Budget Travel and Holiday Shoppe in the retail market and Atlantic & Pacific and Signature in the business market, divides the market into three: leisure, corporate and business-to-business.

Its online efforts are "heavily weighted" to the last category, as that is where it sees the most growth, borne out by international experience. Retail online travel purchasing is not a huge market at this point, says O'Connor.

"If you look at what people are buying on the Internet, they're buying low-cost items - CDs and books - or [they] participate in auctions. The people who are quite sophisticated in using technology will use it to book an airfare. In general the business traveller is sophisticated in the use of technology."

It's too early to generalise about what will happen in the travel market, says O'Connor, though she sees kiosk and touch-tone booking, Internet sites and full-service agencies all being offered in future. "People will look for the simplest way to do things."

New Zealanders have never gone in for the kind of package holidays the British do, and while they are experienced travellers, will always be looking for somewhere new to go to - and will want advice and information, says O'Connor. Shopping for travel is no less a social experience than shopping for anything else.

It's also about who delivers excellence and confidence to the customer, she says. "Prices are pretty transportable in the market," she says, meaning travel agents can rarely offer huge price advantages because of the "scarcity of product" here - the limited number of flights and hotels that can be offered. A large company like Gullivers has the clout to block-book hotel space; for instance, in Sydney during the Olympics. Also, the market is complex in this country and "competition will come from all sorts of people".

O'Connor says the amount of money currently being spent online on travel is not large but once confidence in the brands increases - as it has with banking - this will rise rapidly. For travel agents, this means whereas commissions were important, in future it will be all about "adding value" to travellers' holidays.

The entertainment dollar

It's too early to generalise about what people do with their leisure dollars, says O'Connor. "You've either got time or money." It's all about disposable income and how sophisticated the buyer is.

Online music, for instance, is stealing dollars from other entertainment industries, says Tierney.

The online book stores of Amazon and Barnes & Noble "have not closed a single bookstore", he claims. The real retail future is yet to be seen.

Sony Music's Glading says: "There are probably more questions than answers at the moment - it's the nature of the beast."

Mark Broatch is an Auckland writer.

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