Editor's note: Today in Reston, Va., Jim Cramer spoke at the Friedman Billings Ramsey fourth annual Technology Investor Conference. We'll be running the text of the speech in four parts. Here, the first installment.
From my turret as a hedge fund trader and Internet columnist for
I have a fabulous perspective into the havoc the Net is wreaking on corporate America. All day long I hear about people who "get" the Net and "don't get the Net" -- as in
gets the Net but
doesn't. Or Jack Welch hasn't figured out the Net yet, but John Chambers gets it.
Nobody, however, has ever really put into English what getting the Net or not getting the Net means. Let's change that with this speech. I want to talk about the Net in the world of financial information and brokerage. I have to tell you that when the Net is finished with these businesses, you won't recognize them. And I want to explain to you why it will lead to the destruction of virtually every certain profit stream, when it could lead to precisely the opposite conclusion, if someone would just recognize the changes that the financial industry is undergoing because of technology. You may have heard the phrase "wake up and smell the coffee." Well, with these guys, it is wake up and smell the formaldehyde.
In fact the brokerage industry is like
caught in the cross hairs of the Japanese in the early 1960s. The people who populate these old-line companies know that
-- in the form of Net brokerages -- is about to storm the beaches. They are helpless to stop the charge because they believe they can't afford to alienate their core constituencies and the high-paid minions who broker their stocks. They are doomed, not to extinction (General Motors certainly isn't extinct) but to lose a little bit of share, year after year after year until they are shadows of their former selves. They won't get the Net until they end up working for a Net company. Makes sense; it could happen.
Everybody is familiar with the destruction of the commission system, as we know it through electronic trading. Even those folks who work at old-line brokerages who "don't" get the web understand that commissions will never be the same. The firms that still charge hundreds of dollars of commissions for trades that others execute for 10 bucks are just trying to keep the share loss at a minimum of 10% every six months. Or until the only clients left are those who are too lazy or too stupid to argue or move on. They know they are living off rapidly putrefying cream.
It's what the Net has done to the public's perception of the market that the brokerage houses, with their titanic research departments and their giant paper-generating back offices and mass of research sales people, that the top guys don't understand, or don't "get" at all. And it's the impact of hundreds of millions of ad dollars, given to the online folks by a generous market that hasn't been grasped either.
Do the people who work at these off-line brokerages think no one listens to advertising? These commercials, and we are all familiar with them, make a mockery of the off-line brokerage industry. It reminds me of the days when there would be smoking ads and then right after them anti-smoking ads. It was probably a blessing to that dying industry when they banned advertising for cigarettes. At least it calmed down the anti-smoking campaigns!
First, let's have a little history lesson. Let's look at the traditional model, pre-Net. Brokerage houses generate research product and underwritings that are sold by massive highly paid research firms that rely on high commissions or colossal underwriting fees to make the whole shebang work. The commissions on the individual side can be huge. The fees from underwriting are fabulous. The research departments cover their areas independently and generate proprietary calls designed to make the customer money. Historically, the large institutions get the research call to buy stocks and get first crack at the breaking news because of expensive, sophisticated services and they trade on them.
The individual either piggybacks after or reads about the news the next day, often taking the institutions, especially the fleet-footed ones, out of the stocks. The public is very much second fiddle. But everybody is happy because there is no other way to access timely information, quotes and money-making ideas. You have to play ball with the brokerages.
Now, fast forward to this year. The traditional brokerage is still out there hawking its expensive wares, generated by an incredibly overpriced research team, and, oddly, getting more expensive by the year, as these firms seek desperately to distinguish themselves.
But now let's look at it from the perspective of the client of the new millennium. First, the institutional client has his own research. He does not rely that much on sell-side research and he is barely paying his bills internally, except for when there are underwritings. To him, the brokerage firm has ceased to play a relevant role -- except as someone to beat up on when getting in or out of a stock.
In the last five years, however, it is the individual who is in ascendancy, the individual who has the marginal dollars.
Look for part two Tuesday morning.
James J. Cramer is manager of a hedge fund and co-founder of TheStreet.com. At time of publication, his fund had no positions in any stocks mentioned. His fund often buys and sells securities that are the subject of his columns, both before and after the columns are published, and the positions that his fund takes may change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Cramer's writings provide insights into the dynamics of money management and are not a solicitation for transactions. While he cannot provide investment advice or recommendations, he invites you to comment on his column at