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HolidayBuyer's Guide
Tech Industry

Quest for market share has fallout

As the recent service problems at E*Trade show, Internet companies race to snare customers, but then often can't serve them.

E*Trade's service outages over the past three days illustrate a key lesson about the budding economy growing up around the Internet: the customer is not always king.

Rather, many companies racing against time to hang a shingle in cyberspace are attracting customers first and worrying about quality service later.

As reported, trading capabilities for E*Trade have sporadically failed over the past three days. The glitch comes as the No. 3 broker has flooded Yahoo, the Wall Street Journal, and other popular Web sites with banner ads touting the service, part of a $125 million promotional campaign. E*Trade's service interruptions have created outrage among some customers, who complain they are losing money when they can't buy and sell stocks for hours on end.

E*Trade said that the disruptions resulted when a software upgrade on Tuesday went awry. The problems, which began on Wednesday and were still affecting customers earlier today, are not related to trading volume or the capacity of E*Trade's networks, the company said.

But like past outages that have left customers of America Online, AT&T's WorldNet, and eBay out in the cold, E*Trade's problems are generating criticism among some customers and analysts, who complain that the company seems to care more about selling its services than delivering them.

"E*Trade has gone out very aggressively and very actively promoting their services and [the recent outages] are what happens sometimes when you get a little further out ahead of what you can service," said Alan Alper, an analyst at market research firm Gomez Advisors. "It's certainly a black eye for [E*Trade] because they're so aggressive in their outreach."

E*Trade's glitches illustrate a fundamental difference between online business and commerce in the physical world, where companies are loath to heavily advertise services they are not capable of delivering, worried that customer backlash might destroy their business. But in the gold rush environment of cyberspace, acquiring market share faster than a company's competitors is at least as important as making existing customers happy.

Internet companies "are driven by the principal that adding customers will never be less expensive than it is right now," explains Phil Leigh, a financial analyst for Raymond James & Associates.

Leigh and other analysts note that E*Trade's problems so far are dwarfed by the outages AOL experienced two years ago, when the online service's move to a flat service fee generated more customers that its infrastructure could handle. Despite the poor public relations, class action lawsuits by subscribers, and scrutiny by numerous state attorneys general, AOL is now the clear leader on the online space.

E*Trade's problems are "a consequence of gaining market share today," Leigh said.

For its part, E*Trade said its recent interruptions in service are unrelated to the company's recent marketing blitz. "The specific [software] issue would have caused the glitch whether we had a million customers or five," said Lisa Nash, E*Trade's vice president of customer management. She said the company has spent "a couple of million dollars" so far building its network architecture. She added that E*Trade aims to have excess capacity of 75 percent at all times and is in the process of augmenting its two data centers in California with a third facility, at a cost of $50 million, outside of Atlanta.

"There is no question there was an issue today and yesterday," Nash said in an interview yesterday. "But outside of that our system has been working exceptionally well."

The immediate consequence of E*Trade's snafu is unclear. With the threat of class action lawsuits looming and New York attorney general Eliot Spitzerannouncing aninvestigaton into service disruptions at online brokerages, it is possible the company may reimburse customers who lost money as a result of the problems. Another online broker, Ameritrade, made a similar move last quarter when it took a $3.1 million charge for "customer execution price adjustment during periods of trading system delays or outages."

It is unclear whether E*Trade customers had grounds to sue the company, said plaintiffs' attorney Ira Lee Sorkin, adding that it depended on the language of investor agreements and whether the outages were due to company negligence.

What remains clear is the frustration among E*Trade customers, even as the company continues to boast that "someday we'll all invest this way." The promise is little solace for investors who are unable to execute online trades, or even get through to the company's telephone support center. And unlike online brokerage services offered by Schwab and Fidelity, E*Trade has no walk-in branches to serve investors during outages.

"I'm not happy!!!! Looks like it's time to leave E*Trade," read one message posted to an Internet discussion list from a person who said he lost money because of a delay processing his order to sell Advanced Micro Devices stock, which has plummeted in recent days.

E*Trade's Nash said the company was leaving its options open and would not rule out suspending advertising or reimbursing customers. In the meantime, E*Trade will continue its push to acquire new customers, even if many current ones are unhappy.

But not everyone, it appears, has lost money as a result of E*Trade's outages. One Usenet poster said he actually made money when he was unable to sell stock in JB Oxford Holdings.

"It ended up rebounding right about the time I tried to sell it and continued upward," read the post, made yesterday on the group, misc.invest.stocks. "I ended up unloading it about a point and a half higher."