The Early Stage Competition in the Japanese Online Securities Industry: Research Based on Case Studies of Leading Companies

: In the early stages of the online securities industry in Japan, combined factors of expectation based on the precedent in United States created a “dominant perception” that the customer base of the industry would dramatically increase. Based on this perception, companies other than Matsui Securities continued to participate in endless and morass price competitions. These companies shared sufficient knowledge on Matsui Securities’ strategies as well as Matsui Securities’ performance. However, at least for two years, they underestimated Matsui Securities as “a niche company” and did not seek to its strategies. Thus, Matsui Securities were able to enjoy overwhelming performance and establish a solid position in the initial stages of the industry without being imitated by others.


Introduction
In this paper, we will analyze how such differentiation between Japanese online securities companies, the source of high performance, has been created and maintained. One company's success always invites imitation by other companies, and competitive differences among companies tend to decrease over time (Williams, 1994). Especially in industries where there is severe competition, even core resources or competencies that are hard to imitate are likely to leak to other companies (Teece, Pisano & Shuen, 1997). The resulting minimization of differences between competitors works toward reducing a company's competitive advantage (Noda & Collis, 2001).
In the online securities industry, it is very easy to imitate another company's successful strategy because the products and services of competing companies are shown on their web sites in real-time, and because many of the companies publicly disclose performance results. On the other hand, we can see that Matsui Securities' operating revenue and profit as of March 2003 was far above its competitors, making it the "sole winner in the industry." Matsui Securities' strategy in the initial stages of the online securities market may have been correct. However, had others followed Matsui Securities' strategy immediately, Matsui Securities may not have been able to establish such a solid competitive edge as it has today. Nevertheless, Matsui Securities was successful in establishing a predominant position in the initial stages of the online securities industry. Therefore, the question arises as to why this was possible.
In this paper, we will take a closer look at actual cases in the online securities industry in chronological order, through which we will attempt to clarify the question: "How did the corporations differentiate themselves from others, and how did they maintain these differences in the initial stages of the online securities industry when imitation by the others were easy?" Around this time, the so-called "Big Bang" financial market deregulation in Japan began, which dramatically changed the competitive environment of online securities trading (Takai, 2003a(Takai, , 2003b.

Outline of Online Securities
One of the first deregulation initiatives, conducted in December 1998, was the transition from a securities company licensing system to a registration system. In the beggining, online securities companies only handled a limited numer of products. However, they soon began to provide products at the same level as face-to-face retail sales (i.e., at actual shop counters), and the quality of services also improved.
As a result of such upgrading, the number of exchange transactions conducted online kept increasing despite a depressed stock market. Within few years time, the online securities market has grown as large as the face-to-face retail sales market (Takai 2001).
With this rapid market growth, companies faced severe competition (Takai, 2004). Under the severe competition, many companies including Schwab Tokyo-Marine which had been seen as one of the major competitors to exit the market in 2001. By 2004 the number of companies in the market decreased by more than ten companies compared to the peak in 2001. Currently, the oligopolization of the industry is progressing where a few companies handle most of the stock transactions.

Specialized Companies
In this paper, we focus on the six leading companies (Table 1). For reference, the total market share of the six companies account for more than 70% of online trading and also for more than 52% of the total trading by individuals including face-to-face retail trading. Thus, it can be assumed that these six companies have a strong influence on the overall online securities industry, as well as the securities industry as a whole.

Number of accounts
Source: Japan Securities Dealers Association "Result of an investigation about Internet trading." Company annual reports 13th company to enter the market (Osaki, 1999

Perception"
The securities market became easier to enter in December 1998, upon its transition from a license system to a registration system. Around this time, In contrast to this, the ratio of individual assets made up by stock investments was very low in Japan as compared to the United States (see Figure 2) largely because the securities companies have long since focused their efforts on providing face-to-face service to their main customers, namely affluent middle-aged customers. Thus, in the Japanese securities industry before deregulation, the only successful business model was to have as many "good customers" as possible. Securities companies sought to keep good customers as long as possible by providing valuable investment information and advice tailored to the needs of each customer under a relatively high and uniform commission fee structure.
The fees were not viewed as particularly onerous to the affluent, middle-aged consumer groups with their  surplus assets, to which most of the securities companies' customers belonged (Saga, 2000).
However, amid the public discourse of the "Big Bang" financial reforms in Japan, which gained momentum from around 1997, the government decided that securities commissions were to be  the United States' case, and with a push from the IT bubble economy, the dominant perception that "customers would vigorously increase" was formed.

Securities Companies
At this stage, the major securities companies thought that, while continuing to target affluent middle-aged customers as their major customers in the conventional face-to-face retail shops, they should also start pursuing online business and take in general customers who have no experience in stock trading. twenty years after deregulation, the figure was still below 15%. It has been pointed out that the reason behind this slow increase is that many customers highly value the investment information and advice which sales persons of full service securities companies provide (Osaki, 1999).
This data seemed very encouraging to major Japanese securities companies since they also provided full service. Based on such data, the major securities companies who entered the online market in its early stages, consistently maintained that their major revenue source would continue to be "affluent middle-aged customers," and that they would continue to provide a high level service consisting of full investment advice in their retail establishments.
Moreover, the major securities companies judged that, since important retail customers might start online dealings and significant investment information may be obtained online, it would be difficult to differentiate the commissions charged online from face-to-face transactions. Therefore they announced their policies to minimize commission discounts after deregulation in October 1999.
As a result, it was difficult for major securities companies to take proactive actions towards expanding of their online business because they were anxious to minimize "cannibalization"--revenue loss due to important long-term customers shifting to online dealings. The semi-large and middle-sized enterprises, which did not spin-off online securities divisions, were also facing the same situation more On the other hand, Matsui Securities alone announced a "fixed commission fee system" under which the commission (3,000 yen) will remain the same for up to three transactions as long as the total amount does not exceed a set range (three million yen). Matsui Securities claimed that their fee system was "unprecedented in Japan or overseas" in that it was determined by a matrix of "the number of transactions" by "the total contract amount." Matsui Securities called its system the "Box Rate Fee." When commission fees were deregulated in October 1999, the proposed fee systems of the leading companies specialized in online securities trading except for Matsui Securities were already below the profitable line. Although there was a common understanding at the time that "3,000 yen was the profitable line," the companies other than Matsui Securities proposed fees that were below this line (e.g., E*Trade=2,500 yen, DLJ=1,900 yen, Monex=1,000 yen). In fact, many of these companies admitted that upon deregulation they had set the fee below the "profitable line," as is shown in their comments: "We are prepared to suffer loss for three years (Nikko Beans)" and "The fee will not cover fixed costs (DLJ)." Despite the fact that companies were already incurring losses, a fierce price war soon started. The first company to decrease its commission fee was E*Trade, which was also the company that was first to trigger "price destruction" in the United States.
Initially in October 1999, E*Trade began a "free commission fee" campaign for a limited period without changing its revised price scheme that had just been set up. By this they lowered their minimum commission fee from 1,000 yen to 700 yen, an amont smaller than E*Trade. This fee was only applicable to customers whose accounts were worth more than ten million yen account deposit, but even for customers with lower deposit the commission fee was changed; for example it was lowered to 720 yen for contracts of up to 200,000 yen. Thus, the price revision was significant, offering an average of 16% discount.
DLJ, which initially had not been involved in the price competition but seeking to increase the number of accounts, in July 2001, announced that it would run a "90 yen per transaction" campaign beginning in August, although the campaign was limited to cases with more than 20 transactions per   Our aim is to invoke a price revolution and expropriate customers from the large major competitors." Matsui Securities' targeted "stock investors" and ignored the "general customers" who were commonly believed to increase dramatically.
Not only that, Matsui Securities openly announced its target of acquiring customers of large major companies--a "taboo" in the Japanese securities industry at that time.
The index Matsui Securities had been focusing from the very beginning was the "turnover rate" (i.e., the number of transactions per account). In the stock brokerage business, securities companies gain revenue by charging customers a certain commission fee for stock transactions. Therefore, to increase revenue either the customer base (number of accounts) or the number of transactions (turnover rate) must be increased. While its main competitors were eagerly trying to increase their customer bases, only Matsui Securities focused on increasing the number of transactions per account, that is the "turnover rate." In detail, Matsui Securities established a system which allowed its customers (experienced investors) to engage in any transaction they liked--however small the amount may be and how many times they wished. Through this system, Matsui Securities offered services which took advantage of real time processing capability of online businesses. That is highly risky and requires specific knowledge, regarding margin trading and option trading, for instance. Moreover, Matsui Securities abandoned the commission per transaction system and established a fixed commission fee system that only charged a certain commission fee for multiple transactions as long as the total amount fell within a set range.
These services and this price structure were established to target "active users" who would make a few transactions per day utilizing margin trading and option trading.

7-2. Others' Evaluation of Matsui Securities
The mass media paid much attention to Matsui  While other companies engaged in price competition based on the "dominant perception," Matsui Securities maintained its unique strategy which was completely different from the others.
The result was that it steadily increased its number of accounts to a scale much larger than that of a niche company, and maintained top profit level in the industry, saying "several hundred customers a month switch from Nomura and Daiwa" (Matsui & Matsumoto, 2001).

Strategies and Time Lag
From around the latter half of 2001, competitors started to imitate Matsui Securities' strategy. By this time, Matsui Securities' revenue was significantly higher than the others. In addition, as mentioned above, the industry became aware of the fact that in reality it was normal for one customer to hold four to five accounts, and looking at the breakdown of the explosive increase in online accounts, it was discovered that the majority of these accounts were owned by customers of the three leading companies which mainly provide face-to-face services. As these facts became clear, a new recognition started to prevail in the other online securities companies: In Japan, the actual "customers" who engage in the actual stock trading largely deviate from, or rather, is significantly less than the "number of accounts." Until then, the industry players targeted the general investors which they envisioned would rapidly increase and insisted on attracting such new   companies" (Matsui, 2003).

Imitation of Matsui Securities
Start of margin trading

Discussion and Conclusion
In this paper, we made a case-based analysis to answer this research question: "How did the corporations differentiate themselves from others and how did they maintain these differences in the initial stages of the online securities industry when imitation by the others were easy?" To the first half of the question, "how did the corporations differentiate themselves from others?," To the latter half of the question, "how did they maintain these differences in the initial stages of the   Nevertheless, the other companies continued to follow the "dominant perception," which said that "customers would increase dramatically," and the companies engaged in severe competition, repeatedly cutting the commission whenever others did.
As stated before, it took no less than two years from the real rise of the market for the reputation that "Matsui Securities grabs active users who are the core customers of this stage of the online securities market" to replace the view of Matsui Securities as a niche player that only attracts "day traders." This replacement was a kind of 'Copernican revolution' in the industry's view of the market. However, by the time the change occurred, the distance between Matsui Securities and the others was considerable. Evaluating the case afterwards, even though the service Matsui Securities had offered was the "dominant design" at the initial stages of the industry, because companies other than Matsui Securities were beholden to the "dominant perception," they would not follow Matsui Securities' strategy, even though they acknowledged the strategy and its intention quite well. As a result, Matsui Securities kept growing under the situation that appeared to be similar to the so-called "gap created by concentration of several companies" (Shimamoto, 2001).
There has been an increase in the number of studies that have focused on the social and political processes that surround the companies in the early, uncertain, and fluid stages of the industries (e.g., Numagami, 2000). For example, "the technical result frequently published in an academic community" (Fujii, 2002) or "the technical policy" (Shimamoto, 2001) specified "the axis of competition" through social interactions between the companies, then they had great influence on the process of an innovation or a competition. Under such situation, while a company that has accumulated know-how and deep information is able to judge information alternatively and actively (Itami, 2004), a company without know-how and information can only understand information passively, and it may be at high risk to follow the "dominant perception." Usually, since the late-coming company does not have such know-how in many cases, it may be put in a disadvantageous position. What should such a company do? I think that to find out customers' true needs by repeating small "hypothetical-verification type experiments" (Kagono, 1988), and to deal with them quickly will be most important for latecomers without know-how and information.
For the purposes of this study, we only analyzed limited number of leading companies of the industry. performances of the large-scale securities companies that could not become the major players in online securities industry in Japan. We would like to analyze these issues in researches to follow.