Created over 4 years ago
What does Bill Gates know about 'friction free capitalism'? He certainly knows a lot about capitalism! He's no stranger to friction either; his company has certainly rubbed a lot of competition commissioners up the wrong way. But his suggestion is that the internet will gradually lower prices for trading financial instraments. I buy that bit. I don't buy the bit about putting the buyer and seller in direct contact.
Every internet entrepreneur is looking for a way to make money from his site but relatively few have been successful. Google is one example, Facebook will probably soon be another. The trend, though, seems to be that revenue generation is a secondary part - a sideline - of the main business. For Google and Facebook revenue is generated from advertising not from searches or social networking. And the key to success is simply huge volume; lots of hits, lots of subscribers, lots of contributors, etc.
Every non-web based business is looking for ways to ''go digital'' without losing margin. Consider the very topical case of newspapers and magazines. Almost all of them want to put content online but seem surprised that offline readers are so reluctant to become online subscribers.
So too with stockbrokers, it seems. I'm certainly no expert but there seems to be two kinds out there; expensive, old-school, full service, telephone-type, stockbrokers, and no-frills, cheap(er), (nastier?), more modern, internet- based stockbrokers. The former would like to morph into the latter but retain its margins. The latter knows it will never become a wealthy, powerful robber baron like it's 20th century predecessor unless it can increase its current slim pickings. So it's desperately looking for ways to offer more and better services - for which it hopes its customers will pay more - without adding costs. It's also unlikely that any local internet based stockbroker will ever be able to create sufficient volume to make the leap.
Coming back to Bill Gates, the internet and friction free capitalism; he's right that the internet has helped to lower the cost of stockbrokers enormously - although many would say it's still far too high. But he's wrong about buyers and sellers getting in direct contact. Why? Because governments, regulators and stock exchanges won't allow it. The risks of unregulated trading and the potential loss of tax income if uncontrolled trading in financial instraments were to become the norm are just two of many reasons why it won't happen.
Nice try, Bill. Stick to software.