Need help answering these questions with the case posted.

1. What is the strategic problem at Robinhood? Provide a short summary of key events and decisions to explain how the problem occurred. 5 points in total]
2. Describe the macro-environment of the financial service industry! Which macro-environmental factors appear to have the greatest impact on Robinhood's success? Explain why! 15 points in total
3. What is Robinhood's competitive advantage? Why was Robinhood not able to sustain its competitive advantage? 10 points in total
4. How do you assess Robinhood's initiatives to address the strategic problem? Describe and assess each initiative! What would be your recommendations for Robinhood, based on insights from in-class discussions? 10 points in total

Robinhood: Democratizing Investing or Robbing Investors? Our mission is to democratize finance for all. Robinhood Markets, Inc. is a financial services firm best known for its commission-free stock trading app, which went live in 2015. The Robinhood app is popular with Millennials and Gen Z; it had 23 million users (in 2022). Indeed, users doubled during the Covid-19 pandemic, when people were stuck at home and flush with cash from stimulus checks. Many young people started investing using the Robinhood app. More than 50% of Robinhood users are first-time investors. Robir O Nasdaq Baiju Bhatt (left) and Vladimir Tenev, who met as undergraduate physics students, founded Robinhood Markets, Inc. (in 2013) with the mission to "democratize finance for all" and the belief that "the financial system should be built to work for everyone." Robinhood went public in 2021 at a valuation of $32 billion, making the founders billionaires. Tenev is Robinhood's CEO, while Bhatt serves as chief creative officer. Cindy Ord/Getty ImagesJust six days after going public in 2021, Robinhood's market valuation reached $60 billion. At the IPO, Robinhood had a mere 2,800 employees. In comparison, Goldman Sachs, one of the oldest and most prestigious investment rms, had 44,000 employees and a peak valuation of $141 billion (also in the summer of 2021). How did Robinhood accomplish such a remarkable feat? Robinhood Disrupts the Financial Services Industry Stock trading was traditionally a conservative, low-tech industry in which consumers had to visit, mail, or call their Stockbrokers. Consumers also faced exorbitant commissions and additional fees. The rst wave of disruption arrived with the internet, an external technology shock that decreased barriers to entry to the nancial services industry. New entrants such as TD Ameritrade and ETrade launched a novel business model by providing online trading for retail investors. A retail investor is a non-professional who buys and sells stocks and mutual funds using a brokerage rm such as Charles Schwab, among others. In contrast, an institutional investor pools funds to invest on behalf of others, such as hedge funds, mutual funds, pension funds, and university endowments. While retail investors use their own money, institutional investors invest on behalf of a third party. Because they trade in large quantities, institutional investors receive preferential treatment from large nancial institutions, such as research insights and lower fees. As a consequence of new brokerage rms entering the industry in the wake of the internet disruption, the nancial services industry fragmented, providing lower costs, better service, and many more choices for retail investors. Frank T. Rothaermel prepared this MiniCase from public sources with Duncan Siebert, who provided superb research assistance. The MiniCase is intended for class discussion; it is not intended to be used for any endorsement, source of data, or depiction of efficient or inefficient management. All opinions expressed and all errors and omissions are entirely the author's. Revised and updated: July 8, 2022. Frank T. Rothaermel. To launch the second wave of disruption, Robinhood founders combined technological innovation with business model innovation. They initiated a novel approach to retail investing. In addition to commission-free trading, Robinhood introduced fractional share trading. That is, an investor can buy a small slice of a stock. For instance, fractional trading enables anyone to own a small part (say $50) of Alphabet, where one share costs more than $2,000, or Warren Bulfett's rm, Berkshire Hathaway, where one share costs $400,000. The two founders of Robinhood, Baiju Bhatt and Vladimir Tenev, who had been developing automated trading software for Wall Page 513 Street before starting Robinhood, envisioned high-speed trading on smartphones with a user-friendly mobile trading app that made investing fun. Instead of relying on the traditional nancial infrastructure (which is costly, clunky, and requires high-powered PCs for day traders), investors would use their smartphones to communicate with trading centers and execute trades. Using smartphones as a distributed trading platform was made possible by ever faster wireless internet connections, such as the new 5G standard, which is 100 distributed trading platform was made possible by ever faster wireless internet connections, such as the new 5G standard, which is 100 times faster than 4G (or LTE). Relying on smartphones also allowed Robinhood to create an appealing, visually attractive, and potentially addictive interface by hooking young users through gamication. That is, retail investing was turned into a fun, app-based game. For instance, investors would see confetti rain on their screen after their rst trade. The numbers in the amounts of money displayed would click into place like the images on a slot machine. Investors also received text messages with emojis congratulating them on their transactions. In addition, Robinhood provided fun interactive tutorials that made investing less intimidating for rst-time users. The Robinhood founders used these tweaks, borrowed from behavioral psychology, to encourage inexperienced investors to trade often. Why? Because the more users trade, the more money Robinhood makes. Instead of generating revenue by charging users fees on trades and commissions, as in the business model used by existing online brokers, Tenev and Bhatt realized they could make money by selling user orders to large nancial rms, socalled \"payments for order ow.\" When a user places an order to purchase stocks in the Robinhood app, that offer is passed on to market makers. Large nancial institutions such as banks are market makers because they are able to pool buy-and-sell orders from many clients and can offer instant transactions by providing prices for selling and buying shares. Robinhood matches the user's order to a market maker based on who oers the best price. In this sense, Robinhood is a twosided trading platform that matches retail investors with market makers. Next, the market maker executes the trade, earning money on the difference between its buying and selling prices for those specic stocks (called the \"spread\") and passing a percentage back to Robinhood. The more its millions of users trade, the more money Robinhood makes, especially from so-called day traders, who trade multiple times a day. A fun phone app with seamless functioning encourages more transactions, especially by young users who spend hours each day on their smartphones. Combining technological and businessmodel innovations poised Robinhood to enter the nancial services industry as a disruptive innovator. First, Robinhood provided a nocost solution to an existing problem and entered the market from the bottom up. Second, Robinhood brought in a new customer segment that had been underserved by traditional retail brokers: young, rst-time investors. Individually, this customers segment is a low-margin business, but having millions of people trade several times a day generates large fees earned from payments for order ow. Indeed, Robinhood earned $2 billion in revenues (in 2022), almost all from payments for order ow. Third, locking in young, rst-time investors allows Robinhood to grow with them as their nancial situation improves over time and their demand for additional nancial services increases. Robinhood did everything it could to target a younger audience, appealing to the zeitgeist of anti-elitist and anti-capitalist sentiments amongst Gen Zers, even though owning stock in a publicly traded company makes a person a capitalist in the purest sense. (Karl Marx based his analysis of the economic system on two key production factors where capital exploits labor.) The company tailored its business model for this particular consumer segment and even chose its nameRobinhood Markets, Inc.to channel the popular folk hero who steals from the rich and gives to the poor. Robinhood's emphasis on rst-time investors was hypercharged by the Covid-l9 pandemic. Many young people were stuck in their homes, unable to work but receiving government stimulus checks. Given the ready accessibility of Robinhood, many decided to become rst-time investors. An investing frenzy was exacerbated by the bull market during the pandemic. The opportunities it provided for becoming rich quickly created FOMO (fear of missing out), driving more people to use the Robinhood app. During the pandemic lockdown, the power of individual retail investors banding together on online forums such as Reddit's WallStreetBets became apparent as they drove up meme stocks such as GameStop from a valuation of $200 million pre-pandemic to more than $12 billion (an appreciation of 6,000%) at the height of the Covid outbreak. The conuence of technological and business model innovations with the pandemic contributed to Robinhood's enormous $60 billion stock market valuation, driving a paradigm shift in the industry. Robinhood's new model for retail investing forced other nancial services rms to provide commissionfree trading and user-friendly apps. Page 514 Robinhood Investors Are Robbed One year after its successful IPO, Robinhood's market cap had dropped by 90%, to only $6 billion. What happened? The factors contributing to Robinhood's meteoric rise also caused its downfall. This situation is called the Icarus Paradox, after the Greek myth in which Icarus is trapped on the island of Crete with his father, Daedalus, who is an inventor. Daedalus makes wings from wax and feathers so both can y away. Daedalus warns his son not to y too close to the sun, but Icarus ignores his father's sage advice. He soars through the skies and loves ying ever higher. But he ies too close to the sun and the wings melt, causing him to plummet to his death. In a business context, the Icarus Paradox describes a situation in which a business fails rapidly after great success. The failure results from the very strengths that led to success in the rst place.2 Robinhood's slick, gamied user interface (UI) proved dangerous and addictive. Robinhood's mission of \"helping the little guy\" was fraudulent in several ways, and its business model and operations became subject to Robinhood's mission of \"helping the little guy\" was fraudulent in several ways, and its business model and operations became subject to intense scrutiny in the heavily regulated nancial sector. Although Robinhood's app is intuitive and easy to use, it also provides inexperienced investors easy access to complex trading instruments such as options, other derivatives, and cryptocurrencies. Due to their volatile nature and hidden, often unlimited downside exposure, these categories can lead to enormous losses for novice investors. However, these exotic instruments are incredibly lucrative for Robinhood, generating over half of its revenues. As previously mentioned, day traders are Robinhood's most protable users. Robinhood encourages users to trade several times a day with its slick UI, which lights up in bright green and red, constantly sending notications and raining confetti. Researchers found that Robinhood's users traded around 40 times as much per dollar in their account compared to customers of Charles Schwab, another online brokerage rm.3 Heavy day trading would be in keeping with Robinhood's mission if it weren't for the fact that day traders mostly underperform market averages, a fact well established in the nance literature. The downside of gamication to encouraging heavy trading in exotic instruments by novice investors came to the fore when a 20year-old student and Robinhood day trader committed suicide after believing he owed $730,000 in a sophisticated options trade gone sour. Alex Kearns was a student at the University of Nebraska living at home with his parents in a Chicago suburb during the pandemic. Robinhood's aggressive tactics were implicated in his suicide note, where he wrote: \"How was a 20 year old with no income able to get assigned almost a million dollars worth of leverage?\"4 In reality, Kearns had several outstanding options that could have in part covered his nancial obligations. But he was misled into believing that he owed almost $1 million based on the information displayed on the app combined with the complexity of these trades. Robinhood's business model also proved to be problematic in the long run. It turned out that Robinhood did not offer the best prices for trades to consumers. Instead, it sold to market makers that paid them more. Rather than users benetting from the improved prices gained from market makers, Robinhood and the market makers were capturing most of the value. Robinhood was found to make, on average, twice as much from every 100 shares traded as competitor Charles Schwab. This behavior later resulted in an SEC (Securities and Exchange Commission) investigation that led to Robinhood being charged a $65 million SEC ne and a $125 million F INRA (Financial Industry Regulation Authority) ne. Additionally, despite marketing itself as a nontraditional nancial services rm, Robinhood was still bound by the same strict regulations and rules that apply to more traditional stock brokerages. This situation was made clear during the GameStop stock crisis in 2021. As the GameStop stock took off (\"to the moon\") and superheavy trading ensued, Robinhood restricted trading of GameStop stocks due to the GameStop stock took off (\"to the moon\") and superheavy trading ensued, Robinhood restricted trading of GameStop stocks due to the inability to meet collateral requirements under nancial regulation. The inability to trade drew the ire of Robinhood users and the public. It also led to accusations of market manipulation because one of Robinhood's most signicant sources of prot, the market maker Citadel, had heavily shorted GameStop stock (that is, selling it by betting that the stock price would fall). Several lawsuits against Robinhood were initiated by investors claiming they lost out on GameStop's meteoric rise. These factors, along with app outages and negligent security measures that resulted in data breaches, eroded consumers' trust in Robinhood. It also appears that Robinhood peaked during the pandemic because user growth in 2022 was at. In addition, its users traded much less than they did during the height of the pandemic. And, because payment for order ow is illegal in Canada and the United Kingdom and strictly regulated in Europe, there are few places for Robinhood to expand. The SEC in the United States is also considering stricter regulation for payments of order ow, which would create severe problems for Robinhood's business model. Robinhood's stagnating user numbers also result from the wide availability of substitutes in the nancial services market. As Page 515 mentioned, other brokerage rms have changed their business model to zero-commission as well. The rapid imitation of Robinhood's innovations meant that the startup could not protect its temporary competitive advantage. In addition, on a macro level, economic conditions have changed dramatically, with the United States experiencing the highest ination in 40 years and the onset of a global recession (in 2022). The stock market had the worst rst six months in decades, with the tech-heavy Nasdaq, on which Robinhood trades, dropping by more than 30%. Despite these challenges, Robinhood is attempting to move forward. It is focusing on cryptocurrency and moving toward 24/7 availability of trading to generate more revenue from day traders, its primary revenue source. Robinhood aims to build crypto and NFT (non-fungible token) wallets to draw in more crypto and NFT enthusiasts, who generate a disproportionate amount of Robinhood's revenue. It is also focusing on features that appeal to more mainstream investors, such as a stock lending program in which users can lend out stocks in their portfolio to nancial institutions, thereby generating interest, and offering a debit rewards card. Robinhood is doubling down on its vital money makers and neglecting the thorny issues that turned off regular investors. While the future is uncertain, many see Robinhood, with its low market cap, as a takeover target