RULE MAKER PORTFOLIO

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Coca-Cola and Internet Companies

by Rob Landley (TMF Oak)

AUSTIN, TX (April 15, 1999) -- In the late 1800s, carbonated water was a new high-tech fad, and beverages made with it (mostly fruit flavored) were local seasonal products comparable to modern "Italian ice." Coca-Cola (NYSE: KO) started as a niche summer drink at a few drugstores in Atlanta, Georgia. Expanding out of drugstores, selling year round, and expanding out of the home city, state, and country, were all huge hurdles for the young company.

Today, we can order Coke with a fancy dinner or fast food; at breakfast, lunch, or dinner; in the middle of summer or the dead of winter; in supermarkets, gas stations, five-star restaurants, and bars. In the face of "market saturation," the company has always found somewhere else Coke can go, and found a way to put it there.

An early motto of the Coca-Cola Company was that everybody involved with the company should get rich -- not just the shareholders of stock symbol KO, but also the bottlers and the soda fountain owners. Coca-Cola's customers (that is, the soda shops, gas stations, etc.) could see huge profits selling Coke, and the company was happy to share the wealth if it meant the customers would do their utmost to increase sales. Coca-Cola kept prices low and concentrated on volume growth, preferring to sell more than to charge more.

Now, Coca-Cola's many soft-drink brands are some of the most widely available beverages on the planet, rivaling or surpassing coffee, tea, milk, wine, and orange juice. (Not to mention the fact that Coca-Cola also sells coffee, tea, and juice products of its own.) Coca-Cola's largest rival, PepsiCo (NYSE: PEP), rose to prominence in Coca-Cola's wake as the cheaper alternative to the real thing. Big Red of Atlanta carved out its own market niche, and in the process created the entire industry in which all the store brands survive.

Through it all, Coca-Cola has focused on creating value before collecting profits. Its current expansion into economically depressed Asia is one example of this drive. Someday the economy of the region will recover, but in the meantime Coca-Cola can buy bottling assets and advertising in the region for pennies. The value created is not in dollars today, but in a larger market for its product. The dollars come later.

But the value that the company has generated is also psychological. Coca-Cola has caused people to want caramel-colored fizzy sugar water, to accept it as a beverage, and to see it as something worth buying. The growth of Coke's mind share has preceded and paralleled the growth of Coke's sales, and is the reason Coke's brand name is its single most valuable possession.

In today's marketplace, it is the Internet companies that are best positioned to grow customer value. Yahoo, Amazon, eBay, and thousands of others are all primarily interested in attracting more and more regular users and securing their loyalty. For these companies, the infrastructure required to produce their products is remarkably cheap, and the basis for their growth and their profits is mind share.

The primary challenge for the Internet companies is to harness the value their customers receive and, in turn, generate cash profits. Some websites make money selling ads like a television or radio station. Others sell real products like Amazon's books or eBay's auction services. Some charge a subscription service for their information. Some give the information away to attract more eyeballs for banner ads. The only thing they all agree on is that eyeballs can somehow become dollars, so attracting eyeballs is job #1. If necessary, Internet companies will invest every dime they have and completely sacrifice current profitability to grow as fast as possible before the competition steals all those eyeballs.

But someday, these Internet companies will have to turn eyeballs into dollars. Someday, they will have to profit from their value generation in order to fulfill their promise as investments. In that light, tomorrow's article is about the one company that is best at collecting profits from every last scrap of value generated for a customer.

Until then,

- TMFOak

News Update

Today, Pfizer (NYSE: PFE) released its first quarter earnings of $0.62 vs. $0.53 last year. The market proceeded to pummel the pharmaceutical giant, reportedly due to weaker than expected Viagra sales and concern over management's full-year 1999 earnings guidance of $2.40 to $2.50. Up until now, the First Call estimate of 30 analysts was for $2.49, so some interpreted Pfizer's guidance as a quasi-earnings warning. What does this mean for long-term Rule-Maker investors? Not much. Far more important is that Pfizer's drug portfolio is still stocked with eleven products -- Norvasc, Zoloft, Zithromax, Lipitor, Celebrex, Aricept, Diflucan, Viagra, Zyrtec, Glucotrol XL, and Trovan -- which together generated revenue growth of 48% in the first quarter. These products, which represented 78% of pharmaceutical revenues in the quarter, have U.S. patent expirations ranging from 2004 to 2013. Also of note, the company increased R&D by 36% due to "continued advancement of a large number of promising drug candidates in all stages of discovery and development." The company released a very thorough three-part press release detailing the quarter's results.

For more insight on the recently announced merger of Yahoo! (Nasdaq: YHOO) and broadcast.com (Nasdaq: BCST), check out the Fool's recent StockTalk with broadcast.com Co-Founder & Chairman Mark Cuban.

I'll also mention The Motley Fool's new Jester Award, which identifies books worth reading, keeping, and passing along -- books like Guy Kawaski's new book, Rules for Revolutionaries, which is the winner of our inaugural April Jester Award.

Finally, for any Fools in the Washington, D.C. area, we'll be having a golf shoot-out this Saturday to benefit one of our employees who is undergoing treatment for cancer. For more details, click here. Come on down if you can. There's a $10,000 prize for the first hole in one!

See ya on the board,

Matt (TMF Verve)

04/15/99 Close
Stock Change    Bid
AXP   -2 13/16  133.69
CHV   +4 5/8     95.75
CSCO  -  7/16   110.31
EK    +2 5/16    66.56
GM    -3 3/16    86.56
GPS   -3 11/16   68.88
INTC  +1 5/16    58.44
KO    +  7/8     64.25
MSFT  +3         88.88
PFE   -14 1/4   130.00
SGP   -3 1/8     52.06
TROW  -1 15/16   31.00
XON   +3 3/8     77.56
YHOO  +3 5/8    194.63


                  Day     Month  Year    History
        R-MAKER  -1.19%   1.72%  13.30%  43.36%
        S&P:     -0.42%   2.84%   7.94%  33.53%
        NASDAQ:  +0.59%   2.48%  15.05%  52.57%

Rule Maker Stocks

    Rec'd    #  Security     In At       Now    Change
    2/3/98   48 Microsoft     39.13     88.88   127.10%
    5/1/98   55 Gap Inc.      34.37     68.88   100.39%
   6/23/98   34 Cisco Syst    58.41    110.31    88.86%
    2/3/98   22 Pfizer        82.30    130.00    57.96%
   2/17/99   16 Yahoo Inc.   126.31    194.63    54.09%
   2/13/98   44 Intel         42.34     58.44    38.03%
   5/26/98   18 AmExpress    104.07    133.69    28.46%
   8/21/98   44 Schering-P    47.99     52.06     8.48%
   2/27/98   27 Coca-Cola     69.11     64.25    -7.03%
    2/6/98   56 T. Rowe Pr    33.67     31.00    -7.94%

Foolish Four Stocks

    Rec'd    #  Security     In At     Value    Change
   3/12/98   20 Exxon         64.34     77.56    20.56%
   3/12/98   17 General Mo    72.41     86.56    19.55%
   3/12/98   15 Chevron       83.34     95.75    14.89%
   3/12/98   20 Eastman Ko    63.15     66.56     5.41%

Rule Maker Stocks

    Rec'd    #  Security     In At     Value    Change
    2/3/98   48 Microsoft   1878.45   4266.00  $2387.55
    5/1/98   55 Gap Inc.    1890.33   3788.13  $1897.80
   6/23/98   34 Cisco Syst  1985.95   3750.63  $1764.68
   2/17/99   16 Yahoo Inc.  2020.95   3114.00  $1093.05
    2/3/98   22 Pfizer      1810.58   2860.00  $1049.42
   2/13/98   44 Intel       1862.83   2571.25   $708.42
   5/26/98   18 AmExpress   1873.20   2406.38   $533.18
   8/21/98   44 Schering-P   2111.7   2290.75   $179.05
   2/27/98   27 Coca-Cola   1865.89   1734.75  -$131.14
    2/6/98   56 T. Rowe Pr  1885.70   1736.00  -$149.70

Foolish Four Stocks

    Rec'd    #  Security     In At     Value    Change
   3/12/98   20 Exxon       1286.70   1551.25   $264.55
   3/12/98   17 General Mo  1230.89   1471.56   $240.67
   3/12/98   15 Chevron     1250.14   1436.25   $186.11
   3/12/98   20 Eastman Ko  1262.95   1331.25    $68.30

                              CASH    $185.03
                             TOTAL  $34493.22

Note: The Rule Maker Portfolio began with $20,000 on February 2, 1998, and it adds $2,000 in cash (which is soon invested in stocks) every six months.

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