Rule Breaker Portfolio

<THE RULE BREAKER PORTFOLIO>

Excite@Home Alone
Open minds or locked, plus Q2 prognostications

by Jeff Fischer (TMFJeff)

ALEXANDRIA, VA (July 16, 1999) -- Already the Internet is moving into phase two --a second generation of expansion. The initial stakes have been placed. Now the leading companies are beginning to be leveraged by outside parties. This serves to make leaders even stronger. Potential case in point: a new Web browser has been designed specifically for use with eBay (Nasdaq: EBAY). eBay had nothing to do with its creation.

"Auction Browser" was created by ZCurve software. The browser is a customized Microsoft Internet Explorer browser that displays all the eBay auctions selected by the user at one time, on one page. To prevent missing a sale, the browser automatically updates bid prices and auction closing times, allowing the customer to keep current on many auctions at once without needing to flip to and fro on eBay's pages. Among other auction-centric features, the browser alarms you when an auction is about to end, and it maintains an archive of all your past auctions -- both items bought and sold. A free demo of the new eBay Web browser can be obtained here.

The 3Com (Nasdaq: COMS) Palm Pilot is soaring in popularity partially because the amount of software written for the platform is amazing. With a Palm Pilot, you can track the stars and planets from anywhere in the world, download detailed subway maps of Paris and Rome (and most any other city), install entire medical dictionaries, foreign languages, reams of stock data -- and none of this software was created by 3Com. It was created by users, yet it greatly strengthens 3Com's competitive position. Now, Internet users are creating tools for their favorite websites.

Shares of Excite@Home (Nasdaq: ATHM) continue to decline because people fear that it will lose its exclusive grip on the cable properties owned by AT&T (NYSE: T). I question this logic. Has Apple Computer (Nasdaq: AAPL) taught us anything? Where is the power in offering a closed system? A company must do all of the work itself. In contrast, Digital Subscriber Line (DSL) access is essentially an open standard. Over 300 companies support it and are building for it, including Cisco Systems (Nasdaq: CSCO) and Intel (Nasdaq: INTC) -- just two of the companies working on DSL together. Today, Intel announced the launch of always-on Intel DSL modems later this year. Estimates call for 2 million DSL users by the end of the year 2000, up from about 640,000 today, and closing in on cable usage estimates.

If cable lines were essentially open, most of the technology industry would move quickly to build for cable access and the technology's user-base would very likely expand more quickly. Solutions to rising traffic issues, one of AT&T's arguments for keeping access limited, would be addressed and probably solved by the entire industry. As it is, more corporate momentum is going into DSL instead.

I believe that a closed stance, on almost any issue, usually arises from a position of fear rather than one of confidence. If you have the best products, consumers will side with you no matter who the competitors are.

Anyway, cable modem has many supporters as well, most of them cable and phone-related companies as well as box makers that are beginning to install cable modems in PCs. But this is far from the consortium of giants supporting and soon pushing DSL. High-speed access also represents Internet 2, or the next stage of the Internet. Estimates are that up to 130 million people will use broadband by 2007. How many will use cable and how many DSL and satellite? Predictions abound. The Fool's July Internet Report covers broadband cable, DSL and satellite access.

Now, the main near-term event:

Excite@Home is expected to announce earnings on Tuesday, July 20. This is the first time that @Home's results will be combined with Excite's, so the company will show a few sets of numbers to make everything easier to understand. A loss for the new company of $0.02 per share is anticipated. It is still believed that the company will be profitable by year-end.

@Home ended the first quarter with 460,000 subscribers. It should have grown that number by over 35% sequentially this quarter, to 610,000 or more. One million is still the magic bogey number for year-end. Second quarter revenue should be near $90 million, up about 15% from last quarter en route to over $400 million in revenue for all of 1999, up from $48 million last year. The number of homes ready for two-way cable access should reach 17 million, up 2 million from the first quarter. Meanwhile, Excite's page views will likely increase by about 7 to 10 million from last quarter's 77 million. Excite most recently reported 28 million registered users.

Excite@Home is valued at about $17 billion, or nearly half of Yahoo! (Nasdaq: YHOO) at $32 billion. When you consider that Excite is a leading portal as well, and that with it you get @Home's cable penetration, which should reach nearly two-thirds of North American homes, the price of Excite@Home is far from crazy if Yahoo's price is anywhere near sane. Fear of open access is restraining Excite@Home's stock.

I can understand why, but I don't necessarily agree with it.

Even if AT&T opens its cable lines, @Home will retain a fat lead and many advantages over competitors. Remember: literally dozens of long-distance services are available through common phone lines, but most people use the leading names (AT&T, MCI, and so forth) for obvious reasons: marketing power, brand name, and these are often the "default" providers. That's convenience.

However cable access rights evolve, Excite@Home should land at, or near, the top of the industry. Management would need to blunder worse than Charlie Brown to lose its position. For thoughts from someone who knows the related legal issues inside and out, read this excellent Post of the Day on Excite@Home from a Fool named Supertanker, who is a municipal attorney.

So, next week we'll see results from Amazon.com (Nasdaq: AMZN), America Online (NYSE: AOL), and Excite@Home (Nasdaq: ATHM). Wednesday we previewed America Online's results. Today, we considered Excite@Home's quarter. We have no information from Amazon, although we mentioned possibilities on Tuesday after the toy store announcement.

Amazon's revenue should rise ghostlike (with seemingly little effort) to the $300 million level this quarter following last quarter's $293 million. Amazon's sales have risen from below ground level to surely top $1 billion this year. Of course, the effort has truly been tremendous, and barriers to reaching $1 billion in online sales for new companies are high and rising. Most new companies will be weighed down with chains.

Soon, either here or when writing a Fool News article, I want to discuss the several new broadband companies that have been coming public. Until next time, be Foolish. And remember: quarterly results are short-term results only. Invest for the long-term.

Fool on!

07/16/99 Close
Stock  Change    Bid 
------------------ 
AMGN  +1 3/4     78.88
AMZN  +4 9/16   139.56
AOL   -3        120.94
ATHM  -1 3/8     47.56
CAT   -  5/16    59.50
CHV   +  5/8     96.94
DD    +  5/16    73.31
DJT   -  1/16     5.31
EBAY  +4        127.00
GT    +1 1/4     59.13
IOM   -  1/16     4.69
SBUX  -  21/32   25.84
TDFX  +1 1/16    16.63


                  Day     Month  Year   History   Annualized 
     R-BREAKER  -1.51%   3.82%  33.56% 1240.50%   69.04%
        S&P:     +0.65%   3.35%  16.00%  223.76%   26.82%
        NASDAQ:  +0.88%   6.64%  30.64%  297.75%   32.21%


    Rec'd    #  Security     In At       Now      Change
   8/5/94  2200 AmOnline       0.91    119.94   13096.62%
   9/9/97  1320 Amazon.com     6.58    137.63    1991.81%
  5/17/95  1960 Iomega Cor     1.28      4.50     251.45%
 12/16/98   580 Amgen         42.88     77.63      81.05%
  12/4/98   900 Excite@Hom    28.04     45.63      62.71%
  4/30/97 -1170*Trump*         8.47      5.44      35.79%
  2/23/99   300 Caterpilla    46.96     58.94      25.49%
  2/26/99   300 eBay         100.53    122.97      22.32%
  2/20/98   260 DuPont        58.84     71.88      22.15%
  2/23/99   180 Chevron       79.17     95.63      20.79%
  2/23/99   290 Goodyear T    48.72     58.63      20.34%
   7/2/98   470 Starbucks     27.95     25.38      -9.23%
   1/8/98   425 3Dfx          25.67     16.13     -37.18%

    Rec'd    #  Security     In At     Value      Change
   8/5/94  2200 AmOnline    1999.47 263862.50  $261863.03
   9/9/97  1320 Amazon.com  8684.60 181665.00  $172980.40
 12/16/98   580 Amgen      24867.50  45022.50   $20155.00
  12/4/98   900 Excite@Hom 25236.13  41062.50   $15826.37
  2/26/99   300 eBay       30158.00  36890.63    $6732.63
  5/17/95  1960 Iomega Cor  2509.60   8820.00    $6310.40
  2/23/99   300 Caterpilla 14089.25  17681.25    $3592.00
  4/30/97 -1170*Trump*     -9908.50  -6361.88    $3546.63
  2/20/98   260 DuPont     15299.43  18687.50    $3388.07
  2/23/99   180 Chevron    14250.50  17212.50    $2962.00
  2/23/99   290 Goodyear T 14127.38  17001.25    $2873.88
   7/2/98   470 Starbucks  13138.63  11926.25   -$1212.38
   1/8/98   425 3Dfx       10908.63   6853.13   -$4055.50

                              CASH   $9924.87
                             TOTAL $670248.00
 
Note: The Rule Breaker Portfolio was launched on August 5, 1994, with $50,000. Additional cash is never added, all transactions are shared and explained publicly before being made, and returns are compared daily to the S&P 500 (including dividends in the yearly, historic and annualized returns). For a history of all transactions, please click here.

</THE RULE BREAKER PORTFOLIO>

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