Rule Breaker Portfolio

<THE RULE BREAKER PORTFOLIO>

One of Those Weeks
Amazon, Excite@Home, and AOL

By Nico Detourn (TMF Nico) (TMF Nico)

SILICON VALLEY, CA (August 6, 1999) -- It was one of those weeks for Rule Breakers. In some ways, it's always one of those weeks, if by that we mean new twists and turns in the story lines of some of the most dynamic and interesting companies Fools can follow, or in which they can invest. Of course, we prefer it when the week brings gains in our investments rather than losses, which unfortunately wasn't the case with the Rule Breaker Port. So when I say it was one of those weeks, I mean it was also one of those weeks. In other words....

Ugh! As in, uuugly.

Not as bad as it might've been or has been in the past. But still.

The Rule Breaker Port was down 8% for the week. eBay (Nasdaq: EBAY) sank further into negative territory on news of a site outage, which Jeff Fischer explores in News World. We're trailing the S&P 500 and Nasdaq for the day, the month, and the year. But these are just snapshots, or excerpts-to-date of a story still being written. And at times like this, it's especially helpful to look at the companies, and not the stocks.

Amazon.bomb Revisited

Barron's ran another piece on Amazon.com (Nasdaq: AMZN) this week. Nothing unusual in that. The Internet fascinates, and Amazon is one of the Net's great fascinators, so a regular piece in Barron's helps keep the customers satisfied. That the article was negative -- this time focusing on Amazon's revenue per customer account -- was also not unusual. Neither was the attention given to the article among Fool community members who follow the company.

Did the Barron's piece help account for the drop in Amazon's stock? Most likely. But with Amazon down over 50% since April, and over 30% in just the last few weeks, it's difficult to attribute any given effect to any given cause. More important is an understanding of the company itself and the environment in which it operates -- and how well or poorly it operates. In an attempt to do just that, Jeff looked at Amazon's operations on Monday and addressed the issues raised in the Barron's piece.

Excite Not @Home?


Amazon wasn't the only Rule Breaker company to come under the influence of a financial publication this past week. In this instance, though, Excite@Home (Nasdaq: ATHM) was the subject of a far more intriguing bit of reporting than Barron's now routine pokes at Amazon.

Most of us are familiar with the war between Excite@Home and America Online (NYSE: AOL) for dominance in delivering high-speed online services. Less well-known is the friction -- real and potential -- between Excite@Home and AT&T (NYSE: T), which owns a controlling interest in the company. These issues came front and center on Monday when Business Week reported that Excite@Home "may be" on the market, and that Yahoo! (Nasdaq: YHOO) was a potential buyer.

What? It was just last May that the merger of @Home and Excite became a done deal. Sure, netcos operate on "Internet time." But isn't this a bit much?

Well, yes. And no. By Tuesday, Excite@Home President George Bell had said there was "no truth to the rumors of acquisition discussions" between his company and Yahoo!. But while Bell's comment was sufficiently clear to all but wipe out Excite@Home's 14% gain Tuesday morning, the denial did not extend to the bigger story below the headline.

The Business Week article, based mostly on sources close to the companies, spoke of a rift between AT&T and Excite@Home over the role of online content in Excite@Home's future. No small matter, this goes to the heart of what brought @Home and Excite together in the first place.

The central vision behind combining content with a high-speed cable distribution network was to offer consumers a compelling and self-branded alternative to old-timer AOL as the online medium jets into the mainstream. Yet one of Business Week's few sources with a name attached to it, AT&T's head of corporate strategy John Petrillo, is reported saying that Ma Cable is "not interested in being a content company," and that AT&T and Excite@Home have together discussed content distribution deals with Microsoft's (Nasdaq: MSFT) MSN, Disney's (NYSE: DIS) go.com, and NBC's snap.com, among others. Just yesterday Bell acknowledged having talks with both Yahoo! and AOL about placement on the Excite@Home start page and a "very powerful broadband opportunity." At the same time, he dismissed the idea that the company "be put in a position where we're in a dumb-pipe approach."

Things get more and more curious. But that's often life in the Rule Breaker lane. The relationship between content and connectivity, and between Excite@Home and AT&T, are hot topics on the always exciting ATHM message board. As you might imagine, this week's developments -- or were they non-developments? -- certainly earned an exclamation point or two, even if the fiercely loyal @Homers weren't exactly shouting "Yahoo!"

AOL's Acronym Wars


Like Excite@Home, America Online was also the subject of reports this week that raised questions about the very nature of the company -- or at least about the flagship AOL service with which the company is most closely associated, if not occasionally confused. Unlike Excite@Home's in-family rifts, the challenge to AOL comes from outside. As David Gardner mentioned last night, Microsoft is planning to offer low-priced or free (with some conditions) Internet access in a move that targets the 70% of AOL's revenues that come from subscriber fees.

News of an ISP war, or what The Wall Street Journal calls Microsoft's "generously funded" strategy to "drain profits from the Internet-access business," didn't exactly help AOL's already bruised and dented stock. It has some eerie echoes of pricing tactics Microsoft effectively used against Netscape in their browser war -- an as yet unresolved conflict that AOL inherited earlier this year when it acquired Netscape.

These latest hostilities come just two weeks after a challenge to AOL by Microsoft, Yahoo!, and others over instant messaging standards. That IM war also threatens AOL by allowing users of competing products to interact with AOL subscribers. Of course, all these wars overlap. Microsoft is said to be considering the purchase of an ISP such as MindSpring (Nasdaq: MSPG) or EarthLink (Nasdaq: ELNK) as part of its drain 'n' contain ISP strategy. Yet just hours ago, AOL issued twin press releases that both of those ISP's would be distributing co-branded versions of AOL's Instant Messenger -- which in turn echo a now-forgotten deal between AOL and a still-independent Netscape to co-brand an earlier version of that very same IM program.

Overlapping wars. Multi-level strategies. Interlocking companies. Like I said, it was one of those weeks. It's good to have a weekend to digest it all. So try to make yours a good and Foolish one!

08/06/99 Close
Stock  Change    Bid 
------------------ 
AMGN  -2 3/4     76.44
AMZN  -7 11/16   89.56
AOL   +1 5/8     84.63
ATHM  -2 5/16    42.56
CAT   +1 5/8     57.75
CHV   +1 7/8     95.44
DD    -  1/8     73.88
DJT     ---       4.50
EBAY  -9 5/8     83.25
GT    +  15/16   53.63
IOM     ---       3.94
SBUX  -  15/16   21.13
TDFX  +  1/8     13.13


                  Day     Month   Year   History   Annualized 
      R-BREAKER  -2.44%  -8.03%   1.47%  918.45%   59.04%
        S&P:     -1.02%  -2.14%   6.36%  197.92%   24.39%
        NASDAQ:  -0.70%  -3.43%  16.20%  253.80%   28.74%


    Rec'd    #  Security     In At       Now      Change
   8/5/94  2200 AmOnline       0.91     84.63    9211.22%
   9/9/97  1320 Amazon.com     6.58     89.56    1261.29%
  5/17/95  1960 Iomega Cor     1.28      3.94     207.52%
 12/16/98   580 Amgen         42.88     76.44      78.28%
  12/4/98   900 Excite@Hom    28.04     42.56      51.79%
  4/30/97 -1170*Trump*         8.47      4.50      46.86%
  2/20/98   260 DuPont        58.84     73.88      25.54%
  2/23/99   300 Caterpilla    46.96     57.75      22.97%
  2/23/99   180 Chevron       79.17     95.81      21.02%
  2/23/99   290 Goodyear T    48.72     53.63      10.08%
  2/26/99   300 eBay         100.53     83.25     -17.19%
   7/2/98   470 Starbucks     27.95     21.13     -24.43%
   1/8/98   425 3Dfx          25.67     13.13     -48.87%

    Rec'd    #  Security     In At     Value      Change
   8/5/94  2200 AmOnline    1999.47 186175.00  $184175.53
   9/9/97  1320 Amazon.com  8684.60 118222.50  $109537.90
 12/16/98   580 Amgen      24867.50  44333.75   $19466.25
  12/4/98   900 Excite@Hom 25236.13  38306.25   $13070.12
  5/17/95  1960 Iomega Cor  2509.60   7717.50    $5207.90
  4/30/97 -1170*Trump*     -9908.50  -5265.00    $4643.50
  2/20/98   260 DuPont     15299.43  19207.50    $3908.07
  2/23/99   300 Caterpilla 14089.25  17325.00    $3235.75
  2/23/99   180 Chevron    14250.50  17246.25    $2995.75
  2/23/99   290 Goodyear T 14127.38  15551.25    $1423.88
   7/2/98   470 Starbucks  13138.63   9928.75   -$3209.88
  2/26/99   300 eBay       30158.00  24975.00   -$5183.00
   1/8/98   425 3Dfx       10908.63   5578.13   -$5330.50

                              CASH   $9924.87
                             TOTAL $509226.75
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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