Rule Breaker Portfolio

Rule Breaker Portfolio
Let's Talk Broadband
Excite@Home reports third-quarter results

By David Gardner

ALEXANDRIA, VA (Oct. 19, 1999) -- The Rule Breaker Portfolio rose to beat the market Tuesday, lengthening its lead in The Motley Fool's annual Hall of Portfolios sweepstakes.

Sweepstakes? Well, not really. But there is a friendly rivalry shared by the managers of our various Foolish portfolios. And while Fools all agree that your short-term performance over a given year doesn't matter in the bigger scheme, I certainly still enjoy the competition of trying to outperform our other portfolios year in and year out. Newcomers may wonder how you follow the sweepstakes. Easy. Click here. And bookmark it. Every day by 6 p.m. Eastern, the daily and annual performance numbers of our Hall portfolios are put right there next to each other, on display.

Tonight I'm going to write a bit about Excite@Home, providing thoughts that were first occasioned by reading a couple of very thoughtful posts over in our Excite@Home message board.

Which reminds me! One of my favorite bookmarks in Fooldom today is right here:

http://boards.fool.com/topboards.asp?asof=rec

Save it for yourself! Drag it on to your desktop. (If you don't know how to do this, just ask on our Ask a Foolish Question board.)

It is the top 25 most recommended posts over the past 24 hours, a new feature at Fool.com that enables you to see with a convenient mouse-click some of the best stuff on our boards, at any given moment. Some Foolish readers have said, "You guys are getting thousands of posts a day right now, and I can't keep up!" Well, that's exactly the use of our new feature: It enables you to find the best stuff quickly and conveniently (either across the whole site or within your list of Favorites, or even for just a single stock -- sorted over any time period). At the beginning of this month we introduced our new Recommendations feature, where readers can recommend posts. And you and I benefit from that, as those recommendations are now marked and listed at the address I mentioned above. It was using that list and that link that led me to TMF Nico's thoughts on the broadband battle, in this post.

Nico is saying that regardless of whether the government should regulate the broadband cable industry (as AOL has requested, and as most Fools -- including this one -- reject), we as investors should be more focused on the potential outcomes than on the political squabbles. I own both AOL and Excite@Home, and while the companies frequently seem at loggerheads (as are many members of our community, on the issue), I own both because I think both can and will win. (In fact, both have well beaten the market.) It's not a zero-sum game -- there is lots of room for both of these world-class enterprises to provide for-pay Internet access for a long time. Anyway, in her post (which any investor in either stock should read), Nico looks at each of the end-game scenarios that might arise.

As it so happens, the top percentage gainer today for the portfolio was Excite@Home, rising over 5% to close at $40 5/8. The company announced its third-quarter results today, including its report that at the end of the third quarter it had 840,000 high-paying customers for its cable Internet access service. That's growth of 35%, quarter over quarter, from June. Indeed, Excite@Home is the premier provider of Internet broadband access, which to our Foolish Rule-Breaker thinking is definitely an "important, emerging industry." (If you don't recognize this language, report directly to portfolio management principle #4... or, for more depth, to our book Rule Breakers, Rule Makers.) In fact, we still consider Excite@Home to be the "top dog and first mover" in that industry, providing Internet access to average consumers like us.

Excite@Home is a month and a half short of its one-year anniversary here in RuleBreakerville, and is presently up 45% for us. The S&P 500 over the identical period? Up 10%. Excite@Home has been a market beater.

To tell you the truth, though, I think I would have paid all my profits in the stock up to now as a ticket of admission simply to watch and to learn from the broadband game. It's a battle of the titans. At stake is who will get paid billions of dollars by domestic and international customers for access to the Internet at high-speed rates. The competitors include everyone from AOL to Time Warner to AT&T to Yahoo! to... well, just about every company that has a significant Internet presence, since the moves of the distributors affect the distributed.

Or do they?

Are the big Internet brands (Yahoo! and eBay and Amazon and others) really dependent on the distributing "networks" (AOL, etc.) to any extent like TV shows and content creators were on television? If Excite@Home or AOL or AT&T "won" the broadband battle, would they become so powerful that they could effectively lock out (and make irrelevant) anyone of their choosing, whether it's Yahoo! or eBay or Amazon.com?

I don't think so. The relationship of distributor-to-distributed in television was very top-heavy and controlling; on the Internet, the distributors don't have anything near the control. There are presently dozens of choices that any of us has as to how we'd like to access the Internet: everything from free access via models like NetZero or your public library, to cheap access via regional Internet service providers (ISPs -- like Erols here in Northern Virginia, providing a parochial example), to branded national options (AOL), to broadband options (cable via Excite@Home, DSL service from the Bell companies, etc.). Heck, you can now get Internet content direct to your PalmPilot via 3Com, or straight to your laptop via Metricom.

There are lots of ways to access the Internet.

AND, in most cases you can go directly to anyone's site, skipping the middleman. For instance, The Motley Fool lives here at Fool.com. You can access us through Yahoo! or AOL, in their menus, but you can also just come direct to Fool.com. I write as a manager of an Internet-based company, and with a high degree of confidence I can say that I don't really care that much who "wins" the broadband wars. I know that Fool.com and most other popular, branded sites are going to be there for their customers no matter whose pipe is being used. And if the owner of one of those pipes wanted to play strongman feudal lord and start charging additional fees to free sites like ours, so many people would rebel and jump to another service that it would never work. I don't think you're going to see any company be silly enough to try this, largely because it would be a very silly idea.

So my conclusion on this is that most of the players in broadband will probably win. The battle is NOT zero-sum, and I don't think a single monolithic winner would ever survive; the existing competition is too strong.

This is a huge pie, and our shares of Excite@Home continue to represent a profitable and tasty-looking slice. Overfocusing on who's going to win the open-access argument (where some contend that the cable companies should have to open up their pipes and allow anyone to offer competing access over them) leads mostly to too much of a short-term focus, and losing the forest for trees.

Here's to Excite@Home for at least a year more -- I'll hope for at least a decade.

Fool on,

David Gardner, October 19, 1999


As always, share any thoughts about tonight's recap in our Rule Breaker Strategies board. And if you are looking into, or for, any new Rule Breaker prospects, the conversation always continues on our Rule Breaker Companies message board.






Rule Breaker Portfolio

10/19/99 Closing Numbers
Ticker Company Dly Pr Chg Price
AMGNAMGEN INC3/8$83.94
AMZNAMAZON.COM9/16$76.63
AOLAMERICA ONLINE1/8$115.25
ATHMAT HOME CORP CL A1/16$40.63
CATCATERPILLAR INC-3/8$55.00
CHVCHEVRON CORP9/16$89.88
DDDU PONT (EI) DE NEMOURS-5/16$63.44
EBAYEBAY INC1/8$133.63
GTGOODYEAR TIRE & RUBBER CO-1 1/16$44.88
IOMIOMEGA CORP-1/8$3.13
SBUXSTARBUCKS CORP3/16$21.75
TDFX3DFX INTERACTIVEUnch.$8.13

  Day Week Month Year
To Date
Since
8/5/94
Annualized
Rule Breaker 3.49% 2.87% 1.91% 33.13% 1,238.70% 64.57%
S&P 500 .57% 1.12% -1.67% 2.61% 175.16% 21.45%
S&P 500(DA) .57% 1.12% -1.67% 3.19% 189.41% 22.64%
NASDAQ -.04% -1.60% -2.11% 22.60% 273.27% 28.78%

Trade Date # Shares Ticker Cost/Share Price LT % Val Chg
8/5/942200AOL0.917$115.2512,466.79%
9/9/972640AMZN3.188$76.632,303.91%
5/17/951960IOM1.280$3.13144.06%
12/16/98580AMGN42.889$83.9495.71%
12/4/98900ATHM28.040$40.6344.88%
2/26/99300EBAY100.527$133.6332.92%
2/23/99300CAT46.964$55.0017.11%
2/23/99180CHV79.169$89.8813.52%
2/20/98260DD58.844$63.447.81%
2/23/99290GT48.715$44.88-7.88%
7/2/98470SBUX27.955$21.75-22.20%
1/8/98425TDFX25.667$8.13-68.35%

Trade Date # Shares Ticker Cost Value LT $ Val Ch
8/5/942200AOL$2,017.62$253,550.00$251,532.40
9/9/972640AMZN$8,415.03$202,290.00$193,875.00
12/16/98580AMGN$24,875.50$48,683.75$23,808.25
12/4/98900ATHM$25,236.13$36,562.50$11,326.38
2/26/99300EBAY$30,158.00$40,087.50$9,929.50
5/17/951960IOM$2,509.63$6,125.00$3,615.37
2/23/99300CAT$14,089.25$16,500.00$2,410.75
2/23/99180CHV$14,250.50$16,177.50$1,927.00
2/20/98260DD$15,299.44$16,493.75$1,194.31
2/23/99290GT$14,127.38$13,013.75($1,113.63)
7/2/98470SBUX$13,138.63$10,222.50($2,916.13)
1/8/98425TDFX$10,908.63$3,453.13($7,455.50)
  Cash: $5,954.23  
  Total: $669,113.60  



Note
The Fool Portfolio was launched on August 5, 1994, with $50,000. It was renamed the Rule Breaker Portfolio in October 1998. The investing strategy began with the first investments of the Fool Port and has evolved with time and experience. In July 2001, the portfolio began adding $12,500 each quarter (We missed Jan. 2002, so we added $25,000 in April 2002). We skip a quarter if we have enough uninvested cash or cash available in stocks we would prefer to sell to make new investments. All transactions are shared and explained publicly before being made, and returns are compared in each week's column to the S&P 500 (including dividends where noted) and the Nasdaq composite. For a history of all transactions, please click here.