Rule Breaker Portfolio

Rule Breaker Portfolio
Microsoft's Not a Monopoly
Plus, buying ladders on Amazon

By David Gardner

ALEXANDRIA, VA (November 9, 1999) -- The Breaker Port got hammered today, losing more than 3% of its value. What largely brought us down was the same stock that took us up more than 7% overall, yesterday: Amazon.com.

Yesterday, you'll recall, Amazon shares rose over 20% in anticipation of a significant e-commerce announcement today. The announcement came this morning, and the shares went back down about 10%. Net market reaction to today's news: gain of 10%.

Was this gain justified? Who knows?! I hope you won't come here thinking you'll find airtight explanations for the market's irrational short-term meanderings. What essentially occurred today is that Amazon announced new product categories, including software and computer games (which we've been waiting for, for a long time, and which we expect to succeed to the tune of #1 positioning within 18 months) and... home improvement?! Yep, home improvement. As of Wednesday you'll be able to buy ladders, wrenches, and nails over Amazon.com. No matter the weight, you'll pay $4.95 in shipping. Did you ever think e-commerce would extend to two-by-fours?

You didn't? Hardware.com did. So too did TrueValue.com. Meanwhile, Sears and Home Depot have yet to establish any significant online presence for their hardwares. To tell you the truth, I had never thought to buy my next drill from Amazon, which indicates I hadn't heard of Hardware.com or TrueValue.com. But I'd just as soon save time not motoring down to my local hardware store just as I've bought more books over the past two years than at any point in my life despite almost never going into bookstores. So maybe I'm a customer there, too.

So to tie a ribbon around this latest Amazon announcement and be done with it for now, we can observe with MSNBC that "Amazon wants to be known as "'Earth's biggest selection' for anything customers may want to purchase online and be the top e-commerce destination site." That's the natural course that this company has been traveling since we purchased our shares in 1997. I agree with the Goldman Sachs analyst who opined, "They can gain meaningful marketshare in these categories, but they don't have to be No. 1. Amazon wants to be the place where you can find anything. If they reinforce that and are consistent in that message, they can be successful."

For details on today's announcement, check out our Fool News story.

Switching gears, and moving toward tonight's main event, there has been a thread on our Apple message board the past few days entitled "Disappointed by the Gardners." It refers to the disappointment felt by some that we, the hosts of our weekend radio show, opined there that Microsoft should generally be left alone. I speak as someone who does not personally own shares in Microsoft or Apple (though I've certainly been closer to buying Apple in the past many months!). I don't particularly like Gates, or his company. They're not to my taste; they lack style like Brezhnev lacked rhythm. On the other hand, I've written of my love of Jobs and Apple in the past (in our most recent book, especially).

But while I might not want to hang out with Microsoft or Gates, I do still admire them. And as a consumer and an American, I'm darn glad they exist and that they exist on our shores. And I value them far more highly -- as, I sense, do most Americans -- than the intervening "help" sometimes on offer from our federal government.

As a Fool, part of my mission is to remain ever-vigilant for what I perceive to be wrongheaded, conventional Wisdom. And my Wisdom Detector (tm) is flashing at the notion that Microsoft has a monopoly. In fact, I don't believe that Microsoft has ever been or is a monopoly.

We should define monopoly, especially if the company is going to be taken to task for monopolistic abuses and practices. I use "monopoly" to indicate a business situation in which there is ONLY ONE PROVIDER of a product or service, in which competition does not exist. I only use the word in the purest sense, pretty close to what I read in Webster's where it is defined as "exclusive control or possession." (I am aware that this is not a strict legal definition -- though I encourage you to ask yourself which is more useful.)

The circumstances that create such a situation are virtually impossible to find today, especially in technology. Microsoft is one of the most competed-against companies in the history of the world. Obvious Microsoft present-day head-to-head competitors today include Intuit, Real Networks, Oracle, Sun Microsystems, AOL, and Apple, and several of those are beating Microsoft handily in key markets -- a few of them have been for a long time. Even within its supposedly most monopolistic market -- operating system software -- obvious distributed alternatives to Windows exist via Red Hat and others distributing Linux (on the PC platform) and Apple (on the Mac platform).

Further, so many technological changes are occurring as I write that any supposedly unbeatable lead in the high tech world is, I submit, a laughably short-term view of business. And in Microsoft's case, mostly backward-looking. There is no monopoly here, Fools.

This said, let's dig just a bit deeper. Students of economics rightly question whether monopolies are even bad -- and if you have never seriously thought through this question yourself, I encourage you to read Hayek, von Mises, or Milton Friedman. The only way in free-market democratic capitalism that you can achieve a monopoly is if you are serving your customers perfectly -- so that no Rule-Breaking entrepreneurs see any room at all to chip away at you, or try to change the rules altogether.

To this end, I believe that a vote for crippling Microsoft is, at root, a vote against capitalism. It demonstrates a lack of faith in free markets, in Rule Breakers, in entrepreneurs... and even in consumers, who are essentially treated by such pundits as "idiots" for continuing of their own freewill to buy products deemed inferior or unacceptable by the much smarter and enlightened critics. The only way a business can grow in the free market (in any industry) is if it serves its customers good products or services at acceptable prices, and if its marketing, methods, and culture are palatable; otherwise, no customers. Or at best, massive boycotts and a fractured market. That's why capitalism and the free market work.

From what I know of Microsoft's actions, I do not find them immoral. They are a strong-as-heck business (despite a lot of the condescension often directed at them) with tough tactics. Demanding that PC makers include Windows, denying outside developers proprietary programming interfaces, etc., are the prerogatives of this company or any company -- just as I might freely and legally decide only to patronize your lemonade stand (for instance) if you visit mine.

No single entity -- company, organization, or individual -- is strong enough to control the actions of all consumers. Any company that behaves in an egregious and offensive manner will incur the eventual wrath of all competitors, of the markets, and of the public at large. The strong-arm tactics are part of a Rule Maker's arsenal, and occur in many contexts all across the world. To single out Microsoft is to turn a blind eye to Coca Cola and Intel and, heck, to many smaller companies as well which have dominance in certain niche categories and can dramatically influence the fortunes of allies and competitors alike.

If most of us really want to be passionate about violations of rights, I think you're better off spending your time trying to overthrow repressive dictatorships (of which there remain many) rather than Microsoft.

Perhaps Microsoft has violated existing law; I'm not qualified nor sufficiently read-up on the subject to say. My thoughts don't speak to that at all. I question the laws themselves, in this case, which do not seem effectively to be protecting the consumer so much as they seem to be trying to protect competitors. I don't see any outcry from consumers. That's where we should look ultimately, as we dream up our laws and our philosophies.

Microsoft a monopoly? Pshaw.

What do you think?
Please post your thoughts about tonight's report on our Rule Breaker Strategy board. Alternatively, if you have ideas, analysis, or questions about a particular Rule Maker company, pull up a chair at the roundtable discussion on our Rule Breaker Companies board.

(Fool Radio Note: This weekend's guests include two Rule Breakers in their own right: Harry Beckwith, author of the Jester-Award-winning Selling the Invisible, and Craig Venter, CEO of Celera Genomics.)






Rule Breaker Portfolio

11/9/99 Closing Numbers
Ticker Company Dly Pr Chg Price
AMGNAMGEN INC7/16$85.88
AMZNAMAZON.COM-7 3/16$70.81
AOLAMERICA ONLINE-4$146.38
ATHMAT HOME CORP CL A1/8$46.06
CATCATERPILLAR INC-3/16$53.88
CHVCHEVRON CORP-1/8$89.25
DDDU PONT (EI) DE NEMOURS13/16$61.38
EBAYEBAY INC-2 1/8$134.88
GTGOODYEAR TIRE & RUBBER CO-5/16$37.06
IOMIOMEGA CORPUnch.$3.13
SBUXSTARBUCKS CORP1/8$29.06
TDFX3DFX INTERACTIVE3/8$9.50

  Day Week Month Year
To Date
Since
8/5/94
Annualized
Rule Breaker -3.55% 3.52% 6.95% 45.21% 1,360.18% 66.40%
S&P 500 -.85% -.36% .17% 11.07% 197.84% 23.03%
S&P 500(DA) -.85% -.36% .17% 11.65% 212.09% 24.13%
NASDAQ -.60% .73% 5.35% 42.52% 333.92% 32.15%

Trade Date # Shares Ticker Cost/Share Price LT % Val Chg
8/5/942200AOL0.917$146.3815,860.64%
9/9/972640AMZN3.188$70.812,121.56%
5/17/951960IOM1.280$3.13144.06%
12/16/98580AMGN42.889$85.88100.23%
12/4/98900ATHM28.040$46.0664.27%
2/26/99300EBAY100.527$134.8834.17%
2/23/99300CAT46.964$53.8814.72%
2/23/99180CHV79.169$89.2512.73%
2/20/98260DD58.844$61.384.30%
7/2/98470SBUX27.955$29.063.96%
2/23/99290GT48.715$37.06-23.92%
1/8/98425TDFX25.667$9.50-62.99%

Trade Date # Shares Ticker Cost Value LT $ Val Ch
8/5/942200AOL$2,017.62$322,025.00$320,007.40
9/9/972640AMZN$8,415.03$186,945.00$178,530.00
12/16/98580AMGN$24,875.50$49,807.50$24,932.00
12/4/98900ATHM$25,236.13$41,456.25$16,220.13
2/26/99300EBAY$30,158.00$40,462.50$10,304.50
5/17/951960IOM$2,509.63$6,125.00$3,615.37
2/23/99300CAT$14,089.25$16,162.50$2,073.25
2/23/99180CHV$14,250.50$16,065.00$1,814.50
2/20/98260DD$15,299.44$15,957.50$658.06
7/2/98470SBUX$13,138.63$13,659.38$520.75
2/23/99290GT$14,127.38$10,748.13($3,379.25)
1/8/98425TDFX$10,908.63$4,037.50($6,871.13)
  Cash: $6,381.51  
  Total: $729,832.80  



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.