RULE MAKER PORTFOLIO

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What Happened to Cash-King?

Microsoft the Overdog
Ultimate Rule Maker? Not!

By Rob Landley (landley@flash.net)

Austin, TX (Dec. 21, 1998) -- Normally we cover recent news from all our Rule Makers every Monday, but one company has produced so much news recently that I'm devoting an entire day to it. I'll do news for the rest of our companies tomorrow. The company I'm covering today is Microsoft (Nasdaq: MSFT), of course.

Someday, I'm going to convince Al to stop calling Microsoft "the model of a Rule Maker company" as he did on Friday. I honestly didn't want to talk about Microsoft at all this week after my weeklong rant about it last month, but anybody who thinks I can sit still after a column called "Microsoft the Underdog"... I was provoked! Besides, our next $2000 investment is coming up and we're still contemplating doubling up on what I consider to be our riskiest investment. I want everyone (including Al, Phil, and Tom) to realize the extent of this risk before forking over their own money.

To directly respond to Al's Friday article, I'd just like to quickly point out that Microsoft didn't create the Internet. The Internet emerged over the past three decades from Unix-based university and government computer networks, fueled by federal funding, open standards, and the spare time of literally millions of individuals who wanted to use the thing and had to get it working first. Even a relatively late comer like AOL has been involved with it considerably longer than Microsoft, which originally expected "The Microsoft Network" to completely replace the Internet anyway.

Microsoft's expansion from operating systems and application software to web browsers and websites is analogous to an auto manufacturer like Ford motors expanding into road construction and running rest stops. The Internet has remarkably little to do with Microsoft's current line of business, but the company has saturated its markets and, unable to innovate, Mr. Softy must expand laterally to expand at all. Microsoft is accused of leveraging its existing monopolies to break into this new territory, yet it claims that the fact it is experiencing resistance from the existing players somehow excuses this. And no matter how much AOL was willing to pay for Netscape, the fact remains that Netscape will not continue as an independent company. It did not have the resources to overcome the revenues from Microsoft's Operating System and Application Software monopolies, which allowed Microsoft to give away for free Netscape's main product, the web browser. How does this lessen the DOJ's case?

If you're interested in following the antitrust trial (which is currently recessed until January 4), the best site I've found so far is Yahoo's. They've got links to some great news articles there, dozens of other trial coverage sites, analysis and background material on the case, and they're not nearly as biased about the whole thing as I am.

Despite the holiday break in the antitrust trial, the legal tidal wave against Microsoft continues to mount. A company called Goldtouch invented and patented an ergonomic mouse, which it demonstrated to Microsoft. (Its first mistake.) Microsoft declined to license it, and instead came out with its own ergonomic mouse one year later. Goldtouch is suing for one billion dollars in punitive damages for malicious and fraudulent patent infringement and misappropriation of trade secrets.

Microsoft's various legal problems are not the main threat facing the company. The increasingly negative attitudes of Microsoft's customers towards Microsoft are of much greater concern. CNN reported a recent poll of information technology executives taken at a technology conference, where 58% of the participants indicated they "would switch from Windows if they had the chance." And when asked to name the one company they "trusted least to deliver on its promises," 59% picked Microsoft. The cover story of the December issue of Wired magazine (on the stands now and also available online starting Thursday, December 23) is "83 Reasons Why Bill Gates' Reign Is Over." The situation is perhaps best summed up by Jesse Berst, Editorial Director for ZDNet Anchordesk and a long-time Microsoft supporter, who recently wrote an excellent analytical article titled "How Microsoft Took the 'Win' Out of Windows." As Microsoft is learning, a captive audience is not the same thing as a loyal customer base.

This may explain why a recent study from International Data Corporation found that over the past year Linux shipments have more than tripled from 6.8 percent to 17.2 percent of the server OS market. NT shipments remained steady, around 36 percent over the same period, although the market as a whole grew about 25 percent. Companies recently publicly increasing their support for Linux include: Apple, Compaq, and Sun. I can't really comment on the rumors coming out of IBM, but I might be able to get away with nodding a lot.

In other Microsoft related news, CNN reported the collapse of some of the Microsoft Exchange servers at the House of Representatives during the flood of impeachment related email last week. Apparently, a bug in Exchange sent two servers into an endless loop until Microsoft was contacted to correct the problem. Bad timing, eh?

Finally, Microsoft's main announcement at Comdex this year was a font enhancement technology called "Microsoft Clearlook." Here's a link giving a fairly good explanation of how the technique works, as well as a description of Apple's original 1976 patent (now expired into the public domain) on the technique for use in the Apple II.

I'm still amazed how Al fears that Dell's hypergrowth must undoubtedly end in some kind of crash, yet he never questions Microsoft's continued hypergrowth beyond market saturation combined with its dependence on stock options to attract and retain employees. Microsoft's balance sheet is the most impressive thing about it, and it is very impressive, but I've always been one who looks beyond the numbers. (Perhaps sometimes too much so.) Microsoft's business model, product lines, customer base, marketing, and R&D efforts do not inspire in me the confidence its raw numbers would suggest.

I'm going to get some eggnog and forget about Microsoft until next year. Tomorrow I'll finish the news, and then Wednesday I think I'll talk about Merchant-Kings some more. (I might even be able to get through it without any bad puns about the three wise men.) Tune in to see. Until then...

- Oak


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12/21/98 Close
Stock  Change    Bid
AXP   +  3/16  100.75
CHV   +1       84.00
CSCO  +4 1/4   94.69
KO    +  3/16  65.75
GPS   +3 3/16  51.13
EK    -  5/16  74.00
XON   -1 1/8   74.81
GM    +2 3/16  73.69
INTC  +2 11/16 122.69
MSFT  +2 5/8   140.44
PFE   -  15/16 115.06
SGP   +  3/16  52.38
TROW  +1 1/2   35.75

                 Day     Month   Year    History
        R-MAKER  +1.98%   5.83%  28.85%  28.85%
        S&P:     +1.25%   3.37%  19.57%  19.57%
        NASDAQ:  +2.49%   9.67%  28.31%  28.31%

Rule Maker Stocks

    Rec'd    #  Security     In At       Now    Change
    2/3/98   24 Microsoft     78.27    140.44    79.43%
   6/23/98   34 Cisco Syst    58.41     94.69    62.11%
    5/1/98 55.5 Gap Inc.      34.06     51.13    50.10%
   2/13/98   22 Intel         84.67    122.69    44.89%
    2/3/98   22 Pfizer        82.30    115.06    39.81%
   8/21/98   44 Schering-P    47.99     52.38     9.13%
    2/6/98   56 T. Rowe Pr    33.67     35.75     6.17%
   5/26/98   18 AmExpress    104.07    100.75    -3.19%
   2/27/98   27 Coca-Cola     69.11     65.75    -4.86%

Foolish Four Stocks

    Rec'd    #  Security     In At     Value    Change
   3/12/98   20 Eastman Ko    63.15     74.00    17.19%
   3/12/98   20 Exxon         64.34     74.81    16.29%
   3/12/98   17 General Mo    72.41     73.69     1.77%
   3/12/98   15 Chevron       83.34     84.00     0.79%

Rule Maker Stocks

    Rec'd    #  Security     In At     Value    Change
    2/3/98   24 Microsoft   1878.45   3370.50  $1492.05
   6/23/98   34 Cisco Syst  1985.95   3219.38  $1233.43
    5/1/98 55.5 Gap Inc.    1890.33   2837.44   $947.11
   2/13/98   22 Intel       1862.83   2699.13   $836.30
    2/3/98   22 Pfizer      1810.58   2531.38   $720.80
   8/21/98   44 Schering-P   2111.7   2304.50   $192.80
    2/6/98   56 T. Rowe Pr  1885.70   2002.00   $116.30
   5/26/98   18 AmExpress   1873.20   1813.50   -$59.70
   2/27/98   27 Coca-Cola   1865.89   1775.25   -$90.64

Foolish Four Stocks

    Rec'd    #  Security     In At     Value    Change
   3/12/98   20 Eastman Ko  1262.95   1480.00   $217.05
   3/12/98   20 Exxon       1286.70   1496.25   $209.55
   3/12/98   17 General Mo  1230.89   1252.69    $21.80
   3/12/98   15 Chevron     1250.14   1260.00     $9.86

                              CASH    $120.62
                             TOTAL  $28162.62
 
*Please note: On 8/4/98 $2,000 cash was added to the
portfolio. $2,000 will be added every six months.

*The year for the S&P and Nasdaq is as of 02/03/98

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