RULE MAKER PORTFOLIO

<THE RULE MAKER PORTFOLIO>

Consuming the Web

By Rob Landley (TMF Oak)

AUSTIN, TX (September 2, 1999) -- I've decided to give Tom a hard time this week. In his Friday column, he said a couple of things I don't agree with, and I'm going to write about it, and he can't stop me. Nyeah.

First of all, he called the Internet the most powerful modifying force in history. I think he's underestimating history. Seeing the present as different from everything that has ever come before is always tempting, but also very dangerous. Antibiotics, electric lights, refrigeration, and even fire are all easy to take for granted. But just try doing without them. And measuring wealth in absolute terms without measuring it per capita, as a percentage increase in the existing economic activity, and without taking inflation into account... For once, I'm the one who wants to run more numbers.

The modern day flood of Internet stocks closely mirrors the rush of automobile manufacturer IPOs in the early part of the century. Strangely enough, Ford put all those upstarts out of business the way Microsoft is doing today. Yet, today the automobile is produced by several competing manufacturers who produce a standardized commodity. Before that, it was railroads. Before that, the factories of the Industrial Revolution.

In healthy industries, like Standard Oil's, the monopoly was broken up or naturally defeated by its competition. When that didn't happen, industries like railroads or U.S. Steel crumbled as the free market went around the bottleneck by producing a new technology to render the impregnable, obstructive monopoly obsolete. A monopoly can profitably stifle diversity, but it cannot indefinitely prevent competition from rendering its product a commodity, one way or another, as the market matures. Then again, in the meantime, a monopoly can make a bundle.

Personally, not counting the comet that wiped out the dinosaurs, I think the widespread literacy brought on by the printing press centuries earlier was the biggest earthshaker, leading directly to the Renaissance as more and more people could learn from and contribute their knowledge to the global pool of shared information. Unearthing and preserving ancient knowledge was important, but the participation of more people than ever before in the extension and refinement of that knowledge was the true driving force behind the explosion of learning that ended the Dark Ages.

The Internet is an efficient new tool for communication that can generate the same critical mass of participatory information exchange necessary to spawn new ideas, like submission-based news services such as the Drudge Report and Slashdot, the Open Source movement's collaborative evolutionary software development, and even the collective discussion and learning that takes place among The Motley Fool's investor community right here on the message boards. But the principles underlying these collaborations wouldn't have been out of place in 12th century Florence. And a lot of people got rich then too.

Wandering back from Renaissance Italy (with 12 rolls of exposed film and an even gaudier hat than before), I want to get to my real objection to Tom's column. He very clearly gave the impression that Cisco (Nasdaq: CSCO) and Microsoft (Nasdaq: MSFT) gave rise to the Internet and are its "two leading forces." History simply doesn't bear that out.

The Internet started as a government-funded research project to develop a communications infrastructure that could survive World War III. Just like the interstate highways, it was designed to provide a redundant path from point A to point B. If the path along the way got damaged, there would be plenty of alternative routes available. And, both systems were specifically designed not to care about what they were transporting, just to get it there.

The Internet is approaching its 30th birthday. Cisco shipped its first product in 1986. Cisco has indeed become the single largest supplier and installer of Internet plumbing in the world today; it has made valuable contributions to the expansion of the Internet, but it joined a game already in progress and has scored all its points playing by that game's rules.

Microsoft's claim to be a founding father of the Internet is simply laughable. Up until the release of Windows 95, the only way to connect a Microsoft product to the Internet was through a third party add-on like "Trumpet Winsock." And Windows 95 shipped with an icon for "The Microsoft Network" (which could not be removed from the desktop with steel wool), a proprietary network that Microsoft hoped would replace the Internet with something it could own. Microsoft's Web server powers less than a quarter of the websites on the Internet, and that percentage has not grown in well over a year according to the Netcraft Web Server Survey.

While Cisco and Microsoft have profited greatly from the Internet, the only company I can think of in our portfolio that can really claim to have even an indirect founding role in the Internet is Intel (Nasdaq: INTC). The easiest way to explain why is to talk some more about highways.

The real value of the interstate highway system was its generic nature. The military goals quickly fell by the wayside as the general transportation infrastructure helped commercial trucking to commoditize the railroads' business, and individuals started driving their own cars around the country. If the interstate highways had been closed to civilian traffic, they would long since have been demolished. But as a resource to use as we please, we keep demanding more of them.

Similarly, the Internet was designed as a generic, decentralized communications infrastructure, which the civilian economy has found far more uses for than the military or government could ever have imagined. Consumers found their own use for a general purpose tool, and that is why the Internet blossomed.

Suppliers who attempt to define what the market needs or wants usually wind up as leaders without followers. Corporations attempting to create the perfect product that everyone will want to buy rarely change the world, but we consumers change the world every day. We define it.

The real breakthrough Intel made, on which everything else it has done is directly based, was the invention of a general purpose computing tool: the microchip. It delivered commodity processing power in a self-contained package that could be mass produced. What the microchip could be used for was not defined by Intel. Instead the ingenuity of millions of individuals was applied to finding new uses for the thing. Once Intel had invented the microchip, a personal computer in every home became possible. And where computers go, the Internet can connect them.

The PC and the Internet are consumer-driven phenomena. IBM lost control of the PC because it tried to lead consumers where it wanted them to go, and was surprised when they didn't follow. Intel has stayed ahead by trying to guess where consumers were going and heading there first. But the Internet was never brought to us by any one company; rather, we as consumers demanded it from many companies. Since there never was a single company behind it, many companies have tried to take the credit. That's like Coca-Cola trying to take credit for thirst. The most Coke can honestly hope to say is that they've contributed to it.

Intel and Cisco have mastered the art of following the thundering herd from out in front. What looks like leadership is actually anticipation and rapid response to consumer demand. Even Microsoft eventually bows to the inevitable and provides what customers demand, as when they replaced their proprietary, non-removable Microsoft Network dialer with a proprietary, non-removable Internet Web browser. A company can sometimes steer consumers by leaving attractive bait in front of them, but leading them around by the nose tends not to work.

Our largest advantage as individual investors is a firm understanding of what it means to be a consumer. In our struggle to understand the corporate mindset, we should never lose sight of that.

Finally, our Motley Fool Radio Show crew has a special request. They're looking for two or three interviewees for this Saturday's show. This Labor Day Special show will be in honor of everyday, hardworking Americans. Specifically, they're looking for members of our community who have an interesting or unusual job. Examples might be mortician, pet groomer, exterminator, mascot, port-a-potty cleaner, hamster trainer, mime, or assistant to Kathie Lee Gifford. If you're interested, shoot an email to radio@fool.com.


 




Rule Maker Portfolio

9/2/99 Closing Numbers
Ticker Company Dly Pr Chg Price
AXPAMER EXPRESS-3 1/8$135.88
CHVCHEVRON CORP-3/16$92.00
CSCOCISCO SYSTEMS-11/16$68.25
DPHDELPHI AUTOMOTIVE SYSTEMS-1/4$18.75
EKEASTMAN KODAK-2 1/8$73.25
GMGENL MOTORS-1 11/16$65.13
GPSGAP INC-1 13/16$38.00
INTCINTEL CORP7/8$85.31
KOCOCA-COLA CO-1/2$59.50
MSFTMICROSOFT CORP-9/16$91.81
PFEPFIZER, INC-5/8$38.00
SGPSCHERING-PLOUGH-1/4$53.50
TROWT.ROWE PRICE ASSOC-1/32$30.47
XONEXXON CORP-13/16$77.50
YHOOYAHOO INC-1 3/4$141.56

  Day Week Month Year
To Date
Since
2/2/98
Annualized
Rule Maker -1.03% -1.82% -.28% 13.81% 43.38% 25.57%
S&P 500 -.90% -2.16% -.10% 7.31% 34.56% 20.64%
S&P 500(DA) -.89% -2.14% -.10% 7.83% 36.34% 21.64%
S&P 500(DCA) n/a n/a n/a n/a 22.07% 13.43%
NASDAQ -.60% -.89% -.19% 24.70% 68.85% 39.24%

Trade Date # Shares Ticker Cost/Share Price LT % Val Chg
6/23/9868CSCO28.784$68.25137.11%
2/3/9854MSFT45.135$91.81103.42%
2/13/9852INTC46.928$85.3181.79%
5/1/9882GPS22.708$38.0067.34%
2/3/9866PFE27.433$38.0038.52%
5/26/9818AXP104.067$135.8830.57%
3/12/9820XON64.335$77.5020.46%
3/12/9820EK63.148$73.2516.00%
2/17/9916YHOO126.309$141.5612.08%
8/21/9844SGP47.993$53.5011.47%
3/12/9815CHV83.343$92.0010.39%
3/12/9811DPH17.190$18.759.08%
3/12/9817GM60.400$65.137.82%
2/3/9856TROW33.673$30.47-9.52%
2/27/9827KO69.107$59.50-13.90%

Trade Date # Shares Ticker Cost Value LT $ Val Ch
6/23/9868CSCO$1,957.28$4,641.00$2,683.72
2/3/9854MSFT$2,437.28$4,957.88$2,520.60
2/13/9852INTC$2,440.28$4,436.25$1,995.97
5/1/9882GPS$1,862.06$3,116.00$1,253.94
2/3/9866PFE$1,810.58$2,508.00$697.43
5/26/9818AXP$1,873.20$2,445.75$572.55
3/12/9820XON$1,286.70$1,550.00$263.30
2/17/9916YHOO$2,020.95$2,265.00$244.05
8/21/9844SGP$2,111.70$2,354.00$242.30
3/12/9820EK$1,262.95$1,465.00$202.05
3/12/9815CHV$1,250.14$1,380.00$129.86
3/12/9817GM$1,026.80$1,107.13$80.32
3/12/9811DPH$189.09$206.25$17.16
2/3/9856TROW$1,885.70$1,706.25($179.45)
2/27/9827KO$1,865.89$1,606.50($259.39)
  Cash: $100.80  
  Total: $35,845.80  


Notes
The Rule Maker Portfolio began with $20,000 on February 2, 1998, and it added $2,000 in August 1998 and February 1999. Beginning in July 1999, $500 in cash (which is soon invested in stocks) is added every month.