Rule Maker Portfolio Microsoft's HailStorm

Microsoft's struggles in the Internet arena are starting to pay off. Part of the .Net initiative is an ambitious personal information manager called HailStorm that promises to make online transactions of all kinds easier.

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By Todd N. Lebor (TMF TeeTime)
April 11, 2001

True visionaries only come around once in while. Thomas Watson Jr., of IBM (NYSE: IBM) saw the power of computers, Henry Ford brought us the assembly line, GM's (NYSE: GM) Alfred P. Sloan shaped the modern corporation and then there's Microsoft's (Nasdaq: MSFT) Bill Gates, who recognized the power was not in the device but in the software that powered it. Now, I'm beginning to suspect that Oracle (Nasdaq: ORCL) CEO Larry Ellison and Sun Microsystems (Nasdaq: SUNW) CEO Scott McNealy deserve more credit as visionaries than they get. Not for building their respective businesses into world-class companies, but for fearing the inevitable -- Microsoft in their back yard.

While Microsoft was exerting its power in the applications and operating system markets, the big three comfortably grew their businesses. But, two guys knew what was coming. Just like the convergence happening now in the telecommunications markets with copper, fiber, and wireless devices and gizmos, software is starting to mesh. Ellison knew this day would come and he wanted his fair share of the pie. Time's up guys, Microsoft is at the doorstep.

According to a recent eCompany Now article, "Windows-based servers now run at least the front end of more than half of all secure websites." Twenty of the 50 largest retailers also run Windows as do half of the 50 largest business-to-business (B2B) sites. Last year Windows servers grew at a 31% rate, while Unix-based servers (Sun's forte) grew by only 14%. And to cap it all off, the Transaction Processing Performance Council, an independent arbitrator, ranked three Compaq (NYSE: CPQ) servers running Windows 2000 and Microsoft SQL databases as first, third, and fourth in processing speed.

There's more. In January, MSN climbed onto the throne. According to Media Metrix, the MSN network of sites had 109 million users globally, versus Yahoo!'s (Nasdaq: YHOO) 97.8 million and AOL's (NYSE: AOL) 95 million. Then in February, MSN's instant messaging service beat out AOL Instant Messenger with 29.5 million people downloading its software versus 29.1 million for AOL IM. Like crab grass that shows up suddenly one day on your lawn, before you know it, it has taken over.

Microsoft is re-engineering its business for enterprise software. No longer is the consumer-based operating system the main focus of attention in Redmond. It's .Net. Mike Trigg did an excellent job of outlining the purpose of .Net in a recent Rule Maker column, but I did not understand the scope of .Net until the HailStorm arrived.

HailStorm is a souped up version of Outlook or what we all wish Hotmail (Microsoft's free Internet email service) turned out to be. It is what I (yeah, me) envisioned when I signed up for Hotmail several years ago. HailStorm is a compilation of 14 consumer web-based services including a calendar, address book, secure credit card information, and messaging capabilities. It uses an open access model and promises to work with "any device, service or application with an Internet connection regardless of the underlying platform, operating system, object model, programming language or network provider (i.e., Windows, Macintosh, UNIX, Palm OS, Windows CE, etc)."

I return to Amazon.com (Nasdaq: AMZN) because it keeps records of all my purchases. It keeps my work address, my home address, and even the addresses where I send gifts during the holidays. I entered my credit card info the first time I bought a book years ago, and have only updated it once, when the card's expiration date passed. So, when I want to send my grandfather another audio book for his birthday, the address is just a click away. The trouble comes when I am sending something to someone for the first time. I have to open up Outlook, find the new address in Contacts and manually enter the address. This may sound lazy, but that's me. If only the two applications were integrated. HailStorm using Microsoft Passport technology is going to do just that.

HailStorm is an attempt to take Amazonian service Internet-wide. Rather than just Amazon.com having a quick checkout, any vendor can offer easy checkout through Passport. Microsoft has already signed up a short list of retailers and has a long way to go before I can shop anywhere online and use my Passport, but it's a start. Consumers and investors must also factor in the vaporware issue, but a guy can dream, can't he?

The key to HailStorm and every other secret weapon under development at Microsoft is XML (extensible markup language). XML is the programming language behind .Net and, like Java, Sun's cross-platform programming language, XML allows Microsoft to promise the agility touted in the quotations above. It aims to communicate with whatever type of operating system it encounters on whatever type of device it encounters.

Several weeks ago, I wrote about Maker holding American Express' (NYSE: AXP) latest run at the credit card business with its new card, Blue. One of the differentiating features of Blue is its smart chip and the online wallet that goes with it. I wrote, "The reason for the smart chip is so that the credit card can be used with a Smart Card Reader, which provides secure access to the American Express Online Wallet. This wallet speeds up online ordering by automatically filling out online order forms with your personal information." Great minds think alike. Passport is the technology behind Blue's online wallet.

Passport is an online wallet on steroids. It does what you'd expect from an online wallet; it stores credit card and other sensitive personal information. But, Gates and gang have bigger plans for Passport. They imagine a virtual safety deposit box. Need a place to put your stock certificates? What about your mortgage document or bank statements? Passport will be a secure place to store these documents as active files, not just scanned jpeg files. Passport holders will be able to use the information from these documents in digital transactions like mortgage refinancing or loan applications. If Microsoft has its way, the forests of the Northwest will be a little flusher 25 years from now.

As a shareholder, the thing I like best about HailStorm is Microsoft's revenue approach. I'll let the press release explain, "rather than risk the user-centric model by having advertisers pay for them, the people receiving the value -- end users -- will be the primary source of revenue. HailStorm will help move the Internet to end-user subscriptions in which users pay for value received."

How much would you pay for HailStorm? Take the poll on our discussion boards.

On an administrative note, we will be moving to a thrice-weekly Rule Maker column schedule beginning next week. For more on the change see "Less Is More."

Fool on!

Todd Lebor owns shares of Microsoft, Oracle, and Sun Microsystems because he has no idea who will win this war. Oh, and General Motors too. Todd's other holdings can be found online along with the Fool's complete disclosure policy.


 

Rule Maker Portfolio


4/11/01 as of ~8:30:00 PM EDT

Ticker Company Price
Change
Daily Price
% Change
Price
AXPAMER EXPRESS0.280.73%38.45
CSCOCISCO SYSTEMS1.549.71%17.40
INTCINTEL CORP2.7511.10%27.52
JDSUJDS UNIPHASE CORP1.568.71%19.48
JNJJOHNSON & JOHNSON(1.19)(1.29%)90.84
KOCOCA-COLA CO0.481.10%44.13
MSFTMICROSOFT CORP0.360.60%60.04
NOKNOKIA CORP ADS1.124.39%26.62
PFEPFIZER, INC(1.00)(2.44%)40.00
SGPSCHERING-PLOUGH(0.65)(1.80%)35.40
TROWT.ROWE PRICE GRP INC1.755.42%34.03
YHOOYAHOO INC(0.16)(1.00%)15.86

Overall Return -- total % Gained (Lost)
  Day Week Month Year
To Date
Since
Inception
(1/6/1998)
Rule Maker3.57%10.14%3.89%(28.51%)(25.10%)
Comparable S&P 500n/an/an/an/a5.83%
S&P 500(0.21%)3.32%0.48%(11.69%)19.32%
S&P 500 (DA)(0.21%)3.27%0.47%(11.54%)21.10%
NASDAQ2.53%10.38%3.19%(23.14%)19.12%

Internal Rate of Return -- Annualized Rate of % Gained (Lost)
  Since Inception (1/6/1998)
Rule Maker(11.45%)
vs. S&P 5002.70%

Trade Date # Shares Ticker Cost/Share Price Total % Ret
2/3/9866PFE27.4340.0045.81%
2/3/9859MSFT49.3560.0421.66%
5/26/9866AXP36.0038.456.81%
4/3/015JNJ87.3090.844.05%
2/3/9856TROW33.6734.031.06%
2/13/98147INTC27.4427.520.30%
8/21/9844SGP47.9935.40(26.24%)
6/23/98182CSCO24.7217.40(29.35%)
2/15/00117NOK40.9526.62(35.00%)
2/27/9827KO69.1144.13(36.14%)
2/17/99106YHOO57.6015.86(72.47%)
2/15/0032JDSU100.7519.48(80.67%)

Trade Date # Shares Ticker Total Cost Current Value Total Gain
2/3/9866PFE$1,810.57$2,640.00$829.43
2/3/9859MSFT$2,911.79$3,542.36$630.57
5/26/9866AXP$2,375.95$2,537.70$161.75
2/3/9856TROW$1,885.70$1,905.68$19.98
4/3/015JNJ$436.50$454.20$17.70
2/13/98147INTC$4,033.23$4,045.44$12.21
8/21/9844SGP$2,111.70$1,557.60($554.10)
2/27/9827KO$1,865.89$1,191.51($674.38)
6/23/98182CSCO$4,498.75$3,166.80($1,328.92)
2/15/00117NOK$4,791.64$3,114.54($1,677.10)
2/15/0032JDSU$3,224.00$623.36($2,600.64)
2/17/99106YHOO$6,105.72$1,681.16($4,424.56)
 
Cash: 
Total: 
($413.44)
$26,046.91
 


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.