Hunting Monopolies

by Tom Gardner

Alexandria, VA (Sept. 3, 1998) -- Last night, from 9 p.m. to midnight, I, my sister, her husband, and Erik Rydholm, the chief operating officer of The Motley Fool, sat around on my living room floor playing the now timeless game of Monopoly.

If you haven't played it in a decade or two, let me refresh your memory. Here are six snippets as an overview: 1) You can play the Top Hat, the Terrier, the Shoe, the Car, the Thimble, and others. 2) You start with $1,500 and collect $200 each time you past GO. 3) If you land on a property and don't want to purchase it, all other players may bid for it. 4) Separate from the rolling of dice, you're welcome -- for example -- to trade the Reading and B&O Railroads for Indiana Avenue, to create two monopolies. 5) In the latter stages of the game, going to jail for a few turns can be a real lifesaver. 6) And remember -- a hotel on Marvin Gardens can be deadly.

I've tapped out this brief overview of Monopoly because today's and tomorrow's columns will expressly deal with the issue of building dominance in an industry -- and how we as investors can measure monopolistic control. Let me assure you that every single company in the Cash-King Portfolio is engaged in trying to build an ongoing series of natural or patent-based monopolies. Cha-ching! Gap Inc. would love to control casual clothing stores along the sidewalks of America. Coca-Cola craves the opportunity to sell all 48 billion ounces of liquid consumed each day across the planet. Intel wants to own The Chip. Microsoft would like to quilt each and every data and communications platform with its operating systems.

Our commercial system in America dictates that behavior.

Every public company fights for its life in the early days, struggles for control in adolescence, seeks dominance as an adult, and then, in select cases, battles the Department of Justice for latitude and liberty. Since I'm not legally trained, I won't fake a mastery of the ins and outs of anti-trust law (if I were, I'd fake it); I won't pretend to know the boundaries between fair competition and inappropriate conduct. But we all do know, as lay Fools, that literally thousands of public companies envy those few that are served notice of a trustbusting investigation into their control of an industry.

Just play Monopoly again once, and you'll know that's true. The game relies on the age-old concept of limited space, a glass filling up with water. Dice rolls lead to land buys (another drop), land-owning leads to home-building (another drop), and building leads to the repeat tariff (another drop). And no matter how each player comes to the game, his or her final intent is the same: To own the glass of water... to increase profit through methodical expansion, until one day, their pieces cover the entire board, from Indiana Avenue to St. James Place, from Boardwalk next door to Baltic Avenue.

In fact, the directive of a public company is far more aggressive and demanding than that of a player in Monopoly. How so? Well, unlike The Thimble controlled by just you, a public company is owned by individuals and institutions who expect it to go farther, to profit more, and to risk less in the process. Shareholders are counting on a win. And because of that, over time shareholders learn to mostly root for the underdogs but mostly bet on the overdogs.

And as public businesses battle for status as an overdog, they're seeking long-term monopolistic success for their shareowners (which typically includes founders, executives, managers, employees, institutional investors, individual investors, and often, customers). Whether it's Ben & Jerry's or Boeing, the company has a responsibility to represent the greatest commercial interests of its owners and, by extension, to drive its competitors off the field it owns.

Those are the rules of the game. Of course, winning the game isn't as simple as we might expect. The temptation, repeated frequently in business development, is to rush for success -- to capitalize a business very quickly, then to plink down the venture money or convertible debt to buy early power positions across a category.

To win... NOW.

It's an approach akin to loudly (and often sloppily) dominating the first few turns in the game of Monopoly. Huzzah! But winning early, by any means necessary, doesn't guarantee a controlling position in the thirtieth and fiftieth turns. Owning Park Place out of the gate might just translate into mortgaging it after ten dice rolls, then selling it under duress for half its price on the fifteenth turn. In the reverse, stockpiling cash by slumming it into the middle rounds with only a beggar's monopoly on Connecticut, Vermont, and Oriental Avenue (the light blues) might position your little Terrier for a long-term win.

There you are with your little Terrier and your stable of properties, trying to manage it all, and public companies struggle with many of the same problems. They need speed to win, but they equally need sustainability of that speed. Think of Netscape, which owned more than 90% of the Internet browser market when it filed for its IPO in 1995. After a few turns in the public markets, the company was valued at $7.2 billion. Many felt it owned the Internet. But now, two-and-a-half years later, Netscape is worth $2.1 billion, 71% off its highs, and holds just 60% of the market for Internet browsers.

Both matter: speed and sustainability of speed.

The only time sustainability isn't important for a public company is when its executive team is concentrated on the shutting and opening of their stock-option window. Here again think of K-tel's executives, opportunistically associating their business with the Internet -- then selling $60 million in stock before the mighty tumble. Or think of Nine West, pushing its stores to sell more shoes now, only to jeopardize long-term product management. Or think of the accounts receivable creep at any number of companies that announce sales today but must delay the collecting of those bills -- they trade work tomorrow for good news today.

All three of those can hit long-term shareholders from behind, about six inches above the ankle. Oooo-yowch!

Now, the game of Monopoly teaches another lesson about the development of natural monopolies worth mentioning here. Even as players grab to own the whole board, they're forced into strange alliances with the enemy. Knowing that there'll only be one monopolist in the end, still they have to team up before those wrenching final turns. The Terrier trades Pennsylvania Avenue to the Thimble for Ventnor Avenue, creating small monopolies for both dealers. But both dealers know their monopoly will ultimately be working to destroy the other.

They make deals today for dominance tomorrow. Because if the game of Monopoly were just about the final duel, about going out, kicking the participants in the head, and bringing home maximal loot today, then thoughtless haste would win every time. Greed and aggression at every step would run the board quickly. They don't. And if the dynamics of our public markets worked similarly, then thoughtless haste would have really big guys strutting around with bad attitudes, loaded shotguns, and spiked hubcaps (cf. Mad Max)... who ruled their industry. They would win early, win often, and destroy the competition overnight.

They don't.

Corporate America isn't crowded in by spiked hubcaps, so the game must be played differently. The Rush to Destroy card, which is played often in business, is mostly poison in the long term. More valuable are the Negotiation and the Patience cards. In fact, Monopoly players and shrewd executives at public companies know that creating short-term rewards for the competition sometimes fits neatly into a design for winning the later and the final turns.

Tomorrow, I'd like to walk through some numerics for measuring how well your company is doing at gaining and maintaining monopoly status. Fittingly, I'll then run the numbers on Microsoft.

Fool on!

Tom Gardner

Cash-King Strategy Folder
Cash-King Companies Folder

09/03/98 Close

Stock  Change    Bid 
 AXP   -6 1/2   77.25 
 CHV   +1 11/16 75.69 
 CSCO  -1       90.63 
 KO    -2 1/4   62.00 
 GPS   +5       53.00 
 EK    -  5/8   82.00 
 XON   -  3/16  63.94 
 GM    -1 3/4   57.31 
 INTC  +1 7/8   76.75 
 MSFT  -1 5/16  99.25 
 PFE   -  3/16  99.88 
 SGP   +  9/16  93.75 
 TROW  -  7/8   29.94 
              Day      Month       Year       History 
 C-K         (0.16%)    3.50%      2.00%       2.00%  
 S&P 500     (0.83%)    2.58%     (2.36%)     (2.36%) 
 Nasdaq      (1.32%)    4.85%     (5.67%)     (5.67%) 
 Cash-King Stocks 
     Rec'd    #  Security     In At       Now    Change 
     2/3/98   24 Microsoft     78.27     99.25    26.81% 
     2/3/98   22 Pfizer        82.30     99.88    21.36% 
    6/23/98   23 Cisco Syst    86.35     90.63     4.96% 
     5/1/98   37 Gap Inc.      51.09     53.00     3.74% 
    8/21/98   22 Schering P    95.99     93.75    -2.33% 
    2/13/98   22 Intel         84.67     76.75    -9.36% 
    2/27/98   27 Coca-Cola     69.11     62.00   -10.28% 
     2/6/98   56 T. Rowe Pr    33.67     29.94   -11.09% 
    5/26/98   18 AmExpress    104.07     77.25   -25.77% 
 Foolish Four Stocks 
     Rec'd    #  Security     In At     Value    Change 
    3/12/98   20 Eastman Ko    63.15     82.00    29.85% 
    3/12/98   20 Exxon         64.34     63.94    -0.62% 
    3/12/98   15 Chevron       83.34     75.69    -9.19% 
    3/12/98   17 General Mo    72.41     57.31   -20.84% 
 Cash-King Stocks 
     Rec'd    #  Security     In At     Value    Change 
     2/3/98   24 Microsoft   1878.45   2382.00   $503.55 
     2/3/98   22 Pfizer      1810.58   2197.25   $386.67 
    6/23/98   23 Cisco Syst  1985.95   2084.38    $98.43 
     5/1/98   37 Gap Inc.    1890.33   1961.00    $70.67 
    8/21/98   22 Schering P   2111.7   2062.50   -$49.20 
    2/13/98   22 Intel       1862.83   1688.50  -$174.33 
    2/27/98   27 Coca-Cola   1865.89   1674.00  -$191.89 
     2/6/98   56 T. Rowe Pr  1885.70   1676.50  -$209.20 
    5/26/98   18 AmExpress   1873.20   1390.50  -$482.70 
 Foolish Four Stocks 
     Rec'd    #  Security     In At     Value    Change 
    3/12/98   20 Eastman Ko  1262.95   1640.00   $377.05 
    3/12/98   20 Exxon       1286.70   1278.75    -$7.95 
    3/12/98   15 Chevron     1250.14   1135.31  -$114.83 
    3/12/98   17 General Mo  1230.89    974.31  -$256.58 
                               CASH     $48.07 
                              TOTAL  $22193.07 
 *Please note: On 8/4/98 $2,000 cash was added to the
portfolio for future investment. This will be reflected
in the numbers as soon as possible.

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