The Intelnet
Plus, a Mellon purchase

by Jeff Fischer (TMFJeff)

ALEXANDRIA, VA (April 23, 1999) -- It's a clich� to say so, but we are living in amazing times, and we're not likely to see so much excitement again in the future. We'll probably see more.

Management at Intel (Nasdaq: INTC) believes that the world, led by the United States, will move to an Internet-based economy.

There are no qualifiers to add to that prediction. It isn't believed that the world will move to "an economy where the Internet plays an important role," or to "an Internet-based economy for some businesses." It is believed that the Internet will grow to become the economy's essential, driving force.

Business is -- when you boil it down -- a series of transactions. Almost every aspect of a transaction (especially those done on a large scale) can more easily be accomplished on the Internet: product searches, order placements, fulfillment, billing, payment, feedback, and follow-up. Intel believes that 90% of its $26 billion in annual sales will be completed online within two years. With this change, Intel should save on administrative costs. It won't be alone. All companies strive to save money. Most companies will use the Internet to do so.

The Internet is a New Economy. It is also a new way for the old economy to be conducted. The physical aspect of the old economy will never disappear (items will always need to be built, stored, shipped, or looted), but the actual business of transacting will primarily be completed on the Internet.

Within 10 years, your Foolish correspondent predicts that most U.S. businesses will be at a loss without the Internet. When the computers are turned off, a business will be helpless. Traditional modes of business (meaning pre-Internet) will become as outdated as telegraphs, and therefore just as inconvenient or useless. If you call a company to place an order, it'll be suggested that you place it online.

The population will be driven to the Internet. The final Internet holdouts will practically be forced to buy computers and get online because the economy -- and the companies that drive the economy and want to do so efficiently -- will push everyone online. Just as many of us were pushed to buy call waiting, answering machines, pagers, and cell phones, the last of us not online will be forced to join society or fall behind. ("You don't have an answering machine? Come on!" "You don't have e-mail? Come on!")

Back to Intel.

In May of 1998, Intel formed a unit called the new business group. This branch searches for growth businesses beyond microprocessors. It has now given Intel the goal of becoming a leader in managing, hosting, storing, and delivering Web content and services. The goal is to be "a building block supplier for the Internet economy," with a focus on e-commerce.

This week Intel announced plans to build data service centers that businesses can use to set up electronic commerce activities. Intel will build a network of data centers clustered around "server farms," which are groups of servers capable of processing and storing large amounts of data. Intel plans for three data centers before the end of the year, so it ain't messin' around on this. Each will cost $50 million to $100 million -- peanuts to Intel.

"We plan to build a global network of facilities,'" Intel spokesman Chuck Mulloy said on Friday. "These facilities are in Intel parlance BIT factories... [T]hey will eventually be comprised of several thousand servers and allow businesses to outsource... electronic commerce activities.'' In other words, Intel will be the computer power source behind a company's e-commerce business and other database services, as well as facilitating Internet connection.

The most prevalent criticism of Intel's plan is "the company is too late." I find that criticism shortsighted. (In other words, the criticism is too soon.) Saying Intel is too late to this industry is akin to saying that Porsche was too late to the automobile industry. But even that comparison isn't fair. Porsche was fairly "late" to the auto business, while Intel is entering this industry while it's an infant, still crawling and speaking babble.

The young Internet database and e-commerce related industry promises (almost guarantees) to be a multibillion-dollar business that will last for decades if not forever in some form, and it's currently only a few years old. Intel is far from too late. The competition holds all of the market share now, of course, but there is plenty of market share yet to be created.

The second criticism is that this business isn't related to Intel's core competency. But it is related to Intel's core business more closely than many assume. First, this is a large scale data management business. Intel is second-to-none in managing large-scale chip fabrication plants. Different, but similar -- much more similar than a television station is to Microsoft's (Nasdaq: MSFT) software business. Remember, Intel's goal was to find something outside microprocessors. It has. But it's not completely foreign to the company's management.

Second, Intel will provide the brains that run the servers behind its new business, so it should have advantages over competing companies. It'll presumably have the latest technology first. It'll have the best support and tech teams behind it, too. It'll know the product and its capabilities best. It'll tweak the brains to match its needs (and its customers' needs) as the years scroll by. Using Intel could be akin to using AT&T (NYSE: T) for phone services as opposed to using a company that rents phone lines from AT&T and resells them.

All in all, we don't want to watch Intel's billions of dollars in cash gather dust. Sitting money doesn't do shareholders much good. Therefore, we're happy to see Intel invest in 200 companies over the past three years, and we're happy to see it begin a new business. Even if it fails (doubtful with Intel), our largest concern won't be the few hundred million dollars dumped down the drain (no big deal), it'll be the time needed to focus on something else and the lost opportunity.

Anyway, the fact that Intel is trying something new is excellent. Win, lose, or draw, even the best companies in the world must continue to attempt to reinvent themselves and cannot be comfortable with past success alone. Intel's news raises one question that I have again, which is, "What will Microsoft do with its billions?" So far, that company has been conservative -- when you consider that it has $20 billion sitting still -- and it hasn't leapt on the Internet with the vigor that I expected.

To read more on Intel's news, see Thursday's Rule Maker column, the Forbes article that we linked to on Wednesday, and this C/Net column.

Touchstone Friday. It's been an eclectic week for the column, but a good one. On Monday, George pitted Coca-Cola (NYSE: KO) against PepsiCo (NYSE: PEP). On Tuesday, Brian Foolishly covered the strong earnings report from Johnson & Johnson (NYSE: JNJ). On Wednesday we talked Mellon Bank (NYSE: MEL) -- its earnings, dividend, and stock split -- and Intel's new biz. On Thursday, Vince wrote a great column on giving DRPs to graduating students as May rolls near and graduation parties sprinkle the country. It's actually a good column about giving DRPs to anyone, not just graduates.

Next week we'll send $100 to buy more Mellon Bank. After this investment, we'll have close to the same amount of money invested in each of our three active stocks ($648 in Mellon, $679 in J&J, and $781 in Intel). We aren't trying to keep the value of each stock even. That would be counterproductive. We want to let our winners run and send them more money regularly, and we don't want to send more money than usual to our lagging stocks just to get their value close to the value of our leaders. It's the "amount invested" that we want to keep fairly even -- to give all our companies a fair chance. But the "value" that each stock grows to is beyond our control and not our concern. If one stock becomes half the portfolio through appreciation, that only means it was a good investment. It doesn't mean that we need to readjust our positions. We don't believe in that. That's Old School and flawed thinking.

By the way, everyone should send their money to whatever companies they wish and in whatever amounts they wish. Hopefully you can save more than $100 a month and send money to all of your companies. Don't follow our actions just for the sake of following us. Foolishly, you should cut your own path.

To close, if your head is spinning as you watch the speed with which the Internet world changes each day, be sure to read the Rule Breaker report every night. And then come here for something a little more laid back, but just as interested and involved. Believe me, we're going to try hard to invest in leading stocks of the New Economy. Intel could very well be a biggie. We're looking for others and we're anxious for new ways to direct invest at low to no cost. You'll see.

A reminder: We're always on the Drip message boards.

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