Sep 24, 1999 at 12:00AM
1. The top dog and first-mover in an important, emerging industry.
2. Sustainable advantage gained through business momentum, patents, visionary leadership, and/or inept competition.
3. Excellent past share appreciation, measured by a relative strength of 90 or higher.
4. Good management and smart backing.
5. The greater the consumer brand, the better.
6. A significant constituent of the financial media is recently on record for calling it overvalued.
When you run Iomega (NYSE: IOM) and 3dfx (Nasdaq: TDFX) through the wringer, snags are hit. The first criterion, top dog and first mover, is a quality possessed by 3dfx's graphics cards, but not of its newly acquired OEM (original equipment manufacturer) business. Both must be counted. We couldn't call 3Com (Nasdaq: COMS) a Rule Breaker solely because of its PalmPilot while ignoring the rest of its business. Iomega also sells to the OEM channel and there it isn't the top dog in selling disk drives. It is only an option on many computers, not the sweeping standard.
Are either of these industries important or emerging? 3D computer graphics is not new, but it is still emerging and evolving. The degree of its importance is arguable. Most believe that high-powered graphics is very important to the future of the PC industry -- important for computer-aided design, for commerce and ads, for games, and more. I agree. 3dfx only leads in games, however. That isn't the most important or largest part of the industry. It is commendable to lead any viable industry, though, so we don't just write this off. To fortify its lead, 3dfx launched an online gamers' site.
Iomega leads the consumer market for high-memory portable data storage, but this industry isn't emerging. The level of its importance is also worth questioning, partially because the direction of the industry is a question mark. Storing large amounts of data on the Internet is the most likely solution to storage necessities. The proliferation of devices that can access the Internet from anywhere serve to make storage of data online even more convenient and other means of storage less necessary. As useful as it can be, the Zip drive is a dated solution even though it has been improved recently.
Consider numbers 2, 3, 4, and 6 in the Rule Breaker criteria above. It is easy to find ways that these companies don't match. Neither has strong share price appreciation. The opposite. Plus, management at Iomega has been as holey as Swiss cheese. Meanwhile, nobody calls these stocks overvalued anymore -- and we miss it! Finally, both companies face formidable competition in various forms: 3dfx from NVIDIA (Nasdaq: NVDA) and others, and Iomega from an array of advancing technology (no single one company is strong enough to mention, however, in the consumer market -- a plus for Iomega).
Regarding criterion number 5, both companies have the leading brand name in their industries. Even Iomega has maintained its strong consumer name despite the lack of a clear identity emanating from Iomega headquarters. However, other than meeting the demands of criteria number 5 and certain aspects of numbers 1 and 2, the companies don't pass the Rule Breaker test. So, are they Tweeners, Tweening toward Rule Maker status, or are they doing a Death Rattle as they fall back into a sea of random stocks?
Tweening is a limbo-esque dance that can lead either to the Death Rattle or to the golden crown: that of becoming a Rule Maker. That is, a company that is Tweening will eventually either cross the revered threshold and become a Rule Maker (one that makes the rules for its industry, as explained with chutzpah in the Rule Maker Portfolio), or the company will lose the magic edge that it possessed as a Rule Breaker and fall into a cesspool of mediocrity as it sheds its past glory to share its market with several other competitors, or even fall by the wayside to them.
Iomega and 3dfx have unexpectedly fallen from profitability to net losses. A company becoming a Rule Maker does the opposite: It becomes more and more profitable. Iomega and 3dfx are respectable operations offering products that consumers want and continue to buy, but these companies aren't Breaking the Rules anymore. Zip is five years old and it hasn't grown much beyond its original purpose. It's the "same old." 3dfx's graphics cards compete head-to-head with viable alternatives. The closest that 3dfx is coming to setting the rules in its industry is that it has key partnerships with game makers. This creates barriers for competitors. However, the company has still been Tweened.
Tweening is an art -- both the act of identifying it and the act of moving beyond it (for a company). Sometimes companies return from Tweener status to revisit Rule Breaker status by redefining themselves, or by entering or beginning a new industry. More often, Tweening companies fall off the Map of Importance.
Iomega is still important when you're purchasing a personal computer. "Do you want a Zip drive with that?" However, it isn't important in the ongoing way that Cisco is vital to networking, Microsoft to software, or even Amazon to online commerce. Becoming a Rule Maker demands an industry important enough that Rule Makers can be crowned in it by a mass audience. A king of nothing is not a king. Perhaps the low-margin, high-competition, always-evolving data storage market was never important enough (or proprietary enough) to crown a Rule Maker. Perhaps the same is true of gaming's 3D graphic card industry.
A company can Tween into death, Tween into a humdrum, or Tween into continued greatness. I believe that Iomega and 3dfx are Tweening into a humdrum. (The theme song for this naturally would be Peter Gabriel's "Humdrum.")
Both companies should continue to be respectable operations. Hopefully, both will be profitable again; both will employ hundreds to thousands of people and therefore help society; both will ideally offer products that consumers want and enjoy; but neither appears to be moving to Rule Maker status, and neither fits the qualities of Rule Breaker now. (However, Iomega could still become a Rule Maker if the Zip does become a standard on computers in the way that the floppy is still a standard. We've waited long for this, but perhaps not long enough.)
Continuing from Thursday's column, I peg all of the BreakerPort's stocks like this:
America Online: Tweening toward Rule Maker.
Amgen: Rule Breaker.
eBay: Tweening toward Rule Maker.
Excite@Home: Tweening toward question mark.
Starbucks: Rule Breaker.
Iomega: Tweening toward humdrum.
3dfx: Tweening toward humdrum.
You might say that the last two companies on the list have already done a fairly noticeable Death Rattle and that the humdrum has been taking place for a long time already, and I may not disagree. If you'd like to discuss the companies, please visit the Rule Breaker Companies board.
Following Thursday's column, some Foolish Excite@Home (Nasdaq: ATHM) owners questioned my call that the company was Tweening. On the message board, some people believe that Excite@Home should continue to build its dominance over cable and not open cable to competitors. I don't entirely disagree with this. However, I don't believe that this choice will lead to a Rule Maker position for Excite@Home. Given this approach, I believe that other forms of high-speed access will surpass it in popularity. I promised to visit the Excite@Home board for continued discussion.
By the way, A Fool named Lydia suggested that we offer a small icon next to each stock in our daily numbers to indicate what each stock is in our opinion: Tweener, Rule Breaker, or Rule Maker. We like this idea. We may try it (we need to talk to production and graphic artist Fools!).
To close, America Online (NYSE: AOL) supposedly rose on word that Microsoft (Nasdaq: MSFT) is not going to be so cut-throat in pricing its Internet service provider offerings. Companies that provide online service in the U.S. face one less worry. It is doubtful that the big guys in the industry will ever cut prices so much that they hurt themselves. It would take a significant price cut to lure AOL users away anyway. Already, $9.95 per month services exist, but most AOL users are content staying with AOL and pay more than twice that per month ($21.95). There have been cheaper alternatives available. Apparently, AOL is worth the price to many.
Have a wonderful weekend -- to ensure that you do, catch Tom and David on the weekly Motley Fool Radio Show. The merits of Amgen (NYSE: AMGN) will be dueled on the air, and Jeff Foxworthy will be a Foolish guest.
--Jeff Fischer, September 24, 1999
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