The Breaker Portfolio took another beating today at the hands of a vicious, bloodthirsty market. Led by a 10% drop in (Nasdaq: AMZN) on some negative comments from analysts (when those folks rain, they pour), the port fell another 7.6% today. November has sliced another 20% off the port's value, bringing the bludgeoning for the year to about 45%.

It's like a Dickensian boarding school out there, kids. It's times like this that you wish you'd stayed in bed. But, hey, that's risky, focused, Rule Breaking investing for you: the highs are high, the lows low. All we can do is keep our eyes on the ball.

Today, we ask whether Echelon (Nasdaq: ELON) meets the criteria for a Rule Breaking investment. Check out yesterday's column -- and howardroark's excellent Echelon FAQ -- for some background on this company that wants to network the world's devices (home and commercial) seamlessly, with access through the Net. Fools have zeroed in on this company in the Rule Breaker online seminar and on the Rule Breaker Strategies and Rule Breaker Companies discussion boards. It's time we took a closer look.

A little housekeeping: If you had any trouble with the Echelon Internet demo link yesterday or if you want to play with it now, give it another try.

The top dog and first mover in an important, emerging industry
Before Echelon, there was only a sad world of proprietary, closed control systems for heating, lighting, braking -- all sorts of commercial systems that needed monitoring. You went to Siemens (Nasdaq: SMAWY), for example, and got locked into a system that talked only to itself and required Siemens repair persons and Siemens products. A 10- to 15-year deal, at whatever prices they wanted to charge -- up to what it would cost you to change to someone else's ball-and-chain closed system.

Enter Mike Markkula -- former Apple Computer (Nasdaq: AAPL) bankroller and exec -- and Ken Oshman -- former CEO of Rolm Telephone, which was bought out by IBM (NYSE: IBM). They developed the enabling technology to give us modern-day open control systems. They changed the world so that anyone could create controls systems products for Echelon's LonTalk freely licensed protocol, which allowed devices to talk to each other and to other systems. First mover.

Today, Echelon's LonWorks technology is embedded in millions of devices, estimated at 40-45% of all smart devices worldwide, offering potential Internet and phone (via an AT&T (NYSE: T) deal) access for remote diagnostics, product updates, device management, status monitoring, and control worldwide. Top dog.

But how can anything like interoperable distributed control networks (yawn) be important and emerging? No wonder Echelon's motto is the sexier "Bringing the Internet to Life!" (eyes light up).Yet, here's one deal that helps explain: In June, Italy's Enel (NYSE: EN) electric utility agreed to pay Echelon $300 million to install equipment for LonWorks utility networks throughout Italy. This is big money for debt-free, just-now-profitable Echelon, with $47 million in trailing 12-months revenue.

Enel will put $300 million worth of Echelon hardware and software to use to enable information to travel from home electric meters, through power wiring, to a data concentrator, and then to talk across the Internet. This lets Enel do automatic meter reading, manage demand (rotating brownouts, etc.), change the cost of energy throughout the day, and so on. They can tell if there's been tampering, detect power outages, and isolate occurrences -- probably before you call. Better service, lower cost. They're looking to save money. They figured they can.

Enel wants not just to save, but to make money from new businesses, too. The meter is the link -- the mole -- to bring the system inside the home, where millions of potentially smart devices live. With access to those, Enel can turn the electric power grid into an intelligent delivery platform for security monitoring, energy-related services to lower bills, and all sorts of other possibilities.

There are about 13 million "smart" devices in the world with LonWorks capability embedded. Enel is going to install 30 million more just for the utility infrastructure, and this does not include anything past the meter into the home. By investing to connect to the home, Enel pushes the inside and outside home markets to each other.

This is one utility in one country with 58 million people, which is only 21% of the U.S. population. Investors in Echelon (including me) eye the potential for Rule Breaker returns -- say, 10 times in 5 years.

Sustainable advantage gained through business momentum, patents, visionary leadership, and/or inept competition; good management and smart backing
Echelon, led by Markkula and Oshman, created a market that didn't exist. They think they can dominate it. Can they?

Business momentum is clear, with the acceleration of partnerships not just with Enel or NTT Data, a subsidiary of Nippon Telephone and Telegraph (NYSE: NTT), but the worldwide networking and server gods: Cisco Systems (Nasdaq: CSCO) and Sun Microsystems (Nasdaq: SUNW). With Echelon's new Cisco-certified i.Lon products, LonWorks-based systems can connect with the Internet for remote control by browser. And, Sun and Echelon cross-license thusly: LonWorks "connectivity bundle" sold with Sun's Java Embedded Software (JES), and JES for use in future i.Lon Internet servers. Bottom line: The world's networking and server giants back Echelon control systems technology.

Visionary leadership, good management, and smart backing? Yup. Begin with the vision of Mike Markkula and Ken Oshman. They wanted to make microprocessors that talk to each other as part of open control systems. Then add their more than 10 years of putting Echelon people on the boards of all the major building, industrial, and automation standards bodies, while creating an interlocking set of board memberships with important partners such as Sun. Mix in smart backing from Arthur Rock, one of Intel's (Nasdaq: INTC) founders, and Larry Sonsini -- of Silicon Valley's premier anything-technology law firm, Wilson, Sonsini, Goodrich, and Rosati -- and you've got an all-star cast.

Inept competition? The defenders of closed proprietary systems aren't giving up, and it's taken more than 10 years to make any inroads into their fiefdoms. But today 60% of all buildings controls manufacturers are shipping LonWorks-based products. Open and Echelon are winning.

Other Rule Breaker criteria
Echelon doesn't do very well on the remaining Rule Breaker criteria:

  • Excellent past share appreciation, measured by a Relative Strength of 90 or higher: Relative Strength checked in this week at 40 -- ouch!
  • The greater the consumer brand, the better: Echelon is decidedly not a consumer brand, although it is in one niche -- the admittedly small consumer group of original equipment manufacturers and systems integrators for control systems.
  • A significant constituent of the financial media is recently on record for calling it overvalued: Maybe when it was more than $100 per share earlier this year, but I don't hear any catcalls now.

We're not chained to all the criteria: Our biotechs Amgen (Nasdaq: AMGN), Celera Genomics (NYSE: CRA), and Human Genome Sciences (Nasdaq: HGSI) aren't consumer brand names either, for example. So, what do you think -- is Echelon a Rule Breaker? Network freely and openly on the Rule Breaker Strategies board!

Yours in Fooldom,
Tom Jacobs, TMF Tom9 when roaming the discussion board range