Intel: Master of Tact

By Rob Landley

AUSTIN, TX (March 15, 1999) -- Hello, and welcome back to The Motley Fool's Rule Maker Portfolio, the portfolio that promises whiter teeth and fresher breath. That's why you're here, right?

The biggest news of the week was that Intel (Nasdaq: INTC) settled its antitrust suit with the federal government. It's done, over, gone, history. After seeing the results of the confrontational approach Microsoft (Nasdaq: MSFT) has taken with the DOJ, Intel decided to settle quickly and quietly, with no dirty laundry aired to competitors and customers, no antagonized federal officials, no public relations nightmare, no unending distraction for upper management, no mounting legal costs, and no admission of monopoly status given or asked for. It was beautiful.

Of course, Intel has visible competition to use as an anti-antitrust bargaining chip. And it even lengthened the leash it keeps on its competition in the months leading up to the aborted trial. In January, competitor Advanced Micro Devices (NYSE: AMD) actually shipped slightly more X86 compatible processors than Intel did! (Here's the story.)

But this doesn't mean AMD is anything like the financial powerhouse that Intel is. Despite the enormous volume it shipped, AMD lost money in the first quarter of this year. In addition, the company announced its intention to lay off 300 employees. AMD's shortcomings are numerous. First, the company's manufacturing costs are higher than Intel's. Second, AMD is selling at the low end of the market where there's practically no profit margin to begin with. While AMD has gained volume by undercutting the price of Intel's own low-end offering (the Celeron), that volume has come at the price of profitability.

X86 cloners like those offered by AMD are not the only competition for Intel; several other viable microprocessor architectures exist. The IBM/Motorola PowerPC is at the heart of both Apple's (Nasdaq: AAPL) popular iMac and most of IBM's (NYSE: IBM) high-end offerings. Compaq (NYSE: CPQ) (which bought Digital Equipment Corp. last year) is selling record quantities of the DEC Alpha processor design, mostly due to the Alpha port of the Linux operating system. Sun Microsystems (Nasdaq: SUNW) has its own processor designs, the Sparc and UltraSparc, at the heart of its computers. Even Intel sells other chip designs, such as the StrongARM aimed at embedded devices like Empeg's digital car stereo replacement.

So, Intel remains firmly at the top of the heap, but there is a heap. An antitrust case against Intel would be difficult to make with half a dozen active competitors selling microprocessors into a market Intel has never tried to exclusively control, merely dominate. Intel ruthlessly uses its brand name, technical skills, marketing partnerships, and all the other weapons at its disposal to remain ahead of its competition. Nevertheless, the competition still poses a serious enough threat that Intel must expend significant resources in order to remain ahead. Intel is not a monopoly, just the most successful competitor.

Still, the Justice Department has tasted blood recently, and Intel had no reason to antagonize it. Microsoft has done so poorly in court and in the press that the other half of the Wintel duopoly risked guilt-by-association simply for stepping into the courtroom, especially with the MS-DOJ "main event" adjourned until April. Even when you're right, you can still lose where it counts.

By settling out of court, Intel sent a message to investors, customers, and competitors alike: "We can be reasonable." Intel doesn't have to win every battle at any cost, nor does it have to be the only winner in a deal. For Intel, a bruised ego won't get in the way of calculated business decisions. This pragmatic stance has won Intel high praise from just about everybody who's tried to analyze the situation.

Including me. Way to go, Intel!

And judging by our response to last Monday's Question of the Week, you also applaud Intel's settlement. Over on the Strategy board, not one person argued in favor of adding an antitrust criterion to our official Rule Maker scoring. Many of you shared your insight on the matter, and for that we thank you. Once again, picking a single winner was impossible. Here are some snippets from a few of the many excellent responses:

"...an actual DOJ investigation or trial can have a negative impact on a company's business. It's a huge drain on management time and focus. It weakens the company's resolve as a competitor in the marketplace, and it emboldens competitors."

"I am glad the DOJ exists, and I want there to be fair competition... it means better products for the consumer. I want the companies in my portfolio to be successful based on their superior products, marketing, etc... not just because they have a stranglehold on their competitors."

"While I appreciate the contrarian leaning of awarding points for an antitrust investigation, I think we need to keep something in mind. This is more of a relative, (changeable) standard as opposed to an absolute (consistent) standard. Many times, the Department of Justice inquiries are influenced by political leanings and/or public sentiment."

"One of the things that concerns me is that many of the criterions being developed here are a little too 'American-Centric,' to coin a bad phrase. This [antitrust] criterion would probably be the most obvious."

Each of you who shared your opinion added to the ongoing brainstorming that will make the Rule Maker scoring methodology stand the test of time. It is this collective brainpower that makes our online community uniquely powerful. This week, let's apply our collective mind to the following question:

"Pfizer vs. Schering-Plough -- sure they're both great, but which is better -- in regard to product pipeline, financials, management, you name it. In a one-on-one knock-down drag-out, which of our two pharmaceutical giants wins?"

Spring is right around the corner (finally!), so this week's prize will be a newly redesigned Motely Fool T-shirt. Bring your thoughtful responses to the Strategy message board, subject "PFE vs SGP."

See ya on the boards,

- Oak


03/15/99 Close

Stock  Change    Bid
AXP   -  1/2   125.75
CHV   -  5/16  84.38
CSCO  +1 3/4   105.00
KO    -  9/16  68.69
GPS   +2 13/16 69.31
EK    +  1/8   66.75
XON   -  5/16  73.69
GM    +  9/16  89.56
INTC  -  3/8   117.88
MSFT  +5 11/16 165.88
PFE   +  7/16  140.69
SGP   -  1/2   57.50
TROW  +1 1/2   37.13
YHOO  +3 7/16  179.44
                   Day   Month    Year  History
        R-MAKER  +1.31%   8.49%  13.10%  43.11%
        S&P:     +0.98%   5.57%   6.67%  31.97%
        NASDAQ:  +2.10%   6.27%  10.89%  47.10%

Rule Maker Stocks

    Rec'd    #  Security     In At       Now    Change
    2/3/98   24 Microsoft     78.27    165.88   111.93%
    5/1/98   55 Gap Inc.      34.37     69.31   101.67%
   6/23/98   34 Cisco Syst    58.41    105.00    79.76%
    2/3/98   22 Pfizer        82.30    140.69    70.95%
   2/17/99   16 Yahoo Inc.   125.81    179.44    42.62%
   2/13/98   22 Intel         84.67    117.88    39.21%
   5/26/98   18 AmExpress    104.07    125.75    20.84%
   8/21/98   44 Schering-P    47.99     57.50    19.81%
    2/6/98   56 T. Rowe Pr    33.67     37.13    10.25%
   2/27/98   27 Coca-Cola     69.11     68.69    -0.61%

Foolish Four Stocks

    Rec'd    #  Security     In At     Value    Change
   3/12/98   17 General Mo    72.41     89.56    23.70%
   3/12/98   20 Exxon         64.34     73.69    14.54%
   3/12/98   20 Eastman Ko    63.15     66.75     5.70%
   3/12/98   15 Chevron       83.34     84.38     1.24%

Rule Maker Stocks

    Rec'd    #  Security     In At     Value    Change
    2/3/98   24 Microsoft   1878.45   3981.00  $2102.55
    5/1/98   55 Gap Inc.    1890.33   3812.19  $1921.86
   6/23/98   34 Cisco Syst  1985.95   3570.00  $1584.05
    2/3/98   22 Pfizer      1810.58   3095.13  $1284.55
   2/17/99   16 Yahoo Inc.  2013.00   2871.00   $858.00
   2/13/98   22 Intel       1862.83   2593.25   $730.42
   8/21/98   44 Schering-P   2111.7   2530.00   $418.30
   5/26/98   18 AmExpress   1873.20   2263.50   $390.30
    2/6/98   56 T. Rowe Pr  1885.70   2079.00   $193.30
   2/27/98   27 Coca-Cola   1865.89   1854.56   -$11.33

Foolish Four Stocks

    Rec'd    #  Security     In At     Value    Change
   3/12/98   17 General Mo  1230.89   1522.56   $291.67
   3/12/98   20 Exxon       1286.70   1473.75   $187.05
   3/12/98   20 Eastman Ko  1262.95   1335.00    $72.05
   3/12/98   15 Chevron     1250.14   1265.63    $15.48

                              CASH    $185.03
                             TOTAL  $34431.59

Note: The Rule Maker Portfolio began with $20,000 on February 2, 1998, and it adds $2,000 in cash (which is soon invested in stocks) every six months.

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