The Real Power of the Internet

By Rob Landley (TMF Oak)

AUSTIN, TX (June 11, 1999) -- The power of the Internet continues to surprise people. That statement has been repeated so often that it already has become a cliche. Even so, the Internet does indeed continue to surprise, largely because people misunderstand exactly what the Internet actually does.

From a purely commercial perspective, the Internet enhances communication between producers and consumers to a level that allows tiny hole-in-the-wall stores to put up websites that suddenly receive international orders. Without the Internet, eBay would be a rest-stop flea market and Amazon.com would be a struggling corner bookstore.

But now, obscure ultra-low-margin mail order operations can suddenly sell their wares the world over, and the only limiting factor is how fast they can scale up their operations to handle ever-increasing orders. The Internet has created numerous millionaire entrepreneurs by enabling the best competitor to grab a huge chunk of business, bypassing the former necessities of developing local advertising and building brick-and-mortar infrastructure in each and every town.

But that's just a small part of the story. The commercial picture is full of existing successful businesses that are suddenly exposed to cutthroat competition. Every little upstart around the globe who wants to live in a leaky shack and eat Ramen noodles every night can suddenly compete with 1% profit margins. As the printing press made scribes unable to compete, so Amazon is tearing away at both Barnes & Noble and Borders, and online brokerages like E*Trade and Ameritrade are eroding the volume of Merrill Lynch.

For these traditional businesses, responding by going to the Internet may not help if the problem is with the business model. Trading profit margins for volume is not an attractive proposition when you already have high margins and high volume. For more on Merrill's Internet woes, check out this excellent article.

But the most surprising thing to emerge from the Internet is not the new relationship between producers and consumers, but rather the way the Internet can actually give more power to consumers. Internet communication allows a level of collaboration between consumers that introduces a whole new dynamic, the impact of which is only starting to be felt.

The spread of the Internet around the globe was not driven by companies hawking their wares through Web pages. At first it was driven by e-mail, then newsgroups, and finally a web of personal home pages. And one of those personal home pages was called "Yahoo!"

Yahoo! (Nasdaq: YHOO) wasn't started to make money, but to provide a service. Two college students wanted to find fun things on the Web, but there was no organization to the thousands of personal home pages except for links from one page to another. So, they explored this new realm themselves and kept a list of pages that they liked. Almost as an afterthought, they put that list up on their own Web page, and that's where the fun began.

That index of sites became a popular destination, and other surfers who used it contributed the results of their own explorations, making Yahoo! that much more valuable. The new dynamic put the power of publication and peer review -- the driving force of science -- into the hands of individuals everywhere. As more people used the resource, more suggestions for improvement and corrections of mistakes trickled in, and the value of Yahoo! grew. Volunteers were needed to maintain it, but why not if it was fun and useful and not too much work?

There you see how the real power of the Internet is the power of collaboration.

But the founding of Yahoo! is just one example of this dynamic. Another example (that I've mentioned before) is the rise of the computer operating system Linux. Linux is a clean-room reimplementation of the Unix operating system created by another college student, who gave away the "source code" that allows other people to modify and re-create the program. Despite continuing to be primarily a hobby for everyone involved, and distributed under a license that prevents even its creator from making it proprietary, Linux has become an amazingly successful operating system. Microsoft, in its antitrust trial, has repeatedly pointed not to the Macintosh but to Linux as their most serious competitor (although, like the little boy who cried wolf, nobody seems to believe Microsoft anymore).

Red Hat, the largest commercial distributor of pre-packaged Linux CDs and software, just announced an initial public offering (IPO) that is seen as a hot prospect by people willing to gamble on IPOs. Actually, the MakerPort already has a stake in Red Hat through Intel's 5% ownership. Believe it or not, Linux and the "Open Source" method of free software development seem to be slowly changing the entire computer industry, with support from plenty of big companies like IBM, Dell, Compaq, Oracle, and Hewlett-Packard, and literally hundreds of start-ups. All this, despite the fact that the only perceived problem to the Linux-backers is that there is really no central company behind Linux, just a scattered group of users making improvements to their own systems and sharing these improvements over the Internet.

One final example of this new dynamic, where collaborating consumers become producers of value, is wonderfully summed up in this post by pianofloyd from the Rule Maker Strategy folder:

"After reading Rule Breakers, Rule Makers and the Rule Maker portfolio columns for the last two days, I am struck by a name for what the Fools are doing here: Open Source Investing.

"Just as the operating system Linux is constantly tweaked and improved by an army of programmers throughout the world, the Rule Maker investment strategy is constantly tweaked and improved by an army of Fools throughout America, if not the entire world.

"The same collaborative approach that is beginning to worry Microsoft should also be worrying the Wise. Technology has made it possible for a lot of intelligent amateurs working together to match or exceed the work of a small group of professionals.

"I look forward to observing the impact of both open-source software and open-source investing!"

Yes, right here. The Fool itself is a successful Internet collaboration between consumers of investment advice. Back during the collaborative analysis of Iomega (NYSE: IOM), as detailed in the original Motley Fool Investment Guide, Fools who lived in the Utah area drove by the Iomega plant over the weekend and saw a parking lot full of cars, and thereby knew that Iomega could make its production goals. Today, The Motley Fool hosts hundreds of message boards where Fools educate and amuse each other, and perform more insightful and thorough analysis of individual stocks than most of the Wise could ever hope for. As with other "Open Source" phenomena, the reasoning behind the decisions is laid bare and peer review deals with many mistakes, oversights, and lapses of judgment. You, as individuals, get to follow along with our real-money portfolios, ask us about our reasoning behind our decisions, and tell us about our mistakes.

For this portfolio, such discussion takes place on our Beginner, Strategy, and Companies message boards, which are all linked at the end of each column. That's where the real ideas come from. I learned almost everything I know about investing from the Fool's School and the Web boards, along with a few library books thrown in for a second opinion. And I'm still learning. Got anything to tell me?

Lately, I've been trying to move the Linux-related discussion (which has recently taken over the IBM board a bit) into a new folder: The Conversation Pit. Stop by if you have questions.

Let me leave you with a couple of interesting reads on Linux. Here's a little background behind Unix and Linux, from the IBM message board. And for some excellent analysis of Open Source development, how it works, and why people do it, check out The Cathedral and the Bazaar.

In next week's Rule Maker nightly reports, we'll be offering you a closer look at some of the more prolific contributors to our Rule Maker message boards. We hope to see you then. Have a great weekend!

- Oak

06/11/99 Close

Stock Change    Bid
AXP   -1 19/32  121.53
CHV   -  3/16    93.06
CSCO  +  1/4    110.69
EK    -  9/16    70.69
GM    -  15/16   63.75
GPS   +  1/4     64.94
INTC  -  15/16   54.44
KO    -1 11/16   64.44
MSFT  -1 3/4     78.13
PFE   -2 7/16    97.50
SGP   +  7/16    45.69
TROW  +  7/32    33.50
XON   -  11/16   78.94
YHOO  -9 1/2    135.25

                  Day     Month  Year    History
        R-MAKER  -1.25%  -2.29%   2.30%  29.45%
        S&P:     -0.70%  -0.62%   5.57%  30.62%
        NASDAQ:  -1.48%  -0.92%  11.64%  48.10%

Rule Maker Stocks

    Rec'd    #  Security     In At       Now    Change
    2/3/98   48 Microsoft     39.13     78.13    99.63%
   6/23/98   34 Cisco Syst    58.41    110.69    89.50%
    5/1/98   55 Gap Inc.      34.37     64.94    88.94%
   2/13/98   44 Intel         42.34     54.44    28.58%
    2/3/98   22 Pfizer        82.30     97.50    18.47%
   5/26/98   18 AmExpress    104.07    121.53    16.78%
   2/17/99   16 Yahoo Inc.   126.31    135.25     7.08%
    2/6/98   56 T. Rowe Pr    33.67     33.50    -0.51%
   8/21/98   44 Schering-P    47.99     45.69    -4.80%
   2/27/98   27 Coca-Cola     69.11     64.44    -6.76%

Foolish Four Stocks

    Rec'd    #  Security     In At     Value    Change
   3/12/98   20 Exxon         64.34     78.94    22.70%
   3/12/98   20 Eastman Ko    63.15     70.69    11.94%
   3/12/98   15 Chevron       83.34     93.06    11.66%
   3/12/98   17 General Mo    72.41     63.75   -11.95%

Rule Maker Stocks

    Rec'd    #  Security     In At     Value    Change
    2/3/98   48 Microsoft   1878.45   3750.00  $1871.55
   6/23/98   34 Cisco Syst  1985.95   3763.38  $1777.43
    5/1/98   55 Gap Inc.    1890.33   3571.56  $1681.23
   2/13/98   44 Intel       1862.83   2395.25   $532.42
    2/3/98   22 Pfizer      1810.58   2145.00   $334.42
   5/26/98   18 AmExpress   1873.20   2187.56   $314.36
   2/17/99   16 Yahoo Inc.  2020.95   2164.00   $143.05
    2/6/98   56 T. Rowe Pr  1885.70   1876.00    -$9.70
   8/21/98   44 Schering-P   2111.7   2010.25  -$101.45
   2/27/98   27 Coca-Cola   1865.89   1739.81  -$126.08

Foolish Four Stocks

    Rec'd    #  Security     In At     Value    Change
   3/12/98   20 Exxon       1286.70   1578.75   $292.05
   3/12/98   20 Eastman Ko  1262.95   1413.75   $150.80
   3/12/98   15 Chevron     1250.14   1395.94   $145.80
   3/12/98   17 General Mo  1230.89   1083.75  -$147.14

                              CASH     $70.09
                             TOTAL  $31145.09

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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