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Strategies & Market Trends : Gorilla and King Portfolio Candidates -- Ignore unavailable to you. Want to Upgrade?

To: Judith Williams who wrote (32461)	9/27/2000 9:54:20 PM
From: gdichaz	Respond to of 54805

Judith: Great. Best. Cha2

To: Judith Williams who wrote (32461)	9/27/2000 11:31:25 PM
From: Mike Buckley	Read Replies (3) \| Respond to of 54805

Judith, You've done a fabulous job bringing everyone's ideas about the networks project into one coalescent format. Thanks so much! I've got some minor suggestions to make, but they're only minor. Project Name I think the offcial name should be "Project Network" from this day going forward. Net Margin I suggest that it be clarified to exclude one-time gains and charges. Cash Minus Debt I've seen the term, cash, interpreted so differently so often that I'd like to suggest that it should be clarified to mean the following: cash assets, short-term investments, and all other liquid assets. Question: Is the debt intended to include long-term debt? If it is, I'd also like suggest that convertible debt be specially noted so readers can appreciate the implications for the balance sheet and thus the extent of the competitive advantage if the debt is converted instead of paid off. Like I mentioned, only minor suggestions. --Mike Buckley

To: Judith Williams who wrote (32461)	9/28/2000 12:22:56 AM
From: sditto	Read Replies (3) \| Respond to of 54805

<<PLEASE COMMENT ON ANY REDUNANCIES, OMISSIONS, SUPERFLUOUS ITEMS, OR OPAQUENESS>> Some quick thoughts: - I'm not 100% clear as to where we are heading with this project and what questions we are ultimately trying to answer. Are we trying to hone our understanding of network effects, identify companies with the strongest network effects, evaluate how a company could create additional network effects, determine when tornados will be created by network effects, etc. Being a Steven Covey enthusiast I always like to "begin with the end in mind". Perhaps it would be helpful to add a clearly defined set of project goals and objectives so they are clear for me and everybody else. Clarity around the end objective will generate a better final result. - In the Networks Company Participates/Controls section we need to identify the specific aspects of the business model that can create network effects. In this or a related section we should then assess to what degree these aspects are being recognized, funded, and prioritized by management. - The Adoption Potential section description sounds very theoretical as presented. We need to bring it to the real world of who is in the network, who is not in the network, and what can be done to create additional clusters and connections. Although potential network size is subject to great miscalculation there should also be some assesment as to the ultimate size of the network and determination if the market is broad enough (or too niche) to generate crtical mass or a meaningful business opportunity. - The Assessing Growth section would be a good place to assess how the Gorilla Game aspects of high barriers to entry, high switching costs, and strong value chain formation can create network effects and unleash rapid widespread adoption. Best of luck with the effort.

To: Judith Williams who wrote (32461)	9/28/2000 12:49:49 AM
From: tekboy	Read Replies (1) \| Respond to of 54805

there should be a line at the bottom that says, "Given all this, above $X this company is so grossly overvalued that you are a complete lunatic for buying in, and below $Y you might want to think about gobbling up shares with the rent money." tekboy/Ares@notentirelykidding.com PS Merlin's hints re SEBL, for example, have been much appreciated. This time at least I'll get killed with my eyes open.

To: Judith Williams who wrote (32461)	9/28/2000 5:12:17 AM
From: Bruce Brown	Read Replies (1) \| Respond to of 54805

Judith, I would like to propose an alteration to section one on measuring the "Basic Facts" when studying the balance sheets and income statements of these fine companies. It's a way of looking at the companies which is right in line with the project from a valuation standpoint of using ROIC (return on invested capital) and ROIC - WACC (weighted average cost of capital) spread. This would simply be an addition to see how the network effect has the ability to contribute to the underlying financials and helps address the valuation issue. We continually hear traditional metrics like P/E ratios, net income and EPS being used as a back drop that are tossed off by certain members of the financial community as reason 'not to invest'. It's always nice to know what's really behind a Network Appliance, a Yahoo!, a Siebel, a Brocade or any company once we get deeper under the hood. I'm a big fan of Andrew Chan who is a business/finance student, co-founder of the McGill Investment Club and contributes at the Fool come earnings report time to review the cash flow and ROIC of companies like Ariba, i2, Network Appliance, Yahoo!, Brocade, Broadcom, Nortel, CommerceOne, Cisco, AOL and Nokia. Here's his guest appearance on Fool Hill last night: fool.com Here's an earlier post describing his 30 page report on "The Mechanics of the Economic Model": boards.fool.com Some examples of his work: Network Appliance boards.fool.com Brocade boards.fool.com Yahoo! boards.fool.com boards.fool.com Ariba boards.fool.com boards.fool.com Just a thought since Andrew lists these sources for his work: Does Valuation Matter?, Paul Johnson, Paul Sylverstein Thoughts On Valuation, Michael J. Mauboussin * Competitive Advantage Period "CAP": The Neglected Value Driver, Michael J. Mauboussin, Paul Johnson * A Look at ROIC, Dale Wettlaufer BB

To: Judith Williams who wrote (32461)	9/29/2000 8:27:30 AM
From: Judith Williams	Read Replies (1) \| Respond to of 54805

The following revision in the Project Network format incorporates suggestions from the thread. If points have been misinterpreted or diluted, blame it on faltering synapses here and holler. Mike, Kat and I want to thank everyone for their close attention and generous suggestions. Project Network Focus companies: Siebel--Mike Buckley I2--Bruce Brown NTAP--Down South JDSU--pending WIND--Don Mosher GLBX--Don Mosher QCOM--Eric L. (potential draftee) YHOO--Don Mosher (first report expected) PROJECT NETWORK FORMAT Objective: There are few true networks, but their effects are powerful, becoming stronger as the network increases. A company that dominates or controls a network can realize geometric returns. Project Network aims to explore the sustainable competitive advantage that can be gained through network effects by identifying and studying companies that exploit them in various markets or are positioned to exploit them in the future. I. Basic Facts Gross Margin Net Margin (excluding one-time gains or charges) Cash* Minus Debt** Convertible Debt (if any) as a Percentage of Total Debt Flow Ratio (current assets-cash)/(current liabilities-st debt); this metric may be less relevant for young companies Cash King Margin* (operating cash flow-capital expenditures)/sales Revenue Growth ROIC(return on invested capital) WACC(weighted average cost of capital) If ROIC is greater than WACC, the company is a value creator. (For calculation and concept, see Andrew Chan fool.com Market Cap Markets and Share Competitor's Markets and Share Cash means cash assets, short-term liquid investments, and all other liquid investments, excluding accounts receivable Debt includes all debt--short term and long term If possible or enlightening on trends, it would be helpful to give YOY and QOQ figures. II. Knowledge/Intangible Assets* Intellectual Property Human Resources (compensation, training, acquisitions) Customers (brands, trademarks, cost advantage, focus) Organization Designs (process-based advantages, management) III. Investment in Intangible Assets Intangible/knowledge assets don't always come through on income statements and balance sheets at their full strength. What are the core knowledge assets, where has management placed its bets? Quantify, if possible, particularly with respect to r&d and sales development, retention and/or acquisition of necessary skill sets/technologies. IV. Networks in which the Company Participates or Controls Description What aspects of the business model can create network effects? To what degree has management recognized potential network effects and funded the network's expansion? How is the company leveraging its tangible and knowledge assets to increase network effects? Effects Direct: When the value of a good changes as more agents consume that good. Indirect: When the value of a good increases as the number or variety of complimentary products expands. V. Interactivity of the Networks The more contact among end users, the stronger the potential network effects. The S-curve of product adoption is much steeper for an interactive network than a noninteractive one. How interactive is the network? VI. Compatibility within the Network Transactional Compatibility: where compatibility derives from creating a forum for exchange. As the exchange captures the majority of buyers and sellers in a particular space, competing exchanges lose or never reach critical mass. Community Compatibility: In networks with direct interaction among members, links among members are strong and value grows as more participants join the community. Compatibility from Devices: As the function of ancillary devices, services and software increases, the value of the device increases. VII. Adoption Potential Networks must achieve critical mass for expansive growth. There is often a "delayed gratification principle" at work as a value chain develops that may initially inhibit a network's growth and, hence, network effects. Who were key additions to the network in the past, who are key prospective targets? What threshold, event, or other members will be necessary to draw a given individual/group into the network? What can be done to create additional clusters and connectors? Clustering: the degree to which the connectors to one node in the network also connect to another. Long-range Connectors: Are local clusters connected by multiple long-range connectors or more isolated? How dense is the network? Although calculation of potential network size is subject to great miscalculation, can the network reasonably be expected to reach critical mass and achieve a size that can generate meaningful, sustainable business opportunities or is it too niche constrained? VIII. Assessing Growth Demand or Supply-Side Driven: Are the network effects demand-side driven with a best-of- breed service or dominant product or, as in manufacturing companies that enjoy economies of scale, is it supply-side driven? Are most costs incremental or fixed? Value creation that comes from surging sales driven by demand-side effects when coupled with negligible incremental costs outstrips that produced when supply drives and fixed costs are high. GG Criteria: Are the switching costs high? What are a competitor's barriers to entry? Has a strong value chain formed? Do these factors--barriers to entry, high switching costs, strong value chain--coalesce (or can they in the future) to create network effects and unleash rapid widespread adoption? Critical Mass: If it has not been achieved, when will it be achieved? Critical mass occurs at the start of the tornado. All issues about the constraints to the formation of a tornado are critical to discussion of achieving critical mass. Natural Monopoly: IP-based networks garner huge market share in a winner-takes-almost-all situation. Does a natural monopoly exist? IX. Revenue Sources from the Network and Their Potential Commerce/transactional revenue Advertising revenue Subscription revenue Data-base revenue Royalty revenue Incubation revenue from investments in related companies X. Threats to the Network Internal External (technological disruption, antitrust action, etc.) Competition