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Technology Stocks : Intel Corporation (INTC) -- Ignore unavailable to you. Want to Upgrade?

To: Gerald Walls who wrote (75422)	3/4/1999 7:23:00 PM
From: Tony Viola	Read Replies (1) \| Respond to of 186894

Gerald and Intel Investors, a good article from the fool about the three top tech companies and how they keep their grip on their markets: fool.com ====================================================================== <THE RULE MAKER PORTFOLIO> Light Business Models, Part II By Phil Weiss (pweiss@homemail.com) TOWACO, NJ (March 4, 1999) -- Last night, I discussed the intangible asset value created by some of our companies and the related benefits. Tonight, I'm going to finish the discussion by looking at our three technology heavyweights. First up is Microsoft (Nasdaq: MSFT). Its balance sheet includes little in the way of tangible assets. Its biggest strength comes from its investment in intellectual capital to create all of its software products. As computer users have grown accustomed to Windows and the Microsoft "look and feel," the company has built a tremendous business based on the strength of the Microsoft brand name. Although some competition exists among operating systems for servers, Microsoft's domination of the PC operating system (OS) seems secure. Microsoft's vice-like grip on PC OS is further secured by the fact that the vast majority of software is built to run on the Windows platform. Unless the antitrust suit results in any changes, the Windows source code is solely the property of Microsoft. It's pretty hard to imagine a company being able to invest enough in product development and advertising to overtake Microsoft's domination. Because of the costs involved in building its fabrication plants, Intel (Nasdaq: INTC) has the biggest investment in tangible assets of any of our stockholdings. It's estimated that the cost of building each such plant is around $2 billion, and Intel currently has six such plants. Its next largest competitor Advanced Micro Devices (NYSE: AMD) has only one. AMD just doesn't have the capital resources to compete with Intel. The capital costs alone create an immense barrier to entry in this business. But the vast tangible assets only begin to fill Intel's "moat." When it comes to research and development (R&D) expenditures, Intel is able to spend more on R&D than its competitors realize in total revenues. This will continue to make it difficult for companies to overtake Intel for the foreseeable future. In addition, Intel has invested a lot of capital in building a valuable brand name. This was the reason for the whole "Intel Inside" advertising campaign. Before Intel started promoting its brand name, very few people really had any idea who made the processor that served as the brains of their PCs. Intel's wildly successful advertising led consumers to insist on having an "Intel computer." Last week the company started selling its next generation chip, the Pentium III. The company has said that it will spend $300 million promoting this chip, which is its heaviest promotional effort to date. Cisco (Nasdaq: CSCO) lies somewhere in between Microsoft and Intel. Although many think of Cisco as a company that sells hardware (e.g., routers), the key to Cisco's business is really its Internetwork Operating System (IOS). IOS integrates all of Cisco's products so it can sell complete networking solutions to its customers, which has proven to be a key competitive advantage (this link is a great article). It also helps Cisco to sell its products at comparatively higher prices than its competitors. IOS is a key part of Cisco's growth strategy as well. Cisco regularly buys small companies that are developing innovative products. It takes the technology that these companies are developing and builds it into IOS. Since many network administrators are familiar with IOS, this makes the sale of products using these new technologies a lot easier for Cisco. According to Peter Alexander, vice president of marketing for Cisco's enterprise products, "IOS' overriding benefit is that it provides a common set of services and has a common look and feel [that extends over a lot of Cisco products.]" Many of Cisco's customers are afraid that products made by Cisco's rivals will be incompatible with our company's products, so they won't even consider purchasing competitor products. Another of Cisco's strengths is its ability to market its products and focus on providing its customers what they want. Eighteen months ago, Cisco launched its Cisco Powered Network (CPN) logo program, which is a variation of Microsoft's "Designed for Windows" and Intel's "Intel Inside" programs. This program provides qualified partners with access to Cisco's customer list, as well as the chance to see product information earlier than those that are not part of the program. Service providers are also allowed to display a CPN logo on their Web sites and in advertisements. The key to this program for Cisco is that in order to qualify, 85% of an ISP's networking gear must be supplied by Cisco. The key to all of the above is that it helps to essentially guarantee millions of dollars of sales for Cisco. It also serves as a means of keeping rival equipment makers from infringing on Cisco's turf. The common attribute among all the intangible assets that I've discussed over the last two nights is that they help to create barriers to entry for the competition. They also help to build what Warren Buffett likes to call a "moat" around their businesses. This helps prevent other companies from successfully competing with each of our companies. It's also what helps our companies make the rules. From time to time, our companies may face competition from others. As a matter of fact, a case in point is Yahoo! (Nasdaq: YHOO). As was stated in the buy report, Yahoo! is currently battling companies such as Excite (Nasdaq; XCIT) and Lycos (Nasdaq: LCOS). I believe that the Yahoo! brand name is stronger than that of its competition and that is one of the things that will enable Yahoo! to emerge from its current Tweener status and become a full-fledged Rule Maker. I'll be back tomorrow night to assess Schering-Plough (NYSE: SGP) under the Rule Making criteria discussed in Rule Breakers, Rule Makers. Should return on equity (ROE) be considered in evaluating a potential Rule Maker? Join us on the Strategy message board to discuss this (which is our question of the week, by the way) and other ideas for improving the Rule Maker scoring criteria. Over on the Companies message board, we're ranking Rule Makers using the new Rule Maker Spreadsheet (links below). Have you downloaded your free copy yet? See ya on the boards, Phil Weiss, Fool Rule Maker Strategy Folder Rule Maker Companies Folder Rule Maker Spreadsheet (Excel 97, 68k) Rule Maker Spreadsheet (Excel 95, 41k