close this bookVolume 10: No. 19
View the document1) Industry news
View the document2) Entrepreneurship
View the document3) Career topics
View the document4) Lifestyles
View the document5) Personal finance
View the document6) Investment

US District Judge Thomas Penfield Jackson has ordered Microsoft split into an operating systems company and an applications company (with browsers considered an application). They will be barred from joint ventures and favored cross- licensing or information sharing for a number of years. Microsoft will appeal. [WSJ, 08Jun00. NewsScan.]

Although Microsoft argues that its standards and innovations are good for the consumer, Judge Jackson favors letting competitors also innovate. Companies exist that can compete with pieces of Microsoft, but none can compete with the full monopoly. An alternative would be to declare Windows computing a utility -- similar to phone or postal service -- to be regulated by the government.

Analyst Mark R. Anderson has predicted that Microsoft stock will go up after the ruling, and that the company is poised to grow much larger. (He also predicts a good year for Dell and Apple, and for other tech companies.) He also predicts that the decision to split MS will be reversed on appeal. Even if split, this is not a company in trouble. Microsoft has $42B in cash and securities, and earned over $7B last year. (Some of that money *could* be used to buy back MS stock, which would boost the stock price.) MS has just announced a $2B three-year budget to entice and educate independent software developers for the Next Generation Windows Services platform. (That's 20 times the marketing budget for Windows 2000.) MS also has in-house R&D in excess of this amount every year. Once NGWS profits kick in, earnings could grow even faster -- to maybe $200B or more in cash after another six years. On another tack, MS has been buying into both cable and telecom technology in North America, Europe, Japan, and South America. Wall Street has been ignoring this. "Someday, people will look back at the company as it is today and marvel at how small it was, when all it did was PC software." [, SNS, 07Jun00.]

----- "Clearly, MS's dominant status allows it to pick winners and losers. And they get to bind users to their platform. And they get to co-opt open standards. And they get to manipulate other people's innovations. And they get to sell millions of copies of buggy mission-critical applications. And they get to knock off other people's innovations and fold them into their platform. And they can block interoperability with their platform. And they get to plug security holes on an as-needed basis. And so on... This is unfettered competition?" -- Joe Seither. [SNS, 07Jun00.] -----

Silicon Valley has been host to many serial entrepreneurs who start a company, sell it for millions, and then move on to another. Now people around the US are doing this via the Internet. Kevin Seney (Danville, CA) has created 40 e-commerce websites -- using simple tools available on the Web -- for sale to others. Others are doing the same, asking $1M+ for and $59K for Over 10K developed sites are up for sale on Rick Hilliard uses mostly to sell his own recordings, but is offering the site for $1.67M if anyone is interested. Seney turned down $100K for -- one of 12K online properties he has purchased for $84K total. (He comes from a home mortgage background, and relates to websites as properties that need to be improved for sale. "It's like a land grab. It's not hard to get into once you realize how it all works." His father sees building Web businesses as more like building model airplanes.) Developed names may sell for ten times as much as undeveloped ones, and Seney can establish a viable e-business in just a few days. Operations are outsourced to fulfillment warehouses that maintain stock, handle sales, and ship products for a cut of the profits. "Affiliate" programs are another easy path, paying maybe 10% commissions for sales leads. (Jordan Haines makes something like $100K from his 100 affiliate sites, all of which are for sale. He got started from a "Dummies" how-to book.) Custom information content can be acquired from others, sometimes free in return for sales opportunities. That's how Seney's gets its Webcasts and CD previews. Having the operational store allows measurement of traffic and sales volume. is planning to offer professional appraisals for buyers wanting to know the worth of a particular name, business model, clientele, and volume. [Elise Ackerman, SJM, 29May00.] (Other than the domain name, it's probably easy to clone any of these businesses. Not much barrier to competition, but plenty of opportunity for entrepreneurs who aren't greedy -- just like the restaurant business, with few of the hassles of actually running a business.)

On the other hand, many online retailers are finding that the New Economy feels a lot like the bricks-and-mortar Old Economy. has filed for Chapter 11 bankruptcy and Disney-backed has shut down. Investors are becoming wary of companies that absorb cash instead of returning profits. Companies that survive will emerge stronger... [Joelle Tessler, SJM, 24May00, 3C.]

is a networking and advice site for budding capitalists, especially those who have already tried and failed. It's from Nicholas Hall, president of the Silicon Valley Association of Software Engineers. "Michael Jordan took 7-8 years to win his first championship. It's part of the journey." If you'd like to improve your odds, you might try the consultants at Start Up Right (San Francisco), , or Your Corporate Mom (San Mateo), . Superficial advise is free; in-depth consulting is fee-based. Mom/coach Susan Schwartz says that anyone who never fails isn't really pushing the startup envelope. People should cushion the inevitable blows by having a full life -- professionally and personally. [John Boudreau, SJM, 02Jun00, 3C.]

----- "The chief object of education is not to learn things but to unlearn things." -- G.K. Chesterton. -----

The CRA-W Graduate Student Information Guide has been updated. This publication from the CRA Committee on the Status of Women in Computer Science and Engineering is full of valuable information for anyone considering graduate school. . [Ann Redelfs , CRN, May00.]

Marc Andreessen's advice to college students is to study history, philosophy, or economics more than engineering. (Andreessen is co-founded Netscape and is now chairman of Loudcloud, helping Silicon Valley companies get started.) "Have a broad view on how the world works and a really good grasp of critical thinking skills." As for technology, you can't know what's going to be hot. None of us really have a clue what we'll be doing in five years. We had best be open to learning new skills. Attitude, aptitude, and the willingness and ability to change are the keys to success. Adaptation, flexibility, and critical thinking are skills that will pave the road to success. [Larry Magid, SJM, 28May00, 4D.] (Magid recommends English as the best "computer language" for children to study.)

Minority students in CS are invited to fill out a short, anonymous survey about career plans, aimed at determining why so few seek or accept teaching positions. Of the 41 African-American CS PhDs from 1991 to 1996, only one took an academic position. The survey is by the Coalition to Diversify Computing, . [Bryant York , CRN, May00.]

A Nov98 salary survey by CRA shows that PhD salary spreads at industrial labs are much wider than those at universities. Minimum industrial salaries (at eight companies with 644 CS employees) were above maximum university salaries out to about 14 years of experience, after which the shallow exponential growth of maximum university salaries overtook industry's linear growth. These salaries rose from $55K-$65K with no experience to $120K with 18 years. (Minimum university salaries went from $55K to just $75K at 18 years.) Maximum industrial salaries rose from about $125K with no experience to $200K at 18 years, but the data are sparse. Average industrial salaries rose from about $100K to $155K. [CRN, Nov99.]

US tech wages are now 82% higher than private-sector wages. California continues to dominate, but tech is growing faster in WA, KS, CO, and GA. (CA grew 30% from 1993 to 1999, vs. 49% in CO.) CA had 835K tech jobs in 1998 (up 193K over 1993), followed by TX, NY, MA, and NJ. CO has 146K tech jobs, and the highest percentage of private-sector tech jobs. CA leads in high-tech exports ($53B in 1999), VC funding ($17B in 1999), and R&D spending ($42B in 1997). High-tech wages are higher in WA, averaging $106K (vs. $67K for CA). Across the US, there are 5M tech workers -- twice the number in auto manufacturing and services. [AEA study funded by Nasdaq. Jennifer Bjorhus, SJM, 17May00, 1C.]

Canada is losing skilled workers to the US, with emigration increasing steadily over the past decade. 22K-35K Canadian -- or 0.1% of the population -- move to the US each year, mostly high-tech workers. [SJM, 25May00, 6C.]

----- "We must prepare students for their future, not our past." -- David Thornburg. -----

Silicon Valley women replied to the Business Week article about the shortage of dateable women, saying that it can be hard to find a good man if you're not willing to advertise in the newspaper, hang out in bars and nightclubs, or sign up for dating services -- especially for 30+ and 40+ women who aren't shaped like movie stars. The perfect woman-next-door may be living next door or working in the next department, but chances to meet are few. Religious groups are trying to provide channels: Congregation Kol Emeth (Palo Alto) recently hosted a Shabbat dinner for about 75 single women and 25 single men. See for their traditional matchmaking (Shadchan) service for Silicon Valley Jews. [BW, 27Mar00, p. 15.]

The median home in Silicon Valley now costs $421K, up 65% in five years. Only 29% of Valley families can afford that. Blue collar workers earning $15/hour or less are often sharing housing, several to a room. Income for the bottom fifth of households actually fell during the 1990s, due partly to the use of outsourcing, subcontracting, and temp agencies. (That gives high-tech companies maximum flexibility. Companies focus on their core competencies, outsourcing everything else.) Part-timers, temps, contract workers, and the self-employed are now 42% of the workforce (vs. 33% for the US). Retail workers make about $23K/year. Those earning something like $8/hour often end up in homeless shelters -- if they can get past the waiting lists. San Jose's soup kitchen servings are up 27% from 1998. Some 20K people had a period of homelessness last year. Such statistics are hidden by Valley averages, which show family income up 50% (not adjusted for inflation) since 1990, to $83K/year (vs. 36% for the whole US, to $47,800). Santa Clara County has at least 13 billionaires (worth $45B total), several hundred families with $25M, and 17K with liquid assets above $1M (not including their houses). Incomes for the top fifth have risen 29% since 1992, and software workers now average $96K/year. [Aaron Bernstein, BW, 27Mar00, p. 76.]

The median house price in California is now $232K, which only 32% of CA families can afford (down from 43% a year ago). In the Bay Area, only 21% can afford a $421K median home (down from 33%) -- and it's still dropping. (In 1989-90, affordability dropped to 15%.) Average salaries may be high in Santa Clara County, but only 20% can afford a $489K median home (also down from 33%). San Francisco's affordability ratio is only 13%, followed by 15% in San Mateo, Marin, and Monterey. These figures assume 20% down and a 30-year, fixed-rate mortgage at 8.06%. To afford that, families in Santa Barbara or Alameda need to make $92K; Monterey, $112K; Contra Costa, $113K; Santa Cruz, $117K; San Francisco, $130K; Santa Clara, $135K; San Mateo, $152K; and Marin, $182K. For the Bay Area as a whole, it is $115K. However, those who do own homes are enjoying double-digit appreciation. [Sue McAllister, SJM, 08Apr00, 1C.]

New figures for Santa Clara county show that only 16% of households can now afford a median home of $540K. Only 12% of San Franciscans can afford a home in the city, vs. 28% for the full Bay Area. [SJM, 05May00.]

National Alliance for Fair Employment is a new advocacy group for adjunct professors, secretaries, and other contingency workers. It's a coalition of labor unions, activists, and advocates for minority rights. The group wants to help temp workers win health insurance, retirement benefits, equal rights, and upward mobility. [Kirstin Downey Grimsley, Washington Post. SJM, 24May00, 14C.]

----- "If work was a good thing the rich would have it all and not let you do it." -- Elmore Leonard. -----

The US House of Representatives has been considering tax incentives for stock option plans, extending the tech success model to other domains. (Under current rules, employees must pay taxes in the year that they exercise options. This makes participation unattractive. Incentive stock option plans defer taxes until the stock is sold, unless alternative minimum tax is triggered.) Stock ownership may help employees take more interest in their companies. Democrats are pushing for 90% eligibility, rather than the 50% originally proposed. Labor unions are wary, though, and don't want stock options to replace conventional retirement plans or to hurt salaries or employment levels. [Marcy Gordon, AP. SJM, 24May00, 4C.]

Incidentally, the House voted last week to repeal all inheritance tax in the US. This -- with bipartisan support -- beat out a Democratic plan to raise the inheritance exclusion from $1M to $4M. Clinton has vowed to veto the bill if it reaches him, though the House vote had just enough support to override a veto. Eliminating inheritance tax could cost the government $50B in revenue. (... to be spent by heirs or loaned out by financial institutions, creating jobs and boosting income taxes. It's not as if the inheritors were going to bake the money into pies, as Dave Barry might say.) Either way, there is support for tax relief that would help businesses remain intact when passed to heirs. Estate planning will also be simplified, for all but the very wealthy.

The US government is also urging people to cash in the $7B in matured savings bonds. "We want them to put their money back to work for them." [AP. SJM, 24May00.] (Apparently the Bureau of Public Debt now regards circulating capital more useful than interest-free loans to the government.)

If you have art, antiques, or collectibles that need appraisal, try You may learn that your Himalayan yak-milk canteen is worth $1,250. [BW, 05Jun00, EB 10.]

Women interested in being business angels should check out (about $1M per member), ($250K minimum), (Renaissance Ventures in Boston), (Seattle), and (DC, $75K per member). You typically need $1M net worth or an income of $200K. Be careful. A study of 1,200 angels investing between 1989 and 1999 found that only 30% made money, and then only two to ten times their investment. Funds were often locked up for 5-10 years. However, many angel club members gained board seats or managerial posts in start-ups. [Toddi Gutner, BW, 15May00, p. 190.]

In 1996, all-female investment clubs averaged a 21.3% annual rate of return, according to NAIC. Mixed-gender clubs averaged 18.1%, while male-only clubs averaged only 15%. [Douglas Gerlach, "The Complete Idiot's Guide to Online Investing" (Que, 1999), p. 66.]

NeuroDimension is developing a new stock market modeling tool based on their NeuroSolutions Neural Network product. See to participate in the beta program. [Brian Wolfe , 16May00.]

----- "The quest for certainty blocks the search for meaning. Uncertainty is the very condition to impel man to unfold his powers." -- Erich Fromm. -----

I previously reviewed the Motley Fool's "Basic Four" investment strategy -- a variant on Dogs of the Dow -- from David and Tom Gardner's first book, "You Have More Than You Think." Their third major book, "The Motley Fool's Rule Breakers, Rule Makers" (Simon & Shuster, 1999), offers much deeper understanding of how to pick long-term stocks.

A basic premise of the book is that it is better to pay a single transaction fee of $15 or so to purchase a stock -- and a similar fee, plus capital gains taxes, when cashing out perhaps decades later -- than to pay an ongoing 1.75% or so per year for a mutual fund. A portfolio of ten buy-and-hold stocks is almost as convenient as a mutual fund, and you don't get hit with transaction fees and taxes from the fund manager's trading. Over forty years, your stocks may grow to twice the value of a mutual fund with similar holdings -- e.g., $2.4M instead of $1.2M on an initial investment of $75K at 9%. For Dow Jones or S&P 500 stocks, that argument makes perfect sense -- even with just the 0.2% management fee of a Vanguard index fund. For small-cap stocks, consider that a good fund manager may achieve a much higher rate of return than you would have by yourself. (Most mutual funds have lagged the S&P 500 in recent years, but stock pickers are having more success this year.)

If direct stock ownership is best, which stocks? The Motley Fools recommend either Rule Breakers or Rule Makers. The first half of their book is about Rule Breakers: the Yahoo!s, Wal-Marts, Amazons, and Starbucks that are 1) top dog and first-mover in an important, emerging industry; 2) have a sustainable advantage; 3) show strong past price appreciation (90th percentile for its industry); 4) have good management and smart backing; 5) sell to a mass market (if possible); and 6) are grossly overvalued, according to some financial pundit. Each criterion must be satisfied, to at least a plausible degree. With these companies, get in as early as you can.

Eventually, every company faces competition and must adapt its tactics accordingly. The companies become "Tweeners," no longer Rule Breakers and not yet Rule Makers. You may want to hold onto the stock during this phase, but the Fools don't recommend new investments in Tweeners. There's too much risk and too little chance of rapid growth.

A few companies will conquer their competition, becoming monopolies. These are the Rule Makers, and again a new style of management is required -- one that builds for the future and ignores the short-term pressures of Wall Street. The second half of the Fool book is about finding these companies, via a 26-question, 60-point evaluation. The Fools gave Microsoft 59 points in 1999, whether whole or soon to be broken up. Others with 50 points or more were Cisco, Coca-Cola, Pfizer, and AOL. Of course you'd rather have bought them many years ago, but the high Rule Maker scores say that these companies are still rising fast, a bargain even at current prices and P/E ratios. (In fact, Coca-Cola's profits are growing faster than ever before.)

Second-tier companies scoring 40-50 points included Gap, Schering Plough, Intel, Disney, and Dell Computer. These are solid investments, but keep an eye on whether they progress to true Rule Makers or begin to decline. Consider selling if the Rule Maker score drops below 40, and especially below 30.

If you're interested in this kind of screening, see the latest Rule Maker recommendations at . You'll also find the official Rule Breaker portfolio -- based on past choices, not today's data -- and a discussion forum for almost any stock. Other good stock-picking forums include AOL Message Boards , Clearstation , Raging Bull , Silicon Investor , and Yahoo! Finance . CompanySleuth at pulls business news from other services, and at offers a pool of private research reports.

Computing the Rule Maker score requires little research, as it's not hard to distinguish a Rule Maker from companies struggling under the domination of a Rule Maker. Some of the more technical rules are based on "Foolish Flow Ratio": non-cash assets divided by current liabilities. Only a dominant company can keep this ratio low by reducing inventory and accounts receivable while delaying payments to suppliers. If the ratio is getting lower over time, even better. Other rules have to do with market factors, margins, cash holdings, and corporate style. Only companies with $1B in sales are considered as potential Rule Makers. Nowhere do the Fools consider P/E ratios and other common screens for short-term bargain hunting. (Their Basic Four portfolio was based on exactly that kind of screening among the Dow Jones stocks. Check the website to see how its returns compare.)

A quick check for both Rule Breakers and Rule Makers is that customers have no legitimate alternative. If the company were to disappear today, would it be missed? Rule Breakers are changing their markets with new products or services, and are outpacing any potential challengers. Rule Makers have captured their markets, and have the power to crush or buy competitors. Either is likely to offer market-beating returns over years or even decades.

-- Ken