What to Watch in 2002 Trends in How We Acquire Goods

One of the most important steps in successful investing is distinguishing meaningful trends from overpriced hype, fads, and �noise� in the marketplace. In this newsletter, we note that one of the more significant changes going on is how goods are bought and sold. In the paragraphs below, we have identified issues related to this theme which we have incorporated into our �investment attitude�. As always, we appreciate any feedback you might have on our observations.

We can�t ignore Microsoft because of the enormous impact they have in technology and our economy. Microsoft�s new Windows XP will matter most in 2002. It�s a vital phase in Microsoft�s plan to weave all of its products into the fabric of the Internet. How they do this is likely to provide an important model for how billions of dollars in annual software sales occur. Note the clear parallel here with Gateway: increase profit margins by cutting out retail stores, many of whom rely on software sales.

Microsoft�s Passport service is also worth watching. It is a Net-wide identification system and could make Microsoft the gatekeeper to trillions of dollars of electronic commerce transactions. Consumers and businesses will demand more secure payment systems (see below) as activity expands. In this regard, we note that AOL reported that Internet sales were $11 billion in the fourth quarter alone, up 72% over last year.

Computer security is hot. Heading the list of concerns are massive security flaws in software which allowed thieves to see users� credit card numbers and other flaws which allowed remote users to take control of computers. Ongoing threats of viruses and potential massive disruption to Internet communications by terrorists are also issues which will impact the way investment dollars flow and the way consumers and businesses interact.

The Liberty Alliance is an important development which will take shape in 2002. It includes a host of major companies AOL Time Warner, Bank of America, Sony, General Motors, United Airlines, RealNetworks, eBay, Nokia, Vodafone, American Express, and more who have joined forces to form an alternative .NET work. Their primary concern is that Microsoft may end up handling their e-commerce transactions. How this works if it works will have a variety of long-term implications for how we are connected to one another and how business is done.

Ongoing Microsoft litigation will continue to impact the business/investment landscape. Nine states have refused to settle with Microsoft in its antitrust case. While a corporate breakup is off the table, Microsoft could still be saddled with penalties that will cost it billions and dampen its competitive ferocity.

People want net music. While Napster is effectively disabled, users can still get free music from companies like BearShare and Audio Galaxy. In 2002, we�ll find out if they want Net music enough to pay for it. A host of Net music services with names like EMusic, Pressplay, Rhapsody, and RealOne hope to collect monthly fees for digital music. But none of these services offer the versatility of the old Napster system.

The coming year promises the continuing gigahertz chase between chipmakers Intel and Advanced Micro Devices, as they continue to develop the new 64-bit chip. Early reports suggest Intel�s next version of Itanium will be powerful enough to propel Intel into new markets: high-end scientific desktops and top-of-the-line mainframe computers. It�ll also spell a major competitive threat to Sun Microsystems, whose UltraSPARC computers currently dominate the 64-bit market.

Amazon.com’s next profit report in January may help to foretell the future of e-commerce. For months now, Amazon.com has been forecasting its first quarterly profit number for the quarter ending in December. Analysts disagree and are projecting a .04 to .08 cents per share loss. But analysts have been wrong (they have overestimated losses) in five of the last six quarters.

AOL has the opportunity to make its merger with Time Warner really pay off big by integrating Time Warner’s high-speed cable and content (movies and music) services with its existing Internet services. It could pull this off in 2002, and this would open a whole new chapter in home entertainment and how we do business.

The proposed merger of Compaq and Hewlett Packard is worth watching. If the merger doesn�t collapse, it would produce the second largest computer company behind IBM. The new company will need to find a new way of doing business (which neither of them individually has been able to do so far) to compete in the low-margin PC arena against Gateway and Dell. Everyone will be watching for the creative new approaches these companies might bring to the table in 2002.

I have often thought of how helpful it would be to be able to pay for an independent, objective service which would tell me what to pay attention to, so I could ignore the noise. That way, I�d have more time to fish.