Finding the New Tech Gorillas in Our Midst

For a brief shining moment, Geoffrey Moore got it right. The famed consultant realized eons ago -- in January 1999 -- that investing in so-called Internet companies wasn't sustainable. "I do not think (Internet stocks) can be called investments at this time," Moore told his clients then, and I duly reported his thoughts in my San Jose Mercury News column. "An investment is something you would want to hold for 10 years, say. I don't think many people would be comfortable with eBay EBAY as the foundation of their retirement plan."

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Gorilla Game goes on Printer pricing heats up

Unfortunately for Moore's position among great Silicon Valley seers of our time -- admittedly a short list -- he didn't stick to his guns.

"I flinched a little bit," said Moore, president of the Chasm Group consulting firm and a venture partner at Sand Hill Road venture-capital outfit Mohr Davidow Ventures, over breakfast last week. "If I had been a really great thinker, I would have held to that. Instead, I said, 'What the hell.' "

Things didn't work out badly for Moore. An early adviser to Internet Capital GroupICGE, he says he made a killing selling its shares before they fell from around $200 in January 2000 to $2.22 Friday. And he's also done fine advising a handful of the most prestigious technology concerns, including Cisco SystemsCSCO, Microsoft MSFT and BEA SystemsBEAS.

But Moore wishes that he had quit while he was ahead and listened to his initial -- and accurate -- take on the Internet-stock phenomenon. To wit, Moore argued in his Gorilla Game terminology (from a book by the same name) that gorillas are companies that dominate an industry with proprietary technology that carries high switching costs for its customers. Cisco, Microsoft, and Intel INTC are "canonical" gorillas, to Moore. Even the best of the pure-play Internet stocks were assailable by the competition, often because customers of companies such as Yahoo! or Amazon.com always had plenty of other places to take their business. You barely could buy a PC operating system from anyone other than Microsoft.

"What happens when a hyper-growth market has no barriers to entry?" asks Moore today.

Moore's embarrassment is assuaged by the fact that he's kept his head above water and kept working on new ideas. Since his landmark Crossing the Chasm and Inside the Tornado books, he's also published a tome for public companies besieged by the challenges of the new economy, Living on the Fault Line: Managing for Shareholder Value in the Age of the Internet. His prescription is outsourcing of everything but core functions, not a unique suggestion and one that hasn't been fully embraced by corporate America.

He notes, however, that Sand Hill Road is back to playing the gorilla game: Venture capitalists are taking their time to identify future leaders again. After all, VCs have time on their hands now. He's still advocating some past gorillas, including clients Cisco ("a fabulous investment once the [telecommunications] carriers figure out where their new revenues are coming from") and Microsoft ("a huge opportunity" in Internet software). He also thinks enterprise software will have a run of three to four years as long-term licenses suddenly come back into vogue and subscription models become suspect.

Geoffrey Moore is the fortunate investor who ignored his own advice but prospered anyway because he had a good inside track and regained his senses in time. Picking the next gorilla is tougher than Moore would have you believe, but at least he gives investors a framework for hunting. Just be sure to listen to his main, consistent advice, not his flights of fancy.

Paper Profits

You'd think the paperless office would have dealt a body blow to the printer business, but it hasn't. Folks still like to print out the documents they read on screen. And digital cameras promise to give the printer industry its next leg up as Grandma and Grandpa in those cute Microsoft promotional videos rush to "publish" the photos of their grandkids sent over the Internet.

In fact, printers are so much in demand that market leader Hewlett-PackardHWP is getting into the business of making the sub-$100 variety. That's an inexpensive printer, so inexpensive that Credit Suisse First Boston analyst Gibboney Huske thinks HP is interested in the market more for the "consumables" (that's cartridges to you and me) customers will buy rather than the printers themselves. Huske -- who has been correct of late on the direction of shares of Xerox XRX (down) and Adobe Systems ADBE (up) -- sees HP's move into the sub-$100 category as the beginning of a price war in printers, and she notes that price wars seldom are good for any of the participants. The focus, then, isn't on the aggressor, HP, which has its own problems, but on low-end stalwart Lexmark InternationalLXK, whose hide HP is targeting.

"Having lived through the Kodak/Fuji film pricing war of 1997-1999, experience tells us that investor sentiment is likely to deteriorate as ongoing pricing and promotion actions move the market out of an equilibrium state where price/performance curves are well known and stable," Huske told clients in early march. On Friday, she said she remains convinced of the brutality of the impending price war and that unfortunately for shareholders of Lexmark, the effects are not priced into the Lexington, Ky.-based company's stock.

In fact, Lexmark's shares are up 9% this year, having closed Friday at $48.20. Huske estimates the company will earn about $331 million, for $2.60 per share, in 2001, about a dime per share less than the Wall Street consensus forecast, according to Multex.com. Noting that inkjet printers don't make money for Lexmark, Huske doesn't think a volume decline would hurt Lexmark's earnings this year. But she is worried the company won't be able to hit her projection of 11% year-over-year revenue growth to $4.2 billion. Huske's forecast already is below Wall Street's average call for about 15% revenue growth for Lexmark.

There is no obligation for investors to go along for the ride during a price war. You just know somebody's going to get hurt.