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Mark -

Thank you for your insights.

From Morningstar's perspective, a firm has a "network effect" when the value of its service grows proportionately to the number of users.

Take the phone system. If just you and I have a telephone, then the phone company isn't very valuable. There is no "network." But if nearly everyone in the world has a phone, then the phone company is very valuable. We are all able to mutually benefit from the network. An early example of the network effect is the post office. A more recent example is the Internet.

Some market strategists think the network effect is the rarest but most potent of the four competitive advantages because of the "winner-take-all" dynamic. Common trait among companies that exploit network effects is they are early movers to create a standard in an emerging industry. Some companies that benefit from the network effect become monopolies.

Today, a company like eBay has a network effect. The trading portal's value increases alongside the growth in buyers and sellers. Other examples include the Chicago Merc, Western Union, and the Microsoft Windows operating system

From this perspective, I do not think TRLG has a network effect.

As for brands, again, I'd be careful. Fashion is evanescent. It comes and it goes, as you remind us. And, even if TRLG has a brand, we have to be careful. Look at Dow Jones & Co.. Is there any better brand than the Wall Street Journal? If you read John Train's The Money Masters, recall that Warren Buffett considered the business daily "one of the most perfect business franchises." Well, the "perfect business franchise" became less relevant over the last 20-25 years, partly due to the rise of the Internet. Since 1971, the S&P 500 is up about 1,500%, vs. just 250% for Dow Jones (thanks in part to Rupert Murdoch).

TRLG may have a brand, but it is too early to know if it is a competitive advantage.

The reason we want to determine if TRLG has a competitive advantage is because this is the connective tissue between the Earnings Power Chart analysis work, which is history, and our valuation work, which is the future. The more durable a firm's competitive advantage, the longer we we can project above-average growth rates in sales, operating profit margins, etc. This, in turn, results in a higher intrinsic value estimate.

While TRLG is forging an Earnings Power Staircase, I do not believe it has a durable competitive advantage. Thus, my explicit forecast period is 5 years, and then I will pay no more than 10 times earnings in year six. If TRLG had a durable competitive advantage, then I'd go out 10-15 years.

As always, divergent views are welcome on this board.

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