View Full Version : Honeymoon over at Amazon.com

06-25-2002, 04:16 PM
I have always believed the Internet brand-monopoly - "get big fast and then get bigger" - was a misplaced ambition.

But then a strange thing happened. The big guys were losing so much money, instead of making money, who wanted to compete!

But if an Internet company actually makes money, the web is just too fluid and easy to enter for it to last for very long.

Let me reiterate this just once. Other people said Amazon would make a billion dollars. I said they'd get competed to death.

But then other people's assumptions - which my arguments were merely meant to extrapolate - fell flat themselves.


06-25-2002, 06:24 PM
I agree with you on this one. I never quite understood why so much money was placed on this bet.

I learned economics at a no name state school before the whole internet revolution. Even back then they taught that the old "Structure-Conduct-Performance" model of market behavior had pretty much been debunked. This model teaches that if you look at the structure of a market you can then make conlusions about the pricing conduct of the market players and from there draw conclusions about profit performance. So if you analyze a market and notice that one or two companies have say 90% of the market share the market must be an oligopoly. Since the market is an oligopoly they must be earning monopoly rents and they must be making big profits. The logical(?) conclusion must be that all you have to do to make tons of money is get real big before everyone else and be a monopoly. And from there springs the ephemeral "first mover advantage" that entrepreneurs talk about when they come to our firm looking for investment.

The simple fact of the matter is that unless you can do something that no one else can do, you are going to be constantly fighting for market share and seeing pressure on your margins. In this particuar case size doesn't matter.

06-26-2002, 02:16 AM
Maybe true based on prior investment values, but this latest "competitor" has to be kidding. They have a cost structure much higher than Amazon and are fighting them in a battle they start out about three miles behind in. And they say they can undercut Amazon by this much? Are you kidding me??? It will cost Amazon for maybe a month, but the challenge will fall by the wayside too. Amazon is probably laughing at these guys. Amazon may never have deserved the valuation they did in the past, but for better or worse they are a break-even company about to be solidly profitable. Not billion dollars profitable, but certainly a strong retail presence with no peers in the online field. If someone really thinks they can go out and undercut an already highly-discounted retailer, they must be kidding themselves. Amazon probably will only match them in specially chosen areas and then let them fold up in the rest. When a company that has no marketable database and no loyalty from book buyers thinks they can replicate the kind of distribution and costs savings Amazon can with their vast investments, then that is a crazy-ass CEO. If anything, I think the best idea is to short the daylights out of any companies that come up with such ridiculous ideas. You go out and try to slowly work your way up in a business, not go out and tell the world you are challenging the top dog to a duel at noon in the courtyard. This business has its open niches and its ability to pick up some of Amazon's customers with a smaller model based on specialties or service touches. You never go out and take them on in price, that is foolish. No one is stupid enough to be a small regional store and then say they are going to grow big by undercutting Walmart. No one is that stupid, but these guys seem to be trying.

If I were Amazon, what I would do is say fine. Let them have the price edge on the best-sellers by any margin they want. Then see what they do if everyone goes and buys from them in the first month. See how they can't fill 2% of their orders and piss every customer off that gives them a chance. That ought to end this charade really quick.

Amazon's model really isn't about the net or anything high-tech anymore. Its about distribution, advantages due to scale, and most of all delivering a quality product to customers. They are a very good company in all categories and its folly to think they are on the verge of collapse due to the rules of the business market. Their valuation might be a bit rich when looking at EPS, but from a free cash flow perspective they are on the verge of hitting the bonanza.

06-26-2002, 12:38 PM
I have no idea which Amazon competitor you guys are talking about. Barnes&Noble maybe? But it really doesn't matter. My only point is that Amazon will never have very good margins because there is no barrier to entry in this industry. Amazon hopefully has a marginally lower cost structure but that is their only advantage. Whether there are competitors to Amazon or not doesn't really matter. Merely the threat of market entry is enough to keep prices down.

06-26-2002, 03:25 PM
You are assuming you have to have high margins to make it in this industry. The whole theory of winning the market and then becoming a monopolist. As recent history has showed, this theory really isn't at work any more. Southwest has come to dominate a lot of airports and yet they have never become a monopolistic player in any of them. Walmart could easily squeeze more money out of their customers yet they seem to thrive on their theory of lowering costs to gain more revenue. Even Microsoft hasn't really put it to customers in outrageously priced products, despite all these silly claims that they should have eventually charged $10 for Windows or something along those lines. Fact is that companies know they can't be monopolistic and not draw in competition in most cases. Amazon has never said it had any plans to become the richest company in the world, they have just had their sights on being efficient and becoming larger with the benefits that come from size. They model themselves after Walmart in so many ways and for the most part they have finally got the model down. Walmart has never been about margins, so why should Amazon be? This business isn't about margin or margin expansion, its about distribution and scaling down costs through expansion. No one can match Amazon's system as far as books go. It would cost way too much to build the name, the database, the warehouses, the system, etc. Its foolish to try because it cost the company a lot of money along the way and no one will go down that path again. However, the legwork has been done and now its time for the company to earn the fruits of its labor. I think its emerging as a great long-term investment because it will have an impressive bundle of cash coming in so long as they stick to what they do well and undergo initiatives to bring in money from ventures that take advantage of their strengths. Setting up e-commerce stores for others is ridiculously lucrative. You take no risk really, you just offer them skills that you have in-house and bring in very high margins off of that since you invest almost nothing and have minimal costs. Even better, I like the strategy because it keeps them from foolishly trying to create those stores for themselves as they did a few years back.

As for the competitor, the stock tanked because Buy.com claimed they were going to undercut Amazon by 10% on all the books that they sold. Buy.com, being privately held, had no logical reason for this. Seems like a marketing ploy, but since there is no stock price to drive up with such an announcement it really made me wonder.