*Extra* Why Amazon's New Plan May Be Further Evidence That Its Biz Ain't Booming
By Herb Greenberg
Senior Columnist
9/29/99 3:11 PM ET
Seymour's comments and Cramer's wimp-out notwithstanding: So, as this column suspected the other day, Amazon.com (AMZN:Nasdaq) really must've been whispering sweet somethings in the ears of Wall Street analysts who, out of nowhere last week, started speaking positively about the online merchant. That sweet something most likely was that a big announcement was coming. Most analysts expected something home-store-related, such as a deal with Home Depot (HD:NYSE) or Williams-Sonoma (WSM:NYSE). Instead, the Seattle company announced that it plans to open new zShops that will let other online merchants sell their wares over Amazon in return for giving Amazon a small cut of the action.
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Amazon's stock zoomed on the news, but skeptical money manager Jeff Matthews of Ram Partners wasn't impressed. Matthews, you may recall, caused a stir here several weeks ago with his guest column on why he believed "Internet time" had caught up with Amazon, whose growth has slowed. "This is evidence that they have to scramble," he says. "It's 'Game over,' and it says they can't open any new stores themselves.
"It's the functional equivalent of Wal-Mart (WMT:NYSE) saying, 'We're not opening any new stores in any new countries or any new concepts, but instead we're going to open our parking lot to anybody who wants to set up shop to sell merchandise to our loyal Wal-Mart customers. And we'll get a cut.'
"So, it's failure."
Matthews, who is short Amazon, goes so far as to say the announcement is proof that Amazon's model of building up its e-tailing distribution biz is broken. "This [new service] doesn't take advantage of any of those assets," he says. "This is really just an extension of their eBay (EBAY:Nasdaq) auction model and an attempt to do what GeoCities is doing, by hosting people to do their own thing on the Web."
Some analysts believe this new biz will help boost Amazon's sagging margins, but Matthews isn't convinced. He wonders what kind of e-tailers will take advantage of the service. By the nature of Amazon's existing biz, it's likely not to include retailers of books, toys, music, videos, drugs or consumer electronics. Others will be mom-and-pop operators who are hoping for access to more eyeballs but will face the enormous challenge of stocking their own shelves and shipping the products -- two areas in which Amazon excels. Any bad experience in either of those areas is likely to cause customers to stick with established retailing names like Amazon itself.
As for Amazon's stock: It's anybody's guess. "The business and the stock are two different things," Matthews says. "I'm looking at this based on what they're saying, which is that they can't open any new stores."
An Amazon spokesman emphatically disagreed with Matthews' analysis. He says the company has been saying for more than a year that it wants to be the leading e-commerce site where customers can buy almost anything. This, he said, is really a "manifestation" of the company's purchase last year of Junglee, the Sunnyvale, Calif., developer of the Shop the Web search engine.
Wasn't it assumed that Amazon would do that internally? No, he says, insisting that would've been impossible. "To offer universal product selection you have to partner with other people."
Perhaps, but that's not the only part of the story. Amazon said Wednesday that it has at least 12 million customers. Sounds like a lot, but that number is as much as 1 million customers short of some analysts' estimates and is only 11% more than last quarter. In other words, the hullabaloo over this latest announcement aside, if Amazon doesn't do much more than 12 million customers, it will look as though it's going upriver without much of a paddle.
The company, meanwhile, is telling analysts to expect a strong fourth quarter.
"But it'll be good for Toys R Us (TOY:NYSE), too," Matthews says, "and that doesn't mean Toys R Us is a good business model."
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