When revenues exceed these relatively fixed costs, profitability will follow. These fixed costs are the barrier to entry for competitors--the competitors can't grow revenues fast and far enough to survive.
Tom, Econ 101. Remember? Amazon is the one at a disadvantage because they still can't cover their fixed costs, much less variable. Their bigger competitors (BKS, BGP, Bertelsmann, WalMart, etc., etc.) long ago reached the point where they cover fixed overhead costs. They can price off of the direct, marginal cost of selling a book over the Web (CGS, shipping, marginal cost of carrying the book in inventory). AMZN, OTOH, has all sorts of corporate expenses and distribution facilities to pay for PLUS the direct, variable costs. If they ever decide that turning a profit matters to shareholders and lenders, they will have to price off of average cost, not marginal cost. Forget whether AMZN will ever be able to purchase books as cheaply as the big guys - even if they reach that point, BKS, BGP et al will still be able to undercut them without sacrificing bottom line profits. And remember, as Ken used to remind us so often, BKS said that they would not sacrifice overall profitability to the Web. Perhaps they remembered their microeconomics classes from college.
Regards,
Bob |
