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Technology Stocks : Amazon.com, Inc. (AMZN) -- Ignore unavailable to you. Want to Upgrade?

To: Bill Harmond who wrote (64687)	6/25/1999 6:35:00 PM
From: Eric Wells	Read Replies (1) \| Respond to of 164684

William thanks for your message. Regarding the points you raise: 1. I agree with your point regarding lower costs of doing business on the net. But I do believe that Amazon competes on price, even though they don't always have the lowest prices (price competition on certain items can lead people to the site, where they might buy things that sell at a higher price). You may recall the time last month when Amazon launched a marketing campaign advertising titles on the NY Times bestseller list at 50% off. This is definite evidence of price competition. But growth is one thing - profit another. Yes Amazon might be quite profitable at a 5% margin (personally, I don't believe they could) - but we don't know what might happen if they were to either raise their prices 5% across the board or decrease operating expenses by 5% in order to achieve this. It could have a offsetting negative impact (losing customers on the one hand, losing marketing muscle on the other). 2. Customer Service - there have been recent articles in Red Herring and I believe Wired where Bezos has emphasized the importance of customer service to Amazon. Bezos has explicitly stated that customer service is one of Amazon's main advantages. Does Amazon employ fewer people to answer email messages and phone calls than Borders does to staff it's stores? I don't know. I do know, however, that Amazon does employ a lot of people in its customer service department. Amazon offers very good customer service, there is no doubt - but it costs them money. And I have read more than one article speculating on the degree to which their good customer service cuts into their profits. Also we should distinguish costs associated with customer service and costs associated with marketing - marketing costs are involved in building awareness of the brand, while customer service costs are involved in sustaining the brand and keeping customers coming back (you could argue that customer service is a marketing cost). But no one knows how loyal internet customers are at this point. If you have only one Safeway in your town, you will most likely purchase your groceries at that Safeway because it is too much effort to drive thirty miles to the next town to shop at Lucky. However, on the internet, there's no geographical limitation - the next online e-commerce site is a mouse click away. I'm not saying that this will doom Amazon - but what I am saying is that it poses a risk. There is no certainty that even if Amazon does a good job in building its brand that it will be able to retain its customers. We simply don't know. But I would say that the risk of customer defections is much greater on the internet than in traditional bricks and mortar businesses - because it is just so easy to go to another web site. 3. Barriers to Entry: I should have qualified my statement in specifying "technological barriers to entry". In short, it's not that technologically difficult to set up an functionally effective e-commerce site (any major company can probably do it for under $5 million - smaller companies for much less). Building awareness of a brand, as you state, however, is a very different issue. Amazon, Ebay, and Yahoo all have a very high level of brand recognition on the net on the moment. And as you state, Amazon is much more well known on the net than Barnesandnoble.com. But being better known than Barnesandnoble.com will not be enough to drive profits to a level that can justify AMZN's price (see the market valuation of BKS and BNBN for reference). So Amazon is going into other areas as well - and you could say that this will help to drive profits. It might - yet, it might not. There are two things working against Amazon in deriving profits in other areas: > Not getting their first. Will Amazon be the WalMart of the web? I'm sure that WalMart is very intent on being the WalMart of the web - and as for being the WalMart of the web, I would say WalMart is further ahead at this moment as it already has the well-known brand name. Amazon is going to find more competition as it tries to expand into other areas. > Will Amazon spread itself too thin and dilute its brand? Is there a fundamental difference in selling books - or CDs - or lawn mowers - or prescription drugs. Perhaps over the web there is not. But perhaps there is a difference. Developing a recognizable and respected brand has a lot to do with associating that brand with a particular product or service. In the bricks and mortar world, you could not imagine buying a motorcycle at a Victoria's Secret store, or fine wine at McDonalds. You might say that such brand associations disappear on the web - but we don't know. And in this lack of knowledge, there is risk. Unfortunately, I'm not familiar with the Drugstore.com situation and therefore cannot really say anything about it. 4. Rising bond rates have already taken liquidity out of the market as you state. But interest rates might go even higher. There is a risk here - and unfortunately, it is very difficult to measure the risk. Again, thanks for your message. My own view is that there are too many risks with AMZN. I would be much less bearish on the stock if Bezos was more open with stockholders regarding how much longer it will be until profitability. I liken Bezos position to the following: I try to imagine myself going out and borrowing money from all my friends and family to start a business, and although the business does well year after year, I keep telling my friends and family, "it's only a matter of time until I make some profits in order to pay you back." This analogy is not perfect (it's more perfect if you bought AMZN at $220 then if you bought AMZN at $10). But I could never put myself in this position - I would feel a responsibility to inform those that have invested in me to give them a good and honest idea of when they will get a positive return on their money. Bezos has been doing this for five years now. Thanks, -Eric Wells