It's all about scale,ramp, morph and timing.
>>By Andrea Orr, Reuters, 5/01/02
PALO ALTO, Calif. -- Remember "first mover advantage," "get big fast," and "profits don't matter?"
These rules of the so-called new economy led Internet companies to sell merchandise at steep discounts and deliver it for free, but earned a place in the annals of stupid business practices after one too many online furniture store tried to swallow the costs of shipping solid oak bookcases.
It has been more than two years since Internet retailers started focusing on the bottom line. By now, everyone knows that the game is not only about building traffic with excessive sales and promotions, but making sure everything you sell generates a decent profit.
Or do they?
Just last week, Amazon.com Inc., the very first "first mover" on the Internet, reported surprisingly strong first-quarter results -- largely due to the old Internet retailing practices of steep discounts and free shipping.
It was proof, said the company, that its founding business model, badly copied by so many, is bearing fruit at last.
After succumbing for a while to the pressure to build profit margins rather than just grow the company, Amazon last year returned to some of its founding principles, tweaked to deliver maximum return.
It promised free shipping on all orders over $99, and later offered a 30 percent discount on all books costing $20 or more. Both promotions attracted more shoppers, and the free shipping on large orders gave many of them the incentive to throw in an extra toy or DVD.
"Vindication is not exactly the right word," said Amazon spokesman Bill Curry. "We still have a lot of work to do."
"But we have always had a commitment to building a business over the long term and are now seeing that, as we continue to lower our costs, we can pass the savings onto our customers, which drives more business, which helps us lower our costs and pass more savings onto customers."
And so on.
Most industry analysts who have both cheered and disparaged Amazon as the investor climate shifted, now concede that some of the company's most criticized practices are starting to pay dividends.
STILL BOOKING LOSSES
"Free shipping certainly has proven to be an important driver of the business," said Derek Brown of W.R. Hambrecht.
Jeetil Patel of Deutsche Banc Securities cited the same factor. "Amazon is obviously focused on driving unit volume. I think its free shipping on orders over $99 has improved the average overall order size."
But why is the free shipping and the big book discount -- recently extended to all books over $15 -- working for Amazon, when it was the nail in the coffin for so many other e-tailers?
This is where Amazon really enjoys dusting off that original business plan, which had a lot to do with something called "scale." That, of course, was the ultimate goal of pouring money into acquiring customers and building infrastructure, and doing all the other things that first movers did.
When, after several years, the honeymoon ended for Amazon, investors looked at the steep costs of building warehouses and complex order fulfillment technology, and noticed that the company was spending just as much as many of its lumbering bricks and mortar counterparts. In other words, it didn't look like the Internet was saving the company much money.
Today, it does.
"The services we offer on our Web site cost the same whether we have one million customers or 25 million," said Curry. "Technology keeps getting cheaper, but real estate gets more expensive."
There are some other factors behind Amazon's strong results. A relatively new business selling used items -- like books -- is growing explosively. For this winning business concept, the online auction site eBay Inc. probably deserves more credit than Amazon.
Still, critics and supporters both cite the fact that Amazon had a first-mover advantage and got big fast to explain why it is now reporting 21 percent quarterly sales growth, compared with Barnes & Noble.com's nearly flat sales.
Amazon, of course, does not adhere to that most outlandish of new economy rules -- that profits don't matter. But it is still working to make money.
After a single profitable period in the fourth quarter of last year, the company continues to absorb the steep costs of building its massive business, which it now concedes were bigger than it had ever expected.
"It has involved greater losses than we ever envisioned," said Curry.
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