Old news, but it is rather negative on AMZN. Notice the reference to
paper thin margins, that is, when it starts making money:
4/6/98 Forbes 055
1998 WL 2086856
Forbes ASAP
Copyright 1998 Forbes Inc.
Monday, April 6, 1998
Cover Story
Future Shop Does Amazon.com really matter? The cyber bookstore may be a
glowing beacon of the online revolution or just a freak of commerce.
Either
way, it's definitely not a role model for everybody.
BY Clint Willis
When Jeffrey Bezos sat down in 1994 to make up a list of 20 things
that might sell well online, the idea of selling anything on the Net was
still pretty radical. Not anymore. Analysts now routinely churn out
thick reports on the potential of Internet retail ("e-tail" to the
cognoscenti), variously forecast to be a $6 billion, $12 billion, or
$35 billion market by the year 2000.
Those reports almost without exception cite online bookseller
Amazon.com--which Bezos launched in July 1995--as living proof that
Internet retailing works. "Amazon has become the default name when you
think of buying
on the Net," says Keith Benjamin, an Internet analyst with BancAmerica
Robertson Stephens in San Francisco. "They're the poster child of
Internet commerce."
Amazon's name recognition in part reflects the site's popularity--it
has more than 1.5 million customers, making it the Web's busiest retail
location, according to Media Metrix (music retailer Columbia House
Online was second). But while Amazon has proved it's possible to sell
books on the Internet, this doesn't necessarily vindicate the Web as a
retail outlet. Says CIBC Oppenheimer analyst Henry Blodget, "You have to
be careful about implying that Amazon's success proves you can sell just
about anything online."
Is Amazon the paradigm for e-tail's promise? Or is it the exception
that proves the rule: The Internet isn't the place to sell most retail
products? While we're asking, what else can Amazon tell us about the
future of online selling?
Amazon's rise to some extent reflects elements of its business model.
For starters, the firm got to its market first; none of the big
booksellers were giving much thought to the Net in 1994. Bezos also
spent heavily on traditional advertising to establish a brand.
In theory, firms selling other products can mimic that model. But will
their products sell as well as books, which offer superb opportunities
to exploit the Web's peculiar advantages? For instance, compared to the
limited selection in an actual bookstore, Amazon can list a huge catalog
of titles, and it's easy to search among them online.
The Amazon site also exploits the Net's potential to build what
analysts call a "community" around a product. Example: Amazon publishes
customer reviews as well as those by staffers and outside reviewers.
"The depth of potential discussion is an issue with the success of a
site," says Marc Usem, an Internet analyst with Salomon Smith Barney.
Amazon's ability to maintain records of customer preferences and then
act on that information gives it yet another advantage as an online
retailer. Books lend themselves particularly well to an Internet-selling
tool known as "collaborative filtering": Amazon and other Web vendors
ask you to name some of your favorite products--in Amazon's case, the
books, authors, or genres you like best--and then the retailers'
software program tells you what other people with similar tastes liked
so you can add to your shopping list.
Meanwhile, the almost infinite array of topics makes it easy to sell
Amazon's product through other sites--a practice called "syndicated
selling." Bezos has lined up alliances and exclusive agreements with
28,000 sites, including Yahoo, America Online, and the @Home Network.
Thus, consumers who visit, say, StarChefs.com to check out recipes from
celebrity chefs
can click a button that lets them order cookbooks from Amazon.
Finally, it helps that books are quasi commodities--there's no need
to try them on before you buy--and that they're small-ticket, impulse
items that are easy to ship. Established distribution channels mean that
Amazon can maintain a low inventory, ordering only the books customers
request. Result: Morgan Stanley reports that the firm's inventory turned
over 42 times last year versus only 2.1 times for Barnes & Noble.
That said, books are not the only products well suited to Internet
commerce. "Amazon.com has executed particularly well on an opportunity,"
says Nicole Vanderbilt, director of digital commerce with Jupiter
Communications in New York. "But similar opportunities exist for other
products."
A recent 71-page Goldman Sachs report on Internet retailing lists
books third among 21 products ranked for their potential as online
successes. Computer hardware is first; software second. But music,
electronics, and office products also earn high scores, and nine other
categories, from cars to specialty apparel, have online prospects that
earn them a moderately favorable rating.
Theoretically, developing an online community can help sell almost any
item; in fact, it's already happening with products such as seeds and
garden tools (Garden Escape) and software (Cnet's Download.com). "If you
think about it, you can build a community around any retail category,"
says Michael Sullivan-Trainor, director of Internet research at IDC in
Framingham, Massachusetts.
Some products may turn out to be even easier than books to sell on the
Internet, once their sellers follow Bezos's example and tackle the
issue. "A lot of companies just throw a catalog online and hope people
buy stuff in cyberspace," says Stan Dolberg, software strategies
director at Forrester Research. "Amazon really understood the elements
that make buying a book rewarding and then tried to address those
elements on the Web."
So it is fair to extrapolate from Amazon's experience and conclude
that other consumer products will sell on the Internet. That said, does
Amazon show us the best way to sell on the Net? By no means, says
Sullivan-Trainor. "Amazon is a good intermediate model," he concedes.
"But they would have to address a whole set of issues to become the
ultimate model." Such as? To start with, Amazon needs to begin using the
Net to enhance production and distribution. For example, Dell can
customize computers in response to customers' online requests. That kind
of thing needn't be confined to PCs: You might order a book made up of
six chapters on Russian stamps from six different books, or a CD with
12 tracks you specify, or a pair of pants cut to your measurements.
The ability to customize products sold online can have benefits apart
from its appeal to customers. For instance, it reduces the need to carry
inventory, cutting costs significantly. It also makes it possible to
pinpoint selling opportunities. Say L. L. Bean has a surplus of canoe
paddles. The company could program its Web site so that users who visit
the canoeing
section encounter a banner offering a 75% discount on paddles--if they
buy in the next 60 seconds.
Amazon also lacks online delivery. Someday you might be able to order
your book as a multimedia file to download to a CD. It's already
happening with software and other print media such as magazines. In
short, Bezos may have as much to learn from other Internet retailers as
he has to teach them.
Amazon's current selling technique may not even be the best way to
move books on the Internet. Analyst Keith Benjamin figures online mall
CUC NetMarket's model--where customers pay an up-front fee to receive
bigger discounts on all subsequent book purchases--might prove more
profitable.
Or should we say less unprofitable? Amazon has yet to prove that it's
feasible to make money selling books. Bezos lost $27.6 million on $147.8
million in sales during 1997--and won't say when he expects to make a
profit.
For now, the firm's losses can be accepted as part of its business
strategy: Get an early start and spend whatever it takes to build a
powerful brand name; profits presumably will follow. But that assumption
may be flawed. One potential problem: Amazon may have a hard time
maintaining the exclusivity of its alliances with Internet service
providers like @Home and content aggregators such as Yahoo and Excite.
"Many of Amazon.com's deals are only for three years," says Blodget.
"When they come up again, it's going to be war--like the television
networks bidding for NFL rights."
Moreover, it's going to cost plenty to develop services such as
customized books and online delivery that exploit the
Net's features more fully--even assuming Bezos is willing to try.
"Bezos may have to reinvent the company in the next 12 or 18 months,"
says Stan Dolberg. "And it could face a cash problem as it makes the
investments necessary to get to the next level."
Even if Amazon does become profitable, its margins are likely to be
paper-thin. "With several booksellers online, the competition is only a
click away," says Nicole Vanderbilt. "You can compare prices on a given
title, and most people will go with the cheapest."
That ultimately could be bad news for Bezos. Bill Bass, an analyst
with Forrester Research, figures Barnes & Noble will be able to undercut
Amazon's prices in the long run:
"If you're a publisher, who are you going to give a better
discount to--Amazon with $150 million in sales, or Barnes & Noble with
more than $2 billion in sales?"
If even Amazon isn't a shoo-in for success, Internet startups that try
to follow Bezos's model may be in trouble. Already, established
retailers are taking the Internet seriously enough to muscle out
potential newcomers. And raising money to finance a brand-building
strategy will be a lot tougher for future startups. "It's going to be
hard for a new firm to attract the kind of attention and interest Amazon
did," says Blodget. "There are so many more options now for investors
who want to back an Internet company."
The costs of establishing a new online retail brand also have climbed
sharply. A company getting on the Web now pays much more than Bezos did
to land affiliates. "I think that fact alone will make
the Amazon model hard to clone," says Bill Gurley, a partner with
Hummer Winblad Venture Partners.
Moral? Amazon's model for Internet success is already an anachronism.
>From here on, the factors important to success in the traditional
brick-and-
mortar retail business--pricing power based on brand strength and
economies of scale--also will be required on the Internet.
In the end, Amazon's greatest contribution to Internet commerce may be
that it has alerted consumers to some of the pleasures of online
shopping. "When people buy a book from Amazon, they are really giving
this whole new world of Internet commerce a try," says Oppenheimer's
Blodget.
Translation: Amazon may or may not make money on the Internet. But
somebody will. --Additional reporting by Sean Donahue
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