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

To: umbro who wrote (12874)	8/8/1998 4:56:00 PM
From: Rob S.	Read Replies (2) \| Respond to of 164684

We are homing in on a basic difference in how Amazon.com envisioned the evolution of e-commerce, how some others have envisioned it, how it has proved out thus far and how Amazon.com is reacting to the new understanding. There are a few extremes of influence and points of view that are at play (odds) here. These mechanisms are playing themselves out - the Internet is a lot an experimental laboratory in which ideas are tried out, tweaked, combined with other ideas, relegated in importance or discarded. Let's look at some of the basic influences and elements of success for e-commerce: A) What has been the mind-set or prejudices to the decision process that has guided high-profile development of the Internet? 1] A large influence comes from the existing broadcast medai/ad agency mentality. The influences to perceive the Internet as a new form of TV in which ad revenue plays THE central role in paying for content and making profits. The corollary to that thinking is that ads are not only important but absolutely vital to developing the most competitive site and to the very survival of the enterprise. 2] "Critical Mass" or the importance of volume efficiencies in the ;purchasing and delivery of products and services is pretty well accepted to be crucial to mass market competitiveness. Since the Internet allows a high degree of automation of the order and fulfillment processes, volume efficiencies is more important. 3] Building "brand" awareness for mass merchandisers is important to retaining customers and reaping latter profits once "critical Mass" is achieved. To the ad/media educated camp, this fits with assumptions in item 1]. 4] At odds with the motus operandi of item 1] and ad generated branding strategies that are often used to implement item 3], is the basic technological difference of the Internet: the Internet is a one-to-one media that enables dynamically generated and selected content. a.) The importance of this difference in technologies can be clearly seen in how it has played out for Amazon.com, OnSale.com and other ground-up Internet sites that have had success in gaining large numbers of customers. Bezos stated recently that Amazon.com has found that banner ads are less effective than the company had expected. He said that the company has gained most of its customers through "word of mouth advertising" or what I call "Word Of the Web or WOW" advertising (copyright yournetshare). Part of that success owes itself to the creative use of the Associates program which now has 100,000 associates generating referrals to Amazon's web site. A large portion comes from e-mail to friends or associates, posts on chat boards, and verbal communications. What is also interesting about WOW advertising is that referred customers tend to become repeat buyers more than banner ad generated customers. This makes sense if you think about your own experiences and human psychology - people tend to "transfer" bonds and comfort levels through their association with others. OnSale.com became a successful business (and profitable before they went public) based largely on WOW. b.) Building a business based on the web dynamic WOW advertising doesn't fit that well with the "BIG Buck" mind-set of VCs and the media/ad industry. To do so takes control away from the trillion dollar media industry. Bezo and Amazon.com listened too much to these jackals in pursuing an ad & promotion centric development strategy that has proven to be very costly and is generating diminishing results. After evaluating what has actually gotten Amazon.com to where they are and coming to the realization that Shop Bots and increased competition make an ad-centric mass merchandise approach suicidal, Amazon.com has made the costly acquisitions of PlanetAll.com and Junglee. I think the basic reasoning for these strategic moves was sound. The problem I have with them is the high cost Amazon.com has paid. Of course, it can be argued that they paid for these with stock and stock options - and that's only worth whatever the enterprise becomes years from now. But what does that say about the current stock valuation? It says that it is too high. Few in the industry could argue that these acquisitions are "worth" $280 million in real dollars. $280 million in inflated stock, maybe. To make these really useful to Amazon, a lot more development needs to be done to meld them into an "Internet community" asset that lends itself to e-tail sales. On the one hand, I think it was the "right move" in recognition of the fallacy of Amazon's previous "vision" of e-commerce development. On the other, I think this move was as much or more an expensive knee-jerk reaction to the awareness of increased competition and the growing need to defend against price and service comparison Shop Bots. --------- How will Amazon generate profits from the huge debts and business it is developing? How does this effect their cost structure? How well can Amazon.com put up barriers to protect itself against growing competition? How soon will comparison shopping via Shop Bots play a role in determining margins? These are questions that need to be answered before jumping to conclusions about long-term profitability or failure of this company. IMO, it's far too early to tell how well Amazon.com will develop their new vision into solid operations and profits. It is certainly far too early to value the business based on any assumptions for year 2002 earnings (profits are at least one year further in the future due to these moves). No one has a lock on the quickly changing environment and early success is no guarantee of long term success. At the very least, the fact that Amazon.com even needed to make acquisitions of companies that provide basic internet services and that they paid dearly for them should bring into question the thinking that Amazon merely needs to extend the capability that they have already created to more and more business ventures. In contrast to Amazon's strategies have been sites such as OnSale.com. Jerry Kaplan has said from the start that he expects e-tailing margins to be lower than through other marketing channels. His business was porfitable until they went public and took on more agressive advertising and promotion tactics. Still, OnSale's expense for marketing and advertising is only around 8% (10Qs) compared to Amazon's over 20%. Keeping the financial structure and costs under tight control are seen as a very important ingredient to being competitive. OnSale expects to return to profits by early next year.