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

To: Randy Ellingson who wrote (26638)	11/18/1998 1:25:00 AM
From: Glenn D. Rudolph	Read Replies (3) \| Respond to of 164684

What credit, if any, do you give to Amazon for their 'success'? By success here, I mean taking market share (e.g., leading in music sales after one full quarter). Randy, They clearly deserve credit. They had a good idea. They still do and they executed well with the non mainstream consumer. I am referring to the avid net surfer which is not mainstream. It is my opinion they made some errors which all companys do as they develop. Some of these are major although not insurmountable. The first error is their heavy marketing during the fall of 1997. There was hardly a market for e-commerce then. They spent milllions on a very small percentage of the population. Secondly, the business model does not work as planned. The concept was to sell the merchandise before they had to pay the supplier. It is an excellent idea in theory. The problem is the cost of merchandise, no matter what it is, when bought as needed is higher than if bought in bulk from the manufacturer and sold from inventory. There is a tug and pull problem here. Either the company ties up capital or they pay more for their merchandise cutting margins. Thirdly, they made a strategic error in not wanting to partner with some big players. I suspect this was Bezos's decision. Partnering with Bertlemans was very important to gain and hold the European market. The Seattle Times ran an article that indicated Bertelmanns wanted to partner with Amazon but rumor has it Bezos said know. They could have partnered with certain product lines such as books, music, etc but excluded other items added that are not a main product from Bertlemans. This last error is the most important. The cost to capture Europe now has likely tripled. If they really do have a way to not only attract new customers, but sell to them and get many of them to return to buy more, then don't you wonder how far revenue growth can take this company? They can grow revenue and grow it large in commodity products. The analysts with strong buy recommendations are always referring to the economy of scale as revenues grow. There are certain cost that are somewhat fixed or could be such as marketing once a certain scale is reached. However, in low end commodity items, such as books, music, videos, etc. the fulfillment costs are higher than the gross margins. The reason for this is that in a brick and mortar store the customer sort of does the fulfilling for the company. They chose books off a shelf and take it to the cash register where the clerk rings it up and places it in a bag. The brick and mortar store still has to stock the shelves just like Amazon has to stock their inventory. Amazon has to have a person pull the product, box it, lable and sort it for shipping for every order. That is the expense that will always exceed the gross margins unless it can be automated. Don't you think it's possible that they can maintain market share, even as they move into higher margin sales (I have no idea what those might be)? The answer is yes. The problem is items with higher gross margins are typically higher ticket priced items and i do not they will sell well on the net ever. People like to look at high ticket items prior to purchase. Even televisions, they like to see the picture side by side, etc. I ask these questions because you seem to base your bleak outlook on lost sales growth momentum (as opposed to impossible-to-achieve sales and/or profit expectations, taken as far out as necessary). Sales growth can continue with good execution and one cannot argue or at least I will not, that Amazon executes well. The problem now is being undercapitalized which may be able to be solved by a secondary. The largest reason for business failures is lack of experience and undercapitalized. I believe they did a good job of getting experienced retailers when they borrowed some personnel from Walmart<G> They still need a lot of capital to stock merchandise as discussed above. This becomes even more important in higher priced products. They need a lot of capital to fight to get market share in Europe and to maintain and increase share in the US. Currently, they are undercapitalized to do that. Business is never static. I am looking at the fundamentals as I see them today. They could change. A secondary may go over well. Bertelmans may execute poorly. I just do not see that happening since the real high visibility sites particularly, AOL, are going to Bertlemans and barnesandnoble here. Glenn Glenn