AS -- I thought you might be interested in this article.
NYT OpEd
February 26, 1999
FOREIGN AFFAIRS / By THOMAS L. FRIEDMAN
Amazon.you
Testifying before Congress Tuesday, Alan Greenspan wouldn't exactly come out and say that there was a little irrational exuberance behind some of the Internet stocks, but he said these share prices had reached levels that gave him "concerns."
Well, if you really want to be "concerned" about the levels of some of
these profitless Internet stocks, such as Amazon.com, you should pay less attention to Mr. Greenspan and more attention to what's going on in a small house in Cedar Falls, Iowa.
There, a single Iowa family, headed by Lyle Bowlin, is re-creating Amazon.com in a spare bedroom. I tell you this not because they're an
immediate threat to Amazon.com, but to underscore just how easy it is to compete against Amazon.com, and why therefore I'm dubious that Amazon and many other Internet retailers will ever generate the huge profits that their stock prices suggest.
Lyle Bowlin is the director of the Small Business Development Center at the University of Northern Iowa. He is also a book lover. But having grown up in small Iowa towns, he has always regretted that he never had access to a good independent bookstore, with lots of titles. When the Internet and Amazon.com came along, said Mr.
Bowlin, "I realized that in my spare time I could create a virtual
independent bookstore."
So first he set up a commercial Web site -- www.positively-you.com. Then he contacted the very same book wholesalers that Amazon.com uses and discovered something interesting -- that to get virtually the same volume discounts that Amazon.com gets, all he needed to do was order five copies of any particular book.
The other accouterments were just as cheap: He pays an Internet service provider, ACES, $30 a month to house his very colorful Web
site, and $30 a month to Americart to enable people to charge books on their credit cards over a secure server line. He pays his bank $50 a month to manage the credit card transactions, and has $40 a month printing costs, largely for his own monthly book newsletter.
"I have no employees," says Mr. Bowlin. "My daughter does the accounting, I maintain the Web site and my wife does the shipping.
Altogether, I only need to generate $150 a month in profits to
cover all my expenses, and the rest is cream."
Once he was set up for business, Mr. Bowlin just spread the word among his neighbors, colleagues and friends that not only could he
offer them everything Amazon.com did, but he could do it cheaper and make a profit from day one. He now has customers from 23 states and Canada. It is funny to go to his Web site and see it offering "Millions Of Books At Great Prices," knowing that it is all
being done out of his spare bedroom -- as a hobby!
Here's the deal: Amazon.com offers "The Testament," by John Grisham, for 30 percent off retail ($19.57), plus $3.95 shipping and handling. Mr. Bowlin sells it for 35 percent off ($18.17) and $2.75 shipping and handling -- $2.60 less. How? Like Amazon, Mr. Bowlin buys "The Testament" from the wholesaler for 44 percent off retail, but since he has no overhead or advertising budget he can sell it for 35% off. He can deliver the book through the U.S. Postal Service within three days for only $1.63, so he makes $1.12 more on shipping for each sale. Total profit: $3.65 per book. Plus, says Mr. Bowlin, "when you charge a book, I collect your money within a few days from Visa, but I don't have to pay my wholesaler for that book for 30 days, so I have a free loan which I earn interest on -- just like Amazon."
Because his profit margins are razor-thin, Mr. Bowlin, like Amazon, needs repeat buyers. Amazon gets them by offering useful information
about books. Mr. Bowlin does it by offering any government-certified nonprofit organization a donation of 10 percent of the purchase price of any book that any nonprofit or its members buy through him.
So the next time your broker tells you that this or that Internet retailing stock is actually worth some crazy multiples, just think for a moment about how many Lyle Bowlins there already are out
there, and how many more there will be, to eat away at the profit
margins of whatever Internet retailer you can imagine. It only costs them $150 a month and they can do it as a hobby! Or think about it like this: For about the cost of one share of Amazon.com, you can be
Amazon.com.
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Comments:
Of course nobody knows about Mr. Bowlin, so he'll never sell a lot of
books or erode Amazon's share/margins. $150/month cannot support a high volume site. And Amazon is now selling a lot more than books. In 6 months of starting to sell CDs, it's the largest CD etailer. All those repeat eyeballs mean big bucks.
Hence, Amazon's share price is justified.
Or is it?? |
