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

To: Radim Parchansky who wrote (57632)	5/21/1999 11:04:00 AM
From: Glenn D. Rudolph	Respond to of 164684

Amazon.com – 18 May 1999 2 Price cut should not have a major effect on gross profit. We estimate that less than 15% of Amazon.com's sales are New York Times bestsellers. Although the price cut will obviously cause some per-unit margin erosion, we believe that, in cases when Amazon.com is selling books above cost, this could be offset by higher volumes resulting from increased demand. At 50% off, of course, there will likely be cases when Amazon.com is selling books below cost. One subtle but important point about online retailing in general and online bookselling in particular, however, is that online retailers generate a higher percentage of revenue from non-bestsellers and the backlist than physical-world retailers do. Just as Wal-Mart and other retailers use loss leaders to get customers into the stores where they will also buy other, higher-margin products, we believe that Amazon.com might take losses on bestsellers only to stimulate greater demand for more obscure—and more profitable—books and other products. One of the great advantages of Amazon.com's scale and product diversity relative to other online competitors is that, if it is using bestsellers as loss-leaders, it has an enormous amount of other stuff available for its customers to buy. We believe the price cut is positive for the long-term value of Amazon.com-the-company (and, thereby, long-term shareholders). Industry leadership in the selling of commodity products, which Amazon.com's book business is all about, comes down to 1) customer satisfaction— which, in internet retailing, hinges on selection, price, and service, and 2) efficiency. Amazon.com has always focused on customer satisfaction—customer “ecstasy” is, we believe, the internal mantra—and has put off focusing on efficiency until it has gained enough scale to have a significant volume advantage over every other player in the industry. In our opinion, the further slashing of prices on headline products will increase Amazon.com's customer satisfaction—the value proposition being great service and low prices—and place additional pressure on some of the company' competitors, both current and future, which lack Amazon.com's scale purchasing power. Again, we believe management is focused on long-term value-creation—which may not be great for near-term stock performance. Amazon.com can clearly afford to cut prices—it is already the volume leader in internet bookselling by nearly an order of magnitude and has $1.5 billion in the bank. As described above, we don't think the price cut will materially slow Amazon.com's gross profit growth. If it would have, however--but still been the right long-term move for the business—we expect that management would have gone ahead and cut prices anyway. Management is deeply committed to building customer satisfaction and loyalty at the expense of near-term financial performance. The big losers here are probably not other existing online retailers, but real-world retailers. With billions in the bank and no earnings to protect, Amazon.com and other online retailers can strongly compete in the name of “long-term value creation.” As long as the market is willing to tolerate this, the companies won't come under pressure from angry shareholders demand near-term profits—a distinct advantage over real-world retailers, whose shareholders want profits. Even in a more rational, less investment-oriented market environment, all of the online retailers—and especially Amazon.com—should be able to operate with lower cost structures than real-world retailers. If Amazon.com's price cut is sustainable long-term, then, the likely outcome is that it will drive more sales from the physical world to the online one.