<nettime> Dow Jones down by 1,266 points

["nettime's_roving_reporter" <nettime-l@bbs.thing.net>]

<http://www.nytimes.com/library/opinion/friedman/101799frie.html>

October 17, 1999

FOREIGN AFFAIRS / By THOMAS L. FRIEDMAN

Reality Bytes
   
   Is this a story we will read sometime in the next year?
   
   NEW YORK (NYT) -- The Dow Jones industrial average dropped 1,266
   points today after Amazon.com announced that it had inadvertently made
   a profit.
   
   After years of having persuaded investors that its business model
   called for it to consistently lose money until it had built up its
   market share, Amazon stunned Wall Street by announcing earnings of 1
   cent per share this quarter on sales of $1.1 trillion, or 10 percent
   of U.S. G.D.P.
   
   The reason these earnings rattled Wall Street was that investors began
   to realize that no matter how big Amazon's market share became its
   profit margins were going to remain razor thin because it is now
   competing with everyone -- not just booksellers. And therefore its
   market capitalization -- the company is valued at more than Fort Knox
   -- was simply not sustainable.
   
   "Pie in the sky is always great as long as the pie remains in the
   sky," said one Wall Street broker, "but when the pie actually comes
   down to earth and you get to see what a real slice looks like -- well,
   you have a problem. Amazon's whole strategy was to keep the pie in the
   sky. But now they've blown it by accidentally making a profit."
   
   The Seattle-based Internet retailer issued a statement following its
   quarterly earnings report, saying: "The Amazon board wants to
   apologize to shareholders for completely missing its quarterly loss
   target and inadvertently making a profit. The board has been assured
   by management that this problem will be rectified in the coming
   quarter. Amazon intends to increase both its advertising budget and
   the number of books it will sell at a loss to insure that it returns
   to unprofitability by the next quarter. Our shareholders can rest
   assured that our primary goal remains market share and our business
   motto remains: 'Amazon.com: We took the 'E' out of P/E.' "
   
   Said one Wall Street Internet analyst: "Look, I believe the Internet
   changes everything. I've taken the Kool-Aid. But I think the question
   of whether Jeff Bezos [Amazon's founder] will ever make the massive
   profits that his stock price implies is really uncertain."
   
   It will depend on at least three things, the analyst said. The first
   is, Are Amazon's competitors dead or are they just behind? Has Mr.
   Bezos killed Wal-Mart, Barnes & Noble, Best Buy, Borders, Toys "R" Us
   and Circuit City -- all of which he is now competing against? Or, has
   he just showed them the power of the Internet as a retailing tool and
   all these brick-and-mortar companies will now become clicks and
   bricks?
   
   "If that is the case," the analyst said, "all Amazon will have done is
   to build market share for the day when its rivals catch up. If it
   hasn't made money up to now, with its huge head start on the Internet,
   how is it going to make big money when the others catch up? The cost
   of switching from Amazon to another retailer is zero on the Internet.
   
   It's just one click. Wal-Mart hasn't even come into cyberspace in any
   serious way yet -- and those guys are meaner than junk-yard dogs. You
   think they're going to let Amazon just put them out of business? No
   way."
   
   The second thing Amazon's future depends on, said this analyst, is
   what inning we are in.
   
   If we are still in the first inning as far as Internet retailing is
   concerned, maybe Amazon, or another Amazon soon to be born, will come
   up with yet another innovation for using the Internet to sell things
   at a profit. But if we are already in, say, the fifth inning, if the
   basic Internet revolution in retailing is now in place and the rest is
   just execution, then the Wal-Marts will eventually learn to execute.
   Amazon might still be a winner -- it is a phenomenal marketer -- but
   not a winner-take-all.
   
   The third unknown, the analyst said, is whether Amazon can use its
   high stock price to buy one or more already profitable
   brick-and-mortar retailer in order to go head to head with Wal-Mart.
   At first people thought all business was moving to the Net; now they
   see that the Net is moving into business. The next big merger wave
   will be between virtual companies and real ones.
   
   "I swear, I thought Bezos' actual plan was to skip making a profit and
   go directly from being an I.P.O. to being an N.G.O. for distributing
   books cheaply," said another analyst. "I don't know what Amazon's
   future is as a company -- but as a charity, wow! What a write-off
   machine! It could have been called 'Unicef.com.' Really, who's given
   away more kids' books at cost than Amazon? Bezos had a chance to be
   Andrew Carnegie -- without ever making a dime. Now he's blown it by
   making a profit and forcing everyone to look at Amazon like, well, a
   real company. I mean, who needs that?"
   
   Copyright 1999 The New York Times Company


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