Amazon grace under pressure

1999-10-29

Despite a huge increase in revenues from $154m to $356m, Amazon.com’s reported a four-fold increase in operating losses, from $21m to $79m. Amazon has seen increases in just about everything else from new accounts to repeat business, but is also seeing increasing pressure on profit margins, both from rising internal expenses and the inevitable external competition. Amazon continues to invest in new product lines and in new parts of the world. The question remains – how much longer can it keep up this momentum?

It is commonly held wisdom that it is healthy for dot-com companies to post a loss. The argument concerns the investment in the number of customers who use Amazon by default, hence the importance of both accounts and repeat business. However, the Web community is a notoriously fickle bunch. Just as Lotus never expected to lose its spreadsheet monopoly to Microsoft, so it seems equally unlikely that Amazon could lose its customer base. There are three ways in which this could happen.

The first way is system failure. Lack of service is very quickly jumped on by the Internet news, as eBay, eTrade and Charles Schwab have all discovered in recent times. eBay’s failures caused a reported mutiny of customers to Amazon; similarly, eTrade has lost custom to other online brokers, both through downtime and through processing errors (for example, those which caused potential Red Hat beneficiaries to lose out). The Internet does not take any prisoners: news of failure and retribution spreads like wildfire. Amazon’s systems are holding up well – they were designed for scalability and Internet access. However the same could be said for eTrade and eBay, of which the latter is famously hanging on by its fingernails to support its burgeoning community. Failure of a dot-com company results not only in customer flight but also shareholder concern, and this is the last thing any tech stock wants in the current, volatile market conditions.

The second route is competition. The Internet purchasing model is still very much built around lock-in, such that it is easier to stick with one supplier than move to another. Amazon’s one-click purchasing is an example of this. Moves are afoot, however, to make it simpler to deal with a variety of supplier sites: Snaz.com, for example, offers a multisite shopping basket for exactly that purpose. To water down lock-in is to do the same to Amazon’s key performance indicators of customer retention. Amazon may choose not to play, but this could have the effect of locking the company out, of siting Amazon outside the mall, as it were.

Thirdly, we have the unknown quantity. Amazon exists by virtue of riding the Internet wave long before other companies knew it was coming. Much as we like to speculate, none of us really knows what the next wave will be. Plenty of so-called giants have been washed away by the tidal waves of technology, and Amazon is no more immune than any other company.

Some are saying that the really big hitters are still to join the fray. Companies like WalMart are on the point of launching their Web strategy – this may happen with a whimper, but it could well be with a bang. Industry and financial analysts alike have so far been unable to predict how things are to turn out. This is certainly no time for dot-com companies, Amazon included, to get complacent.

(First published 29 October 1999)