Amazon.com was RE: UKNM: Fast Summit

[Ben Thompson]

Ross wrote:-

> Because it is cost inefficient for Amazon. I don't know if you saw a very

good business report on Amazon by ICE Group - which has caused a lot of

kerfuffle - but only really around accounting procedures for disagreement.

One of the reports conclusions is that "Based on the numbers provided,

Amazon.com's average order costs the company $40.81 to process, yet its

average order size is $35.59--essentially creating a loss of $5.22 for each

Amazon.com order processed."  This is because "most computer users

believe--incorrectly--that online merchandise orders are cheaper to process

than those placed through traditional distribution channels."  (see


> http://www.news.com/News/Item/0,4,25516,00.html for a summary or


http://www.icegroup.com/ to download pdf of their report)  Amazon cannot

afford true one to one marketing - christ they look like they have a few

problems with their standard business model to begin with!


Actually this is not really a clear example. None of the figures ICE quotes

make any sense and include factors that destroy the basis under which they

are made. One example - during Q2 98 Amazon bought Bookpages, IMDb and

Telebook Inc. These exceptional items (purchases of companies are always

exceptional items to some extent) account for at least $5m of that loss.

Losses after Exceptional items bear no resemblance to operational costs

(i.e. cost of sale or the amount of money spent processing the order).


If the ICE report was of any worth simple errors like that one could have

been avoided (Amazon made an operational loss of $11m in the quarter and

that is the figure they could accurately work from). By, clearly, selecting

only figures that emphasis the point they want to make, rather than suitable

figures I can only treat the report as worth the paper its printed on (and

I'm not going to print it out).


In many ways no Internet company can produce accurate figures. While large

advanced payments are made to companies such as AOL, Yahoo and Excite we

cannot see accurate operational costs unless we see management accounts. For

all I know that $11m operational loss results from Amazon paying Quicken

$12m for 3 years advertising. Remember advertising cost $26,452,000 in Q2


and this must be largely made up of these payments. (taken from the

Quarterly finance report


http://www.amazon.com/exec/obidos/subst/misc/1998-second-quarter-press-relea

se.html/002-0532160-1861440 ).


Of course, $11 million to keep Barnes and Noble out of the market is

probably cheap in the long run. After all how many repeat customers do you

expect to use both companies for ordering books online 5 years down the

line.


Amazon sells approximately 2million books a month ($120m /3 months /$20 a

book). How many firms do you think could manage to do that from a standing

start 4 years ago and not lose money. Remember this is not a simple web

site, you cannot just go and purchase another server (as Porn companies do)

you need to expand your warehouse, employ more workers etc. This is not a

small immediate investment it has to be planned months in advance and its

logistics must be a nightmare.


Finally, remember Amazon has turned the industry plan on its head. It does

not order a book until it receives an order for it and does not pay for it

until 60 days after its been paid for it . For stock, the company lives on

cash rather than debt. Remember with a couple of exceptions Amazon do not

store books they have purchased. Rather they allow publishers to store books

at their warehouse without charge but will only order and pay for them when

the books are actually ordered.


There we are five minutes of thought about that report and a cursory glance

at the quarter's results. When I get time I might even comment on the FAST

stuff.


Ben