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Tuesday, 22 January, 2002, 18:10 GMT
False dawn for Amazon?
By BBC News Online's James Arnold
It has taken a strong stomach to read the business pages over the past few months.
What with recession and investor panic, collapsing stock markets and a string of blue-chip bankruptcies, corporate news seems to have become one long torrent of woe.
Odd, then, that cause for cheer has now come from an industry considered until recently the nearest thing to a casino.
To the more optimistic, it is even being seen as a turning point for the benighted online industry as a whole.
It is not just Amazon: Roughly since Christmas, the online sector has been astir with something close to hope.
It has been an unusually lively holiday season, with online sales growth outstripping - exactly how strongly depends on whom you ask - the growth of the retail market as a whole.
"What is new in the US is that, for the first time, online shoppers have become representative of the nation as a whole," says David Pannell, an analyst at London investment bank Durlacher.
"Internet shopping has moved into the mainstream."
In Europe, where e-commerce is comparatively in its infancy, growth in online shopping has started to beat overall growth in the online population, says Daniel Stevenson, an analyst with research firm Jupiter MMXI.
In the UK, for example, the number of visitors to shopping sites was up 41% year on year in December, compared with only 25% (and slowing) growth in the overall number of surfers.
"Internet users are overcoming their initial nervousness about online shopping," says Mr Stevenson.
For Amazon, too, its profit ought to be a watershed.
The firm's days of expensive acquisitions are behind it, and although Christmas is now a depressingly long way off, it aims to return something like $30m in operating profit this year.
The company is enjoying sterling sales growth - and more to the point, has a highly respectable profit margin of around 25%.
"Amazon is now selling to that segment of 'cash rich, time poor' customers who want convenience, rather than cheap prices," Mr Pannell says.
Buoyed by its initial success in books, Amazon has driven aggressively into a wide range of consumer goods markets, using its established brand name as a means to grab market share from sluggish High Street incumbents.
... but could do better
But "turnaround" might be putting it a bit strong.
For a start, worries linger over the details buried within Amazon's financial statements.
Thankfully, Amazon avoided the slippery dodge of reporting "pro forma" profits, an unreliable US accounting measure that represents earnings without most major deductions.
But the absolute fact of making a profit is not exactly enough.
"What's important is to make a profit that is commensurate with the amount of capital that has been invested in the business," Mr Pannell says.
Amazon, manifestly, is miles off doing that.
Those who become Amazon shareholders now may do well. But many of those who bought the firm's stock in the past few years have suffered badly.
Amazon shares, currently trading at around $12, were above $50 for most of 1999-2000, and at one point hit more than $100 apiece.
Speculate to accumulate
Nor, in context, is making a $5m net profit such a great achievement.
The gloss is certainly taken off the news of Amazon's results by the fact that it has made accumulated losses of $3bn in the years since 1997 - and spent more than $10bn to achieve them.
Amazon, analysts feel, will need a few more quarters of solid earnings before it shrugs off the notion that it is paying too much money for market share.
Luck certainly played a role: like some other lingering e-commerce successes - Lastminute.com in the UK, or eBay in the US, for example - Amazon had the luck to raise a huge amount of money early, allowing it to keep on making losses for longer than its punier rivals.
Luckiest of all for Amazon, it is now operating almost entirely free of competition in many markets.
The hi-tech crash, the global economic slump and the investor coup de grace of 11 September have cleared out most of the firms that threatened Amazon's online hegemony, leaving a few High Street-sponsored competitors.
Amazon's core business, online book retailing, has steadily emptied out to the extent that Amazon now operates the online services of most of its erstwhile competitors - Borders in the US, for example, or Waterstone's in the UK.
In toys, once one of the most promising-seeming sectors, there have been a string of casualties, and Amazon now runs the online side of market leader Toys R Us.
In its other businesses - music, videos, household goods and electronics - Amazon faces stronger, but far less concerted competition.
Fighting for money
Not that competitive threats are entirely absent.
Now that the feeding frenzy of the internet boom years is firmly in the past, the company is having to try a lot harder to sell its story to the investment community.
"Amazon is now having to fight with Ford and General Motors for capital," Durlacher's David Pannell says.
"They are its real competitors now."
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