Amazon faces the challenges of its second decade

Ten years after Jeff Bezos started Amazon.com in his garage, the company is celebrating three things that evaded legions of other Internet start-ups: survival, independence and profitability.

But as Amazon celebrates itself with 10 days of concerts and special offers, profound challenges face the e-commerce pioneer. Profits are stagnating, competition is blooming, and even people who are bullish about the company are concerned about downward pressure on prices.

"The bull-bear divide on Amazon is whether or not it can have double-digit operating margins," said Mark Mahaney, an equity analyst with Citigroup's Smith Barney division in San Francisco. "I'm uncertain they can get there. And right now, they're going in the wrong direction."

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What's new:
As e-commerce pioneer Amazon celebrates its 10-year anniversary, competition from traditional retailers and discount pressures loom.

Bottom line:
Analysts, while crediting the company with growing from a money-losing electronic bookstore into a profitable online mall with international reach, caution that the pressure on Amazon's profits shows no sign of letting up.

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It may sound like nitpicking, but financial analysts have always considered operating margins to be an important indicator of Amazon's health. It's a bugaboo the company has dealt with for years: Sure, skeptics wonder, Amazon can be the online world's fast-growing discount king. But can it turn a healthy profit in the process?

Although he upgraded Amazon to "hold" from "sell" in February, Mahaney anticipates that for at least the next two quarters Amazon's margins will be lower than they were in the same period the year before. That has already been the case with the last two quarters. Amazon executives have said publicly that they'd like to get that number up to double digits.

Amazon's operating margins were 7 percent for the quarter ended in December and 7.4 percent for the quarter ended in March. But Mahaney estimates they'll be 6.5 percent for the quarter ended in June--which Amazon will announce July 26--and 5.6 percent for the quarter ending in September.

Profits are down even as revenue goes up. For the March quarter, the company's net income was $78 million on $1.9 billion in sales, down from $111 million on $1.5 billion in sales for the same quarter a year ago. The consensus estimate of 13 analysts surveyed by Thomson Financial Network predicts earnings of 9 cents per share for the current quarter, down from 18 cents a year ago.

Amazon declined to comment for this story. Analysts, while crediting the company with growing from a money-losing electronic bookstore to a profitable online mall with international reach, caution that the pressure on profits shows no sign of letting up.

One reason is that as Amazon turns 10, the competition is closing in.

In a bit of irony to people who remember that not so long ago old-line companies were worried about getting "dot-commed," a significant threat has emerged from brick-and-mortar stores. Bookstores such as Barnes & Noble and general retailers like Wal-Mart Stores and Costco Wholesale have aggressively gone after online sales.

"The bull-bear divide on Amazon is whether or not it can have double-digit operating margins."

--Mark Mahaney, equity analyst, Smith Barney

"The idea was that everyone would shop online and you wouldn't need stores anymore, and these people would be extremely profitable because they wouldn't need to have the stores," said Gene Alvarez, an analyst with Gartner Group. "But then it turned out that multi-channel retailing was the way to go, that consumers mix and match the touch points to their convenience."

Without brick-and-mortar lures and comforts like instant shopping gratification, bookstore cafes and in-person author readings, Amazon is compelled to compete on price and customer service. Increasing shipping costs make the online retailer's price proposition tough enough, and then it has to deal with the world's biggest retailer and low-price champion, Wal-Mart.

Amazon has met the challenge by offering frequent discounts--cutting into profits--and fanatically maintaining customer service. These efforts have succeeded in helping the company build what analysts call one of the Internet's strongest brands.

"We think of Amazon the way we call Scotch tape 'Scotch tape' whether or not it's by Scotch," Alvarez said. "That's what Amazon's achieved with its brand online."

Amazon has exploited that brand to expand into so many areas--through in-house category launches, acquisitions and partnerships--that it has essentially become the primary tenant of its own online mall.

Amazon's mission statement, which states the company's goal to

[afbcasejr]

Amazon Won't Last Alone

In 2000, I was running Gartner's eBusiness Resource Center. I predicted that Amazon would ultimately merge with one of the major retailers - either Barnes & Noble or Borders Books and Music. What has actually happened is that B&N wasted a ton of money replicating Amazon and getting sued in the process while Borders ultimately cut a deal with the online giant (www.borders.com IS Amazon).

I still predict an ultimate merger between Borders and Amazon - unless Wal*Mart steps in and buys them first.

Al Case - CEO, <a href="http://www.stamfordresearch.com>Stamford Research

[afbcasejr]

Amazon Won't Last Alone

In 2000, I was running Gartner's eBusiness Resource Center. I predicted that Amazon would ultimately merge with one of the major retailers - either Barnes & Noble or Borders Books and Music. What has actually happened is that B&N wasted a ton of money replicating Amazon and getting sued in the process while Borders ultimately cut a deal with the online giant (www.borders.com IS Amazon).

I still predict an ultimate merger between Borders and Amazon - unless Wal*Mart steps in and buys them first.

Al Case - CEO, <a href="http://www.stamfordresearch.com>Stamford Research

[bobby_brady]

I love Amazon! No taxes, free shipping

I just had to return a product last week. No questions asked, they took it back, paid for shipping and I already have my refund.

Agree, that Amazon rocks! Let's hope Congress doesn't screw it up by creating internet taxes.

[bluemist9999]

Internet Sales Taxes Coming Soon

I read on another news.com story that the states are creating a simpler sales tax system. My guess is, once that system is in place, they will lobby Congress to force all online retainers to use it.

Sales tax AND shipping costs with every purchase, yay. :-P

[bobby_brady]

I love Amazon! No taxes, free shipping

I just had to return a product last week. No questions asked, they took it back, paid for shipping and I already have my refund.

Agree, that Amazon rocks! Let's hope Congress doesn't screw it up by creating internet taxes.

[bluemist9999]

Internet Sales Taxes Coming Soon

I read on another news.com story that the states are creating a simpler sales tax system. My guess is, once that system is in place, they will lobby Congress to force all online retainers to use it.

Sales tax AND shipping costs with every purchase, yay. :-P

Amazon - best thing to happen to the net

Fast,free shipping, great customer service and lots of stuff.

On top of that, the user reviews can be really helpful in choosing the right product.

I hope they can pull through.

Amazon - best thing to happen to the net

Fast,free shipping, great customer service and lots of stuff.

On top of that, the user reviews can be really helpful in choosing the right product.

I hope they can pull through.

Former customer

I once drank the Amazon.com Kool-Aid as well. That was until I ordered a book through them from a rare book vendor named Booksquire. Amazon charged my credit card. Booksquire did not deliver and when I inquired after several months wait told me they would send me a check, which they never did. When I complained to Amazon.com, they would do nothing because more than 90 days had elapsed. After several attempts to get them to refund me the money that THEY charged me without them or THEIR merchant partner delivering anything, I canceled what had been a very active account for several years. I will not deal with companies that do not deal in good faith, and Amazon.com is one of them. No more Amazon.com Kool-Aid for me.

Former customer

I once drank the Amazon.com Kool-Aid as well. That was until I ordered a book through them from a rare book vendor named Booksquire. Amazon charged my credit card. Booksquire did not deliver and when I inquired after several months wait told me they would send me a check, which they never did. When I complained to Amazon.com, they would do nothing because more than 90 days had elapsed. After several attempts to get them to refund me the money that THEY charged me without them or THEIR merchant partner delivering anything, I canceled what had been a very active account for several years. I will not deal with companies that do not deal in good faith, and Amazon.com is one of them. No more Amazon.com Kool-Aid for me.

[Earl Benser]

No time for Amazon....

... it's a great pile of PR, but I can get better prices locally, wthout
shipping or delay, on almost anything I might buy from Amazon.
And I don't have to put up with all the 'suggestions' Amazon thinks
that I would be interested in. And there's only one way to turn off
the Amazon garbage stream - don't go to the Amazon website.
That's a relatively easy solution.......

[Earl Benser]

No time for Amazon....

... it's a great pile of PR, but I can get better prices locally, wthout
shipping or delay, on almost anything I might buy from Amazon.
And I don't have to put up with all the 'suggestions' Amazon thinks
that I would be interested in. And there's only one way to turn off
the Amazon garbage stream - don't go to the Amazon website.
That's a relatively easy solution.......