Technology TransactionsHas Online Retailing Come Of Age?
When last we left off, the Internet was to be the "next great thing." Online firms would decimate terrestrial rivals, local malls would shutter in the face of Internet competitors, and newspapers circulation would decline as the population increasingly turned to electronic updates.
And now it is said we have the first evidence that indeed the promise of the Internet not only lurks in the future, it"s here.
Amazon, the symbol of online retailing has made a profit. Not a pro forma profit that ignores costs, not Jules Verne numbers from Enron, but real, actual, spendable cash.
Unless you"re a local bookseller you have to like Amazon. It"s a clever idea, cleverly done. In minutes you can search through several million book titles, author names, and subjects.
Moreover, despite ups and downs, when Amazon has lousy news, it says so. And now that it has a profit, the company has a right to crow, at least a little.
That said -- and forgive me -- I am not convinced that Amazon"s good news changes much of anything. Yes, Amazon reported a profit. But no, I do not see the latest results as the first step in a long-term Internet trend.
If you"re a retailer you love the end-of-the-year. The last quarter is when the money is spent. A lousy May or June can be easily offset by a robust holiday season.
For the first three quarters of 2001 Amazon sales were $700 million, $668 million, and $639 million respectively. During the same period, Amazon had quarterly losses of $234 million, $168 million, and $170 million -- a total of $572 million.
In the fourth and final quarter, the company earned a net profit of $5 million on sales of $1.12 billion.
You can see where this is going. A $5 million profit in the best quarter is not going to offset $572 million in losses from the first nine months. You can"t do this forever.
Moreover, that $5 million is a fluke. In its news release, Amazon plainly says that it made $16 million in foreign currency transactions during the third quarter by investing in 6.875% Premium Adjustable Convertible Securities or PEACS.
"Currency gains and losses arising from the remeasurement of the 6.875% PEACS principal from Euros to U.S. dollars are recorded each quarter," says the company. "We are unable to forecast the gains or losses associated with our PEACS that will result from fluctuations in foreign exchange rates in future periods. Absent the foreign-currency gain recorded this quarter, we would have reported a fourth quarter 2001 GAAP net loss."
In other words, Amazon had $5 million in net income because it earned $16 million on currency transactions. Otherwise, the quarter would have seen more red ink.
You have to wonder if Amazon"s economics could apply to any other business.
As the company told the Securities and Exchange Commission in its latest report:
*Amazon has an accumulated deficit of $2.86 billion.
*Amazon has a long-term debts amounting to $2.16 billion.
Just for fun, imagine if less daring investors had taken that $2.86 billion deficit and $2.16 billion in long-term debts and simply invested in a bond paying 5 percent. The total investment would be $5.02 billion and the annual return would amount to $251 million.
Until online retailers produce numbers which compete with real world investments, it"s hard to argue that they are either competitive or sustainable. For the foreseeable future, anyway, don"t shutter that local mall or cancel your newspaper subscription.
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