Does Amazon’s Fiscal Plan Make Sense?

When giant e-tailer reported its fourth quarter earnings earlier this month, the company reignited an old debate over whether pure-play Internet e-tailers are fundamentally capable of turning a profit.

Many critics pointed out — and rightfully so — that despite enjoying skyrocketing revenues, the company reported significant losses. These analysts point to the fact that the company’s stock has been stuck at about $80 (US$) a share, some 28 percent below its high of $113 on December 9th.

Is Amazon Turning Profitable?

Just before Amazon released its earnings report, the company made some savvy moves that were designed to lessen industry criticism. Since then, it has attempted to force-feed Wall Street on the idea that it is finally on its way to turning a profit.

The first step toward this public relations turnaround was the announcement on January 28th that the company had laid off two percent of its workforce. Even though this cutback amounted to 150 lost jobs out of a workforce of 7500, it was seen as a conservative fiscal move.

Soon after, Amazon announced that its North American book operations were in the black in the fourth quarter.

Leveraging Massive Customer Base

As part of its greater fiscal responsibility, Amazon followed in the footsteps of America Online by systematically leveraging its most valuable asset: a customer base of 17 million shoppers.

AOL was probably the first online company to sell space on its service to e-tailers that wanted access to AOL’s customer base. However, while these deals are billed as joint ventures, they are really payments to AOL.

By signing six recent agreements with other e-tailers for exposure on its Web site, Amazon will net a total of $606.5 million at profits of 80 percent or more if the multi-year deals are completed, according to Goldman Sachs.

Additionally, Amazon says it will concentrate on enticing its customers to spend more by continuing to expand it offerings. Its goal is to beef up individual customer spending from $116 to $150 by 2002.

Keep Advertising Costs Down

Amazon has stated that its status as one of the most recognized brands on the Web will allow it to cut its advertising and marketing spending from 25 percent of sales in 1999 to 13 percent of sales by 2002.

Additionally, there are some rumblings that the company could easily provide logistics services for other e-tailers, and some analysts are even speculating that it may get into the Internet Service Provider (ISP) business.

All Sounds Good

Despite all of this activity, I think there is one glaring omission on Amazon’s roadmap to future profitability: Nowhere has the e-tailer talked about a partnership with a comparable brick-and-mortar retailer.

Without the consummation of such a strategic alliance, I think that Amazon’s plan is doomed to failure — especially as more giant brick-and-clicks like Wal-Mart Stores, Inc. get their acts together.

All the same, Jeff Bezos and Co. may be secretly cutting such a deal at this very moment. For Amazon’s sake, I hope so.

What do you think? Let’s talk about it.

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