April 2, 1997

Internet Amazons Take A Beating At Market's Hands

Markets are showing a healthy scepticism about the much-hyped high-tech re-invention of the US economy. Eric Ellis reports from Los Angeles.

Investors are being asked to cough up around $US40 million ($51.3 million) for a two-year-old US company that last year lost almost $US6 million.

That loss was not an improvement on its debut year, but almost 20 times worse, and the 32-year-old manager - whom investors' money will make a multimillionaire - will retain 52 per cent of the stock.

Moreover, this company has few traditional assets, its staff has grown ten-fold in two years, and it is about to face a withering competitive onslaught from established companies.

Welcome to the world of Internet commerce, where immature companies such as Yahoo! and Netscape, with modest profits and sales, command market capitalisations in the billions.

The latest operation set to join these ranks is Amazon.com Inc, a pioneer in selling books through the Internet, which could be worth as much as $US300 million after it goes public later this year.

Amazon's public offering comes as the market is showing scepticism about technology stocks and the hyped-up blue-sky of the Internet.

Technology issues have borne the brunt of the recent downturn in the stock market and seminars are popping up around the country advising investors what to look for in a technology investment.

"There is an increased focus on the part of analysts and investors on when are they going to make money," said Mr Sheldon Laube, chief technology officer of California-based consultant US Web.

"It's a healthy part of the evolution of the business," he said. Amazon likes to call itself the world's biggest bookshop, offering 2.5 million books to anyone with a computer, modem connection and a credit card.

But really it is one of the world's smallest - at any time it has no more than 500 books at its Seattle office, but 2.5 million books are considered 'available', and obtained and posted in the same way as through any conventional bookseller - via a publisher and distributor.

Amazon's energetic founder, Mr Jeff Bezos, a former Wall Street investment banker, has been very successful in selling himself.

Amazon has attracted $US8 million in venture capital from giants of Silicon Valley finance, Kleiner Perkins Caulfield and Byers, which backed Oracle, Netscape, Marimba and any number of hot start-ups.

More recently, Mr Bill Gates' multimedia guru, Mr Patty Stonecipher, joined the Amazon board after unexpectedly resigning from Microsoft last year. Intuit co-founder Mr Scott Cook is also a director.

Amazon's public offering will raise more money than its sales.

According to a filing with the Securities and Exchange Commission - the company is very reluctant to release financial details - Amazon had sales last year of $US15.7 million, up from just $US500,000 in 1995. Staff has grown from 20 in 1995 to a current 200-odd.

But despite the growth in sales, profit remains elusive because, Mr Bezos says, Amazon has been investing heavily in keeping up with the demand to service more than 60,000 daily web site visits.

The filing further notes that Amazon expects 'substantial operating losses for the foreseeable future'. 'The rate at which such losses will be incurred will increase substantially,' it says.

Amazon's greatest contribution to Web commerce may prove to be its nemesis.

While profits have been hard to come by, its mere presence has encouraged some of the world's biggest booksellers, Simon & Schuster and Borders and Barnes & Noble, to open online bookshops.

Amazon has responded to this threat by announcing big discounts on the titles it offers, which could further eat into profits.

Amazon, for the moment, remains a mostly US phenomenon, but the emergence of online bookshops and fellow travellers such as CD Now!, which sells and dispatches compact discs online, is good news for enthusiasts in 'distant' markets like Australia, who pay some of the world's highest prices for books and music.

That's because of cosy cartels and agreements between traditional outlets, which would be rendered powerless by border-free Internet trade - if someone could work out how to make it profitable.