River of No Return
As Amazon has evolved…so have the arguments for why it should be valued at least as highly as it is. Just a few months ago, AMZN was supposed to be a bookseller. Its brand meant “books over the Internet.” Now it has morphed into “the world’s largest shopping service,” according to John Levinson…an Amazon bull. What’s more, they are on their way to becoming “web sites so powerful that they are competitively untouchable.”
Levinson’s enthusiasm for AMZN highlights the reason I have focussed on the company in this series of notes. Amazon is illustrative not only of a whole new industry…but a whole new way of investing that I have characterized as: Moore & Metcalf have replaced Graham & Dodd. . Don’t look for profits, in other words. It’s the vision thing that counts. Profits will follow.
Levinson lays out a superb argument for AMZN…one that could also apply to a whole group of companies…including Yahoo!, eBay, AOL and others. He maintains that these companies have an opportunity to become something far greater than practically anyone imagined a few years ago — efficient internet shopping sites with recognizable brand names. This opportunity results from an ability of the companies to bring huge numbers of people to their sites and then capture and manipulate four types of data in such as way as to improve service and cut cost over time. The four types are transaction information, demographic information, cookie data, and registration information. Using this data intelligently, Amazon can provide more and better tailored, personalized service to the customer, without increasing prices. This means that, unlike brick and mortar stores, where crowds and scale effects produce diminishing levels of service, Amazon and its New Era brethren can actually turn the law of diminishing returns around…producing greater service, more customer loyalty and higher profit margins as volume increases.
This virtuous circle argument is always applied to the runaway leaders in a bull market. A bull market produces a demand for rationalizations…a demand which is quickly filled — as evidenced by the many books forecasting large increases in the Dow in the years ahead. Thus, the go-go years were explained by a Frenchman, Francois Revel, who wrote a popular book describing why American companies were unstoppable, The American Challenge. The Americans had money, technology, talent, and the best marketing skills in the world, he argued. Plus, they had a huge domestic market to use as a launching pad. And the more they grew, the more power they accumulated. It was just a matter of time before they would take over the world. Of course, a few years later, popular business authors were saying the same things about the Oil Sheiks…who would buy the world with oil revenues. And then it was the Japanese…whose business methods and culture made them irresistible. And now similar virtuous circle arguments are being made for the Internet megasites. The bigger they get…the better businesses they become.
Meanwhile, the industry buzz is that the megasite portals are losing traffic to a new generation of portal. One such site is ZineZone recently mentioned in Forbes. ZineZone is a “web portal with an attitude.” It makes entering the web more of an adventure. This is probably the direction the web will go — towards more specific brands, rather than a generalized shopping service.
Something always goes wrong on the way to the future. You’re enjoying a peaceful vacation in a remote, traditional resort with your teenage daughters and the rest of the family…and along comes the local chapter of the Hell’s Angels who have decided to stop over on their way to their annual super-debauch. Who would have imagined it? In the middle of nowhere. Certainly not me. Of course, the motorcycle gang might not have shown up. Your vacation could have gone exactly as planned. You never know. How to invest in a world of uncertainty…tomorrow.
July 27, 1999