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TMF Parlay: But you have to agree, Amazon's positioning is the best among its peers, right? Peers, as in other online merchants who physically ship products.
TMF Parlay: So, Tom, I hear that you're not exactly a fan of Amazon. What's up, dude?
Tom Gardner: Ahh, well. You've heard half the message. I'll start by saying I'm a very big fan of their core service. Love the convenience. And I believe that Interbrand's study is right. Amazon.com has one of the top 50 brands in the world, an astonishing achievement in such short order and the simplest rebuttal to any Wall Street analyst who is looking to "throw in the towel" on Amazon -- or who believes Amazon is at risk of insolvency or failure.
TMF Parlay: But...
Tom Gardner: But the past year has not, to my eye, been a great one for Amazon. And this recent quarter captures both the beauty and the danger of Amazon's approach.
TMF Parlay:How so?
Tom Gardner: First of all, I believe Amazon is trying to change its message midstream, from the message of fierce sales volume to long-term profitability to a message of moderated sales volume toward intermediate-term profitability. And while I like some of that, the execution of it is at issue.
I wonder right now, for example, why Amazon is engaged in selling power tools, and cookware, and furniture, and carpeting, none of which yet resonate with me as an Amazon customer and none of which I believe, from an economic standpoint, Amazon would really want to market, sell, package and then deliver to me.
They all seem pretty low-margin and wide of the core Amazon experience relative to some other options available to them. So if they are going to accept moderated sales growth and push the margins higher, they had better look very closely at their product offerings and ask: Does this, one, reinforce the core experience of being on Amazon? And two, does this push margins higher over our core business?
I wonder right now, for example, why Amazon is engaged in selling power tools, and cookware, and furniture, and carpeting
Right now, I think there's a lot on Amazon that does not.
TMF Parlay: So you're basically thinking that Amazon should stick to what it does best: selling books online?
Tom Gardner: Actually, no. I think that's their core. How they expand off that core says a lot to customers and investors. As a customer and a potential investor, many of their newer offerings have communicated a lack of focus and design rather than a designed, focused, increased suite of offerings.
TMF Parlay: I agree that some of their ventures away from the core have been less than stellar (auctions, for example), but others (music, video) have done quite well.
Tom Gardner: Right. But they don't seem to be focusing on the economic realities of their offerings.
TMF Parlay: You mean, for example, shipping lawn tractors across the country?
Tom Gardner: Amazon has had a great opportunity to offer two higher-margin products that I think are more relevant to their core customer, who wants convenience and quality.
The first is discount brokerage services. The second is publishing services. Both of these are higher margin. One is relationship-based (brokering). The other is intellectual property: (publishing).
TMF Parlay:Actually, they do sort of have a publishing arm. Independent authors can send in books, and they'll sell it, keeping a 50% or so cut
Tom Gardner: Yes, but it is hardly recognized today. And in today's quarterly announcement, did they choose to emphasize it or their ability to sell me cookware?
TMF Parlay: Well, I think one of the problems with being so big is they have limited space to push their individual "stores."
Tom Gardner: I would say that right now, Amazon is failing to link together their economic interests with the advantages of being on the Internet. Yahoo! is a master of this. eBay is getting better at it. Amazon is not there yet.
I believe five years from now, eBay will be worth two times more than Amazon.
Tom Gardner: Depends how we define its peers.
TMF Parlay: I just did!
Tom Gardner: I would invest $10 into Yahoo! (Nasdaq: YHOO) for every one I'd invest in Amazon. And I'd invest $5 into eBay (Nasdaq: EBAY) for every one I'd invest in Amazon. So, are they peers?
TMF Parlay: Yes and no. Both are on the Internet, but that's where the similarity ends. eBay and Yahoo! and America Online (NYSE: AOL) are really just e-commerce middlemen. There still needs to be someone physically fulfilling the orders.
Tom Gardner: In the terms you've defined, yes, I agree. Amazon is the best product retailer online, bar none. Now ask me if I think product sales are the core future of e-commerce.
TMF Parlay: OK: Are product sales the future of e-commerce?
Tom Gardner: Hehehe. You cited something interesting and true, Paul. Earlier you said, "Hey, what about Amazon being the leader in the sales of music and video, as well as books?"
TMF Parlay: Yup.
Tom Gardner: And I agree with your point. And if Amazon held to those three categories and began to develop controlling positions of intellectual property in terms of digital books, digital music, and digital video, I believe they'd be sitting on a higher-margin business, and a more highly valued business, and a more defined -- and thus relevant -- brand.
But cookware? Lawn chairs: the future of the Internet. Get your lawn chairs -- more conveniently! Get your dog food -- more conveniently! Lower margin, less relevant.
TMF Parlay: So if I'm reading you right, you think that Amazon is making poor decisions on where it's investing its capital?
Tom Gardner: You have said it far more succinctly than I, yes.
TMF Parlay: Investing in online furniture instead of digital books, digital music, etc.?
Tom Gardner: Amen. What do you think?
TMF Parlay: Well, I think many of your points have a lot of traction. I see what you're saying, but then I also see where Amazon is coming from in trying to parlay its books lead into many other categories. It wants to be the place to buy ANYTHING online. It worked in music and video, [and] sort of worked in toys, but hasn't worked elsewhere very well.
Tom Gardner: I never asked to be able to buy anything from Amazon.
Jeff Bezos said one thing that scared me. I'm paraphrasing, but he said something about how dollar volume was so much more important to him than dollar margin. It made me uncomfortable, as an investor. And as a customer, to be honest.
I would be much more comfortable, as an investor and a customer, if I could buy any sort of intellectual capital (text, audio, video) from Amazon as they began to play up the communications aspect of the Internet (reviews, etc.) more.
TMF Parlay: That may have been the "old" Bezos that was aiming more for real estate than for immediate profits. In listening to him in yesterday's conference call, it seems, at least to me, they're really focusing on gross profit dollars and overall profitability these days. They gave several examples of programs they're scaling back on to help the profitability picture.
Tom Gardner: That's reassuring. I confess, I haven't listened to the conference call.
If you could be the new president of the company and you had the choice -- either invest $100 million in products for the home or invest $100 million in reinforcing and extending an intellectual capital platform -- which would you do?
TMF Parlay: Choice #2, in a heartbeat.
Tom Gardner: Do you think Amazon agrees with you?
TMF Parlay: But do keep in mind that many of their "stores" aren't really theirs. They are from pets.com, drugstore.com, living.com, etc.
Tom Gardner: Right. But I think the association of those brands is really dragging on Amazon, and I think the concern from that perception is well-placed.
TMF Parlay: I think, and I may be wrong, Amazon wishes they had stuck to higher-margin intellectual products. But hindsight is always perfect, right?
Tom Gardner: Interesting. If so, I think that's wonderful. I confess, their earnings announcement mentioned cookware.
TMF Parlay: Yummm, cookware!
Tom Gardner: Amazon.com/kitchen was a highlight in their release.
TMF Parlay: I think Amazon has made a lot of mistakes, but I still gotta like their positioning within their core businesses
Tom Gardner: Next up: the Home Living store.
TMF Parlay: They even have a deal with greenlight.com to sell cars. The deals and investee list is quite long.
Tom Gardner: Here's my position on it: I think, on its present course, Amazon will be in position to be acquired by a company like eBay within five years.
TMF Parlay: Hmmm. Interesting prediction!
Tom Gardner: Amazon is already in position to be acquired by Yahoo, though I don't think Yahoo! would take that deal.
TMF Parlay: Stranger things have happened
Tom Gardner: I believe five years from now, eBay will be worth two times more than Amazon. And I believe these two companies are relevant peers -- with different aims and different economic assumptions, certainly, but a common technology platform.
Paul, do you expect Amazon to outperform the market's average return from here over, say, the next five years?
TMF Parlay: I do believe Amazon will outperform, but my confidence is not very high.
Tom Gardner: If you could invest $5,000 split between any two of these companies -- Amazon, Yahoo!, or eBay -- which two would it be?
TMF Parlay: Yahoo! and eBay.
Tom Gardner: I agree. I actually believe that all three will beat the market over the next five years, particularly given the drubbing that Amazon has taken. But I view Yahoo as 10x, eBay as 5x, and Amazon as 1x.
TMF Parlay: Exactly. At these levels, a lot of the pessimism has already been priced into Amazon.
Tom Gardner: I think the former two have found their business models, and are now able to push, push, push without much internal hand-wringing.
TMF Parlay: Yup. They also have that good ole "Zero/Infinity Advantage." Incremental costs are going toward zero for eBay and Yahoo!, while the potential revenue and competitive advantages are going to infinity.
Tom Gardner: So, man, am I to take it that we largely agree?
TMF Parlay: Yes, we seem to largely agree, strangely enough!
Tom Gardner: What does it look like for Amazon, vis-a-vis Zero/Infinity?
TMF Parlay: Well, having to physically ship product, their incremental costs will never go to zero, but they will hit economies of scale. On the infinity side, the opportunity for consumer e-commerce remains enormous, in my opinion. But I think, like I think you do, a "laser-rifle approach" would probably work better for Amazon than a loose shotgun approach.
Tom Gardner: Looks like the land-grab was overrated. They had more time than they thought to refine their business model.
TMF Parlay: So, don't you have like another meeting or something to go to right about now?
Tom Gardner: Of course. It's a meeting with my e-mail box.
TMF Parlay: Okay! Have fun, and Fool on!
Tom Gardner: Fool on!
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