E-Commerce will be HUGE
Friday, May 15, 1998
by Jeff Fischer

ALEXANDRIA, VA (May 15, 1998) -- The Wise are complaining that the market "has no direction" or can't decide where to go. Sure, it's only been a number of days that the market has drifted up and down aimlessly, but complaining about the short-term situation is appropriately Wise, so let them do it. Fools that we are, we hardly even watch the fabled "market." We focus on what matters most -- our individual companies.

This week our basket of stocks surrendered over 2%, while the S&P dropped over 1%. The S&P 500 is the one market number that we do watch, but for comparison only. If we're not beating the market over the long term (and so 90% of the Wise as well), we're not being Foolish. Right now on the Foolish scale we're doing great, but there's no reason to beat this point into the ground with words, because the numbers speak volumes.

When you look at the numbers, compare the Fool to the S&P and then remember that 90% of mutual funds have lost to that S&P number over the past five years. And many mutual funds have lost badly. This means potential wealth has been lost for most mutual fund investors -- wealth that is otherwise incredibly easy to capture by merely investing in the S&P 500 index. The propensity of the Wise to waste potential is much of the reason that we're Fools, and the more Fools the merrier, so send your family and friends the 13 Steps to Investing Foolishly. Those simple steps have the power to make anyone Foolish.

Not so simple is discussing Amazon.com (Nasdaq: AMZN). This company's stock is up 400% from its $18 initial public offering that took place one year ago. It seems that everyone has a strong opinion about the stock, and so the discussion on our Amazon message board, though good, is often heated. This week the conversation is centering on a website called www.acses.com. At this site you name any book that you're interested in buying and it searches for the book on over twenty different online booksellers, giving you the list of sellers along with prices and links. In this manner you can find the best price for any book sold online.

Every book that I've searched for shows Amazon as one of the top three cheapest sites. And, for me, Amazon is where I have 1-click ordering in place, so it's much more convenient than going to a new site that I don't know or trust -- not to mention Amazon's reliably quick shipping. So on a book by book basis, I'm not going to worry about saving a dollar or two if I need to use another service to do so (having to give out personal information and credit card numbers again for each new site). But, if I'm buying several books over time, of course the savings could be substantial if I shopped around. That's obvious. So websites like ACSE will certainly pressure pricing, because all online book retailers know that their prices are being compared to one another. In fact (and this is great for consumers), the entire Internet will soon operate in this manner for all items that are sold.

Anytime that you want to buy anything, you'll be able to do a quick automated search of all relevant online sites for the best price. Airplane tickets are already sold like this, as are books and several other items. "Shop bots" are emerging all over the Web. These tools search out the lowest prices for you, anywhere online, automatically and quickly. So what does this mean?

This means that the Internet is going to be the place to buy almost anything. E-commerce is going to be huge. Giant, even. No holds-barred ENORMOUS. E-commerce will be the most convenient, economical, and savvy way to shop in the world, and the majority of the population will embrace it over the years ahead. I have no doubt about this.

Due to the advantages that the Internet offers consumers, though, retailing on the Web is going to be more price competitive than any other retail environment. You can count on that, too. With books, I believe that eventually all online booksellers will charge the same low prices. Nobody will want to sell at a loss, though, so books will be priced to sell at a small profit. Obviously, only the most efficient retailers will be able to survive, because more efficient companies will have lower prices and still make money where weaker companies can't. Among the surviving retailers of books, the only distinction between them will be the service and the name brand. (Arguably, Amazon has the leading service so far, and the name brand.) The margin on the sale of books will be razor thin, though, so the better margin sales will have to come from advertising and from other transactions (including referral transactions). Last September we began to posit this in our Amazon buy report in the section about virtual communities.

In the end, it's the traffic that counts. Retailers will need high levels of traffic to produce other higher-margin revenue streams aside from product sales. Bears see Amazon as a bookseller only -- a low margin commodity seller. I see Amazon as a very popular Internet destination. (If Amazon's management sees itself as only a bookseller, I'd worry.) Amazon is a brand name destination that has numerous possibilities for different revenue streams. Eventually, books might even become loss leaders. Because for online retailers, it's going to be the traffic that matters most (at least initially -- more on this in a minute), along with traffic-related advertising revenue and value-added transactions that offer higher margins. This is why America Online and Yahoo! are in such sweet spots, and Amazon could be too -- if it can execute beyond book selling.

Viewing Amazon as one of the most popular Internet destinations on the Web, we must ask: How can the company leverage this great start?

How Amazon chooses to leverage its position will determine its ultimate success and profitability. As for the retail business itself, booksellers will succeed at the expense of other booksellers, until eventually only a handful of leaders will be left standing and then pricing might not be such an issue. After a shakeout, companies might be able to make some money on book sales. (The pricing competition won't be quite so fierce. Some little guy won't always be undercutting you.) But efficiency and traffic are the first issues. Who can attract the most people for the lowest cost, and thereby charge the lowest prices? So far, Amazon has the market share by a mile, so it's doing something right.

E-Commerce will be huge. Bigger than we could have imagined. Eventually money will be made even in traditional retailing. In the end, companies want to survive, and competition makes for compromises. Don't expect any certainty in the next several years, though. Expect competition, change, and shakeouts. And folks, this is still entirely new. By being online, you and I are freaks. Most people are not yet online. But eventually they will be. Eventually the cost of not being online will overshadow the cost of actually buying a computer and modem. The opportunity cost will be too great -- you'll have to be online. In fact, not too many years from now we'll all wonder how we ever lived, as a society, without the Internet.

Talk about exciting! Now get out there and score that touchdown!

Or... wait. Fool on!

--Jeff Fischer

(P.S. Tom's Friday Cash-King column is a great read!)

WE DELIVER - Get Fool Portfolio Nightly Reports
delivered straight to your e-mailbox every evening!

Today's FoolWatch: all the latest in Fooldom.


Stock Change Bid ---------------- AMZN -1 15/16 89.63 AOL -2 7/8 84.88 T - 7/16 57.00 DD -1 3/16 80.50 DJT - 1/16 8.75 XON - 1/16 73.69 INVX - 15/16 21.69 IP -1 3/4 53.25 IOM - 3/16 7.31 KLAC -1 1/2 38.44 LU - 11/16 70.63 COMS - 5/16 29.94 TDFX - 5/8 23.00 SPY - 5/8 111.03
Day Month Year History FOOL -2.24% -0.10% 21.42% 307.49% S&P: -0.77% -0.27% 14.25% 141.87% NASDAQ: -1.00% -1.16% 17.60% 156.43% Rec'd # Security In At Now Change 8/5/94 710 AmOnline 3.64 84.88 2234.02% 5/17/95 1960 Iomega Cor 1.28 7.31 471.11% 10/1/96 84 LucentTech 23.81 70.63 196.64% 9/9/97 290 Amazon.com 38.22 89.63 134.49% 8/12/96 130 AT&T 39.58 57.00 44.02% 2/20/98 215 DuPont 59.83 80.50 34.54% 1/8/98 115 S&P Depos. 95.91 111.03 15.77% 2/20/98 200 Exxon 64.09 73.69 14.98% 2/20/98 270 Int'l Pape 47.69 53.25 11.65% 4/30/97 -1170*Trump* 8.47 8.75 -3.32% 1/8/98 425 3Dfx 25.67 23.00 -10.39% 8/24/95 130 KLA-Tencor 44.71 38.44 -14.03% 6/26/97 325 Innovex 27.71 21.69 -21.73% 8/13/96 250 3Com Corp. 46.86 29.94 -36.12% Rec'd # Security In At Value Change 8/5/94 710 AmOnline 2581.87 60261.25 $57679.38 9/9/97 290 Amazon.com 11084.24 25991.25 $14907.01 5/17/95 1960 Iomega Cor 2509.60 14332.50 $11822.90 2/20/98 215 DuPont 12864.25 17307.50 $4443.25 10/1/96 84 LucentTech 1999.88 5932.50 $3932.62 8/12/96 130 AT&T 5145.11 7410.00 $2264.89 2/20/98 200 Exxon 12818.00 14737.50 $1919.50 1/8/98 115 S&P Depos. 11029.25 12768.59 $1739.34 2/20/98 270 Int'l Pape 12876.75 14377.50 $1500.75 4/30/97 -1170*Trump* -9908.50 -10237.50 -$329.00 8/24/95 130 KLA-Tencor 5812.49 4996.88 -$815.62 1/8/98 425 3Dfx 10908.63 9775.00 -$1133.63 6/26/97 325 Innovex 9005.62 7048.44 -$1957.18 8/13/96 250 3Com Corp. 11715.99 7484.38 -$4231.62 CASH $11558.06 TOTAL $203743.84

Are you a Foolish investor?
The Motley Fool Recommends...
Industry Snapshot
New format! A stock idea, industry overview, top players, and financials -- every two weeks! Get more info or order.

Fool Port Reports
The nightly scoop on the Fool Port Report, delivered straight to your e-mailbox. Get more info or order.

Motley Fool Investment Guide
Just getting started? Been investing for years? Foolishness for investors of all vintages. Get more info or order.

Shop FoolMart!