E-Commerce Pain Could Be Amazon's Gain

Indexes that track e-commerce stocks have fallen an average of 70% this year upon the realization that many new online retailers will not survive. More than forty e-commerce companies went public last year alone, and most of them have declined in value since. Like breakdancing or "Baby on Board" signs, the best days are already in the rear-view mirror for many of these stocks.

The much ballyhooed cash balances at many young e-commerce companies are running dry, and avenues for raising more cash are being depleted. This leaves few options for most afflicted e-commerce startups: either merge with a company that has cash, be acquired (good luck on that!) or close the doors.

News of the dire situation has brought the entire e-commerce sector to its knees. First, all of these stocks rose together. Now, they all fall together. After the dust settles, however, a few surviving online retailers should actually benefit from the failure of others and will stand to gain the most long term. Amazon.com (Nasdaq: AMZN) could likely be one company that remains standing.

In fact, I believe that Amazon's competitive position looks better now than it ever has. The Rule Breaker has owned shares of Amazon since 1997 and I've owned shares since 1998. As an investor, let me explain why I like the company's prospects now more than ever.

Good-bye Competition, Hello Steady Growth?

Amazon initially represented a new way to buy books. More important, however, was that management realized its online store should not be a static, one-way medium. An online store should focus on community, be interactive, and eventually tailor itself to each individual shopper. Amazon says that if it has 21 million customers, it wants to have 21 million different stores.

Having been an Amazon shopper since 1997, I've seen the company's product recommendations improve to the point that now much of Amazon's homepage purposely lists items that should appeal to me -- and most of them do. No competitor does this nearly as well as Amazon, and most don't even try. Rather than merely serve products to a customer when they seek them, Amazon provides relevant new product ideas. This service makes me return to the site and obviously it presents great value to Amazon, too.

That's great, but two years ago Amazon's future was more questions than answers because competition was perceived to be deadly and widespread. Concerns abounded that price-cutting competitors would kill Amazon. Then shopbots would kill it. Then Barnes & Noble (Nasdaq: BKS) would kill it. Then Wal-Mart (Nasdaq: WMT). Finally Buy.com (NYSE: BUYX) with its advertised-based model would kill Amazon. Now I believe that Amazon is the only thing that can really kill Amazon.

The company has a strong enough brand name and customer base and so few adept, dynamic competitors that its chances for survival and prosperity are much better now than they were two years ago. Assuming smart management at the helm, Amazon could now evolve into a long-term growth proposition that can sail the rising e-commerce sea indefinitely. Amazon will be a pure online company with great scale and cost benefits that competes mainly with well-monied -- but not purely online-focused -- operations like Wal-Mart.

By continuing to use technology to offer a continually better service than its competition (it already has an enormous head start), Amazon should capture and retain a meaningful slice of the online retail market. And that is all that Amazon needs to do. The company doesn't even need 15% online market share to be a long-term giant. So, we're not counting on complete domination. Amazon will logically share customers with the Wal-Marts of the world -- check out Kmart's (NYSE: KM) new Bluelight.com site -- but many online competitors are evaporating, leaving more market share for Amazon.

I've always thought that consumer e-commerce revenue would largely be split among hundreds or at least dozens of large, viable online-based companies due to the Internet's open nature. However -- to my surprise -- it appears that much of the long-term spoils may go to only a small handful of online-based companies and the remainder of the spoils will be split among companies that operate strong businesses off-line, too.

What may be most important, then, is that so many people equate Amazon with online commerce and the chances for any other company surpassing Amazon's stature in this regard are now low. Given this, Amazon may be standing near a precipice of potentially excellent, long-term and steady value creation. With a large and growing customer base and without strong competitors that have a pure online focus, Amazon appears poised to lead the e-commerce industry to a degree that I didn't before believe possible.

Of course, we need to address the prospect for profitability, among other issues, at Amazon. We'll start that next time. Fool on!

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