E-Commerce
What Is Amazon Thinking?
Despite the fact that every PC company has struggled for years to maintain profitable growth in what is undeniably a bloody commodity business, Amazon.com says it will open an online store to sell PCs. Why? To help it reach profitability.
What are they thinking? If Amazon
(nasdaq: AMZN - news - people) thinks that selling PCs will bring profits, the company is sadly, woefully mistaken. It's tough for the PC experts to make money selling PCs, never mind an everything-but-the-kitchen-sink retailer like Amazon.
Spokesman Bill Curry says that Amazon expects the PC store, which will open in the latter part of this year, to "bring a high dollar contribution" to the company. But growing sales hasn't been Amazon's problem; it's those elusive profits. Consider that Dell Computer
(nasdaq: DELL - news - people), the most efficient PC maker and maybe the most efficient manufacturer period, can only muster 18% profit margins on PCs. Are these the kind of high-profit businesses that will hasten Amazon's move into the black? Hardly.
Details are sketchy, but Curry says that an undisclosed PC maker--or maybe more than one--will fulfill PC orders placed on Amazon. Presumably, Amazon's ordering systems will be tied to those of the PC maker. "It's the model we already use for [selling] cell phones," Curry says.
True, Amazon won't have the burden of warehousing systems--PCs lose value every hour they sit unsold--but hammering out pricing structures with its PC partners will probably be difficult. On one hand, a PC maker would be glad to get the eyeballs--tens of millions of them--belonging to Amazon's subscribers, but it doesn't want to get undercut on its own products.
"It's the old problem of stealing from your own mouth to have an alternate channel," says Roger Kay, analyst at International Data Corp. "They wind up competing on price."
PCs will be sold through Amazon's electronics store, its second-biggest domestic category, which already carries almost everything that might get sold with a PC: digital cameras, PDAs, monitors, printers and scanners.
"People go to where the greatest density of activity is," says Kay.
That's true, but PCs are different. Spending $1,500 or more on a product that's prone to crashing is not the same as buying a $400 digital camera that, more often than not, just works. What type of value will Amazon offer than can't be had from Dell.com, Compaq.com, Gateway.com or HP.com? And who will provide support and maintenance?
Amazon, which recorded a net loss including restructuring charges of $234 million in the first quarter, will no doubt sell a lot of PCs. But investors are tired of the continued absence of profits. The company says it will hit pro forma operating profitability in the December quarter. PCs are a tough, tough business, and selling them won't help Amazon achieve or maintain profitability.
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