Friday, October 26, 2012

Amazon threatens corporate America

Matt Yglesias explains:

But what makes Amazon not just amazing but downright dangerous is that as a financial matter it has something even better than profits—the boundless faith of the investment community. You can think of a company's stock price as jointly determined by its profits ("earnings") and by Wall Street's level of optimism about the future, expressed as a price-to-earnings ratio.

In any line of business where you're earning healthy profits you always need to worry that a competitor will undercut you on price. But normally you can also have some confidence that they'll be restrained in their price cutting by the need to maintain profits of their own. Amazon is totally off the leash in this regard. Wall Street treats it like a brand new startup that just needs to think about growth and can find a viable business model later. Which means that if they come after you, you have no recourse. Your profits are going to shrink, and your investors are going to punish you for it but Amazon's profits don't necessarily need to grow proportionally. They just need to show they can poach your market share.

Be afraid.

I don't have much relevant commentary on this. It's not my area of expertise. But I did find this interesting in part because I love Amazon. It nearly always matches, if not undercuts, the price of local retail stores where I live. The only reason I might not use Amazon to buy something is if I want to get it immediately. That's because the cost of shipping to get it quickly can be more than state sales tax and the gas I use to get to the store and back.

For now, the lack of sales tax they charge for TN makes it the best retailer. I expect that to change eventually, which could shift things more towards Best Buy. But that calculation also depends on the price of gas. With gas being so expensive it could cancel out the ~ 9% sales tax in TN. However, I guess rising gas prices could affect shipping prices too. But the reason I like Amazon if I don't need something right away is because I can usually get cheap shipping or, depending on how much I spend, free shipping.

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