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T A B L E__T A L K The small, the rugged, the new. Join a discussion about the latest generation of laptop computers in Table Talk's Digital Culture area   Search for technology books, software and more at barnesandnoble.com Search by:  Keyword Title Author     ____________________ Technology news from Will Red Hat's success spark backlash? ____________________   R E C E N T L Y How can they patent that? By Peter Wayner The torrent of patents for e-commerce schemes raises new questions about an old-fashioned system (03/09/99) Fortress Microsoft By Tony Seideman Redmond's scorched-earth spin strategy has turned into a PR nightmare (03/08/99) Let's Get This Straight: By Scott Rosenberg Why hasn't the software industry given us more tools to get our lives in order? (03/05/99) Gathering of the Linux tribes By Andrew Leonard Hackers and suits eye each other warily amid LinuxWorld hoopla (03/04/99) Molotovs and mailing lists By Austin Bunn When bomb-throwers target e-mail discussions, no one can escape the carnage (03/03/99) - - - - - - - - - - BROWSE THE 21ST LET'S GET THIS STRAIGHT ARCHIVES - - - - - - - - - -

Amazon vs. the ants Sure, David can beat Goliath on the Web -- if he's got a New York Times columnist in his corner. - - - - - - BY SCOTT ROSENBERG | A couple of weeks ago, New York Times op-ed columnist Thomas Friedman made the case against high valuations for Net stocks in an article headlined "Amazon.you." Tuesday, Friedman returned with a second broadside that may be the most amusingly off-base piece of Net commentary since the days when the Times warned us that the Internet was a hive of "nuts." Friedman is normally a thoughtful observer of events in the Middle East and around the world. What happened? "Amazon.you" offered an argument that, while not especially novel, had a certain anecdotal power: To all those investors who have paid a fortune for their shares in Amazon.com, Friedman offered the cautionary example of Lyle Bowlin, a guy in Cedar Falls, Iowa, who is running his own online bookstore out of a spare bedroom -- and underselling Amazon. "For about the cost of one share of Amazon.com, you can be Amazon.com," Friedman exclaimed. Big Net businesses are in trouble, he suggested, and any day now, little-guy start-ups will begin to swarm over their bloated carcasses: "Just think for a moment about how many Lyle Bowlins there already are out there ... to eat away at the profit margins of whatever Internet retailer you can imagine." Friedman had figured out about one half of the logic of the online marketplace -- and partial knowledge is a dangerous thing. I wouldn't argue with Friedman's dour view of the inflated valuations of Internet stocks. Certainly, if the Net is even half as efficient a marketplace as its biggest boosters maintain, it will keep driving profit margins down. The "barriers to entry" are minimal; start-up costs are low; anyone can start an online shop. No one should expect massive profits in such a market. But that doesn't mean anyone can be an Amazon.com, for two simple reasons. The first reason is what engineers like to call scalability: Lyle Bowlin can keep operating his store on a shoestring as a hobby only as long as it remains a low-volume operation. If he starts growing, he can't handle all the orders himself in his spare time anymore. He has to start hiring people. He needs to spend more than $30 a month for his Internet access, or customers can't get through to his site. He needs to build new back-end systems to support the increased load on his servers. At that point, either his meager profits evaporate or his prices go up -- to Amazon's level. Start-up costs on the Net may be low, but the cost of doing business balloons as the business's size grows. The second reason is the killer, though. Amazon.com is such a success online not so much because its prices are low but because it has marketed itself smartly and built a loyal customer following over the past four years. That market profile -- the traffic on Amazon's site and the name-recognition the company has achieved -- is what investors, rightly or wrongly, are placing their bets on when they buy Amazon stock at sky-high prices. It is not easy to build Amazon-scale traffic on the Web today -- hell, it's no small feat to build any traffic at all. Your options are: 1) cross-linking and word of mouth, online and off, which is effective but slow and unpredictable and not likely to help anyone reach Amazonian proportions; 2) advertising, which can also be effective but which costs a fortune and immediately eats into those low start-up costs (Amazon itself launched in 1995 with a blitz of small-type ads at the bottom of the New York Times front page, wishing happy birthday to famous authors "from the world's biggest bookstore"); or 3) press coverage. Well, Lyle Bowlin obviously hit the jackpot on No. 3 when Thomas Friedman decided to write about him. - - - - - - - - - - - - N E X T_ P A G E .|. Where do you think all that traffic and business came from?