The Guardian 0
The fascinating question about Amazon.com is how it will avoid going broke. At some stage it is not enough to grow: it must make money too; and it is in a business where it cannot get a monopoly or anything like one. There are several sites which will automatically search all the online booksellers and find which is offering the lowest price and this is by no means always Amazon's. The real secret to the business is the fact that it inverts the traditional cash flow of retailing, where you buy things from your supplier on credit and then hold them until someone comes along to pay cash for them.
Amazon gets the cash first and only then buys from the publishers on credit the books that it is selling, so that it has about thirty days in which to put the money to productive use. This is an idea of tremendous brilliance, which ought to be a guarantee against going broke. On the other hand it is possible that Amazon will expand into so many areas in an effort to find somewhere it can make an honest profit, that the cost of marketing and of trading at a loss will bring it to its knees. Like all these things, it depends, or appears to depend on confidence among investors. A high share price means that if all else fails, you can buy the competition, and at the same time you can buy traditional and more profitable businesses.
Amazon.co.uk claims to be doing £100m of business this year. This represents a truly phenomenal rate of growth because it was certainly doing nothing like that a year ago. It's impossible to know exactly how many books they sell, but the volatile way their charts were moving last year suggests that this was not a very large number: one friend of mine had a book at number 18 in their charts last summer. He ordered eight copies for relatives and the book not only went straight to number one, but stayed there for three days as a result.
The root of all these problems is that business on the web is incredibly competitive. Anything that works will be copied all over the place. As soon as it became successful Amazon was itself the target of a ferocious assault from Barnes and Noble, the largest terrestrial bookseller in America which sued them as well as copying their web site fairly closely. The only defence against such a thing would be to have a legal, patentable monopoly on the way you do business. And this is where the story gets really nasty. Amazon has in recent months taken out two patents on features which it pioneered, but which have been copied all over the web since then and are among the foundations of e-commerce.
The first is one click shopping, which allows you to buy things instantly on many occasions after entering your credit card and shipping details once. This is one of the most important advantages that Internet shopping has over the real thing, or over all other forms of mail order. The second, even more worrying, is for the affiliates programme, where the company gives a cut on books which it sells to people who have followed a link from someone else's web site.
Giving someone a cut of the business they pass on to you is scarcely an idea so new that it can safely be patented. But even the patent for one-click shopping has raised hackles and outrage all over the Internet. It's not just that the net in general relies on free and unpatentable software, which anyone can in principle modify and improve. But Amazon's own business would have been impossible to implement without free software. The whole case has brought into high relief two contrasting attitudes which have underlain the growth of the web: the idea that huge riches should be within the grasp of anyone with a really good idea; and the idea that good ideas are for sharing with the world. Everything in the history of the software business suggests that huge and lasting riches only really accrue to people who have a good idea and can keep others from copying it.
The best guide to the row is found on the web site of Tim O'Reilly, a publisher who is exquisitely balanced on the cusp of these affairs. He makes his money selling books on free software, often through Amazon. He protested publicly to Jeff Bezos, Amazon's founder, about the patents, and got a reasoned reply back, claiming that they were really defensive moves. Amazon had no intention of going after other people who use these tricks, but it did want to be sure that the patents were not used against it. Well yes, but suppose the exploitation of such patents were the only way for the company to make a profit?