PHILADELPHIA INQUIRER
Friday, July  7, 2000
The Economy
By Andrew Cassel  

    Tens of thousands of young readers are poised this weekend to dive into yet another magical adventure story from England. And right behind them will be tens of thousands of investors, twitchingly eager for the next chapter in what might be called . . . Harry Potter and the Cashflow of Amazon.

   In earlier installments of this elaborate tale, our hero, a wizard-boy named Jeff Bezos, was elevated from obscurity to mega-mogul when he uncovered the secret power of the “new economy.” Using Internet mumbo-jumbo to conjure the ancient retailing arts, he transformed millions of desktops into electronic bookstores, helping fuel an investment boom for the ages.

   Fans thrilled to the delightful adventures of Jeff and his Dot-Com pals as they uncovered the Secret Riches of Silicon Valley. Who could forget those funny little creatures, the Venture Capitalists, madly flinging money everywhere as they tried to hit the New New Thing? And those electrifying IPOs

   But that’s all in the past. The latest installment takes a somber turn, pitting our hero’s innocence and vision against the dark forces of the “old economy.” From out of their Wall Street caves, the Bears have emerged, and they’re crying for profits. What . . . about . . . the . . . bottom . . . line? they howl.

   A BLOCKBUSTER – FOR WHOM?

   Which brings us back to this British book. Harry Potter and the Goblet of Fire is that rarest of things in publishing: a guaranteed blockbuster.

Hundreds of thousands of copies have been pre-ordered, and many more are certain to fly off shelves beginning tomorrow.

   You might think that Amazon would be in a position to clean up on this. But will it? The pioneering e-tailer has a well-known brand and a huge distribution network, including not only its Web site but also giant warehouses coast to coast, and alliances with delivery firms such as Federal Express. Amazon ought to make a bundle.

   Look at what’s already happened, however: To avoid losing market share to both online and conventional competitors, Amazon had to sweeten its deal with consumers, offering at least 250,000 customers premium next-day delivery at no extra charge.

   Instead of creating a chance to reap huge profits, in other words, the book’s extraordinary appeal has created cutthroat competition. Amazon and its rivals are absorbing extra costs, and some are even discounting the book’s cover price. It’s fantastic for consumers, of course, but what does it say about the ability of electronic retailers to produce big returns?

   LOOKING INTO A CRYSTAL BALL

   In fact, investors have been asking just that for several months now. Amazon stock, which sold for $113 per share in December, closed yesterday at $36.06. The company took a big hit recently when one analyst said it was over its head in debt and likely to run out of cash in a few months.

   It’s not clear if that will happen; Amazon executives insist they will be profitable by the end of 2001. All the discounting, promotion and heavy spending on infrastructure may yet produce a retailing Goliath.

   But it’s becoming clearer all the time that the Internet’s magic alone can’t turn red ink black. Even online, the old joke about the guy who loses a little on each item, but makes it up on volume, still stings.

   It may even be true, as some cyber-seers suggest, that tough competition and teeny profits are what’s really new about the new economy.

   Since online shopping is so easy, merchants could be left with razor-thin margins. That would take the sizzle out of stocks, ending the investment boom and eventually leading to the next installment in our series.

   How’s this for a working title . . . Harry Potter and the Recession of Greenspan.