The general thesis is 'they're the low cost provider, they're going to make a ton a profit'. This thesis is one that often leads Wall Street and investors to tears. Because there's another factor that needs to be taken into account: is there going to be a glut of capacity.
Here's the classic example. One of the managers of Buffett's textile mills came to Buffett and told him they could invest in a new power loom that would double production for the same cost to run. Buffett's response: that's terrible, none of that will stick to our ribs. Buffett could see that everyone in the industry would increase capacity, there'd be a glut of product, and the industry wouldn't capture the profits.
Another classic example: fiber optic. Read a research report from the late 90's on the fiber industry if you can get your hands on one. Lot's of comments on what a great investment Global Crossing would be because 'low cost provider wins'. Of course 'low cost provider' went bankrupt because there was a glut of capacity.
So bringing it back to Amazon, is there a glut of capacity? I'd say probably. What's Amazon's fundamental purpose? Matching buyers and sellers (which they do much much better than a mall). A computer basically has infinite capacity to match buyers and sellers. The warehouses are nice but when I look at the forest I question whether the profits are ever going to materialize. I see a glut of capacity and no reason why that would lessen. It's getting easier to start an internet company, not harder. The competition isn't going to cede the field either. They'll continue to put a ceiling on prices until the bitter end.
I wouldn't be surprised if Amazon spent more on new fulfillment centers this year than they did on their entire web facing development team for the past three years. Amazon is an internet company in the same way that WalMart is a parking lot company.
if you think its all about fulfillment centers, Walmart has a pretty incredible logistics operation. The big brick and mortar companies have warehouse operations as well. Plus, with Sears and Walmart already using their stores as fulfillment centers its not hard to see that some of that brick and mortar space will get converted to 'fulfillment' centers (I just call them warehouses).
So then ask yourself, is warehouse capacity going to be constrained? Or will there be lots of warehouse space and lots of people who can create a web frontend to pair with that warehouse space?
Look, I love Amazon, I'm just telling you the 'low cost provider' wins thesis is one that people repeatedly get wrong because the low cost is often due to a technological advance that results in overcapacity in the industry.
If you think of a warehouse as just a place to put stuff, then yeah, there has been a glut of capacity for over a hundred years now. Walmart has an incredible transportation logistics system. I have no problem admitting they do it better than Amazon. But WalMart still cant compete on fulfillment. Throw in the worlds largest inventory selection (I'm guessing at least an order of magnitude larger than WalMart as a whole, and about 2-3 orders of magnitude larger than an individual WalMart store), and the ability to guarantee same day fulfillment, and Walmart doesn't even come close.
Remember, even then, you are comparing Walmart to Amazon...not JoeSchmoe.com to Amazon. If you think it just amounts to putting things in a box and calling UPS for a pickup, I double dog dare you to compete with Amazon. It doesn't get any closer to a pennies-on-the-dollar comparison.
The general thesis is 'they're the low cost provider, they're going to make a ton a profit'. This thesis is one that often leads Wall Street and investors to tears. Because there's another factor that needs to be taken into account: is there going to be a glut of capacity.
Here's the classic example. One of the managers of Buffett's textile mills came to Buffett and told him they could invest in a new power loom that would double production for the same cost to run. Buffett's response: that's terrible, none of that will stick to our ribs. Buffett could see that everyone in the industry would increase capacity, there'd be a glut of product, and the industry wouldn't capture the profits.
Another classic example: fiber optic. Read a research report from the late 90's on the fiber industry if you can get your hands on one. Lot's of comments on what a great investment Global Crossing would be because 'low cost provider wins'. Of course 'low cost provider' went bankrupt because there was a glut of capacity.
So bringing it back to Amazon, is there a glut of capacity? I'd say probably. What's Amazon's fundamental purpose? Matching buyers and sellers (which they do much much better than a mall). A computer basically has infinite capacity to match buyers and sellers. The warehouses are nice but when I look at the forest I question whether the profits are ever going to materialize. I see a glut of capacity and no reason why that would lessen. It's getting easier to start an internet company, not harder. The competition isn't going to cede the field either. They'll continue to put a ceiling on prices until the bitter end.