Selling things online appears to be a great idea for a business. In fact, it's a fun model: we are all so excited about the many opportunities for new businesses to thrive online. In the case of some major Internet companies, we have bid up the stocks to very high levels. But history tells us that we have done so at our own peril.

Yesterday I wrote that Amazon.com Inc. (NASDAQ:AMZN) is overspending on growth and is thus overpriced, and concluded that the market has lost its collective sense once more. I raised numerous questions and received some thoughtful support in the comments. Since then, I have asked myself one more inescapable question which I pose today: What choice do they have?

From the inception of Amazon.com, Jeff Bezos has argued that, in this particular business, "first mover status" is critical to its success. The market supported this thesis and we were off to the races. Amazon has been on a spending spree, growing its sales quarter after quarter. But Amazon is trapped. It must continue to grow at all costs. It has reported top line sales growth again in the latest quarter -- but very disappointing profits.

The truth is Amazon is just like a great big supermarket. That is what it wanted to be, the online supermarket to the world. I think Bezos has achieved his goal but there is a HUGE problem here: supermarkets have very low profit margins!

Continue reading The Amazon spending trap

The Amazon spending trap originally appeared on BloggingStocks on Wed, 01 Nov 2006 11:14:00 EST. Please see our terms for use of feeds.