March 26, 1997 6:15 PM ET
Jungle fever: Behind
By Margaret Kane

  Up until now,'s chief executive, Jeffrey Bezos, has followed the Internet scenario to a T: come up with a fresh idea, turn it into a success and file for a public offering.

The hoped-for storybook ending is, of course, to make a killing in the stock market and become yet another under-40- year-old millionaire thanks to the 'Net.

But when's shares go on sale later this spring, the offering will be greeted by a skeptical Wall Street community that's in no mood to take chances in this season of Internet discontent.

The market has pulled back from its technology love fest of a year ago, when all it took was inclusion of the word "Internet" in a prospectus for millions of investors to snap up the new issue., which announced its initial public offering plans on Monday, is a bookseller that sells its wares over the Internet. But there are questions about the company's staying power once larger book merchandisers, such as Barnes & Noble and Borders Bookshops, move their operations into cyberspace.

What is more, an analysis of's prospectus indicates that the Seattle company may not be able to make it into the black for some time--with or without the arrival of new rivals moving into its backyard.

"The Company believes that it will incur substantial operating losses for the foreseeable future, and that the rate at which such losses will be incurred will increase significantly from current levels," the document says. "Although the Company has experienced significant revenue growth in recent periods, such growth rates are not sustainable and will decrease in the future."

Prospectuses are often worded so as to keep expectations low, but that statement underscores the concerns that analysts express about the company's long-term prospects.

"I don't have the foggiest notion of how they ever plan on making money," said Mark MacGillibray, principal at H&M; Consulting, in Sunnyvale, Calif. "I don't think they'll turn around, and neither do they." is asking prospective buyers to pay $13 a share, which would net the company $37.3 million. Since its founding in 1994, the company has racked up a $6 million deficit.

From the day it opened for business, has had trouble turning a profit because its costs have risen right along with its sales--a combination that MacGillibray says can prove deadly.

"If they have to increase sales [to make a profit], they also have to increase costs as well," he said.

But if it is not the next Netscape Communications Corp., is still a successful company that has enjoyed quite rapid growth. Last year, sales soared to $15.7 million from $511,000 the prior year. And the number of visits to the site jumped form 2,200 in December 1995 to approximately 50,000 in December 1996.

However, the company's cost of goods also increased during the same period, climbing to $12 million from $409,000, while operating expenses increased to $9.4 million from $406,000.

Some of the money went to beef up's computer systems in order to better handle sharp increases in Internet traffic.

"Let's look at AOL. Remember what happened to those guys? They offered all you can eat, and their server lines were so swamped they couldn't deal with it," said Larry Dietz, vice president of Zona Research, in Redwood City, Calif. "You have to step back and say, `Do they have to be successful at a volume they can't handle?' "

And, of course, a big concern going ahead for is the competition.

The day before Barnes & Noble launched its site on America Online last week, slashed 40 percent off list prices for many of its books. The move was interpreted as a pre-emptive strike aimed at Barnes & Noble. But analysts question whether the company can afford to get bogged down in a tit-for-tat price war with a larger rival that can "out-discount" it every day of the week.'s business model works on very thin profit margins. And like a distributor, it needs to sell high volumes of product in order to stay in the black.

"Amazon probably doesn't buy in volume anywhere close to what Barnes & Noble does," said Melissa Bane, an analyst at The Yankee Group Inc., in Boston. "The value-add of the mainstream coming on now will be to undercut [Amazon] on prices."

"They have the IT structure, they have the relationship with the distributors, they 'own' a lot of the authors," Bane continued. "There will be a tight race there, and pricing could get ugly."

Still, analysts pointed out that does enjoy advantages over Web newcomers. The company has a strong brand name and offers some nifty technology tricks, such as a service that notifies users via E-mail when books by favorite authors are issued. The service also suggests books based upon reader preferences.

"That function allows me to establish a connection with my customer," Dietz said. "If I already have a connection with Amazon, am I going to spend the time to start over with Barnes & Noble just to save a buck a book? Absolutely not. The reason I'm with Amazon is I don't have spare time."

Meanwhile, has established relationships with other Web entities through its licensing program that then sell books over the Net through the company. Analysts said the decision to cross-market and co-market was a smart move since--at least in its early phases--the name wasn't as synonymous with books as the name Barnes & Noble.

Yet book buyers are fickle and often attracted to the outlet that offers the best prices. Analysts note that's "value-added" features are no guarantee that browsers won't buy elsewhere.

"I could get my editor's choice or recommendation from Amazon and then go up the street to Borders and have my cappuccino and buy the book there," Dietz said.

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