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I've been around and around on this point with JohnKe. (You can probably find it somewhere in Palafo's book, "Amazon: The Message Boards," coming soon from a web site near you!)

Anyway, my optimistic argument is that Amazon won't have to cut costs to be profitable in the future. Many of their costs are fixed. For example, web sites and distribution centers are fixed costs. When Amazon quits building those things, those costs will disappear.

Also, there are efficiencies of scale in running a larger operation. I think a lot of people are assuming that Amazon is like AOL--it's just a matter of making the business large enough for the profits to appear.

If Amazon does have to cut costs, then it will do so by cutting its advertising expenditures at the Yahoo! and AOL web sites. Indeed, it's possible (probable?) that those companies will take a more adversarial position with Amazon in the future. Amazon would, at that juncture, rely upon bookmarks, its associates program, and word of mouth. (This is not as dubious as it may seem. You don't use a search engine, for example, to find Yahoo or AOL).

Covey has suggested Amazon will cut advertising expenditures eventually (if I remember right). Bezos, on the other hand, hasn't stated they will do that. So we will see, I guess. They'll be profitable one day, don't you agree?


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