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Author: BobMcNab Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 58816  
Subject: Re: Amazon - Another Compuserve? Date: 2/24/1999 9:25 PM
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With respect to AMZN, as with any business, there are inherent start-up costs that will decline over time relative to the variable costs of running a business.

Currently, AMZN is building its distribution network. This network consists of physical capital which will slowly depreciate over time, technological capita, which quickly depreciates, and human capital (software engingers, marketers, etc). We might consider the expenditure on physcial capital a long-term, fixed costs. Technological capital tends to be more of a variable cost in that it quickly depreciates, and thus must be replaced on a systematic basis. The cost of human capital is the wages and salaries, benefits, stock options, taxes, and other paymnets, and is a variable cost.

As noted by Taylor, there are economies of scale that remain to be reaped in this industry. By lowering their average fixed and variable costs, AMZN can increase their profit margins in the long run. These profits margins, even if considered in excess of 'normal' profits for the industry, can be sustained if substansial barriers to entry are created by AMZN's first to market, first to brand presence in the e-commerce field.

Regards,

Bob

Average fixed costs decline as sales increase, thus as AMZN increases sales, the percentage of revenues that will need to go to fixed costs will decline. Technological costs are variable in that the cost of technological does vary over time, but given that technology costs have declined over time, these costs might also represent a smaller percentage of AMZN's expenditures over time. Thus, we can expect to see that while the level of AMZN's costs in these areas might remain stable over time, they will actually decline relative to sales, assuming, of course, increasing sales.

The question thus lies in whether AMZN's labor costs will increase at the same, above, or below the rate of increase in sales. If AMZN can hold the increase labor costs below the rate of increase in sales, then the costs relative to revenues will decline, and losses will decrease (or profitability increase).
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