dpk, first, let me say that I am far from expert in the field of e-commerce. My posts were simply an attempt to give some concrete form to thoughts I have had over past year or so. I am hoping for that epiphany that will allow me to say "I understand". So far it eludes me.
You said However, there are a couple of considerations that may justify the crazy economics. First, some of these companies claim that they do not mind losing a little bit of money on each retail transaction in the early stage of the game because they are trying to build net brands. And second, the advertising revenue they are/will be able to generate more than offsets the small loss on each etail transaction. Clearly, the veracity of such claims is difficult to confirm, as only time will tell whether net brands are defensible and what the value of brand equity is in the net world. And as you mentioned even Amazon.com is not yet profitable despite being in business for a relatively long time in net-years.
I think we need to distinguish cases. Portals are clearly different from e-tailers. e-tailers may be able to generate a certain amount of cash through advertising, but they must carefully balance rewards with risk. For example, when it was discovered that Amazon was highlighting certain books because it was receiving payment from the publishers it quickly abandoned the practice for fear of losing credibility. I think there is also the possibility of saturating your site with so much extraneous advertising that focus is lost.
Analyst Alan Braverman seems to think that branding is important in cyberspace. I think he is only partially correct, because I don't think this effort at branding is lasting in the same sense that we think of famous brand identities such as Kleenex, Scotch Tape or Frigidaire. Do consumers really care at which store they cybershop? Furthermore, as traffic on the internet grows, so will the cost of advertising. So while Braverman talks about scalability he seems to ignore the fact that scalability implies variable costs rather than fixed costs. In other words, there are few economies of scale to be had. One key financial driver for the e-tailer is the substitution of variable costs (for example servers and web content) for fixed costs (for example leasehold improvements and rent).
Braverman makes an argument I find particularly odd. He claims that Amazon's new 300,000 square foot distribution center will lower the cost of product by getting popular items direct from the source, and not through distributors. If Braverman is correct it would seem to me that Amazon is abandoning one of the leitmotifs of cyberspace: abhorrance of inventory. And if that is true, then their cash flow will be constrained by the necessity of having to carry significantly more inventory.
TTFN,
CTC
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