Why No One Can Compete with Amazon

Yahoo Contributor Network

COMMENTARY | Amazon.com is sort of like the Wal-Mart of the Internet. It doesn't just sell books anymore; nowadays, it sells everything from riding lawn mowers to bulk toilet paper. And its Kindle Fire tablet has become strong competition for Apple's iPad, selling (possibly) millions of units compared to hundreds of thousands for most of its Android competitors.

Like eBay and Craigslist, it doesn't have any real online competitors in the United States, at least not on the same level of scale and revenue. Most retailers that compete with Amazon.com run brick-and-mortar stores, like the actual Wal-Mart and Target.

Barnes and Noble may be Amazon's most direct competitor, since the two companies' flagship offerings -- online bookstores and color e-reader tablets -- are so similar. But the brick-and-mortar bookseller saw its stock plunge earlier this month, according to Reuters' Phil Wahba, and its market value of $676 million is "less than 1 percent of Amazon's." There's even talk of spinning off its Nook e-reader business into a separate company.

Here's why it's so hard for anyone else to compete with Amazon:

Externalized costs

That's the economist's term for costs of doing business, which Amazon shifts onto others who don't have a say in the matter. The classic example would be a factory which pollutes the river, forcing others to pay more in cleanup and health care costs.

In Amazon's case, there are widespread reports of harsh working conditions in its warehouses, like Spencer Soper's in the LA Times. Temperatures are said to exceed 100 degrees in its warehouses at times, forcing some workers to be treated by paramedics, while others were hospitalized after exposure to the cold during fire alarm evacuations.

Tax law advantages

Most people don't have to pay sales tax on Amazon.com. Only in five states does it collect taxes, as of last September, and those are the ones where it operates physical buildings. When states threaten to force Amazon to collect sales tax, it has a habit of striking deals with state governments or threatening to pull out altogether, according to The Street's Jeanine Poggi.

Razor-thin profit margins

Amazon's revenue climbed almost five billion dollars from 2010, according to its Q4 2011 report, but its profits fell by more than half. It only made about a couple of hundred million dollars in profit last quarter, out of a total revenue of over $17 billion.

A large part of the reason for that is probably its Kindle Fire tablet, the bestselling item on Amazon.com for several months in a row. According to iSuppli, it costs more to make than Amazon's selling it for. With over $25 billion in total assets, though, Amazon can afford to lose a lot of money on Kindle Fire tablets.

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