Amazon on the way to profitability

Amazon.com looks as though it is fulfilling the Internet dream - drawing closer to a profit while continually expanding its customer base. Its second quarter results announced yesterday show that the online retailer has cut losses to $58 million, from $116 million this time last year. This time next year we may see it enter profit for the first time.

Amazon's finances work in a peculiar but extremely simple way. From its creation in the middle of 1995, it has tended to produce the same set of results for the first three financial quarters and then jumped up (or down) at the start of the new year. It strongly suggests that some creative accounting is going on. Also, about six months ago when everyone was getting shaky about Internet models, there were various leaked suggestions that the company could turn in a profit whenever it fancied.

So, while losses have been cut it half year-on-year, Q2 losses are larger than Q1, which were $49 million. Note: almost exactly half for Q1 year-on-year which was $99 million. Revenues were up 16 per cent year-on-year to $668 million. But slightly below Q1's $700 million, where sales had risen 22 per cent year-on-year. And so on and so forth.

CEO Jeff Bezos said he was hoping to increase his revenue this quarter but "disappointing sales" in Europe had put the kybosh on it. Its CFO Warren Jenson said it could be looking at a profit by Q4, but in Amazon's official release, a huge and extensive caveat is given under the forecasts. We reckon Q1 2002 will suddenly see a profit.

Amazon is still expanding at a fair old rate, and now claims to have 29 million customers in 160 countries. Its personalisation software that it has been gradually improving also shows that the original Internet dream still holds - albeit in only about three companies.

What's the evidence that Amazon is looking healthy? Up pops AOL-Time Warner which pumps a load of money into it and buys itself another chunk of Internet real estate. At the same time as the results, Amazon announced a $100 million deal with the monster conglomerate.

AOL-Time Warner will buy $100 million worth of Amazon shares at market price and for this it gets a four-year deal. You can do that if you're AOL-Time Warner. And so AOL's entry into selling goods will be helped on Shop@AOL by access to Amazon's search and personalisation software. Amazon will say how wonderful AOL is at every opportunity.

Hence Amazon gets hundreds of orders and AOL controls yet more of the Internet. Wouldn't you just love to be Steve Case at the moment? ®