Amazon.com reported net sales of $356 million for the third quarter ended September 30, a 132% increase over sales of $154 million recorded in last year's third quarter. The net loss in the quarter was $197 million, a figure that includes $111 million in merger, acquisition and investment-related costs as well as stock-based compensation charges. Amazon's loss in last year's third quarter was $45.2 million.
Boosted by users of its new auctions service, Amazon added 2.4 million new customer accounts during the quarter, giving the e-retailer a total of 13.1 million users as of September 30. The company also said that repeat customers represented 72% of all orders.
To prepare for the upcoming holiday selling season, Amazon said that it has significantly upgraded both its customer service and distribution capabilities. As a result of the enhancements, Amazon said it expects that fourth-quarter net revenues will be significantly higher than in the third quarter, but that gross margins will fall. In addition, the company expects that fulfillment expenses as a percentage of sales will slightly increase and that marketing expenses, including advertising, will also increase. As a result of the higher expenses, Amazon will likely report higher than expected losses in the fourth quarter.
In a conference call, Amazon executives said that the company's book operation should be profitable in the fourth quarter and that during the period, sales of items other than books will likely account for nearly half of all revenues.
For the nine-month period, total revenues rose 170% to $963.8 million, while Amazon's net loss increased to $396.7 million from $78.1 million in the same period in 1998.
Implications of BN.com Suit
The patent infringement lawsuit filed by Amazon.com late last month charging Barnesandnoble.com with illegally copying its 1-Click technology (Highlights, Oct. 25) makes significant allegations against the New York bookseller and could have far-reaching implications for e-commerce.
"Through its wholesale copying of the 1-Click Feature and infringement of the... patent, defendants are irreparably harming Amazon.com, particularly during the holiday shopping season," said the plaintiff in its filing. It added, "The 1-click process is a significant element in attracting customers to the Amazon.com Web site. Defendants' infringement of the... patent diverts to defendants' site customers who would otherwise choose to purchase products from Amazon.com." Amazon.com obtained a patent in late September for the technology that facilitates ordering, about two years after bn.com adopted it.
Technology similar to 1-Click, which allows repeat customers to purchase merchandise without reentering biographical and payment information, pervades the Net, as companies realize the monetary value of customer convenience. In court papers, Amazon.com cited published news reports, including one from the New York Post, to establish the merit of 1-Click. The e-retailer uses 1-Click on many areas of its site.
As a result of the technology's ubiquity, a victory by Amazon.com could result in a cash boon for the Seattle e-retailer-and give pause to other e-commerce sites employing technology resembling 1-Click. "I think Amazon.com will go after only one case, and then everyone else will get in line and pay a small royalty" to Amazon.com, said David Kline, coauthor, with Kevin Rivette, of Harvard Business School Press's upcoming Rembrandts in the Attic: Discovering the Hidden Value of Patents. Amazon.com requested an injunction, said Kline, in the hope of gaining leverage when negotiating that royalty fee. Amazon.com spokesperson Bill Curry declined to comment on further negotiations or suits.
Still, the Internet merchandiser faces challenges. Said Kline: "What Amazon has to prove was that not only that they [bn.com] did it, but that they did it in substantially the same way." Barnesandnoble.com has 60 days to respond to Amazon.com's filing by either challenging the patent or refuting Amazon.com's charge that it infringed on the patent, at which point a court date may be set. After initially calling the suit "completely without merit," bn.com issued a second statement that described the suit as "a desperate attempt" by Amazon to retaliate for bn.com's "growing market share."
In Silicon Valley, the suit seemed certain to augur a spate of patent bids and lawsuits from other e-commerce ventures, even as the technology press thumbed its nose at Amazon.com. Book industry observers also questioned Amazon.com's motives in light of the legal wrangling that has characterized the relationship between these companies. In 1997, Barnes & Noble sued Amazon over the latter's claim regarding the size of its store. Amazon.com countersued, alleging that Barnes & Noble should have to pay taxes in every state it has a superstore. The two agreed to drop matters before they could be adjudicated in court.
