Balancing the books

Internet - Andrew Brown on a website's attempt to stifle competition

The fascinating question about Amazon.com is: how will it avoid going broke? At some stage, it is not enough merely to grow: Amazon must make money, too, and this in a business where it cannot hope to get a monopoly or anything like one. Several sites other than Amazon automatically search all the online booksellers and find which is offering the lowest price. The real secret of the business is the fact that it inverts the traditional cash flow of retailing, where you buy things from your supplier on credit and then hold them until someone comes along to pay cash for them.

Amazon gets the cash first and only then buys from publishers, on credit, the books that it's selling, so that it has about 30 days in which to put the money to productive use. This is a brilliant idea, which ought to be a guarantee against going broke. On the other hand, it is possible that, if Amazon expands into other areas, then the cost of marketing and trading at a loss will bring it to its knees. Like all these things, it depends, or appears to depend, on confidence among investors. A high share price means that, if all else fails, you can buy the competition, and at the same time acquire traditional and more profitable businesses.

Amazon.co.uk claims a turnover of £100m this year, a truly phenomenal rate of growth over the previous year. But business on the web is incredibly competitive. Anything that works is copied all over the place. As soon as it became successful, Amazon was the target of a ferocious assault from Barnes and Noble, the largest terrestrial bookseller in America, which copied its website fairly closely. The only defence against such a thing would be to have a legal, patentable monopoly on the way you do business. And this is where the story gets really nasty. In recent months, Amazon has taken out patents on two features that it pioneered, but which nonetheless have been copied all over the web since then and are among the foundations of e-commerce. The first is "one-click shopping", which allows you to buy many things instantly after entering your credit card and shipping details once. This is one of the most important advantages that internet shopping has over the real thing, and all other forms of mail order. The second, even more worrying, is the "affiliates programme", where the company gives a cut on books that it sells to people who have followed a link from someone else's website.

The patent for both these technologies has raised hackles across the internet industry. It is not just that the net in general relies on free and unpatentable software, which anyone can in principle modify and improve, but Amazon's own business would have been impossible to implement without free software. The whole case has brought into high relief two contrasting attitudes that have underpinned the growth of the web: the idea that huge riches should be within the grasp of anyone with a really good idea; and the idea that good ideas are for sharing with the world. Everything in the history of the software business suggests that huge and lasting riches only really accrue to people who have a good idea and keep others from copying it.

The best guide to the row is found on the website of Tim O'Reilly (www.ora.com), a publisher who is exquisitely balanced on the cusp of these affairs. He makes his money selling books on free software, often through Amazon. He protested publicly to Jeff Bezos, Amazon's founder, about the patents, and got a reasoned reply, claiming that they were really defensive moves. Amazon had no intention of going after other people who use these tricks, but it did want to ensure that the patents were not used against its own interests. Well yes, but suppose the exploitation of such patents were the only way for the company to make a profit?