Will Amazon's goose be cooked by Christmas?

If the financial gurus at Lehman Brothers have got it right, the next few weeks should prove crucial for the world's biggest online retailer, Amazon.com.

Either Christmas shoppers will go on a huge internet spending spree, pushing Amazon's sales for the quarter above the $1bn mark for the first time, or its trading patterns will remain much as before, with the company likely to be plunged even further into the red as it struggles to contain operational costs.

Fears over Amazon's ability to survive were first sparked back in July when Lehmans predicted it would run out of cash by early next year. And last week, when the firm reported a pro forma operating loss of $68m (£46m), Lehmans was sticking to its guns.

As Ravi Suria, a Lehmans convertible bond analyst, warned investors soon after Amazon's third quarter results were announced: "Despite the undeniable improvement in current performance, we reiterate our stance - it is the fourth quarter that makes or breaks a retailer."

And he added that people should avoid buying Amazon stocks until the mist had cleared.

But if the unthinkable happens and Amazon does go down the Swannee, the fallout for other dotcoms could be huge - perhaps all the more so in the UK, where City investors have long been shy of such stocks and are already running scared following the spectacular collapse of companies such as Boo.com and ClickMango.com.

So just how perilous is the situation for Amazon? For one thing, the web giant's losses were actually down from the $79m reported in the third quarter of 1999, while sales were up 79 per cent to $638m.

Not only that but as its accounts reveal, it also has $1bn in cash held in reserve and marketable securities. Perhaps the single biggest thing in Amazon's favour, however, is that it has 25 million registered customers worldwide and they keep coming back to buy CDs, books and other online wares.

But the flip side to this is that the retailer continues to lose money by the shed load. And despite the pronouncements by Amazon's chief financial officer Warren Jensen that it is now "driving towards profitability", it remains to be seen how long investors will stay patient.

Amazon's shares, once as high as $113, have today fallen to almost a quarter of that value. The news that the US Securities & Exchange Commission is holding an "informal inquiry" into how the company accounts for, and discloses, its investments in other dotcoms, is not helping matters either.

Dodgy dotcommery?
Financial websites in the US are already abuzz with suggestions that Amazon is guilty of dodgy accounting, with many amateur investors arguing that it is no longer a matter of if the retailer will collapse, but when.

Back here in the UK, Amazon is not even among the top five most visited websites according to figures compiled earlier this year by Media Metrix. That honour goes instead to the likes of Yahoo, Microsoft's MSN and Dixons subsidiary Freeserve.

Meanwhile, although Amazon has been going for five years now, its gradual decline in many ways mirrors the misfortunes of Boo, which went bust in May leaving millions of pounds of debt and 300 people without jobs.

It too witnessed an exodus of investor confidence as costs continuously exceeded revenues. A similar fate befell ClickMango and even though Freeserve, the UK's top internet service provider, has Dixons' backing, its first annual results in June this year showed losses of around £20m - a factor that probably explained the decision by Deutsche Telekom subsidiary T-Online not to buy it, as had been widely mooted.

All of which might generally suggest that the writing is on the wall for dotcoms. But over at First Tuesday, the marriage broking forum for internet startups and venture capitalists, founder Julie Meyer is nothing if not upbeat.

She counters that Amazon's increasing revenues should be seen as evidence that the dotcom sector is anything but bust, and says her convictions have been re-enforced by her own experiences in the UK.

If anything, she claims, there is a new generation of internet entrepreneurs starting to emerge who are more financially au fait than their predecessors, have realistic turnover targets and who tend to set their sights on the new opportunities thrown up by the mobile sector and Bluetooth, a technology specification that describes how cellular phones, computers and personal digital assistants should communicate with each other.

At the same time, Meyer contends, venture capitalists are becoming more flexible about how they appraise the potential of dotcom startups. "The message is getting across that they can't just go by cash flows," she said. "There are many successful internet companies that wouldn't be around today if that had been the only metric used."

Meyer also argues that while business-to-business and business-to-consumer startups might no longer be fashionable, entrepreneurs that are able to present a cogent business case in these sectors are still receiving funding. Even Boo, she points out, is making a comeback, re-launching itself under the management of New York businessman Ben Narasin, the owner of Fashionmall.com, who bought the failed retailer's subscriber base.

And she says that, unlike the original founders of Boo, who had attempted to build a multi-billion dollar business in less than a year, its new chief executive Kate Buggeln, a former retail consultant, has clear contingency plans. Her "worse case" scenario for the re-launched venture is that it would become a small-scale operator with low overheads, but would otherwise make a respectable profit.

Down, but not out
In many ways, says Meyer, Boo's resurrection acts as a mirror for how other members of First Tuesday have been forced to take a reality check in recent months. The cold winds blowing across from the US might have left many UK internet entrepreneurs feeling down, but they are far from out.

Not only that, she reveals, but First Tuesday is also doing nicely itself from the two per cent cut it takes for matching around half a dozen startups with financiers every month. The list of hopefuls is whittled down from a field of 300 and each matchmaking event typically yields a £250,000 fee.

Murray Hancock, chief executive at Four Leaf, a similar club for fledging internet companies, also reports that while Amazon's performance, or lack of it, always has a big impact on investor psychology in the UK, the fact that it has stayed around so long is testimony to the long-term viability of the dotcom sector.

More significant still, he says, is the declaration by Amazon's chief executive Jeff Bezos that the company will no longer buy heavily into other ecommerce players, even if it has the opportunity to buy them for a song as they run out of cash. He believes this signals a sea change in thinking by indicating that in future, dotcoms will only consider other dotcoms with positive balance sheets as suitable marriage partners.

Meanwhile, he predicts that startup firms that cannot persuade financiers to help them out will be forced to seek the support of established bricks and mortar organisations.

"For most entrepreneurs, it's just a case of keeping your head down at present," he said. "The hype about the industry may have blown over, which is not a bad thing, but there will definitely be an upswing again. And this time the companies will be stronger than ever."

In other words, Christmas is coming - be it better or worse for Amazon.

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