Mumbai: If Amazon isn’t profitable, why have venture capital companies invested around $750 million over the past few years in e-commerce start-ups here ($500 million came in 2011 alone) that sell everything from pet food to diapers?

The most obvious answer to that may well be: a belief in the greater fool theory.

Still, Amazon’s numbers merit a close look for a variety of reasons.

The $61 billion Amazon.com Inc., which has been in business since 1995 has forecast a disappointing March quarter, but it has found favour with investors for its range of goods and services, consistency and breadth of volume, which has helped its branding and improved its margins.

On 29 January, Amazon.com reported a 45% drop in profit to $97 million in the quarter ended 31 December from $177 million a year ago. In 2012, the company reported a loss of $39 million compared to a profit of $631 million in the previous year. Amazon.com, however, knows how to play the volumes game. Net sales in the December quarter increased 22% to $21.27 billion from $17.43 billion a year ago and operating income rose 56% to $405 million. For the year ended 31 March 2012, the company’s net sales increased 27% to $61.09 billion, compared with $48.08 billion in 2011, while operating income fell 22% to $676 million, compared with $862 million in 2011.

The message for Indian e-commerce companies, and their seemingly charity-minded investors is simply this: it will take time for them to turn profitable, if at all they do.

In Amazon’s case, it is also likely that the company’s digital focus is helping.

It is seeing success with e-books that now make up a multi-billion-dollar category for the company, founder and chief executive officer Jeff Bezos said in a 29 January statement.

E-book sales were up approximately 70% over last year; physical book sales experienced the lowest December quarter growth rate in the company’s 17 years—book sales were up just 5%. Amazon.com tasted success with its latest tablet—the Kindle Fire HD—as also with the Kindle Fire, Kindle Paperwhite and Kindle that held the top four spots on the Amazon worldwide best-seller charts since their launch, the company claimed. It also has AutoRip—a new service that gives customers free MP3 versions of CDs they purchase from Amazon.

Amazon’s digital media selection grew to over 23 million movies, TV shows, songs, magazines, books, audiobooks and popular apps and games in 2012—an increase from 19 million at year-end 2011. It announced new licensing agreements with companies such as Turner Broadcasting System Inc., and Warner Bros. Domestic Television Distribution for popular television series. The company also launched Kindle stores for Brazil, Canada, China, and Japan.

Amazon also has a hedge against the risks prevalent in the retail business—its Web services business that largely serves companies.

Amazon Web Services (AWS), for instance, provides cloud computing (metaphor for Internet-based services) services for enterprises. Information from Nasdaq is hosted onto Amazon S3 (Amazon simple storage service). By moving the data into the cloud, Nasdaq built a whole business to resell the data for others to build applications on.

And with Amazon Capital Services Inc., the e-commerce company also entered the commercial lending space.

Inspired by the poster boy of e-commerce, Indian e-commerce companies have been attempting to play the volumes game, ostensibly to get higher valuations. E-commerce transactions crossed 45,000 crore in 2011, according to estimates by the Internet and the Mobile Association of India (IAMAI) and the value of transactions is expected to touch $70 billion by 2024-25 and could even rise to $260 billion if all factors remain conducive to growth.

Based on such rosy projections, private equity and venture capital funds invested over $750 million in the e-commerce sector in the last five-six years. But it’s not easy to make profits on the Web in India because of fewer Internet users in the country, confusing taxation laws, poor penetration of credit and debit cards, disappointing payment gateways and lax consumer protection laws—and definitely not at the kind of price points at which most such companies sell products.

Online shops selling everything from discounted electronics to vegetables and have been posting monthly revenue growth of 40-50% in a country with 125 million Internet users. Investors pumped at least $500 million into 68 e-commerce sites in 2011. But e-commerce companies have been burning cash due to procurement, warehousing, logistics and delivery costs associated with every transaction. At least four e-commerce start-ups have shut shop till date, including Taggle.com, Nammagroceries.com, Harisabzi.com and Subzimandi.in.

In the first six months of 2012, the sector saw 27 deals valued at $103.6 million while the same period last year saw 18 deals valued at $177.83 million according to VCCEdge, which tracks PE and VC activity. Besides, India has not seen any real, successful exit of investors from the e-commerce sector so far with the exception of travel website MakeMyTrip.com, which listed on the Nasdaq three years back.

Building a brand like Amazon.com is not simple . Experts cited in media reports have reiterated that for some brands, the cost of customer acquisition can touch 4,000-5,000 while anything above 350 per customer is not sustainable. Add to this the high cost of inventory since most online retail stores store goods in warehouses that increases their real estate costs in a weak economy when unsold goods pile up.

As Internet numbers increase with an increase in the use of third-generation (3G) technology and introduction of the fourth-generation (4G) technology—hopefully by the end of 2013 or early 2014, coupled with the Indian government’s plan to connect every panchayat (village council) with high-speed broadband by 2014, the fortunes of e-commerce companies in India may improve even as consolidation rises, although, as Amazon’s numbers show, profits will lag.

There has also been some consolidation to stave off competition. In February 2012, Flipkart—which is yet to post a profit—bought Letsbuy.com for $20 million. Two months later, Snapdeal acquired eSportsBuy.com, an online retailer of sports and fitness equipment. It’s a no brainer that scale does have the potential to keep one ahead of the pack but no Indian e-commerce company has the potential to become an Amazon.com. Amazon’s investors may be willing to wait and watch but here in India, investors have shown themselves to be a not-so-forgiving breed.

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