Thursday, April 14, 2011

Why I Don't Believe Thomas Friedman

On February 26, 1999, New York Times columnist Thomas Friedman published an article hyping Lyle Bowlin of Cedar Falls, Iowa as an alternative bookseller. Friedman declared:
Well, if you really want to be ''concerned'' about the levels of some of these profitless Internet stocks, such as, you should pay less attention to Mr. Greenspan and more attention to what's going on in a small house in Cedar Falls, Iowa.

There, a single Iowa family, headed by Lyle Bowlin, is re-creating in a spare bedroom. I tell you this not because they're an immediate threat to, but to underscore just how easy it is to compete against, and why therefore I'm dubious that Amazon and many other Internet retailers will ever generate the huge profits that their stock prices suggest.
Luckily, in 1999. I was a satisfied Amazon author, and a satisfied Amazon customer. So I bought some stock. This was contrary to Friedman's advice:
Because his profit margins are razor-thin, Mr. Bowlin, like Amazon, needs repeat buyers. Amazon gets them by offering useful information about books. Mr. Bowlin does it by offering any government-certified nonprofit organization a donation of 10 percent of the purchase price of any book that any nonprofit or its members buy through him.

So the next time your broker tells you that this or that Internet retailing stock is actually worth some crazy multiples, just think for a moment about how many Lyle Bowlins there already are out there, and how many more there will be, to eat away at the profit margins of whatever Internet retailer you can imagine. It only costs them $150 a month and they can do it as a hobby!

Or think about it like this: For about the cost of one share of, you can be
I was among those who posted comments on the NY Times website taking issue with Friedman's analysis. He had so many complaints that the Times published a follow-up on March 9, 1999:
I recently wrote a column about Lyle Bowlin, who, for about $150 a month, had managed to put together a Web site that could compete with for selling books. Mr. Bowlin was underselling Ama (and making a profit!) while running the whole operation out of a spare bedroom in his home in Cedar Falls, Iowa. Well, the column elicited the usual range of skeptical responses from experts, who argued that Mr. Bowlin's operation was just a fluke, or that he wasn't calculating his costs properly, or that would soon crush him and all other would-be little-guy competitors.

Well, to all of you I say: YOU'RE WRONG.
Lyle Bowlin's internet bookshop, hyped by Friedman (reportedly a family relation of some kind) went out of business. But Amazon didn't. It's trading today at $179 per share. Amazon not only dominates the book business, it is a major player in the rapidly growing cloud computing field. Amazon is currently valued at approximately $80 billion.

One title you won't see on a Thomas Friedman book, I imagine: Money Talks, B.S. Walks.