FOREIGN AFFAIRS / By THOMAS L. FRIEDMAN

        Reality Bytes

        Is this a story we will read sometime in the next year?

            NEW YORK (NYT) -- The Dow Jones industrial
            average dropped 1,266 points today after
        Amazon.com announced that it had inadvertently made
        a profit.

        After years of having persuaded investors that its
        business model called for it to consistently lose money
        until it had built up its market share, Amazon stunned
        Wall Street by announcing earnings of 1 cent per share
        this quarter on sales of $1.1 trillion, or 10 percent of
        U.S. G.D.P.

        The reason these earnings rattled Wall Street was that
        investors began to realize that no matter how big
        Amazon's market share became its profit margins were
        going to remain razor thin because it is now competing
        with everyone -- not just booksellers. And therefore its
        market capitalization -- the company is valued at more
        than Fort Knox -- was simply not sustainable.

        "Pie in the sky is always great as long as the pie
        remains in the sky," said one Wall Street broker, "but
        when the pie actually comes down to earth and you get
        to see what a real slice looks like -- well, you have a
        problem. Amazon's whole strategy was to keep the pie
        in the sky. But now they've blown it by accidentally
        making a profit."

        The Seattle-based Internet retailer issued a statement
        following its quarterly earnings report, saying: "The
        Amazon board wants to apologize to shareholders for
        completely missing its quarterly loss target and
        inadvertently making a profit. The board has been
        assured by management that this problem will be
        rectified in the coming quarter. Amazon intends to
        increase both its advertising budget and the number of
        books it will sell at a loss to insure that it returns to
        unprofitability by the next quarter. Our shareholders
        can rest assured that our primary goal remains market
        share and our business motto remains: 'Amazon.com:
        We took the 'E' out of P/E.' "

        Said one Wall Street Internet analyst: "Look, I believe
        the Internet changes everything. I've taken the
        Kool-Aid. But I think the question of whether Jeff
        Bezos [Amazon's founder] will ever make the massive
        profits that his stock price implies is really uncertain."

        It will depend on at least three things, the analyst said.
        The first is, Are Amazon's competitors dead or are they
        just behind? Has Mr. Bezos killed Wal-Mart, Barnes &
        Noble, Best Buy, Borders, Toys "R" Us and Circuit
        City -- all of which he is now competing against? Or,
        has he just showed them the power of the Internet as a
        retailing tool and all these brick-and-mortar companies
        will now become clicks and bricks?

        "If that is the case," the analyst said, "all Amazon will
        have done is to build market share for the day when its
        rivals catch up. If it hasn't made money up to now, with
        its huge head start on the Internet, how is it going to
        make big money when the others catch up? The cost of
        switching from Amazon to another retailer is zero on
        the Internet.

        It's just one click. Wal-Mart hasn't even come into
        cyberspace in any serious way yet -- and those guys are
        meaner than junk-yard dogs. You think they're going to
        let Amazon just put them out of business? No way."

        The second thing Amazon's future depends on, said this
        analyst, is what inning we are in.

        If we are still in the first inning as far as Internet
        retailing is concerned, maybe Amazon, or another
        Amazon soon to be born, will come up with yet another
        innovation for using the Internet to sell things at a
        profit. But if we are already in, say, the fifth inning, if
        the basic Internet revolution in retailing is now in place
        and the rest is just execution, then the Wal-Marts will
        eventually learn to execute. Amazon might still be a
        winner -- it is a phenomenal marketer -- but not a
        winner-take-all.

        The third unknown, the analyst said, is whether Amazon
        can use its high stock price to buy one or more already
        profitable brick-and-mortar retailer in order to go head
        to head with Wal-Mart. At first people thought all
        business was moving to the Net; now they see that the
        Net is moving into business. The next big merger wave
        will be between virtual companies and real ones.

        "I swear, I thought Bezos' actual plan was to skip
        making a profit and go directly from being an I.P.O. to
        being an N.G.O. for distributing books cheaply," said
        another analyst. "I don't know what Amazon's future is
        as a company -- but as a charity, wow! What a
        write-off machine! It could have been called
        'Unicef.com.' Really, who's given away more kids'
        books at cost than Amazon? Bezos had a chance to be
        Andrew Carnegie -- without ever making a dime. Now
        he's blown it by making a profit and forcing everyone to
        look at Amazon like, well, a real company. I mean, who
        needs that?"