firms not only will be worth nothing but are unlikely to
survive. For firms to be valuable, the higher revenues
eventuallyhaveto deliver positiveearnings.Ina valuation
model,thistranslatesintopositiveoperatingmarginsinthe
future.Akeyinputinvaluingahigh-growthfirmthenisthe
operating margin we would expect it to have as it matures.
Inestimatingthismargin,weshouldbeginbylookingatthe
businessthatthefirmisin.Whilemanynewfirmsclaimtobe
pioneersintheirbusinessesandsomebelievethattheyhave
nocompetitors,itismorelikelythattheyarethefirsttofinda
newwayofdeliveringaproductorservicethatwasdelivered
through other channels before.
Thus,Amazonmighthavebeenoneofthefirstfirmstosell
books online, but Barnes & Noble and Borders preceded
Amazonasbook retailers.In fact,one canconsideronline
retailersaslogicalsuccessorstocatalogretailerssuchasL.L.
BeanorLillianVernon.Similarly,Yahoo!mighthavebeen
oneofthefirst(andmostsuccessful)Internetportals,butitis
followingtheleadofnewspapersthathaveusedcontentand
featurestoattractreadersandusedtheirreadershiptoattract
advertising.
Using the average operating margin of competitorsin the
business may strike some as conservative. After all, they
would point out, Amazon can hold less inventory than
Borders and does not have the burden of carrying the
operatingleasesthatBarnes&Nobledoes(onitsstores)and
should, therefore, be more efficient about generating its
revenuesandsubsequentlyitsearnings.Thismaybetrue,but
itisunlikelythattheoperatingmarginsforInternetretailers
can be persistently higher than their brick-and-mortar