July 10, 2005 A Retail Revolution Turns 10 By GARY RIVLIN http://www.nytimes.com/2005/07/10/business/yourmoney/10amazon.html?pagewante d=print
THE image in Mark R. Anderson's head was that of an airplane struggling to gain altitude. Mr. Anderson, one of the technology world's more highly regarded pundits, watched a speck of a company called Amazon.com grow from a three-person start-up in a converted garage into a publicly traded corporation that came to symbolize both the best and the worst of the dot-com era. Mr. Anderson publishes The Strategic News Service, an influential newsletter read by the likes of Bill Gates and Michael Dell, and prides himself on being able to predict the future. But he acknowledged that he had been dubious of Amazon and its charismatic chief executive, Jeffrey P. Bezos, and for a time had believed Amazon was more likely to crash than to attain cruising altitude. Ten years ago this week, Amazon.com made its Internet premiere when Mr. Bezos opened a Web site he audaciously called "Earth's Biggest Bookstore." Amazon sold only a half-million dollars' worth of books in the first six months, but was soon posting the kind of gaudy growth rates that impress Wall Street: sales hit $15.7 million in 1996 and $147.8 million in 1997. Yet the more familiar story of Amazon in the second half of the 1990's was the rate at which it burned through cash. In 1999, for example, its revenue hit $1.6 billion, but it still lost $719 million. To stay aloft, Amazon, based in Seattle, borrowed more than $2 billion from banks, but according to regulatory filings, at one point in 2000 it had barely $350 million of cash on hand. "After raising billions of dollars," Mr. Anderson said, "that's pretty close to hitting the ground." Then Mr. Bezos, like the movie hero who saves the day with only moments to spare, turned things around. He shut some distribution centers and laid off one-seventh of his work force. In 2003 - its ninth year of operations, and seven years after going public - Amazon finally turned a profit. "You have to give Jeff credit," Mr. Anderson said. "His goal was to turn Amazon into the Wal-Mart of the online world and, eureka, he's done it." But, he added, it's time for Mr. Bezos to do as the founders of so many other technology companies have done before him: find a professionally trained chief executive with a deep background in operations to take the reins. Like others who monitor Amazon, Mr. Anderson rattles off a number of criticisms of Mr. Bezos - for example, that he is reluctant to share power and that his company has had a high rate of executive turnover. But the doubts of Mr. Anderson and others about Mr. Bezos boil down to a chronic Amazon sticking point: profitability. In its most recent quarterly report, in April, Amazon said profit fell 29.7 percent from the corresponding period a year earlier, and Mr. Bezos warned Wall Street to expect profit margins to shrink further this quarter. A few years ago, Amazon and eBay dominated online commerce. But where eBay's performance and stock price have surpassed its bubble-era highs, Amazon is still about 70 percent off the stock market high-water mark of $113 a share it set in December 1999. Its stock closed at $34.74 a share on Friday; it has fallen almost 22 percent this year, after having dropped 16 percent in 2004. Currently, 18 of the 23 financial analysts surveyed by Thomson First Call have a hold or sell rating on the stock. "The question that needs to be asked," Mr. Anderson said, "is how many years of declining stock performance will a board tolerate before they finally say, 'Listen, we need to make a change.' " THE founders of Yahoo, David Filo and Jerry Yang, ran that company for only a few months before its financial backers hired a professional manager to take over as chief executive. The investors behind eBay and Google did the same, though both waited several years before making a move. There have been notable exceptions - including Microsoft and Dell, whose founders (both college dropouts) ran them for at least a decade after the companies went public. But in general, the practice in the technology world is to bring in an experienced manager who can earn Wall Street's respect, either shortly after the founding of a company or just before it goes public. In 2000, when Amazon was six years old and bleeding cash, analysts began asking whether Mr. Bezos was still the best person to lead the company. "Time for Bezos to Step Aside?" asked the headline of an article in The Puget Sound Business Journal in 2001. The article quoted Gary Lutin, an investment banker who had repeatedly contacted Mr. Bezos on behalf of the New York Society of Security Analysts - in part to demand that Amazon spell out a succession plan. "Jeff Bezos is justifiably considered a brilliant person," Mr. Lutin was quoted as saying. "But his brilliance has been exhibited so far in the area of stock promotion rather than running a business." Amazon's board seemed to acknowledge that point tacitly when, in June 1999, it hired Joseph Galli Jr., a marketing executive from Black & Decker, as president and chief operating officer. "There was a concern at one point that we needed to strengthen the operational side of things, which is why we brought in Joe," said one director, Thomas A. Alberg, in an interview last month. Mr. Galli, however, lasted only 13 months, choosing to accept the top post at Verticalnet, a technology company with a fraction of Amazon's revenue. When he left, the board conferred the president's title on Mr. Bezos, its chairman and chief executive, and since then the company has made do without a chief operating officer. "It's our feeling that the other managers and Jeff, too, have grown into their ability to focus on operational things," Mr. Alberg said. Whether Mr. Bezos was the best person to run the company's day-to-day operations, even when the stock was 95 percent off its high, was never broached, he said. Mr. Bezos laughed when asked whether the board had ever expressed dissatisfaction with his performance. He laughed again when asked about a 2003 helicopter crash that he survived with only minor injuries but that raised the succession question in a more dramatic way, and he laughed one more time when reminded of how some people jokingly replaced "com" with "con" and called his company Amazon.con. Mr. Bezos, 41, is a slight man with thinning brown hair and large hazel eyes that seem to swell even larger when he's excited, which is often. His leg bobbed sporadically through a 45-minute interview last week in Aspen, Colo., where he was speaking at the Ideas Festival of the Aspen Institute. He owns roughly one-fourth of Amazon - giving him a net worth of about $3.5 billion - but by all accounts, and by all appearances, he is strikingly down to earth. He seems relentlessly upbeat and appears not to waver in his belief that Wall Street is largely one huge distraction. If you give customers what they want, he said repeatedly, the rest will take care of itself. "Our stock was doing all sorts of gyrations, and of course it wasn't just our stock, as you may recall," he said when asked if the board had ever expressed displeasure with the job he was doing. Amazon routinely fell short of Wall Street's expectations, as it has done in three of the last four quarters, but revenue continued to grow as its stock was plummeting. (Amazon now has a succession plan in place, he noted.) "The people who were focused on the company," he said, "understood that the business fundamentals were improving year over year." Besides, Mr. Bezos added, he is a bargain at his current annual salary of $81,000. "And I don't take any stock options," he said. And with that he let loose a rip-roaring laugh. Mr. Bezos has every right to laugh. He proved wrong legions of critics who had predicted Amazon's demise, just as he defied those who had declared that Amazon would never turn a profit. Satisfaction surveys show that Amazon enjoys a golden reputation among most of its 49 million active customers, and last year it booked $588 million in profit on $6.9 billion in revenue. Yet Amazon is still a long way from its larger ambitions of dominating electronic commerce the way Wal-Mart dominates the in-store retail market. It could be said that the dot-com era began 10 years ago, when Amazon made its Internet debut, but the company has been eclipsed by eBay, which in recent years has allowed merchants to forgo auctions and set up storefronts on its virtual worldwide mall. Forrester Research estimates that consumers will spend 22 percent more money online this year than they did in 2004. Yet its research shows eBay's market share growing at roughly twice the pace of the overall market, while Amazon is growing at half the overall pace, said Carrie Johnson, a Forrester analyst. Today, eBay has a market value three times that of Amazon. Then there is the competition on other fronts, as consumers become more comfortable stepping outside Amazon's cozy confines. Increasingly, price-comparison services and bargain sites like Overstock.com - not to mention the Web fronts set up by the very brick-and-mortar giants that Amazon was supposed to put out of business - are putting pressure on Amazon's bottom line. Several years ago, Amazon, along with eBay and Yahoo, were the Internet "it" stocks owned by most mutual funds focused on publicly traded growth companies. Today, eBay and Yahoo - and Google, but not Amazon - reign as the portfolio standard-bearers. "This used to be the most controversial Internet stock," Mark S. Mahaney, a financial analyst at Citigroup Smith Barney, said of Amazon. "It now seems about the least-paid-attention-to." IN 1994, Mr. Bezos was a 30-year-old hedge fund analyst with a degree in computer science and electrical engineering from Princeton when he came up with the idea for an online bookseller. He originally planned to call it Cadabra but later realized that it sounded too much like "cadaver." Ultimately, he settled on Amazon, in part because he thought it would convey the vast breadth of books he intended to sell. At the conference in Aspen, the moderator of Mr. Bezos's panel introduced him with a bit of Internet lore about how Mr. Bezos had written Amazon's business plan on a laptop computer in the passenger seat of a 1988 Chevy Blazer as his wife, MacKenzie, drove them across the country. Reality is a bit less colorful. The couple actually flew from New York to Fort Worth, where they picked up the Blazer - and a $300,000 check - from Mr. Bezos's father, a former engineer at ExxonMobil. And while Ms. Bezos did most of the driving on their way to Bellevue, Wash., where they started their business, she said her husband took turns at the wheel. The business plan that Mr. Bezos wrote on the road called for Amazon to turn a profit long before it did. But, as he points out, the plan anticipated a far more modest company. In no small part because of Amazon's early success, the Internet quickly evolved into a footrace to place first dibs on as many new online markets as an enterprise could. Mr. Bezos's reaction to that rush goes a long way toward defining his management style, and toward illustrating what analysts love and hate about it. "Brands are a bit like quick-drying cement," Mr. Bezos said last week, "so it became very important to get into new categories beyond books reasonably quickly." Inside Amazon, the mantra was "get big fast," and it was everywhere, even on T-shirts. The race to own e-commerce was on. Amazon's strategy seemed to work beautifully in those first years. In June 1998, for example, the company said it would start selling music, and within months it was the Internet's top music retailer. Amazon seemed so rich with potential that $10,000 invested in its May 1997 initial public offering was worth more than $350,000 by the end of 1998, just 19 months later. But that surge came without profits, and Amazon's success appeared to prove that the primary difference between dot-com survivors and many flameouts was the amount of cash they managed to raise before the stock-market bubble burst in 2000. At the time, Amazon was burning cash almost as fast as its investors could shovel it in. For a time, no one seemed to mind very much. Certainly, Mr. Bezos appeared not to be worried by Amazon's losses. "There were no sacred cows with Jeff," said Venky Harinarayan, who was a top strategist at Amazon for two years, starting in 1998. "There was no conventional wisdom." There also didn't seem to be an organizational chart, or anything that much resembled a personnel department in Amazon's first five years, said Jeremy Eskenazi, who joined the company in 1999 as its top recruiter but soon found himself running its human resources department. "If Jeff is passionate about something, he pays attention to it," said Mr. Eskenazi, who left Amazon in 2001. "But H.R. and legal and accounting and all that more mundane stuff Jeff tended to look on as nonsensical, and he didn't support those areas." Instead, Mr. Bezos focused on expansion. He directed an acquisition binge that he now concedes led to excesses that turned out to be as excruciating as "root canal without anesthesia." Among the more painful ones were his decisions to buy a majority stake in Pets.com in 1999, and then to pay $60 million for a large portion of the online delivery service Kozmo.com. Both turned out to be legendary dot-com bombs that went out of business shortly after Amazon invested in them. Pets.com seemed perhaps the most foolish; among other things, pet food is very heavy, and ruinously expensive to ship. "We believed that if we did not participate in these categories at that time, we would be forgoing the opportunity to participate in those categories forever," Mr. Bezos said. "We believed, incorrectly as it turns out - and this was my bad - that these were land-rush opportunities." Amazon took $350 million in losses between 2000 and 2002 for its failed investments in dot-com companies. That same land-rush logic fueled Amazon's decision to start selling toys, electronics, tools, patio furniture and even cellphone service plans - all in 1999 and 2000. It also went head to head with eBay in online auctions, but it has yet to gain much traction after six years. More recently, Amazon has started selling jewelry, health products and musical instruments, bringing to 31 the number of categories on its Web site. "I do think Amazon may have expanded too far, too fast," said Peter S. Fader, a marketing professor at the Wharton School of the University of Pennsylvania. Another Wharton marketing professor, Jerry Wind, added: "With Amazon, there is always a danger that it is spread too thin." Aram Rubinson, a financial analyst at Bank of America, is inclined to agree. In a research report he published last November, he said Amazon should cut its inventory and sell only profitable items, even at the expense of revenue growth. "Other retailers, like Best Buy, Home Depot and Staples, have opted to slow growth in order to improve profits," wrote Mr. Rubinson, who has a sell rating on Amazon. As is, books, music and videos - the first three categories Amazon entered - still account for nearly three-quarters of its revenue, and Ms. Johnson at Forrester said she doubted that Amazon would ever "make much of a dent" in many of the other markets it has entered. Mr. Bezos scoffed at skeptics. Amazon has gold-plated customer service, he said, and has championed any number of nifty early innovations, like one-click buying. With such superior service, he seems to suggest, why won't the world beat a path to his door to buy everything from toasters to trumpets and tennis rackets? "It takes a long time to teach 49 million active customers about our company and all we offer," he said. "Given it takes a long time, why not get into those areas as early as we can?" Ms. Johnson offered one reason: Amazon has trouble focusing. "Frankly, there aren't the resources dedicated to each category," she said, "because Amazon in the meantime is launching more new categories, and getting into new services, and trying to develop a search engine and doing all these things trying to become all things to all people." One of Mr. Bezos's friends has jokingly described his management style as "ready, fire, steer." But by the fall of 2001, when Amazon had accumulated $2.9 billion in losses, the line didn't seem so funny. The mantra was no longer "get big fast" but "go-hi-o," or "get our house in order." When they talk about Mr. Bezos, former Amazon executives tend to gush. Mr. Eskenazi, the former human relations director, described him as an immensely likable man, as "down to earth as any billionaire can be." People who worked closely with him talk glowingly of his ability to lead and inspire, and of his brainpower. Danny Shader, who worked at Amazon for 15 months starting in 1999 after Amazon bought his start-up for roughly $200 million, described Mr. Bezos as "the smartest, best entrepreneur I've ever met in my life, and will ever meet." Almost to a person, though, former employees said Mr. Bezos was incapable of delegating. "The good and the bad of Jeff is that he wanted to be involved with every new Web change, even if it was just to change the colors of a tab," said Brian Lent, a top technologist who worked in an office maybe 40 feet from Mr. Bezos's for most of his two years there. Some also criticized Mr. Bezos for having killed promising companies after Amazon bought them. It acquired Junglee, a database search company, and sought to transform its core technology into an e-commerce search engine that could find any product for sale on the Internet. Mr. Bezos ended the project less than 18 months after it began. Mr. Lent, who came to Amazon via Junglee, noted that commercial search was now one of the Internet's hotter areas. "Amazon could have owned the shopping-comparison market," he said. Instead, it is now battling to enter a field dominated by Google. Mr. Shader expressed a similar disappointment that Accept.com, his early entry into the online payment market now dominated by PayPal, a subsidiary of eBay, never realized its potential. "Quite literally we could've been PayPal if things had worked out differently," he said. Mr. Bezos declined to comment on what might have been. "We made the decisions we made, and we have an outcome we're pretty happy with," he said. He prefers to talk about tomorrow more than yesterday, even as the company gears up for a 10-year anniversary party with performances by Bob Dylan and Norah Jones. Analysts, however, want to talk about today, and to discuss Amazon's slowing sales abroad, its rapidly rising costs, and the $55 million spent in the first three months of the year on its free-shipping promotion. Mr. Bezos brushed off these and other complaints. From the first shareholder letter he wrote back in 1997, he has consistently made clear that he would run Amazon by focusing on the future and shrugging off short-term worries. He said he would "relentlessly slash prices," even if it cut into incremental profits, because he was convinced that it was the right thing to do. Similarly, he vowed that more than a million Amazon customers would receive the latest installment of the "Harry Potter" series this Saturday, the day the new book is released, though the company would most likely lose money on the sale of those books. "We genuinely believe by taking care of the customer," he said, "we'll create the best circumstances for shareholders as well." DESPITE himself, Mr. Bezos has managed to please analysts on occasion. Over the years, he has spent well over $1 billion building Amazon's infrastructure - and in 2001, he began cashing in on that investment by renting out space on Amazon's Web site to retailers ranging from Target and Circuit City to mom-and-pop shops. Third-party deals, which cut across all of Amazon's categories, now account for 27 percent of the company's revenue, or nearly $2 billion. Yet in the end that has served to frustrate analysts as they wonder why profits are falling, given Amazon's successful entry into a high-margin business like renting space on its site. "We don't claim over the long term we're necessarily correct," Mr. Bezos said. "We just claim it's our viewpoint. We don't spend a lot of time defending ourselves." To Mr. Anderson, the technology newsletter editor, Mr. Bezos's relentless focus on the customer - at the expense of his other audience, his shareholders - is "both Jeff's brilliance and his curse." "If you're a long-term investor, you're probably thinking that it will be worth a lot of money to be the Wal-Mart of the online world," Mr. Anderson said. "On the other hand," he added, "if you're the kind of investor who has run out of patience, you're probably wondering whether there's any trained management in place that knows how to get a return on investment." You are a subscribed member of the infowarrior list. Visit www.infowarrior.org for list information or to unsubscribe. This message may be redistributed freely in its entirety. Any and all copyrights appearing in list messages are maintained by their respective owners.
