TOPICS > Economy

Jeffrey Bezos and How Amazon.com is Changing Retail

July 7, 1999 at 12:00 AM EDT

TRANSCRIPT

PAUL SOLMAN: “Amazon.com” — you type in these words on the Internet and go to a Web site where you can buy almost any book imaginable. Once a pioneer, Amazon has become a symbol of the possibilities and pitfalls of cyberspace economics.

Recently, the pitfalls have been getting many of the headlines. Amazon.bomb, one journal announced; the firm has yet to show a penny in profits, another pointed out; and on the NASDAQ, the stock exchange for America’s fast-growing firms, Amazon’s share price has been on a rocky ride for months now.

Is it a sign that the Internet stock craze is over, or just another bump on the road to future riches, since Amazon’s shares were still valuable enough, last we looked, to buy all of Borders and Barnes & Noble several times over and still have billions of dollars left to play with?

Maybe the way to start is by seeing how Amazon.com got to be such a phenomenon in the first place. One reason — the firm’s founder, Jeffrey Bezos, cover boy for Amazon, for Internet commerce in general, for what’s been called “the new economics.”

Lionized in print, Bezos works on a dingy street in Seattle and his company remains immune to profits. But when we made the trek to Amazon, we found ourselves playing ball with the firm’s founder.

If you buy into Bezos’ quirkiness, you begin to think he prepares for the future in ways the rest of us don’t.

What is this?

JEFFREY BEZOS, CEO, Amazon.com: This is my World Trade Center escape kit. It’s a –

PAUL SOLMAN: World Trade Center escape kit?

JEFFREY BEZOS: — a flashlight and, you know, a honking Swiss Army knife. It even has pliers.

PAUL SOLMAN: He keeps it on hand because when New York’s World Trade Center was bombed a few years ago, folks were stuck in the elevators.

JEFFREY BEZOS: And it turned out if you’d had this simple tool you could have carved your way out of those elevators.

PAUL SOLMAN: Carved your way out of the elevators?

JEFFREY BEZOS: Yes. No Problem. So I got my whole family these World Trade Center escape kits. I have this slime dog.

PAUL SOLMAN: Now, to some, Amazon’s leader seems, well, a bit off the wall.

JEFFREY BEZOS: And if you throw it against the wall –

PAUL SOLMAN: Look beyond the levity, though, and Bezos’ business model for Internet commerce is not only no joke but remarkably resilient. Amazon’s main goal has been simple: to cut out the middle man — the expensive American bookstore. Amazon offers more titles than any store could stock, lower prices, customized come-ons when you first visit its Web site.

JEFFREY BEZOS: It says, “Welcome back Paul. Check our your book recommendations.” This is actually my favorite part where it says, “If you’re not Paul, click here.” (laughing)

PAUL SOLMAN: With recommendations, customer reviews, its own bestseller list, Amazon hooks book buyers at home; even book writers have become dependent on it. Cassandra Tate is a friend of mine who happens to live in Seattle. She’s just written a history of the anti-tobacco movement, Cigarette Wars. Amazon, as it happens, keeps its own, ever-changing list of where any title ranks among the million plus books Amazon sells. Tate, like many an author, keeps track of her ranking.

CASSANDRA TATE: The last time I checked my Amazon.com sales rank, which was last week, I was number sixty-eight thousand something, something. What’s happening here? I’m now down to 77,474. This is extraordinarily demoralizing.

PAUL SOLMAN: So, Amazon boasts more information than the physical bookstore, more convenience, and quicker delivery to whomever you want, from low-rent warehouses. Plus there’s a last, less obvious edge that may actually be the key not only to Amazon but to Internet commerce in general: It’s called cash flow.

You see, when you or I order a book from Amazon, it gets money from the credit card company within two or three days. But Amazon has 46 days to pay the publisher for that same book. So the fewer days Amazon can keep the book hanging around in its inventory, the longer it gets to keep and use our cash. In fact, this is a goal of any physical business: to get the goods out the door — to turn the inventory — as fast as possible. The book business was a sitting duck for e-commerce, because printing firms and book distributors already stock the industry’s inventory.

So a firm like Amazon could rely on them to do most of its warehousing for it. Thus, Amazon can keep so few books in its own shipping plants that it clears them out an amazing 20 times a year, versus three times a year for a typical bookstore, where the average book sits around for four months, gathering dusk, taking up pricey space like here at Borders, and already paid for by the bookstore.

JEFFREY BEZOS: So as a result, what happens is our cash flow is much better than the cash flow that you would see in a place that turns its inventory three times a year, and that’s a big advantage in any kind of economic model.

PAUL SOLMAN: Stock analyst Michael Mauboussin is an Amazon enthusiast.

MICHAEL MAUBOUSSIN, Analyst, Credit Suisse First Boston: So they get money today, and they pay their bills down the road, which is always a good thing for a business. And most businesses are the other way around, where they pay their bills first and then get their cash later.

PAUL SOLMAN: Is that the genius of this operation?

MICHAEL MAUBOUSSIN: Yeah, I think that’s a big part of it, and we think that is precisely what the stock market’s picking up on.

PAUL SOLMAN: Now skeptics have long claimed Amazon’s stock is wildly overvalued because the firm has no profits. But analysts like Mauboussin have had a good comeback: “profits” are just an accounting technicality. The argument is that when it comes to the actual cost of making a sale in cyberspace, Amazon generates cash, then spends it on investments in its future: software and advertising. In physical firms, more sales mean more costs: more employees, more machinery, more bricks and mortar. By contrast, each new “online” sale generates cash up front, but barely raises investment expenses at all.

PAUL SOLMAN: Again, stock analyst Michael Mauboussin.

MICHAEL MAUBOUSSIN: And even if you look at a Wal-Mart or any other sort of traditional company, if they want to grow rapidly, they have to build lots of stores, and they have to have lots of inventory. And Amazon will be able to grow at a much more rapid rate with a much more moderate investment rate than most businesses.

PAUL SOLMAN: Now, you don’t have to be a fan of Jeffrey Bezos to think he’s a retail revolutionary. Just as, a century ago, the technologies of railroad shipping and telegraph ordering brought us the department store, with its windows of wonders, enabled Sears to pioneer the shopping catalogue, so Bezos has harnessed digital technology to go the catalogue and physical store one better. And he thinks if stores can’t come up with fun reasons to visit them, they simply won’t survive.

JEFFREY BEZOS: To put it in the extremes, the category that’s most threatened is the strip mall because that’s no fun.

PAUL SOLMAN: Bezos and I also went to Seattle’s famous independent, Elliott Bay Books, recently sold. I asked customers how much they used to buy here but now buy through Amazon.

CUSTOMER: Easy 50 percent.

PAUL SOLMAN: 50 percent.

CUSTOMER: Yes.

PAUL SOLMAN: So you must be somewhat ambivalent then.

CUSTOMER: Well, I don’t know if that’s it. I’d like to have them both. I mean, from a consumer’s standpoint, I’d like to.

PAUL SOLMAN: But maybe you won’t.

CUSTOMER: That’s what concerns me, yes.

PAUL SOLMAN: Author Helen Fremont was at Elliot Bay for a reading, signing her new book, “After Long Silence.”

HELEN FREMONT: Well, I have to make a confession. I actually did buy on Amazon.com.

PAUL SOLMAN: What did you buy?

HELEN FREMONT: It was actually a friend’s book and – it’s Grace Dane Mazur’s book. So I have bought at Amazon.com, but I’m ashamed of it.

PAUL SOLMAN: You’re ashamed, so why did you buy her book?

HELEN FREMONT: Well, it was easy, it was convenient, and I was online and I could hit a button, and, poof, I got a book.

PAUL SOLMAN: It all has Elliott Bay’s manager, Tracy Taylor, depressed enough that she first balked at an interview.

TRACY TAYLOR: Well, it’s hard for me to talk about it. I’ve worked here for nine years; our bookstore has just been sold; and a lot of that is due to competition and not necessarily just competition from Amazon, but it is Internet competition. I’m saying goodbye to somebody who has owned this bookstore for 26 years, that I have a very, very strong tie to, and I do believe that part of that is because of Amazon.

PAUL SOLMAN: Okay, so Amazon’s digital dexterity threatens traditional bookstores. But, does it spell their demise? Now to Alvin Domnitz of the American Booksellers Association, who thinks the death of independent bookstores like Manhattan’s “A Different Light” — the death of all physical stores — has been greatly exaggerated.

ALVIN DOMNITZ, American Booksellers Association: There are I think going to be people left in this world who still want to touch, and that physical need to be in a place, to be with other people. We are social beings, is going to be met by places they can go to be with those people.

PAUL SOLMAN: But just in case, the ABA’s Domnitz has organized his booksellers to compete head-on with Amazon in cyberspace.

ALVIN DOMNITZ: There’s a new project from the ABA which is called Book Sense, and booksense.com, and it’s going to provide stores exactly like this with a very, very equal footing to compete on the Internet with any other Internet seller.

PAUL SOLMAN: Threats to Amazon may help explain why its stock swooned in the spring. Even individuals, it turns out, can now compete with it. In Iowa, Lyle and Linda Bowlin do their own shipping, contract out credit card billing and the like, charge less than Amazon. But the biggest threat may come from the biggest rivals, as we and Jeffrey Bezos discovered, at Elliott Bay Books, when a long-time Amazon customer interrupted our lunch to say that just the night before he had finally checked out Barnes and Noble.com.

CUSTOMER: I ended up using Barnes and Noble, which was really difficult because I’ve got a magnet on my refrigerator from Amazon, I’ve got Amazon post-its. But I think it’s very true that the customer does look ultimately for the things that – the thing that matter are price and speed.

PAUL SOLMAN: And shipping was crucial to you.

CUSTOMER: And shipping was crucial.

PAUL SOLMAN: BarnesandNoble.com‘s Jonathan Bulkley cites a more dramatic example.

JONATHAN BULKLEY: When the Monica book came out, it was interesting, we had stock to ship in 24 hours. Amazon initially had stock to ship in 24 hours, but they ran out, so they had planned poorly, and their shipping went to two to three weeks on the Monica books after about eight or nine hours of being online.

PAUL SOLMAN: There’s an easy fix for this problem, of course, and Amazon’s doing it: build more warehouses to stock more inventory. But such costs will hurt cash flow, as Amazon pays a publishers for more books, which it will have to house longer, in expensive bricks and mortar. And this also makes investors worry that many of Amazon’s so-called “investments,” like warehouses, software upgrades, and advertising all over the Internet, are really just expenses, which rise with sales, just like any physical business.

So when Amazon announced it lost more money than ever last quarter, while sales growth slowed, no wonder its stock swooned. And no wonder, perhaps, that when we were at Amazon, Bezos was already intent on branching out from the book business.

JEFFREY BEZOS: There’s a part of our Web site called “shop the Web” where we have partnered with a large number of merchants to make their products available to our customers.

PAUL SOLMAN: So for example?

JEFFREY BEZOS: So if you come down and you come in to shop the Web, and here you can see clothing and accessories, electronics, computers.

PAUL SOLMAN: Oh, I see. I haven’t ever been to this site.

PAUL SOLMAN: In fact, Amazon has already opened up an auction service, no inventory at all, bought a stake in and partnered with Sotheby’s, with an electronic pet shop, a home-delivery grocery Web site, and helped launch Drugstore.com, whose cyber CEO is as gung-ho about the new economics as Bezos.

PETER NEUPERT, CEO, Drugstore.com: I can do a better job than in the real world. I can have three and four times the products of a normal drugstore, so I can improve selection for customers. I can add information in ways that real world bricks and mortar companies can’t do.

PAUL SOLMAN: In the end then, Amazon may want to be the Internet store, the Wal-Mart of the Web, or simply the innovator which transfers its potent brand name and technology to a host of new ventures, thus cashing in on its advantages while spreading its bets. Investors, meanwhile, are constantly reassessing Amazon’s prospects for future profits, buying and selling its stock accordingly. And since those prospects change so quickly, so does the price of Amazon’s stock. In fact, Jeffrey Bezos has lost, on paper, and made, billions of dollars while we were doing this piece; doesn’t seem to change his routine one iota.

PAUL SOLMAN: And literally you do that every day.

JEFFREY BEZOS: I try to take one every day.

PAUL SOLMAN: Take one picture as a record of the early years at Amazon.com, which could wind up depicting the glories of the new economics in the age of cyberspace, or simply chronicling the physical frustrations of business as usual as we move into yet another century.