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Just when many skeptics had started to wonder if Internet retailing would ever really be a profitable business, Amazon.com Inc. finally may be starting to disprove the naysayers. On Oct. 24, the world's largest e-tailer reported better-than-expected third-quarter results, including lower operating losses, thanks to operational improvements and rising sales of consumer electronics and other products outside its core books, music, and video offerings. In a interview with Business Week Senior Correspondent Robert D. Hof, Amazon Chief Executive Jeffrey P. Bezos remained coy about when the company might turn a profit. But he highlighted measures that could signal light at the end of the tunnel. Here are edited excerpts from their conversation:
Q: Amazon.com surprised analysts by reporting higher-than-expected sales and lower losses. What most contributed to the improving picture?
A: A lot of people wondered, are the new product categories going to gain traction with customers? I think these results clearly answer that question. First, 21% of active customers in the quarter have purchased from our new categories. That's up from 4% a year ago. Second, spending per active customer went to $130, from $108 a year ago and $104 two years ago. Third, electronics is our No. 2 business, surpassing even music, which has been growing fast. Finally, the early-stage business segment has a $600 million run rate. If that were a stand-alone business, it would be the fourth-largest e-commerce business in the world.
So those four things very clearly answer the question, do customers want to buy more than just books, music, and video online? The answer is yes.
Does the business model work? The key piece of evidence there is that our U.S. books, music, and video business had more than a modest profit -- it had a 6% operating profit, or $25 million.
Q: Six percent isn't that much.
A: People can argue. But in one quarter, it went from 2% to 6%. And gross margins are at 27% in that segment.
Q: Even so, it looks like the growth rate for books, music, and video has slowed considerably, to about 33%. Does this make it harder for you to meet the goal of matching or exceeding the 50% growth rate for e-commerce overall that you have forecast?
A: No. If you look at the top line of books, music, and video, it grew 33%, and that's on a business which now has an annualized run rate of $1.6 billion. It's a very fast growth rate for a business that large. And the gross profit in that business grew 70% year-over-year. We made a conscious decision to put a lot of energy and focus in that business into growing gross profit.
If you look at the business as a whole, it grew 79% year-over-year. For a business with more than $2 billion a year in annualized sales, that's highly unusual.
Q: So will Amazon match that 50% per year growth rate for e-commerce at large?
A: What I said is that if you go 10 years into the future, the compound annual growth rate of e-commerce as a whole will be something like 50%. Now, it won't be 50% every year -- some years it will be 30%, some years it'll be 70%. When the technology we rely on gets twice as cheap every 18 months, and bandwidth gets twice as cheap every 12 months, those are the kind of fundamentals that drive improvements in customer experience, which drive those growth rates. As a leader in e-commerce, I would hope that we could do that well, or maybe even better.
Q: Some analysts question how fast the new businesses are actually growing. If you put aside the $20 million in toy inventory that your partner Toys 'R' Us bought and the payments from other businesses that sell through Amazon's site, the growth rate of those new businesses looks much smaller -- about 5% from the second to the third quarter.
A: I don't know how to say more clearly that the new businesses are gaining traction. Basically, the amount each active customer spent was steady -- $104 to $108 -- until we added the new product categories. Then, all of a sudden, it's $130. You can't argue with that.
Looking at quarter-over-quarter growth rates, as opposed to year-over-year growth rates, is a risky business. It's very noisy data.
Q: You still decline to predict publicly when Amazon will turn a profit? Why?
A: We've put a stick in the ground internally, and we have a very firm objective. But we just made a decision that we're not going to discuss that externally at this time.
Q: Why not?
A: We just made a decision not to. But we did give some guidance for 2001. We expect our operating loss to be 5% of sales, or perhaps substantially less.
Q: Wouldn't it help the perception of Amazon to share your profit forecast?
A: I don't know.
Q: What will be your biggest challenge this coming holiday season?
A: This is a great time of year for us to differentiate ourselves from some of our peer group who have not put enough time and attention into the back-end [operations]. Last year, we were one of the very few companies that did a good job delivering for customers in the fourth quarter. This year, we're even better prepared, and we're going to do it very efficiently.
Q: Efficiency seems the key for Amazon to prove its business model. Will the holidays provide solid evidence of that?
A: We expect our operating loss in the fourth quarter to be about 5% to 8% of sales, which would be down from 11% this quarter.
Q: The Securities & Exchange Commission is inquiring about Amazon's accounting of revenues from partners that use Amazon's Web site to sell products or market themselves. Do you anticipate any change in how these revenues are booked?
A: We are confident in the accounting, and so are our auditors.
Q: Why is this being questioned now?
A: They want to understand something. That's all an inquiry is. That's the SEC's job.
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