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"We Want to Be the World's Most Customer-Centric Company" Amazon.com's founder talks about how he got his company to the top of the E-commerce heap -- and how he intends to keep it there Jeffrey P. Bezos, chief executive of Amazon.com, is the poster executive for consumer E-commerce. In a recent interview with Business Week Senior Correspondent Robert D. Hof, Bezos talked about why he thinks Amazon's mix of retail, auctions, and referrals to other merchants will provide the greatest appeal for the most consumers -- and ultimately the most profits. Note: This is a longer, online-only extended version of the interview that appears in the May 31, 1999, issue of Business Week. BW: How is Amazon.com's business model evolving as you've added auctions and referrals to other merchants?  Bezos: Our vision is we want to be the world's most customer-centric company. In many ways, we're a one-trick pony. It's just a good trick. And that is that we focus incessantly on trying to get the customer experience right. Within that, we want to build a place where people can come to find and discover anything that they might want to buy online. You realize very quickly that you can't sell everything that people might want to find and discover online directly. So instead you need to do that in partnership with thousands and indeed millions of third-party sellers in different ways. At Amazon.com today, we have two things that are in that model. One is Shop the Web and the other is Amazon.com Auctions. What's driving this really is this notion of trying to help customers find and discover anything they might want to buy online. To try and do that alone, in strictly a traditional retailing model, isn't practical. BW: Did you think it was originally? Bezos: No. First of all, you have to remember that originally, we did not expect to ever be in the position that we find ourselves in today. Four years ago when we were working in my garage in Bellevue, we expected that selling books online, the odds-on bet was that that wouldn't work. (LAUGHS) I told all of our original investors that they would lose their money for sure. BW: Really? Bezos: Yeah, I did. They were friends and family, and I wanted to make sure I could still go to Thanksgiving dinner. Our expectations in the beginning were very, very low. And appropriately so. Anybody four years ago, sitting in that Bellevue garage who had believed that what has happened would happen would have had to have been institutionalized immediately. Strapped on a little white jacket and put in the padded room. BW: You were pretty ambitious to start, weren't you? Bezos: No. I think if you look at what we did, we raised $300,000 in the first round of financing. Then we raised another $700,000. Then, only once we were up and operating and growing very rapidly did we raise any significant amount of money. We raised $8 million from Kleiner Perkins. The company was incorporated in July of '94, and we didn't raise $8 million until May of '96. We did a year's worth of software development where the number of people in the company never exceeded 10. And the second year, after we had opened the store to the public, we didn't spend a dollar on pay advertising. All of our growth in that year was from word-of-mouth. People forget what it was like back then. And nobody knew what was going to happen at all. And certainly nobody predicted this. If you look at the original plan for Amazon.com, we never get to the revenue levels that we have today. (LAUGHTER) Ever. And it's just a very different kind of business plan because the key thing that I think many people overlooked in those early days, including me, was that everybody online was an early adopter. So when you're setting out a business plan, you say, Look, we've got this much better way to sell things online, and it truly is better, and we know that. That doesn't necessarily mean that you'll get a lot of customers because customers take time to adapt to change their habits to new ways, even if the new ways are better. Normally, that kind of cycle takes years, but it's not decades. But on the Internet, you had this strange phenomenon early on where there were a small number of people online relatively, say a couple million people. But all 2 million of those people were what marketing folks refer to as early adopters, and early adopters do everything first. They're the exact segment of the population that likes to experiment and try newfangled things. That was sort of the key thing that has allowed a lot of these Internet businesses, in the early stages, to grow remarkably fast. If you provided a better mousetrap, you were providing it to an audience made up exclusively of early adopters. BW: What are your goals for auctions and Shop the Web, the program that provides referrals to other merchants? Bezos: If you look at the highest level, it's all about selection. If you look at auctions, for example, we have two sets of customers, buyers and sellers. It sounds ridiculously simple, and maybe it is, but it's hard to execute, to get customer experience right. And so we have two sets of customers in the auction space, and we are focused diligently on trying to get the experience to be as good as possible for both sets. In the case of the buyers, one of the key things that auctions bring for our 8.4 million buyers is bigger selection, and people value selection. We have, with our Bibliofind and Musicfile acquisitions, and with the stuff that we had done in new products, and with auctions, we have now well in excess of something like 16 million different items that people can buy from us. Now, we are trying to do other things that make that selection get even larger. And auctions and Shop the Web are components of that. The primary thing that we bring to the table for sellers in the auction space is access to the world's largest community of experienced online shoppers -- which, if you're sellers, obviously a pretty important thing. BW: Primed to buy, in other words? Bezos: Well, that's right. I might not put it that way -- because they buy only what they want to buy, of course. But once somebody has done something once, it's a lot easier for them. BW: You have different margin dynamics for auctions and Shop the Web. How does that affect how you're going to build Amazon? Bezos: These are two very different business models. In one case, you have relatively small topline revenues -- that's the case of auctions -- but very high gross margins in percentage terms and very high operating margins. In the case of direct sales of products -- the traditional retailing model -- you have a very high topline revenue but lower percentage gross margins and percentage operating margins. BW: Exactly. Bezos: But those models co-exist very nicely. BW: Even in the same company? Bezos: Sure. BW: How much of a factor was the high profit margins of that exchange or marketplace or auction model in adding these? Bezos: It's not a factor in our decision. BW: Not at all? Bezos: No, no, no. Actually, of course, if it were practical, from the business model point of view, it makes more sense to things directly. But it's not practical -- if you really want to have selection for everybody. BW: Why is the retail business model more attractive than the auction model, which has such high margins? Bezos: Percentage margins don't matter. What matters always is dollar margins. The actual dollar amount. Companies are valued not on their percentage margins, but how many dollars they actually make, and a multiple of that. BW: In an ideal world, I suppose. Bezos: At some point, all companies are valued that way. So let's take a simple case where you sell a $20 item, and in one case you sell it directly with the retailing model. In another case, you are the auctioneer of that item; you're brokering the deal. So in the case of the direct sales/retailing model, let's say a $20 item typically has gross margins of 20%, because you had already bought it from somebody for $16. So that means you've got $4 of gross margin. Now, your operating margin ultimately matters more, right? It's the thing that falls to the bottom line, and then you might get net margin after that by taking taxes and financing and some other kinds of charges into account. But for a simple model here, let's just use operating margins. It's probably the single most important metric. [On average], your operating margin is probably about $2. Now, let's look at the auction model. You sell a $20 item as a broker, standing in the middle of the transaction, so your revenues are not $20. Your revenues are about 6% of that because that's the commission you take effectively [eBay's average is 6%]. So you get $1.20. That is your sales.... Then, of that, maybe your operating margin might be 35% of the $1.20 -- it's going to be something like that in the auction model. Which is about 42 cents. In each case, you sold a $20 item, but your dollar operating margin in the retailing model is $2, and your dollar operating margin in the auction model is 42 cents.... So the retailing model is almost five times as good for selling the same item. Where did the other $1.58 go? Well, it went to the seller. Because the seller is doing a ton of work. The seller is doing the customer service, doing all this stuff, and they are basically getting compensated for it. In the free market economy, that's how things work. BW: That's an interesting way to look at it. Bezos: Well, it's interesting, but it's also just math. It's actually correct. BW: On the other hand, eBay, for example, is profitable and you are not. Bezos: But that's a completely different dimension. Different models have different amounts of fixed costs and different amounts of variable costs and so for example, a high fixed-cost model [like Amazon's] is ultimately very leverageable but requires high revenue rates before it's profitable. BW: So it isn't really proper to look at profitability and gross margin percentages? It does seem that investors in many cases do. Bezos: Well, investors look at things all sorts of ways. (LAUGHS). And that's a good thing, right? It's perfectly appropriate, the way the capital markets work is companies pick strategies. Hopefully they are clear and consistent about their strategies, and then investors get to vote with their dollars about whether they agree with the strategy or not. And then over the long term, the markets are always very sensible. In the short-term, of course, there is no correlation between great companies and stock price. In the long term, there's perfect correlation. BW: The question is how far you want to go with the retail portion of the company and how far do you want to go toward the marketplace/auction model? Bezos: You could say we've got three different units, core business models in our company, and we're going to try to have a third of our operating margin from one, a third of our operating margin for another, and a third from a third one. Or you can say, let's provide a great customer experience with each of the three models and let customers sort it out. And not try to have things be the way you think they should be but let the invisible hand pick that out. And that's where we are. BW: So you don't necessarily care whether auctions are 5% of business ultimately or 50%? Bezos: Absolutely right. BW: Do you have a feeling for how much of your business auctions and referrals to other merchants eventually will be? Bezos: I have thought about it some, but my guesses are no better than anyone else's and I think it's extremely hard to know. I'm sure you could get a consulting firm to give you a guess, but I get asked all the time what fraction of retail commerce do I think will go online over the long-term, and I've picked a random number. (LAUGHTER) Which is 15%, and I say, look over 10-plus years, I think it'll be 15%. But I always tell people when I tell them that that I have absolutely no basis for making that guess, and here I'm not even hazarding a guess. It's even harder. And it doesn't matter. Customers will decide. Customers always get what they want. That's the one thing you know in this world. BW: Ultimately, won't it matter that in, say, two or three years, or even sooner, you show more movement toward potential for an actual profit? And doesn't the nonretail portion help you get there? Bezos: As we just went through, if you are looking at the gross sales amount, as opposed to the net sales amount, in the auction model, we would much prefer a dollar of retail revenue to a notional dollar of auction revenue by a factor of about 5:1, right? BW: Since you've moved squarely into eBay's territory with auctions, how do you see it as a rival? Bezos: I believe that this is a large market, and there is room for two players to have critical mass. And probably more. So it's not the situation that somebody has to lose for us to win. And it's for that reason that we've always been a customer-obsessed company instead of a competitor-obsessed company. I think this is one of the most misunderstood things about E-commerce. There aren't going to be a few winners. There are going to be tens of thousands of winners. This is a big, huge complicated space, E-commerce. And it's going to be as complex with as much variety and as many winners as the physical world, and people's intuitions are wrong about that for a series of reasons. But I think one of the big ones is that we live in this strange time when it's actually appropriate for right now, but 10 years from now, things will look very different. Let me give you examples. Wall Street firms have people called Internet analysts. Ten years from now, that will be as if today Wall Street firms had these people called "physical world analysts." And they'd have one analyst that covered publishing companies and General Motors and you name it, retailers and so on and so on. The virtual world is going to be as complicated as a cyberpunk novel at some point in the future.... There's usually lots of variation. You take the auction space. Now, you can easily imagine it dividing up along categories as one example. BW: On the other hand, isn't Amazon a very good example of where you can actually be both broad and deep online -- thereby making it possible to build a very big, dominant force? Bezos: Well, I think that's true, but I think that the only way we're going to be both broad and deep is by partnering with thousands and thousands of others. One company model or even small number of company models only seems reasonable if you think E-commerce in the long term is much smaller and simpler than it actually will probably turn out to be. BW: So the dynamics online are not necessarily that different from the physical world? Bezos: I think some of the dynamics are quite different. Customers have more power, for example. I believe our success has not been because of any increasing returns. I think it's because we've sweated blood and tears to make the best possible customer experience, and customers online have louder voices. And this is something that most companies still haven't figured out. So online it's not just reporters and journalists that buy ink by the barrel. Every customer, if they're made unhappy, can tell 5,000 people and vice versa. They can be evangelists, and they have that powerful Internet megaphone to tell the world about their experiences, and there've been lots of examples of this phenomenon. The earliest one that was picked up by the world was the Intel Pentium bug, where that really was the powerful voice of the Internet, and that was years ago. The Internet is much more powerful now as a consumer ombudsman megaphone, and so that is something that changes everything. BW: In terms of building a major brand and a major shopping destination, it does seem that you and eBay -- even if you're coming from very different places -- have quite similar goals: to be a prime place for consumers to shop for just about anything. Bezos: I can't speak for eBay. I don't know what their goals are, but I can tell you that our goal is to build a place where customers can come to find and discover anything they might want to buy online. BW: I think I've heard that before. Bezos: Yes, well, I repeat it around here -- internally -- I repeat it five times a day. (LAUGHS) Because if you have a vision, you need to talk about it a lot to keep everybody on the same page, moving in the same direction. BW: Do you feel that you are distinct enough from a major brand like eBay? Bezos: I think in the other piece that we haven't talked about is being the world's most customer-centric company, and I think that's where most of our differentiation comes from. I do not believe there is another company on the Internet that thinks about, talks about, and asks about their customers as much as we do, and asks their customers as many questions as we do, and really tries just through plain old hard work to build the best possible experience for customers.... I think that's hard to replicate. And I believe that's why some of the physical world companies who have tried to replicate what we have done have had a hard time. Because it is not easy to do that. You can't just decide you're going to do it. BW: eBay has built quite a loyal community of members. Is that what you're trying to do as well? Bezos: I don't want to be drawn into a discussion, eBay versus Amazon.com, because we're not a competitor-focused company. BW: Maybe it's just because it's early in consumer E-commerce, but it seems that Amazon and eBay are quickly becoming the two dominant brands in that space. Bezos: See, that's the real issue. This is Day 1. Let me give you an example. The five most successful companies created from the PC revolution are Microsoft, Compaq, Cisco, Intel, and Dell, in no particular order. In 1980, none of those were publicly traded companies. By 1995, 15 years later, they were very clearly the leaders created by the PC revolution, and I think by 1995, just as evidence of their leadership, they had combined market caps in excess of $500 billion. Now four years later, it's even much higher than that of course. But in 1980, you wouldn't have picked any of those five companies. I think you date the Internet revolution as beginning around 1995. We're four years into this. Nobody knows who the leaders are going to be 10 years or 11 years from now. And anybody who thinks that they do is fooling themselves. So there are going to be great companies created as a result of the Internet revolution. There is no question that there are going to be many large, important, and lasting companies created as a result of that, but nobody -- nobody -- who is out there today is assured of one of those positions. BW: With your auctions, in contrast to eBay, you seem to be focusing more on the business-to-consumer auctions. Bezos: No, that's not true. This is another one of those areas where we are letting customers decide. We have built the tools to let both person-to-person and business-to-consumer auctions take place at Amazon.com. And then you build those tools and you just let the marketplace decide how the ratio turns out. So my view of things like that is you facilitate those things, but they decide on their own in a self-organizing way what comes out. We have put a huge amount of effort and focus into the person-to-person segment as well. BW: But you started out with a lot of these merchants. Was that just to get this going? Bezos: That was a very important part of getting things started. You don't want to launch something and have nobody there. BW: How will online selling change physical-world retailing? Bezos: The short answer is that strip malls go away because physical retailing is not going to be able to compete on price. That can't happen. If you study the economics, online retailing is just more efficient. Online stores are going to be the low-cost providers. As a result, that leaves other things for physical stores to compete on, and there are lots of dimensions that are important to customers besides price. One of them is entertainment. So a lot of shopping gets done in large part as entertainment. This is why Nordstrom's has a piano player and so on. A second category of things is when you need something right now, this minute. In that case, you need to do the last inch of delivery yourself. Which means you pop in the car and go to the store, and you are willing to pay that half an hour to do that. So what's going to happen in my opinion is that stores are going to get more entertaining. The quality of the sales associates is going to go up to make that experience more pleasant. Stores are going to get cleaner. Every dimension you can imagine of making a physical store better is going to happen. Don't forget that the physical world is still the best medium ever invented. Right? BW: It's the only one, when you get down to it, for human beings, right? Bezos: That's right. That's the medium in which we evolved. (LAUGHS) We're highly attuned to interacting with that medium, and so that medium has huge advantages. Second of all, and maybe even more important, people are gregarious. For decades, pundits have predicted the demise of the movies. First, television was going to put the movies out of business, and the movies became an even larger business. Then the VCR was going to put the movies out of business for sure. And they became an even larger business, and now I hear it again, the DVD player combined with home theater systems, which give great sound and high-quality picture and high definition television, all that stuff, this time for sure, movies are going to be out of business. What this misses is that people aren't going to the movies primarily because they want a really high-fidelity experience. They are going to the movies because it's an event. This is why people like to go to Starbucks. I mean, it's good coffee, but it's still just good coffee. (LAUGHS) And the same thing is true of shopping. BW: Is it possible Amazon is trying to do too much? Bezos: No. We've always been extremely conservative in that regard. And always said we'd rather be too late to expand than too early because customer experience is so important to us. BW: You've also mentioned management bandwidth as a constraint. Bezos: That's our top constraint. That's why we don't expand faster. We're a very lucky company because we haven't been capital constrained. Instead, we've been people-bandwidth-constrained. In one sense, we're faced with insurmountable opportunity. But we have to be very careful and do only as much as we can given the people bandwidth that we have. On the one hand, we triage very carefully and try to do the things that we think will benefit our customers the most the soonest so we prioritize very carefully. And on the other hand, we simultaneously work to expand our executive bandwidth and our people bandwidth around the company so that we can safely with an ultra-high customer experience do more. BW: Is there a risk of making your image so broad that people don't know what you stand for? Bezos: No. See, we're not a book company. We're not a music company. We're not a video company. We're not an auctions company. We're a customer company. BW: Don't you need a message that tells the customers what Amazon really offers them? Bezos: We're the Earth's biggest selection. BW: And you don't think that's too broad? Bezos: No. I think it's something that customers want. BW: Why hasn't Shop the Web, your service to refer shoppers to other merchants, really taken off then? It hasn't expanded much. Bezos: It may seem like that to you. But I would urge you to stay along for the ride. We've been learning a lot. We always put things up and learn because that's the only way you get customers to talk to you. BW: Frankly, it doesn't seem to be up to the standards of other Amazon offerings. Bezos: Well, you'll notice it's not a tab [site markers for Amazon's main shopping areas]. It says "Help us build Shop the Web." This is exactly what we did with music. Now, some things are harder than others, and some things take more time than others, but we put music up for probably 2 1/2 months in a form that was definitely not something that we felt comfortable launching as a tab. You can just go out and survey customers. But it turns out to be a lot more effective to get something up and let them interact with it and then tell you, based on the interaction, what they would really like to see. BW: Are you managing to use the data you collect on customers as they use the new parts of the site? Bezos: Well, they E-mail us. It's not hard data to analyze. They E-mail us and say this is what I would like to see. And they say, you know, you've got this all wrong; I love this; can I get this, or can I get more of that. BW: How do you use the data that you collect from people as they use the site, beyond using it to offer recommendations on other products they might like? Bezos: Under the covers, I think the quality of the recommendations has continued to go up. The most recent visible change is personalized recommendations was maybe a month ago or so. When you come to our store now, instead of just saying, here are your book recommendations, it says -- for me it says, here are your science fiction recommendations, here are your science recommendations, and here are your business and investing recommendations. I think those are the three categories it picks out for me. And then it gives me personalized recommendations in each of those categories. But less visible are very slow, incremental improvements in underlying algorithms that help with the discovery process. So this is the kind of thing that I mean when I talk about us knowing 2% of what we'll know 10 years from now. I mean, you should expect us to just relentlessly work on that stuff and, in your mind, think of it getting 1% better per three or four months or something. That's the kind of thing that you just slowly, slowly improve over time. BW: Some of the merchants on your auctions have been unhappy with the site. What's wrong? Bezos: The thing that we got wrong at launch was closing administration. If you are a heavy seller, administering your auctions is very complicated, because you might have hundreds of auctions closing every day. And, basically, you have to provide a set of what are effectively reports and tools for heavy sellers to manage their auction closings. And our tools were primitive, to say the best. And now they're excellent. And they can be even better, of course. BW: The other concern I heard was that people bidding didn't want to pay as much as sellers thought they should. Bezos: Yeah. But that's a little different. Because this is somebody who wasn't experienced with auctions, and he was setting his prices too high to start with. I think it's a relatively small number. It's not a standard retail environment. And if the seller is treated that way, it doesn't work. It's not what it's intended for. And that's O.K. Again, this is a marketplace. So what happens is lots of sellers come in, they all have different strategies. Some are successful, some aren't. You're taking a look at this thing in its earliest stages. There is no equilibrium, which is what marketplaces always reach. BW: Do you see dynamic pricing of auctions coming to other products on your site? Bezos: No, no, no. Auction pricing is most useful when it's hard to assess a fair value. So that means either that the thing you're selling is a unique item or maybe it's not unique, but its value fluctuates rapidly in time. You know, stock prices are sort of like that. So effectively, auction mechanisms are used to set stock prices; it's not that you're buying a unique item. You know, we can all buy IBM stock, it's not unique -- but it is changing rapidly over time. Or it's a unique item. So it's a one-of-a-kind thing or one of 10 or something. A very rare thing. And then there just isn't any kind of pricing history on it. So setting a price is hard. For most things, fixed prices are more efficient. And the reason is that you don't have to negotiate. You know, you don't want to negotiate the price of the simple things you buy every day. If you've ever been to a country where that's the standard, it's annoying after a while. It's just inefficient. It's just a bad use of time. BW: Even online, where you can have automated haggling, do you think that will be true? Bezos: Yeah, because you don't want to have to wonder whether it's a good deal. You want to have a trusted relationship with someone, some party who you believe is going to give you a fair price. Because that's actually very logical. I mean, that's very rational. This is why if you find a car mechanic who you really like, you don't want to shop around. Because it's very hard for you to assess the value, and you'd like to just be able to have a trusted relationship and know that that person is going to charge you a fair price. That's all branded relationships are, except less one-on-one than the car mechanic example. You know, if you come to Amazon.Com and buy a book, you know you're getting a reasonable price. Because we aren't going to charge you an unreasonable price. It would be short-sighted and dumb. BW: Not necessarily the lowest price, but reasonable. Bezos: Well, actually, our goal in the book space and the music, as a seller, we're not going to ever make people choose. We're going to have the lowest price relative to any competitor who provides even a quarter-decent service offering. So they don't have to provide a half-decent service offering, just a quarter-decent one, and we will match their price. You can't rely on customers having imperfect information, as a merchant. You have to assume they have perfect information, which means you have to give them real value. Now, real value is not strictly a function of price; it's a function of price, service, selection -- a whole bunch of things. But you'd better make sure that, very, very straightforwardly, that you have the best value proposition online. If you don't, you're not long for this world. BW: Do you have a goal for when you can throttle back on expenses and become profitable? Bezos: Our strategy is very, very clear: We're focused on long-term returns for investors. And to throttle back on investment now would be short-sighted. When we have less opportunity, that would probably happen. But as long as we have lots of opportunity, we're going to continue to invest commensurate with that opportunity in a very disciplined and methodical way, but in a long-term context. To do anything else, we believe, is irrational. But we also don't claim that that's the right strategy. We just claim it's ours. And then people get to decide. But we're clear about it. And we do passionately believe it's the right strategy. But we don't have to convince anybody of that. BW: At least as long as investors go along. Bezos: I don't really see that, either. There will always be people who believe and people who don't. We can't do the wrong thing because people want us to. That would be wrong. And they don't want us to. BW: Given Amazon's recent stock drop, some investors seem to have lost faith. Bezos: I just think that's such a wrong way of looking at the world. I admit it's a common way. You're thinking about a two-week period and we're thinking about a 10-year period. We want a completely different set of investors. We don't want investors that are thinking on a two-week time horizon. They're not right for our company. Any investor thinking on a two-week time horizon is never going to be in sync with what we're trying to do. BW: But you have to have enough investors that believe in you to provide that kind of capital for expansion. Bezos: That assumes that you have capital needs. I guess if that assumption is correct, then I think what you're saying is true. But I believe that if our strategy is correct, as we believe, there will always be enough smart investors who believe in our strategy and who have a long-term outlook to support us in doing that. To assume otherwise is to assume that free-market economies don't work. Make no mistake about anything that I've said here: Long-term profitability and building an important and lasting and sustained company is incredibly important to us. We just believe that, by investing now, we increase our chances of doing so. _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ |
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