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Q&A: Amazon's Bezos: "The Company Is Not the Stock"


On Apr. 11, as part of BusinessWeek's continuing "Captains of Industry" series at the 92nd Street Y in New York, Amazon.com Inc. (AMZN) CEO Jeffrey P. Bezos sat down with Editor-in-Chief Stephen B. Shepard to talk about Amazon's prospects. Here are some excerpts:

Q: Did you originally think of Amazon as just selling books?

A: It really was just books. Startups need to be laser-focused. You have these initial, precious resources, and they are so very finite that you need to be very focused. Amazon.com was started with a few hundred thousand dollars, most of which came from my parents--always a good source of angel investment capital.

Q: The ultimate patient investor.

A: That's right. I told them there was a 70% chance they would lose their investment. I really wanted them to know that because I wanted to be able to go home for Thanksgiving. So it worked out very well for them, which I am extraordinarily happy about.

Q: You've branched out to a lot of products. What sells well on the Web?

A: One of the categories that I'm very optimistic about is our electronics business. There are just a lot of economic advantages to selling electronics online. We have the selection advantage--25,000 items in our store, compared with about 5,000 in a big electronics superstore. I think a lot of categories--even some that initially failed, like furniture and pets--will come back.

Q: Are some of these higher-margin businesses than books and music?

A: It depends. If you're looking at the dollar profit per item, the answer is yes. This gets frequently misunderstood, especially in the electronics category. Let's say you're talking about a $300 digital camera. That may have a 10% or 15% gross margin, but that's still $30 or $45 of gross profit. It costs us about the same to receive, stow, pick, sort, pack, and ship a digital camera as it does a book. So the camera can be much more profitable, although the gross margins are lower.

Q: You have a good partnership with Toys 'R' Us Inc. Will you look for other such partnerships, beyond what you announced today with Borders Group Inc.?

A: Yeah, I think there is an opportunity there. One of the things that we've done over the last six years is build a platform. We wanted to make the Web site very easy to use. We wanted the distribution centers to work reliably. We wanted customer service to work reliably. All of this stuff together made us very good at e-commerce and, I think, widely recognized as the best possible online shopping experience.

What we're finding is that there are a lot of physical-world companies, Toys 'R' Us (TOY) and Borders (BGP) being the first two examples, that have found it's very difficult to do a good job online. They have teamed up with us so that they can focus on their in-store experience, which is a very difficult business in its own right. By partnering with us, they can have a top, A-plus quality offering for their online customers. We do all of the shipping and fulfillment. We do all the physical handling of the merchandise.

Q: Why not let them do the bricks-and-mortar part and you do the virtual part?

A: What we're finding is that the bricks-and-mortar companies don't know how to do the back-end part of the business because it's completely different. As far as we know, we're the only company that has a distribution network that ships millions of different items to millions of different customers.

If you look at the distribution center network of a leading retailer like Toys `R' Us, it's built to ship cartons of product to stores, not single items to customers. It's a completely different thing.

Q: Would you consider being the user interface for a bricks-and-mortar company that would handle the back end?

A: Sure. The way we look at this platform is that it's assembled from a number of pieces. There is the Web site, which has personalization and one-click shopping and search technology. All the things that are designed to make it easy. There is customer service and fulfillment. There is access to Amazon.com's customer base. I suspect that different partners will want to assemble an offering out of different pieces. We're agnostic about that as long as it's good for the partner, good for us, and great for the customer.

Q: Cumulatively, you've lost a fair amount of money. When will Amazon start making money?

A: As a first step, we would like to have a pro forma operating profit this fourth quarter. For five years, we've declined to even answer that question. The reason was we didn't feel we had enough visibility to responsibly answer it. Now we feel we do. We just had five quarters of progress in some important operational metrics.

Q: Explain what you mean by pro forma. That's not the same as net income, which is the traditional measure.

A: The difference is a bunch of noncash charges that primarily relate to goodwill of acquisitions, investments that didn't work out and we wrote it down.

Q: Can you talk about net income?

A: No. We're making a very precise prediction and there is a lot of work to make that. It's not a slam dunk.

Q: You still have to finance the debt. Will you need additional financing?

A: We don't think so. If we were to do a financing, it would be for strategic flexibility or to strengthen the balance sheet. But for operating reasons, we don't need it. We ended 2000 with about $1.1 billion in cash. In the year 2001, we expect to use about $200 million in cash, and so we'll end the year with about $900 million in cash. So we're very comfortable with our cash position. In fact, we had a great piece of good news today because Moody's Investors Service, the credit rating agency, came out and said that they were moving us from a "stable" to a "positive," and said that by their analysis we have at least 18 to 24 months of cash.

Q: What has to change for you to start making money?

A: Most of the change that we're driving is in operating efficiencies. If you look at what we did over the last five years, we followed the strategy of "Get big fast." That was a really important thing to do. It worked.

It was only 3 1/2 years ago--at the time of our initial public offering--that we had annualized sales of about $60 million a year. When you have sales of $60 million a year, if you can get a 1% operating efficiency, that will net you over the course of the year 1% of $60 million, which is about $600,000. That's not very much money. Really, what you should be doing is trying to build a company of the scale where 1% matters. We are now clearly at that point. With $2.7 billion in sales, 1% is no longer $600,000. It's $27 million. These are big numbers.

So we've got tons of headroom in operating positioning. For example, we have fulfillment expense, which is the distribution centers, the customer service centers, credit card expense. A year ago, that was 16% of sales in Q4 '99. In Q4 of 2000, that was about 13.5% of sales. So we got about 250 basis points, 2.5% in that area. Over the long term that can be in the high single digits. But there is just a tremendous amount of work to do there.

Q: Your stock price went from $113 to a low of about $8. You're up to about $13 now. How do investors value a company like Amazon?

A: The only way that I know how to think about Amazon.com is in the very long term. The sector that we are in is highly volatile. The stock actually traded below its IPO price for a while. So you could have bought, at the time of our IPO, Amazon stock for roughly $1.25. It's up by a factor of seven or eight even today, which over three and a half years is not a bad return. The people who bought and held from our IPO may curse themselves for not selling at $100, but this is, in many cases, their best investment ever.

I have long warned individual investors--I started doing this two years or so ago--to stay away from Amazon.com and other Internet stocks; not because of the absolute price levels, but because of the volatility. They are not individual investor stocks. They are not "sleep at night" stocks.

Q: What have you learned from the dot-com crash?

A: The company is not the stock. The clearest way I can describe it is that back in the year 1999, when the stock market was booming and Amazon stock prices were booming, we had about 14 million customers buy from us in that year. In 2000, when the stock was busting, we had about 20 million customers buying from us. So if the stock is the company, somebody forgot to tell the customers.

Q: Is running Amazon as much fun as it used to be?

A: The truth is yes. Sure I like being the poster child instead of the pi?ata a little bit more. But I'm a change junkie. I love the rate of change. I love the intellectual challenge of what we're doing. I love the people I work with. It's not like me against the world. We've got a big team of people. It's fun.


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