Chewing the Sashimi with Jeff Bezos


At the height of the dot-com revolution, Amazon.com founder and Chief Executive Jeffrey P. Bezos was named Time magazine's 1999 person of the year -- at about the same point his company's stock hit a split-adjusted record high of $113 a share. For Bezos and Netrepreneurs everywhere, it seemed like the sky was the limit.

Then came the Internet bust, the wave of dot-com bankruptcies, the questions about the future of cyberspace as a sales medium, and a nadir for Amazon in the aftermath of September 11, when its shares fell as low as $6.

The e-tail pioneering giant has crept back, however. Bezos & Co. surprised analysts and silenced skeptics earlier this year when Amazon reported its first-ever net profit -- a penny a share -- for fourth-quarter 2001. The consensus among analysts is that next year could see free cash flow growth and a full year of profitability, if the economic rebound continues. Many institutional investors are coming around to the idea that Amazon has turned the corner, especially if it can post robust holiday sales in the all-important fourth quarter of this year.

CAUTIOUS EXUBERANCE. Still, questions loom about the competition from other retailers that are just now getting up to speed on the Web and about the business model that Bezos seems to tinker with one year to the next.

After seven years and more than $1 billion in losses, Amazon is still a work in progress. Bezos wouldn't have it any other way. In between devouring two sashimi lunches, he chatted recently with BusinessWeek Online Senior News Editor Doug Harbrecht, and BusinessWeek Assistant Managing Editors Frank Comes and Kathy Rebello. Among the topics of discussion: the wisdom he has gained from the Internet boom and bust, and the differences between Amazon and brick-and-mortar retailers like Wal-Mart.

These days, he speaks with caution about investing in Internet companies. But in many ways, he has lost none of his exuberance -- promising more partnerships that will attract millions of new users to the Web site, and talking about a world where people have multiple PCs in their homes and buy kitchenware at a moment's notice -- at Amazon.com. Edited excerpts from a wide-ranging conversation follow:

Q: During the heyday of the Internet Revolution, America Online founder Steve Case used to say that, someday, e-mail isn't going to be referred to as e-mail anymore, it will be just mail. Same with e-commerce: It won't be referred to as e-commerce anymore, it'll be just commerce. Is that the ultimate goal for Amazon -- to become a regular old retailing giant?

A: Let me rephrase that slightly. It's certainly the goal of any new technology to become an old technology. When you fly across the country, or fly across the Atlantic Ocean, nobody thinks anymore: This is amazing -- that I can be in London in six hours. Or that you can pick up a phone and call anyone anywhere in the world. We take it for granted.

Of course, that's what you want for e-commerce to ultimately become: a part of everyday life, that people think of it as if they were going to the grocery store.

Q: If giant retailers like Wal-Mart or Sears ever get their act together [with e-tailing Web sites], what's the value-added characteristic you can provide competing against them?

A: They are really in very different businesses. The set of skills and competencies to be a superb physical world retailer are completely different from those you need to be a superb online retailer.

People always ask me, When are you going to open Amazon stores? We don't know how [to do that]. That's a complicated business in its own right. We have a widely recognized competency in an [Internet] business that is not yet well-served.

We need to stay focused on that. Our big advantage is and will continue to be that we know more about the business, just because we have been doing it for longer. The gap between us and our competitors, if we execute well, should widen, not narrow.

Q: Any surprises this year?

A: Yes, but I can't tell you. You're going to be a great customer of our new offerings, I can assure you of that [the trademark Bezos laugh].

Q: How are things looking for Amazon for the rest of the year?

A: In 1999, we built a fixed-cost structure that requires approximately $4 billion in [annual] sales. You have your unit sales, and a certain amount of variable profit every time you sell something. You need to be able to aggregate those variable profits to cover your fixed costs. What you saw in Q4 of 2001, with the $1.1 billion we had in sales, that was the level we needed to cover our fixed costs and make a profit.

Q1 has less sales than Q4, [yet] as the company continues to grow even in the nonseasonally heavy quarters, we hopefully should be able to make a profit there, too. So, it's really nothing more mysterious than there's a certain fixed-cost structure, and you need a certain amount of sales for the profit to flow across that fixed-cost structure.

Q: Amazon is now trading at around $15 a share. What's a fair valuation?

A: I've never taken a position on the stock price, and I don't think it's appropriate for management to take a position on stock price. [Management's] job is to build an important, lasting, valuable company, and to work hard at that. And then there's the job of investors -- to try to assess what that company is worth. Those jobs are hard [and distinct]. So, I never speculate on stock price.

"If you're going to invest in an Internet stock, you must be a long-term investor"

I've said in the past that all the Internet stocks are volatile...so I'm skeptical that they are appropriate investments for small investors. They're not good sleep-at-night kinds of stocks. If you're going to invest in an Internet stock -- it's really true of technology stocks in general, but Internet stocks in particular -- you must be a long-term investor. And if you're a small investor, it should be a small portion of your portfolio, just because of the volatility.

Q: At what point do you think Amazon is going to be profitable on a GAAP [generally accepted accounting principles] basis?

A: Investors care about two things: future cash flows and number of shares outstanding. You are trying to forecast both those things, so you can get cash flow per share. And that allows you to calculate net present value. And that would be a fair value of the share.

In our GAAP statement, you'll find a variable charge dependent on our stock price. What we did was we exchanged options for a number of employees at a lower stock price. When you do that, you have to take a variable charge against earnings. So, the higher our stock price goes, the bigger charge against earnings that we take.

It's a noncash charge. The way to make it a gain is to make sure the stock price goes down. So, we will not be focusing on trying to optimize that line [laughs].

That's why, when you look at GAAP earnings, it's important for serious investors to look at the GAAP statements, not just at one number. For me to predict GAAP earnings would require me to predict our stock price, which I'm not about to try to do.

Q: But you have expressed concerns about GAAP. I know that's not your favorite way of measuring things.

A: No, that's not actually true. The entire statement is prepared in accordance with generally accepted accounting principles. So for example, two of the numbers we are focused on are operating cash flow and free cash flow. Both are GAAP numbers. GAAP is incredibly useful.

What's debilitating is focusing on any single number. Investors who do that always underperform the market.

"Lowering prices is easy. Being able to afford to lower prices is hard"

Q: What's the next frontier?

A: There is one substantial change to our model. Up until about nine months ago, all the progress in our business was based on two drivers: selection and convenience. The thing we have layered on is lower prices. So, the big change in the model going forward is having all three of those things: selection, convenience, and lower prices.

That's something we wanted to do for some time, but we didn't have the cost structure. Lowering prices is easy. Being able to afford to lower prices is hard. A strong focus on cost structure over the last 2 1/2 years put us in a position where we can drive growth by giving lower prices to customers.

We've had three very significant price reductions in the past nine months. The first was when we took books over $20 down -- with a 30% off discount. We introduced Super Saver Shipping. Then we just took that $20 hurdle on books down to $15, to get the 30% discount. There's still more room in the future...to reduce prices even further.

We invested very heavily in 1999, built a fixed-cost structure that supports a much higher level of sales than we have today. So, we can hold that fixed-cost structure for a number of years.

Q: Let's talk about your product strategy. Are you going to mix it up more?

A: We're in all the same categories we always were in. What we did do, we reaccelerated growth in the books business by lowering prices in that sector. But the strategy of building a place where people can come to find and discover anything they might want to buy online is still the strategy. In fact, we've added product categories, not subtracted them, in the past year. We added computers and magazine subscriptions, for example, and we will continue to do that.

There will be categories that won't work as well. I don't see people rushing to buy evening gowns online, to give you one example. But to different degrees, everything is going to work. The key as we pursue this goal of universal selection, there will ultimately be thousands of [Amazon] partners. There is no way to do it on your own.

Q: Amazon is now offering free shipping 365 days a year on purchases of more than $99. [It's also testing a $49 free-shipping offer for three to six months.] Can you explain the economics of that?

A: We worked hard for a long time for our cost structure to be such that we could offer 365-day-a-year free shipping. That's what we finally figured out how to do.

Q: How many customers are purchasing more than $100 orders?

A: We don't disclose that. We are happy with it, but we wouldn't want to give you any detail on that.

Q: Are you concerned about competitors trying to offer the same thing?

A: It's not an easy thing to do. You need a certain amount of scale to...be able to do this [and have the economics work].

Q: Have you had difficulty moving products across borders since September 11? Is there any impact on your growth in global markets?

A: Most of our growth outside of the U.S. comes from local operations.... [For example], in Germany most of our sales are in German books, and most of those books don't have to move across borders.

Q: How big is your international business?

A: It's about a quarter of our business.

Q: Any projections on growth?

A: None beyond what we gave in our last guidance.

Q: There are a number of deals where Amazon handles the back end for stores. Do you expect to reach more deals with stores in the coming year?

A: I do. We have a variety of good deals. Sometimes we handle the back end, sometimes [our partners] handle the back end. Sometimes they're trying to tap into heavy traffic flows on [our] Web site.

"Expect to see a larger number of smaller deals"

In the case of [Amazon's agreement with Target stores], it's all of the above. We can drive sales for them using our traffic, and we are handling their back end. So, I expect us to do more in all of those categories over the next year. There are a number of deals already concluded that haven't been announced, too. It has a lot to do with what the partner wants. It's their call.

Q: When will you announce these new deals?

A: What you should expect to see from us is a larger number of smaller deals. Target is obviously a very big deal. Toys 'R' Us is a very big deal. Borders, big deal. But there are only so many huge retailers you can hook up with. There are lots of medium-sized ones, too.

Q: Let's talk about Amazon's impact on the Internet in general. Your company has in some ways set the standard for customer service online. But over time, more and more companies got better at customer service. As this continues, what is going to happen to your business? Do you have to keep going to a higher level of customer experience?

A: Our job is to make sure that gap widens.... The good news is that, with innovation in e-commerce, we are still at the very beginning. There is so much more to come.

We'll keep raising the bar. There have already been dramatic improvements to customer self-service [this year], so that you can find your own orders, change your shipping address, cancel items from your orders, all those things. Even things as simple as order forms, we made a major step forward, and we're getting fantastic feedback from customers.

Q: What drives growth going forward?

A: When you have computing power doubling every 18 months, and you have the costs of long-haul bandwidth halving every 12 months, and disk-space costs halving every 12 months, you get to layer a lot of innovation on top of that. Things that would have been prohibitively expensive to do [a few years ago] become possible.

And as CPUs get cheaper and cheaper, people will start to have multiple computers in their homes. That will drive our business, too. If you were to install a computer in your kitchen, your Amazon account purchases would probably double. That's what happened in my house. I strongly recommend this to you [the trademark laugh].

It [still doesn't] make sense for you to look up a phone number on your computer, as opposed to dialing 411 or using the phone book --- we're not there yet in terms of convenience. [But] that's not going to happen with any intervention on our part. Those are things that happen from the free market.

Q: With the proposed FBI reorganization after September 11, it's conceivable that if a customer who orders, say, Principles of the Muslim Faith and the Koran, or shows certain a pattern of online book-buying, the FBI could track those purchasing habits. Where would you draw the privacy line for your customers?

A: These are important national issues that deserve and will get a lot of debate. We'll have to decide one way or another how we want the FBI to act. They will be excruciatingly difficult to answer. I'm not sure I'm the right guy to ask. I don't know much about it.

At Amazon, we require a proper warrant to get any information. If we consider a warrant to be too broad, we will fight such warrants. But if, at the end of the day, if there is a properly constructed warrant, we will service that, as required by law.

"What [Barry Diller] is doing with travel makes a lot of sense to me"

Q: What do you think Barry Diller is up to [with USA Interactive, the expanding e-commerce network that includes Home Shopping Network, Ticketmaster, and Expedia.com]? Is he moving into your space?

A: You have to ask him. He's a smart guy. I think what he is doing with travel makes a lot of sense to me -- the idea of having some of the travel Web sites combining with a TV station. I'm not an expert on travel, but it seems like a good business idea to me.

Q: Do you sell services?

A: It's limited today. We have some partnerships -- basically customer acquisition accords, where we help people using the traffic on our Web site to drive traffic to them. But directly, the closest thing to services we sell are probably our magazine subscriptions.

Q: If Wal-Mart went into, say, the brokerage business, people might feel confident that Wal-Mart could offer lowest cost at reasonable quality. Same with Amazon in some service areas. Do you think your brand will eventually connect in areas outside your specialty?

A: It's possible. But there are counter-examples to that. Sears tried very hard for awhile [to get into the financial-services business]. I think what you have to ask is: Is it a well-served space? If it is, maybe you don't want to go near it.

Do you have an idea of how you are genuinely going to change the customer experience? If you are going to have a me-too service, I don't think that's very interesting.

Q: Can we talk about the furniture category, selling furniture online? You had something like that, right?

A: We did. It was Living.com.

Q: Is there still a place on the Web for selling furniture?

A: A lot of these things were just too early. They'll come back.... When something grows rapidly, as e-commerce did, people dive into things that should be second-phase opportunities. They come back eventually and get done well with good execution. But it will take a number of years for that to happen.

"We invested in Living.com, Pets.com, Kozmo -- a Who's Who of the dot-com dead pool"

Q: If you were going to start up Amazon now, and you knew then what you know now, would you have done anything differently?

A: Yeah, I would not have invested in Living.com [laughs]. Seriously, I would have sidestepped our investment strategy. We invested in a number of companies, most of which aren't around today. It didn't hurt our core business, but we wasted some money doing that. Fortunately, it wasn't distracting. We just made an expensive blunder. We invested in Living.com, Pets.com, Kozmo -- a Who's Who of the dot-com dead pool.

My only defense is that we had a lot of smart company. And we missed something. There was a common theme -- the thing I missed. There really was a land-rush phase to the Internet...which coincided with our strategy of getting big fast. That was very important to our future.

But the landscape changed earlier than people recognized, including me. Our thinking at the time, when we invested in Living.com and Pets.com, was that these were tier-two categories. [We thought] if we don't get involved now, we would be forgoing our opportunity forever. What actually happened was the land-rush phase had ended, but it wasn't detected yet. That's why so many companies, including us, invested so much money.

If I knew that then, I could have saved significant sums of money. But when you're building a company in a dynamic situation, you're going to make some bets that are going to end up well, and other bets that aren't good. But if you don't take those risks, you'll lose out to the companies that do.

I would like some more sashimi.

Q: You can have my chicken salad.

A: I like sashimi. The problem is that I can eat a lot of sashimi. I can eat a whole tuna.

Q: Any lessons from the business models that haven't worked on the Internet?

A: Some of the business models didn't fundamentally work, or they required too much scale to get them to work. For some companies, the execution was poor. Some companies, the fundamental customer experience was never going to work. There were lots of companies like this, some of which we invested in.

Q: Is a combo like the AOL Time Warner deal in Amazon's future, a combo that merges old and new retailing?

A: I don't think so. We're doing things with stores, like in-store pickup arrangements with Circuit City and Borders, where you can come to Amazon, buy what you want, and then have it shipped to you or you can pick it up at your local store. It's waiting with your name on it, at the express counter. You can walk in and walk out.

You can get those synergies without necessarily doing a merger.... I'm a big believer in getting synergies through business contracts. If you are trying to get synergies through a merger, it so often doesn't work. That should be your approach of last resort.

From a value-capture point of view, AOL clearly made a very good decision. At the height of the Internet market, they bought into a very valuable mainstream company. So, from a trading mentality, that was a successful merger for AOL.

Q: What's interesting, though, is that the market seems to be putting all the value on Time Warner's assets but doesn't seem to be putting any value on AOL.

A: It's always hard to know what the market is valuing. The whole ad market is way off, not just for AOL, but for Time Warner, too. I suspect AOL ultimately will be a very important piece of the AOL Time Warner conglomerate. Whether it was a good deal for Time Warner shareholders is another question. Given what happened, it's pretty clear that AOL had excellent timing on that merger.

Q: When you look at Microsoft, what do you see? A rival? An enabler?

A: I see an enabler. Probably all of our customers -- if not all -- are using some piece of Microsoft software, even if they are Apple users. Even Apple customers, who are using Microsoft Explorer or other Microsoft applications.

"The telecom meltdown is probably in the end beneficial to consumers"

Q: What do you make of the carnage in the telecom sector?

A: You have to be careful not to confuse the damage done to shareholders with the damage done to consumers. The telecom meltdown is probably in the end beneficial to consumers, because a big chunk of the fixed costs will be cleansed away through the bankruptcy process, and then that will allow prices on bandwidth to drop. People will pay marginal costs for bandwidth, and shareholders will end up footing the bill for fixed costs.

Q: And the future market for bandwidth?

A: I think you'll see very sophisticated wireless applications competing with land lines. I think you'll see lots of competition, even over the last mile, over a long period of time.

Q: How long has Amazon been around now?

A: We opened our doors almost seven years ago.

Q: So it's time for the seven-year-itch question.

A: I don't know the seven-year-itch question. I know the Marilyn Monroe movie.

Q: You've been doing this for seven years. Are you still excited about it?

A: I'm still faithful to Amazon.com [trademark laugh]. I have the dream job. There's more innovation ahead of us than behind us. People get this wrong. We're not in the Kitty Hawk [where the first airplane flew] stage anymore. Maybe we just built the DC-3. The DC-9 isn't even on the drawing board yet. Nobody has invented the jet engine.

There is so much innovation to come. I'm having fun. And the business is more fun than it was when we were just beginning. What people don't believe, but it's true, was that it was fun even two years ago [when the dot-com crash hit].

Q: Oh, we don't believe that.

A: But it's true. You have to be a change junkie to like that, but I am. It works well for me.

Q: Ten years from now, where do you see yourself?

A: That's a long time.

Q: Especially in Internet years?

A: Yeah. I'll bet you 10 years from now, though, we'll still see more innovation ahead of us. The car industry wasn't exactly done in 1940.

Q: You've done quite well. So let's say somebody comes along and offers you 25% over market cap for Amazon.com. Why not just take it?

A: We are big believers in our long-term opportunity. We really want to build this as an Internet company. That's the best way to unlock long-term value for our shareholders.

Q: So you don't see a sale?

A: We're focused on being an Internet company.

Q: The fight over protecting intellectual property online: The entertainment industry is trying to use technology to block pirating. What's your view?

A: I support intellectual property protections. But if you interview most music customers -- maybe not the teenagers, but most others -- they will tell you, "Look, I'm happy to pay."

Until paying for music is simple -- in an intelligent MP3 format, which is was what everybody wants because it's what everybody has -- some people will continue to steal the music, mostly for convenience. They're not shoplifting because they want to steal. They're shoplifting because the cashier lines are so damn long.

"It's a heck of a lot easier to steal MP3s than to buy them"

I think people are basically honest, and if given the opportunity to pay in a convenient, friction-free way, they will do so, happily. But it's not out there. The music industry is trying to do exactly what the software industry did more than 20 years ago [with complicated copy-protection features that frustrated users]. They are trying to make sure people will pay, instead of trusting people to pay.

I definitely believe people should pay for copyrighted works. And the laws are sufficient: They already require you to pay for copyright work. There's no confusion. The problem is...it's a heck of a lot easier to steal MP3s than to buy them.

Q: What about books?

A: It's different, because paper is such an excellent display device. I'm not a big fan of e-books. It's going to take awhile.

Q: Do you see any glimmer of an economic turnaround?

A: Innovation is still alive and well. In fact, it's much healthier now. When we started Amazon, it took months and months to raise $1 million. Twenty-two angel investors invested about $50,000 each, and 40 others said no. That's how it's supposed to be.

The alien period of time, really, was in 1999, when untested entrepreneurs could raise $60 million with a single phone call. That was unusual. What we have today is not only normal, but healthy.

Q: How about the accounting scandals? What will it take to get ordinary investor confidence back?

A: The traditional role of investors is to be skeptical. That was set aside in 1999. It's back, it's healthy. Remember, there was a time when conglomerates went out of favor. One of the reasons was that investors realized they couldn't understand their business.... So...investors are, very appropriately, going to vote with their feet.

If a company has complicated bookkeeping, investors are not going to invest in that company. That will drive the market multiples on complicated companies down, which will cause complicated companies to try to figure out how to unlock value, which causes them to figure out how to simplify themselves, which may result in spin-offs. You'll see more organic growth.

Q: What do you do to chill out?

A: I see movies. I have two little kids.

Q: That's chilling out?

A: Depends on the day. I read about three books a month. I'm 135 pages in to A New Kind of Science, by Stephen Wolfram (see BW, 5/27/02, "Simple Science").

Q: And as a new father, how do you balance your work and family life?

A: I'm mostly home on weekends. I do a lot of work from my BlackBerry or e-mail. I work 60 hours a week, which I find sustainable. I find if I work less than 60 hours, I'm bored, and more than 60 hours, I'm tired.

Q: Your favorite movie of all time?

A: Dr. Strangelove. I'm a big Peter Sellers fan. My favorite book of all time is Remains of the Day. I'm a huge Indiana Jones fan, too.


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