The fantasy world of Jeff Bezos
Wall Street thinks the magic is gone from its once-favorite dot-com. But Amazon.com CEO Jeff Bezos tells Red Herring otherwise.
By Pete Henig and Nicole Sperling
From the October 2000 issue
To hear him describe it, Amazon.com (Nasdaq: AMZN) CEO Jeff Bezos lives in a perfect world. A world where bad news simply does not exist. Where, says its founder and CEO, anything that could be wrong with Amazon is what's actually right with it. He's the "Tony the Tiger" of e-commerce. At Amazon, of course, everything's just grrreaaat!
It's as if the planet's greatest optimists have been plucked, packed, and shipped to Seattle, then downloaded into one very smart, articulate, and charming person. But optimism is often a clever cover for denial, and with Mr. Bezos, we couldn't decide if his was genuine, or if he was putting us on. Just one example: a day after posting disappointing second-quarter financial numbers, Wall Street sent Amazon's stock tumbling. Yet Mr. Bezos seemed oblivious to the grim news, his famous laugh intact.
Didn't it matter that Amazon's president and chief operating officer Joe Galli had quit that week? "We're not replacing him," said Mr. Bezos. "We've got such a great management team we don't need to." Wouldn't Amazon's sinking stock price make it difficult to attract and keep employees? Mr. Bezos: "Of course, smart employees always want to join when the stock is down, and since we don't want any dumb employees, it works out pretty well." And what about Amazon's flat revenue numbers? "Actually, in our early-stage business segment, we have an annualized revenue run rate of $500 million." To keep this in perspective, it has taken $1.5 billion in losses on $3.6 billion in revenue over Amazon's five-year existence for the company to achieve even some measure of profitability.
At a time when Amazon will either rise to its next level of business -- as America Online (NYSE: AOL) finally did after much maligning -- or become another Harvard Business School case study in failure, Mr. Bezos remains adamant that his company is only "at the tip of the iceberg" in terms of operating efficiencies. One glowing new development: in mid-August it announced a strategic alliance with Toysrus.com (NYSE: TOY) to create a cobranded toy store. Both companies already sell toys online, but the deal could create an industry giant.
But to still believe in Amazon is to believe in all of Mr. Bezos's dreams: the centralized distribution centers, the efficiencies of his Internet platform, and the mystery that out of growth, profits just emerge. To question even one piece is to question the whole model.
Having already raised more than $2 billion in capital, Mr. Bezos's company could be one of the largest corporate startup experiments ever. But how much more time or money will it take to prove Amazon's business ever made sense and that the dream may not have been flawed from the beginning? Mr. Bezos won't answer that one, but he does ask, "C'mon, where are the really hard questions? I thought this was going to be a tough interview."
Red Herring: Do you feel there is more emphasis now on Amazon's bad news, that you're being treated unfairly by the Street?
Jeff Bezos: I feel like it would be incredibly ungrateful of Amazon to ever feel unfairly treated. We have, on balance, been treated so well over time, not only by the media but by Wall Street, and I think that continues to be the case.
RH: Critics say some of your newer categories, like toys and electronics, are not profitable and are not gaining much traction.
Bezos: Our electronics business, for example, is the fastest growing category in the history of the company, so I'm not sure where that notion comes from.
RH: But if you look at certain categories, is there an inflection point that will say you shouldn't stay in those businesses ...
Bezos: I can answer the question before you finish it because the assumption is wrong. We are gaining tremendous traction in all of those businesses.
RH: But are margins so slim that you would simply be unable to make money in them?
Bezos: No.
RH: Lawn mowers, for example. Will you sell enough lawn mowers such that you can become profitable?
Bezos: I don't know about lawn mowers per se. I don't see why not. Sometimes what can be sold online is often counterintuitive. People think you'll never sell a 60-inch television set online. It's actually the perfect thing to sell online.
RH: So then you're simply a retailer who has to fulfill the economics of the retail industry.
Bezos: There is a fundamental difference in our business model than that of physical retailers. We use centralized inventory, centralized distribution. With centralized distribution, what you get is a negative operating cycle. That's going to lead to what we believe will be triple-digit returns on invested capital.
RH: But what is the percentage of each transaction that goes into fulfillment costs?
Bezos: Our fulfillment costs as a percentage of sales are 15 percent of sales, down from 16 percent of sales from Q4, but up from 10 percent of sales in Q4 in 1998. The reason that number has gotten bigger is we've built a new distribution center network that isn't fully utilized, and we're carrying all these product categories.
RH: Do you have a target date for getting those fulfillment costs down?
Bezos: We'd like to see them in the low teens by the end of the year.
RH: You said recently you would end up with $1 billion in cash by the end of Q4. But it's not Q4 that analysts are concerned about: it's Q1 and Q2 of next year. Past the holiday season, how does the cash position look?
Bezos: We're in a very strong cash position today. We expect to be in a very strong cash position by the end of Q4, about $1 billion. And we expect to be in a very strong cash position by the end of Q1 too.
RH: Does that position change dramatically between Q4 of this year and Q1 of next year?
Bezos: I don't know about dramatically, because that means different things to different people.
RH: Dropping to $600 million? Or perhaps $500 million?
Bezos: I'll just repeat what I said: we're very comfortable with our cash position.
RH: A big source of your capital has come from employee stock options. I think last year it was 16 million ...
Bezos: Sixteen million would not be a large number.
RH: Sixteen million shares exercised at $19 a share, raising $320 million.
Bezos: You'd have to check with our IR [investor relations] team.
RH: The numbers are accurate. Is that amount of money raised essential to your business? Do you truly lean on that money?
Bezos: No, it's not something we think about.
RH: It's not even in the equation, especially with your capital needs as you look at the future?
Bezos: Nope.
RH: You're one of the few Internet companies that hasn't gone out for a secondary offering. Won't you need to raise more money?
Bezos: We're very comfortable with our cash position. We're not going to speculate on future financing. It wouldn't be appropriate.
RH: So how do you make your operations more efficient? Do you manage inventory or your warehouses better, squeeze suppliers?
Bezos: We are at the very, very beginning of operational excellence initiatives. It's a huge opportunity for us.
RH: But do you get there through retail expertise or technology expertise?
Bezos: A lot of opportunities are in inventory management -- the buying and management of inventory. Both of those are areas where we have great teams inside the company.
RH: So you feel you're at the starting point?
Bezos: We are at the tip of the iceberg.
RH: Is that your answer when people want to know where the profits are? How are you going to pay off all of your debt? Do the answers come from efficiencies?
Bezos: It comes from growth, efficiencies, and fundamental changes that you'll see happen over the next ten years in e-commerce. It's hard for people to imagine just how good e-commerce is going to be ten years from now.
RH: Looking ten to 20 years out, then, is that where the model finally works?
Bezos: Look, we've already demonstrated the model in books, videos, and music. No one can rightly question the basic model.
RH: But is it possible that your dream for Amazon is so strong that you are either unable or unwilling to see that it may never be a profitable business that warranted the amount of money it took to build it?
Bezos: First of all, you have to realize that the reason we have a $10 billion market cap is because a lot of people do believe in it. I take exception with your premise that we've always had a lot of people telling us the things we're doing don't make sense. We've also had a lot of people telling us that what we are doing is really smart stuff. Let me assure you that hasn't changed.
A preview from the October 2000 issue of Red Herring magazine.
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