In Looking to Branch Out,
Amazon Goes Out on a Limb
By NICK WINGFIELD
THE WALL STREET JOURNAL INTERACTIVE EDITION
Jeff Bezos remembers the "brutal triage" he had to perform in the spring of 1994. That's when Mr. Bezos, now chief executive officer of Amazon.com Inc., sought to winnow a list of 20 potential products he believed he could sell effectively on-line down to three: books, music and videos.
"You and I could sit in front of a whiteboard and come up with a hundred items we should pursue," he says. "The hard thing would be deciding what not to pursue."
Initially, Mr. Bezos decided to sell books -- but that turned out to be just the first chapter in Amazon's life. More recently, he has added new categories of products: Amazon is now expanding its small catalog of compact discs and video tapes into a full-scale library of music and movies.
<Picture: [Go]>Company Profile: Amazon.com
Although books helped Amazon make the Internet safe for commerce, the Seattle company is now shedding its specialty-store focus to become a true mass-media retailer, and eyeing an even bigger chunk of on-line transactions. Analysts say the move is a savvy effort to get consumers to crack open their wallets wider through creative cross-selling of products -- pitching Celine Dion, for instance, to "Cold Mountain" readers.
But the move is risky, too: Cyberspace is increasingly crowded with on-line superstores set up by Amazon's physical-world counterparts, companies with more marketing clout and track records of profitability. And Amazon could lose cachet with bibliophiles if its forays into other media dilute its reputation as a destination for book lovers.
That prospect doesn't daunt Amazon, though: in fact, becoming an all-purpose media mart has been the game plan since day one. "That's why our name doesn't have books in it," says Mr. Bezos, an affable 34-year-old who tends to punctuate his sentences with bursts of uproarious laughter.
The Contenders
Amazon.com
(amazon.com)
CDNow
(cdnow.com)
N2K
(n2k.com)
Barnes & Noble
(barnesandnoble.com)
Borders.com
(borders.com)
Columbia House
(columbiahouse.com)
BMG.com
(bmg.com)
Total E
(totale.com)
Reel.com
(reel.com)
Books Online
(booksonline.com)
Visa Shopping Guide by Yahoo!
(shopguide.yahoo.com/ shopguide)
He isn't joking about expanding beyond Amazon's bread-and-butter book business, though: the company is designing a full-fledged music store to rival those maintained by music specialists CDNow Inc. and N2K Inc. And Amazon offered a hint of its Blockbuster aspirations last month, when it acquired Internet Movie Database, a vast reference guide that will help shoppers pick out films.
Making the World Safe for E-Commerce
While the wisdom of Amazon's decision to expand its product line can be debated, few analysts have seen it as too ambitious -- and that's a testament to how far Internet commerce has come. It wasn't all that long ago that skepticism about the viability of on-line buying and selling was running high, sparked by the flameout of on-line shops such as MCI Communications Corp.'s marketplaceMCI and International Business Machines Inc.'s World Avenue, two Internet malls that hawked everything from Omaha Steaks to sneakers.
Amazon's more specialized, buy-the-book approach proved more compelling than the Internet malls for several reasons. For one, books were a good fit for on-line shopping, since carrying all 2.5 million English-language titles is close to impossible for even the most super of bricks-and-mortar superstores. Freed of the need to physically stock all of its titles, Amazon could draw on its vast virtual inventory and boast of being the "earth's biggest bookstore."
Mr. Bezos also figured that the relatively low cost of books would make them an attractive first-time buy for Web shoppers, and that the lack of tactile contact between buyer and product wouldn't present the same barrier with books that it would with, say, apparel. Above all, Mr. Bezos says he resisted the temptation to create a cyberspace store that offered little more than what real-world rivals could offer. "Even today, I would claim that if you can do something in a more traditional way, you should," he says.
Amazon's concept clicked with consumers, driving the company to $87.4 million in revenues in the first quarter of 1998, a whopping 446% increase over the year-earlier period. The company is still bleeding money, though, partly as a result of steep marketing costs associated with an aggressive branding campaign. Losses for the first quarter were $9.26 million, or 40 cents a share. Nevertheless, Wall Street investors clearly believe Amazon can reverse its losses in the future, and have rewarded the firm with an astounding $2.2 billion market capitalization -- Barnes & Noble Inc., by comparison, has a $2.3 billion valuation.
Now that it has a ready-made audience of shoppers, analysts see Amazon's expansion into CD and movie sales as a prime opportunity for the company to boost sales with relatively little additional expense. "After you set up the infrastructure, the biggest expense is attracting customers," says Lise Buyer, an analyst at Deutsche Morgan Grenfell. With a stable of 2.2 million customers, Amazon has already done some of the heavy-lifting: Customer credit-card numbers are already stored on the site, which could ease Amazon's entry into new markets.
Gold or Lead?
But some analysts caution that Amazon's new markets may not prove a pot of gold. "I think they're going to be successful," says Keith Benjamin, of BancAmerica Robertson Stephens & Co. "But I question, on the music side, whether it's a good business to be in." Music, Mr. Benjamin says, is "somewhere between a no-margin and a low-margin business."
While Amazon's success with books has given it the confidence to branch out into new products, it's also emboldened much bigger competitors to get serious about Internet shopping. Barnes & Noble entered the fray last year with a much-discussed on-line store, and this week Borders Group Inc. finally took the wraps off its own Internet mart for books, CDs and videos.
Meanwhile, mail-order giants Columbia House, a joint venture of Time Warner Inc. and Sony Corp., and Bertelsmann AG's BMG Entertainment have made Internet selling a top priority. Columbia House is taking orders from music-club members on one site; on a separate super-store site, Total E, it's moving straight into Amazon territory with plans to add books and CD-ROMs to its existing catalogue of videos and CDs.
Although he acknowledges Amazon's branding edge, Rick Hunt, vice president of electronic media for Amazon, doesn't see entertainment sales on the Net as a winner-take-all game. "There's plenty of room for our brand to establish us in the minds of consumers," he says. "I don't agree with those people that say there will only be two or three players."
Not everyone buys the entertainment-superstore concept, though. BMG, for instance, has opted to keep a planned book-selling site, Books Online, separate from its music sites, which are themselves separated by genre. Amazon's challenge, says Kevin Conroy, senior vice president of marketing at BMG, will be to stay focused on books as the company enters the highly competitive music market.
"It's often harder to redefine a brand than it is to establish a brand" he says.
And Stuart Skorman, founder and chairman of Reel.com, an on-line video retailer, believes specialty sellers will still have an audience. "There are some people that like going into Kmart and like buying white bread," Mr. Skorman says. "We're the purists."
In the end, though, neither specialization nor branding may determine who succeeds in the on-line sales game. In the physical world, hardcore comparison shopping has been left to a highly motivated faction of consumers willing to trudge between stores. But on the Web, it's become almost effortless. Today, a user can enter a title of a book on Yahoo! Inc.'s Visa Shopping Guide site which then queries multiple book-sellers for prices and displays the results in a table. Hyperlinks next to book prices let users order the cheapest one at the click of a mouse. With comparison services proliferating elsewhere on the Web -- and for dozens of other products -- it's unclear whether a sterling brand like Amazon's will ultimately sway consumers when rock-bottom prices are so easy to spot.
What else, then, could keep on-line shoppers loyal to a site? Internet proprietors say tactics like "one-to-one" marketing -- recommending a CD to a customer based on her past music purchases or e-mailing a customer about new book releases -- will come into play. Customer service is key, too: Amazon, for instance, has added a Delaware distribution center to speed up book deliveries to East Coast shoppers.
Then there are warm-and-fuzzy efforts to create "communities" around shopping sites, such as by offering chats with book authors or by allowing readers to post their own reviews of CDs and movies. Some analysts, though, say low prices will rule the day. "I've been inside of Sam's Club and Costco. There's not a lot of community going on there," says Bill Burnham, an analyst at Piper Jaffray.
Still, physical-world superstores have come up with their own formula for luring customers through a combination of community, low prices and a strong brand -- and Amazon clearly has a good shot at doing the same on the Internet. That has boutique Internet merchants gearing up to fight it out.
"This is going to be a great battle," says Reel.com's Mr. Skorman. |
