rticle 9 of 200
Computers; Information Technology
AMAZON FLEXES ITS MUSCLES
By Leslie Walker
12/01/98
Sydney Morning Herald
Page 1
Copyright of John Fairfax Group Pty Ltd
In a few years, Yahoo! and Amazon have evolved from online amoeba into
globally recognised brand names. This special report explains how they did
it.
AMAZON .COM is the undisputed king of retail e-commerce. Founded in
1995 as a Web-based bookshop, Amazon , which has a market value of
more than $US8 billion ($12 billion) is rapidly becoming an online
department store.
The company, which is expanding into music, videos, toys and electronics,
will this month split its stock three-for-one - the second stock split in six
months.
"First they did it in books, then they did it in music, and I wouldn't be
surprised to see them do it in videos," comments Derek Brown, an analyst at
Volpe Brown Whelan & Co.
It took just one quarter of operations for Amazon to become the leading
online music retailer with $US14.4 million in sales. After opening its video
section in late November, Amazon 's share price hit $US148.50. Last week
it touched $US218.
The shares have multiplied by four this year, although the business has never
shown a profit. All revenues are pumped back into the company.
Amazon 's founder, 34-year-old Jeff Bezos, is a sci-fi buff who named his
dog after the Star Trek character Kamala.
"I'm a nerd; I read science-fiction books," says Bezos, who wears a watch
that updates itself from the atomic clock 36 times a day.
But he's also a bona fide
e-commerce pioneer who built what he calls Earth's biggest online book and
music store. He believes the Internet store of the future should be able to
guess what he wants to buy before he knows himself. Asked what's next,
Bezos answers that he will launch a shopping referral service to help his 4.5
million customers discover new products elsewhere on the Web.
He also is redesigning his own online store to create a shopping experience
even more personal than it is today.
As Bezos sees it, the success of electronic retailers will depend on their
ability to analyse each customer's tastes and create unique experiences from
the moment he or she walks in the virtual door.
"If we have 4.5 million customers, we shouldn't have one store," he says.
"We should have 4.5 million stores."
The man who pioneered large-scale Internet shops sees bricks-and-mortar
stores remaining strong for a long time, while virtual outlets become
smarter, more helpful and more fun.
He paints a rosy view of electronic retailing, likening it to the days before
the industrial revolution ushered in mass production and mass
merchandising, when all clothes were custom-made and small-town
merchants knew what their customers liked. The Internet can bring the
personal touch back to commerce, Bezos contends, only this time on a mass
scale.
If electronic "mass customisation" tools are implemented wisely, Bezos
believes they can improve people's lives by helping them find things they
would never otherwise have. Privacy advocates are sceptical, fearing the new
tools pry too deeply, exposing personal information that might prove
harmful, embarrassing or just plain annoying.
Bezos worries that what he believes are unfounded anxieties could block
people from enjoying the fruits of personalisation: "I think the only
drawback is there is a negative perception that this is a bad thing."
Amazon .com has etched itself into the Zeitgeist as a brand synonymous
with the birth of Internet commerce.
Founded as an electronic bookseller, it added a full music catalogue and some
videos this year, selling $US153 million in merchandise during the
September quarter.
Amazon sustained a blow recently when it was announced that the company
that supplied 58 per cent of its books last year, Ingram Book Group, is being
bought by competitor Barnes and Noble, the biggest bookseller in the United
States. Amazon has been setting up its own distribution centres and had to
reassure investors that it would continue diversifying its supplier base.
Amazon claims 85 per cent of online book sales. But the Internet accounts
for only 3 per cent of the overall book market, and Bezos sees that growing
to no more than 15 per cent during the next decade.
In fact, he believes electronic retailers will put no bricks-and-mortar
brethren out of business in the foreseeable future: "I don't believe you'll see
lots of empty retail space."
Predictions that the Internet will close stores remind him of how people
thought television would kill the cinema. "That ignores the basic human need
to congregate and to be together and to experience things in the real world,"
he says.
Bezos denies speculation that Amazon aspires to be a virtual shopping
centre, directly selling every product imaginable.
But computer industry analysts say Amazon inevitably will broaden its
merchandise. Why? Because the company remains unprofitable - it lost
$US45 million in the most recent quarter - and may have a hard time
reaching profitability without new products and services.
Jonathan Cohen, Internet strategist for Merrill Lynch, is an Amazon
sceptic. He says Amazon 's current valuation in the stock market far exceeds
its profit potential and will be difficult to sustain with Amazon 's current
retail repertoire.
"We are very close to a major competitive push by some very much larger
companies," Cohen adds. "My expectation is that when those players come
online, we'll see a redistribution of market share."
Still, being today's stock market darling has given Amazon some
advantages. It has bought five other Web companies this year using its richly
priced stock instead of cash. Amazon bought the largest electronic
repository of information about movies and videos, called the Internet Movie
Database, and also bought an online calendar, address book and reminder
service with more than one million customers - all potential buyers for its
products. And while Bezos won't talk about it, Amazon is constantly
rumoured to be on the prowl for Internet takeovers.
Kate Delhagen, director of retail research for Forrester Research
(www.forrester.com) says Amazon appears to be executing a plan to
dominate the sale of media products on the Net.
"Based on people's purchasing habits with music and videos, you can
absolutely map some interests in consumer electronics," Delhagen says. "And
with toys, they know a lot from people's book-buying habits. They can
analyse the data and figure out, do they have kids? Do they a disposable
income?"
Bezos says that, rather than sell new products directly, Amazon .com for
now is focused on developing the comparison-shopping technology it
acquired when it bought Junglee Corp. Junglee created the Web-based
software that powers shopping guides for Yahoo!, Snap and Lycos's HotBot.
Bezos says he is still shaping the business model for Amazon 's shopping
guide. He expects it to involve revenue sharing between Amazon and the
selling merchant, payment of commissions for directing customers to a
particular site or some combination of the two.
Amazon was one of several big Internet companies that snapped up small
shopping technology firms this year. The boom in comparison-shopping sites
reflects accelerating growth in Internet retailing, analysts say.
Forrester had predicted US online retail sales would total $US4.8 billion this
year. But it is now revising that to add several billion dollars. While that is
still small potatoes in a US retail economy of $1.7 trillion, profit-hungry
corporations see online shopping as prime, unclaimed real estate of the
future.
Online retailing differs in many ways from traditional retail, chiefly because
of technology. The Internet allows consumers to research the features, price
and availability of millions of products from a single virtual storefront.
Most first-generation Web shopping guides allow price comparisons among
many online stores, even though merchants chafe under the pressure it puts
on prices.
Second-generation shopping guides are expected to be more polite because
their corporate owners see greater profit potential in working with other
merchants than in starting a price war that might leave no-one standing. But
why would Amazon .com refer customers to other merchants, earning less
profit and taking a risk that customers might not return? Why not just sell
the merchandise directly?
Bezos believes his customers will come back: 64 per cent of Amazon 's sales
in the most recent quarter were from existing customers. He believes the
Internet's retailing power lies in its ability to create a deeper relationship
between merchants and customers, one that empowers customers and turns
modern-day marketing on its head. Internet merchants must focus more on
customer service, he says, and on the Internet, the No 1 service consumers
ask for is help in finding things.
Bezos acknowledges the current crop of Internet shopping tools is often
unhelpful. He recalls getting frustrated when he went online to buy a camera
recently. But because Bezos misspelled E-L-P-H as E-L-F while conducting
his search, the Net couldn't help him. He wound up driving to a retail store
to make his purchase: "It was very convenient and a great price."
LESLIE WALKER The Washington Post |
