James,
I believe they borrowed your phrase:
"The Angler
Amazon.com has come a long way since going public.
By Anthony B. Perkins
The Red Herring magazine
From the March 1999 issue
In the spring of 1994 Amazon.com founder and CEO Jeff Bezos came across the statistic that the number of bits traveling across the Internet was increasing by 2,300 percent per year. "It was pretty clear that anything growing at that rate might have been invisible then, but would certainly be ubiquitous in the future," Mr. Bezos recollected in a recent conversation with the Red Herring.
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After this wake-up call, Mr. Bezos ranked 20 types of products, looking for "the first-best product to sell online." He chose books, "primarily because there are more items in the book category than in any other category by far -- more than 3 million in-print books worldwide at any one time -- and it was obvious that computers and the Internet could be uniquely applied to organize, present, and sell the entire stock in a way that a physical store or mail-order catalog couldn't possibly imagine," he said. Following a sprinkling of seed money (about $1 million in angel financing from family and friends) and a year of developing software and setting up relationships with suppliers, the cyberstore opened for business in July 1995.
After nine months of being overwhelmed with online customers, Amazon.com decided to step up its business plan, which meant raising more money for advertising. Real revenues and a significant customer list put Amazon.com in a good position to fetch a high valuation for its first venture capital round. "We joked at the time that we would have to change our voice mail system to say, 'If you are a customer, press 1; if you are a venture capitalist, press 2,'" Mr. Bezos recalled. As it turned out, the lone VC firm that he solicited, Kleiner Perkins Caufield & Byers, was the only one he eventually took money from. Mr. Bezos called KP partner John Doerr and said that, given KP's reputation in the Internet space, they should talk. Mr. Doerr agreed and was at Amazon.com's Seattle headquarters the next day. According to Mr. Bezos, Amazon.com wanted to split the deal between KP, Hummer Winblad Venture Partners, and General Atlantic Partners, but Mr. Doerr made the argument that if KP owned the whole round, he and his partners could justify giving the company their full attention. This seemed reasonable to Mr. Bezos, given that Amazon.com had earned a valuation of more than $50 million and therefore was selling only 15 percent of the company in an $8 million round. So KP cut the biggest check for a single round in its 25-year history.
By the spring of 1997, when Amazon.com set off on the road show for its initial public offering (Nasdaq: AMZN), it was operating at a $35 million sales run rate. On the eve of its IPO, the Red Herring argued that it was premature for Amazon.com to go public and asserted that the bankers "should insist that the company take one more dip in the pockets of its private investors to cover its losses and solidify its business model" (see the Angler, June 1997).
Our biggest concern was valuation vs. associated risk. Amazon.com was valued like a high-margin software company, yet competition from America Online (NYSE: AOL), Borders.com, Barnesandnoble.com, and others would inevitably turn Amazon.com into a very low margin distribution business, we thought at the time. But the Internet land grab was on and, in the words of Mr. Doerr, it was time to "put the puck on the ice!"
DOING THE SPLITS
Of course, Amazon.com's stock price has skyrocketed since its IPO. At our press time, the stock was priced, adjusted for splits, at $420 per share -- compared with an offering price of $18 -- which gave Amazon.com an incredible $22.2 billion market cap. So what's a CEO to say? "I subscribe to Peter Lynch's view that in the short term there is no correlation between great companies and stock price, but in the long term there is a 100 percent correlation," says Mr. Bezos. And what is the long-term plan? On the one hand, the company's revenues tripled in the fourth quarter of 1998 from the same period a year ago, to $250 million; it rose to become the Internet's No. 1 music CD retailer after only four months in the business; and its customer base has risen to 4.5 million, steamrolling Wall Street's most optimistic forecasts. On the other hand, profitability is nowhere in sight (see the Red Herring Online story "Will Amazon ever be profitable?").
So, we asked Mr. Bezos, how does a company win the great Internet land grab? "In online, you will have to be price competitive," he answered. "The good news is that e-commerce businesses, relative to their physical-store brethren, are scale businesses, characterized by high fixed costs and low variable costs. Right now we are still optimizing for market share, with the understanding that the retail e-commerce industry is in an early stage, and optimizing for short-term profitability would therefore be shortsighted. We are investing in introducing ourselves to customers and creating an ever-better end-to-end customer experience. Our only constraint is making the right decision for the long term."
Although Mr. Bezos wouldn't reveal his company's plans for the future, he did offer this hint: "Our goal is to make it possible for customers to find and discover anything they want to buy online at the lowest prices with the highest-quality service level. This does not mean we will directly sell these products ourselves, but we will do it in partnership with other merchants. One metric of our success in the long-term, I think, will be the degree to which we can defy easy analogy. We want to be something completely new."
BATTLE ACTS
Our long chat with Mr. Bezos made us feel more encouraged about Amazon.com's future financial prospects than we did back when it went public. There is a bigger picture here than book sales. By moving aggressively into new product areas, mastering the fulfillment and distribution process, and offering its customers a highly personalized and convenient online shopping experience, Amazon.com will emerge as a next-generation portal with more control over more customers than anyone in cyberspace. And as the Amazon.coms of the world gain critical customer mass and become less dependent on the traditional portals for traffic, the pressure for the portals to break into the e-commerce space will only intensify. Given that AOL, Yahoo (YHOO), and Excite (XCIT) are already running swiftly in this direction, we could see a battle of the Internet titans begin before 2000 that will make the skirmishes of Bill Gates, Scott McNealy, and Jim Barksdale look like children playing with Tonka trucks.
But clearly, there are many parts to the picture that Amazon.com has to fill in before this scenario materializes. Like any good CEO, Mr. Bezos is maintaining a little mystery so that he can keep our attention. But we bet that until he and the world finally figure out exactly what this new thing called Amazon.com is, there will be no correlation between the company's operating performance and its stock price. Until then, may our readers who still own their Amazon.com stock not turn out to be the greatest of fools.
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