[Red Herring] The fantasy world of Jeff Bezos

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From: Linda (joelinda1@home.com)
Date: Mon Aug 21 2000 - 17:12:36 PDT

[Shareholders, be very afraid...



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

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

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

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

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