Bezos, Jeff

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BEZOS, JEFF

Jeff Bezos is the founder and CEO of Amazon.com, the world's largest online retailer of books, CDs, electronics, and more. Although the site experienced explosive growth from the time it was founded in 1995 through the end of the 1990s, analysts in late 1999 began to question the firm's likelihood of achieving profitability. As a result, stock prices plummeted and Bezos found himself having to defend his business model. Some analysts believe Amazon may become profitable in 2002, depending on the direction in which Bezos steers his firm. Although Amazon is best known for selling books online, its ability to assist other companies wishing to engage in e-tailing may well be its eventual focus.

LAUNCHING AMAZON.COM

After graduating from Princeton University with degrees in electrical engineering and computer science, Jeff Bezos began working on Wall Street. Bank-er's Trust hired him to develop electronic fund management systems. Eventually, he left there to begin working for hedge fund firm D.E. Shaw & Co., where he became the youngest senior vice president. Despite his success, the 30-year-old Bezos left his job at Shaw in 1994 to pursue his dream of creating an Internet retailer. He moved to Seattle, Washington, and began working on a business plan that would allow him to capitalize on what many analysts were predicting to be explosive growth in Internet use. After researching 20 different products he believed could be sold via the Internet, including magazines, CDs, and computer software, Bezos settled on books, guessing that this sizable market, with its wide range of purchase choices, would be well served by electronic searching and organizing capabilities. Books also were relatively inexpensive, and Bezos concluded that consumers would be more likely to make their first purchase online if the risk was minimal. In addition, the small size of most books made for easier distribution. Bezos liked the fact that market share was distributed among many leading publishers. In fact, industry leader Barnes & Noble held less than 12 percent of the $25 billion book retailing market. He believed this market fragmentation left room for fledgling companies.

Bezos decided to set up shop in Seattle, where he would be close to the warehouse of Ingram, a leading U.S. book distributor, as well as to a large pool of technology professionals. He hired four employees and began working in the garage of his new home to build the software that would operate his online site. Although he initially planned to call his new business Cadabra, Bezos eventually settled on Amazon, believing the name of the largest river in the world conveyed Amazon's potential to reach vast numbers of customers. In July of 1995, Bezos launched Amazon.com, a World Wide Web site that offered books at low prices and allowed visitors to search for books by author, title, subject, or keyword. Once a customer placed an order, Amazon requested the title or titles from the appropriate publisher, who shipped them to Bezos' home. At first, Bezos packaged the orders himself and took them to the post office. Typically, customers received their books within five days of placing an order. Books were shipped to all 50 states and 45 countries throughout the world.

In October, three months after its inception, Amazon achieved its first 100-order day. Shortly thereafter, the site became so busy that the beep heard at the office each time a customer completed an order was turned off because its tone became continual. Throughout Amazon's first year, Bezos worked to continually update the site to increase its user friendliness and customer service options. Many of these options also were designed to garner repeat business for Amazon. For example, customers could choose to sign up for e-mail messages that would let them know when their favorite author released a new title.

GROWING AMAZON.COM

During Amazon's second year of operation, Bezos began to look for ways to increase the firm's growth. One of his first moves was to create the "associates" program in July of 1996. This program allowed individual Web site owners and operators to offer links to Amazon from their sites. The associates then received a commission any time a visitor clicked on those links and bought books. To help fund future acquisitions, Bezos secured $10 million in capital from Kleiner Perkins Caufield & Byer in exchange for a minority stake in Amazon and a seat on the board. Advertising efforts included banner bars on some of the most heavily trafficked Web sites, as well more traditional plugs in print sources likely to be perused by book lovers. By the end of 1996, Amazon employed 110 people and its book database had grown to include more than more than 1 million titles. According to Bezos, the breadth of its offerings was key to the site's success, along with the fact that most books were discounted between 10 to 30 percent.

In May of 1997, although it had not earned a profit, Amazon went public, listing its shares for $18 apiece on NASDAQ. In less than a year those shares were worth nearly $100, and Bezos was on his way to becoming a billionaire. Bezos planned to use some of the funds from the offering to enhance Amazon's distribution arm. In October, Amazon became the Internet's first retail operation with one million customers. To commemorate this milestone, Bezos himself personally delivered the site's one-millionth order to a customer's home in Japan. The firm's name recognition was bolstered further when Vice President Al Gore spent a day answering customer service calls. Bezos forged alliances with America Online Inc. and Yahoo Inc., both of which resulted in Amazon's promotion on these high-traffic sites. Growing 20 to 30 percent each month, sales at Amazon neared the $150 million mark, and book offerings grew to roughly 2.5 million. Amazon's success left traditional book retailers scrambling to retain customers. Many chains began staying open later, offering entertainment, hosting book clubs, selling coffee and pastries, and even opening up their own retail Web sites, which Barnes & Noble did in May of 1997. According to the September 1997 issue of Chain Store Age Executive, book retailing had been permanently altered. "Bezos redefined book and information merchandising and distribution. He has changed the way some customers shop and purchase books, and continues to challenge the definition of the traditional book store."

The associates program reached 30,000 members in 1998. Bezos then oversaw the launch of Amazon.com Advantage, a program designed to promote the sales of independent authors and publishers. In April, the firm expanded internationally and also diversified into online video sales when it acquired the United Kingdom's Internet Movie Database. Two months later, after Bezos decided to expand Amazon's product line with CDs, he unveiled Amazon Music, which offered more than 125,000 music titles online. International growth continued with the purchase of Bookpages Ltd., an online bookseller based in the United Kingdom, and ABC Telebook Inc., based in Germany. Both firms eventually were folded into international sites such as Amazon.co.uk and Amazon.co.de. In December of 1998, more than 1 million new customers shopped online at Amazon for holiday gifts. Customers exceeded 6.2 million, securing Amazon's position as the number three U.S. bookseller, behind Barnes & Noble and Borders.

In March of 1999, Amazon launched Amazon Auctions, an online auction house that allows businesses to market products to consumers and consumers to market products to each other. A month later, the site began allowing visitors to create and send free electronic greeting cards. In June, Amazon secured its 10 millionth customer. Expanding his site's offerings even further, Bezos created Amazon Toys and Amazon Electronics. He also launched Amazon zShops, which permitted manufacturers to offer products for sale on Amazon. Bezos conducted a $1.25 billion bond offering to fund an acquisition spree that included stakes in drugstore.com, HomeGrocer.com, Pets.com, Gear.com, and della.com. This move later proved costly as several of the smaller dot-com businesses went bankrupt and Amazon was left with nearly $2 billion in debt.

Eventually, Bezos divided Amazon's offerings into virtual stores that focused on merchandise like software, video games, gifts, and hardware. Customers also were able to sign up for a wish list service. By the end of 1999, Bezos had overseen nine acquisitions and the opening of seven new stores. Amazon had shipped 20 million items to 150 countries across the globe. Bezos was elected "Person of the Year" by Time magazine. According to United Press International, Bezos earned the award because his "vision of the online retailing universe was so complete, his Amazon.com site so elegant and appealing that it became from day one the point of reference for anyone who had anything to sell online."

DEFENDING AMAZON.COM

January of 2000 marked the first cutback in Amazon's history when president and chief operating officer Joseph Galli, a Black & Decker executive hired by Bezos in June of 1999, laid off 150 employees, or roughly two percent of Amazon's workforce. Galli also hired several new managers, determined to tighten the firm's spending practices and budgeting procedures. In April, Amazon.com began selling lawn and patio furniture, as well as health and beauty aids, on its site and also launched Amazon Kitchen, offering kitchen products to customers for the first time. In one of its first moves to offer e-commerce services to other companies, Amazon agreed to work with Wineshopper.com, a California-based Internet upstart seeking to become the leading online wine retailer. In June, Lehman Brothers convertible analyst Ravi Suria released a report critiquing Amazon's financial state. As a result, share prices fell by 19 percent. While Amazon's sales had experienced incredible growth in the late 1990s, investors were becoming increasingly concerned by the firm's failure to earn a profit, its $2 billion debt which cost about $125 million in interest each year, and emerging competition from the likes of Wal-Mart and other major retailers who were opening their own online stores. In 1997, Amazon had lost $27.6 million on sales of $147.8 million. In 1998, it lost $125 million. Although sales reached $1.6 billion in 1999, losses continued to mount, reaching $720 million.

To make matters worse, Galli resigned suddenly to take on the CEO role at VerticalNet, an online business-to-business portal. Stock prices fell to $45 per share as investor confidence faltered. By August, stock prices had plummeted to $28 per share, decreasing 14 percent after the firm's announcement of poor second quarter results. Nevertheless, Amazon continued to operate as the leading online shopping site in the world, serving 17 million people in 160 countries. To bolster its image, the firm began touting its offerings as the "Earth's Biggest Selection" of products, including books, e-cards, online auctions, CDs, videos, DVDs, toys and games, housewares, and electronics. With only 24 percent of sales coming from international operations, Bezos began working to expand the firm's international base. He also changed the firm's focus from pursuing growth at all costs, a philosophy Bezos had dubbed "Get Big Fast," to cutting costs wherever possible, building on the corporate overhaul started by Galli.

Forbes writer Katrina Brooker explained that the success of Bezos's efforts became evident in the third quarter of 2000, when losses of 25 cents per share beat Wall Street predictions of 33 cents per share, and operating losses were nearly halved, decreasing from 22 percent of sales to just 11 percent. Even more important was the fact that the division housing books, music, and video—Amazon's core businesses—netted $25 million on $400 million in revenues. However, despite evidence that Bezos was taking Amazon toward profitability, by the end of 2000 stock remained down roughly 80 percent from its high. Losses for the year totaled $1.4 billion on sales of $2.76 billion.

Determined to quiet his naysayers, Bezos laid off another 1,300 employees early in 2001, or roughly 15 percent of Amazon's total workforce. He also announced his intent to shut down a service center in Seattle and a warehouse in Georgia. Growth projections were trimmed from 40 percent to roughly 25 percent. While most analysts agree that Amazon.com will likely earn a profit and remain a key force in e-tailing, they remain divided over what level of success the firm will achieve. Those bullish on Amazon's future point to deals like the August 2000 alliance with Toysrus.com, which resulted in a Web site that coupled the inventory of Toys 'R' Us with the e-commerce savvy of Amazon. According to the terms of the agreement, Amazon gets not only a fee for allowing the toy giant to use its software, but also a commission on each toy sold on the site. Toys "R" Us benefited as well. Once the new site was in place, holiday sales for Toysrus.com grew more than threefold.

According to Molly Prior in DSN Retailing Today, "the pundits can't help but wonder if the marriage of a pure-player to a bricks-and-clicks category leader is the wave of the future for Internet retailing." However, Amazon's critics point out that despite deals like this and Bezos's cost cutting measures, the firm still spends much more money than it earns, and projected profit margins are no higher than those of traditional retailers. As the giant e-tailer works to find its niche in the ever-changing world of e-commerce, Wall Street likely will continue to watch Bezos, who owns 32 percent of Amazon, very closely.