Despite tough year, Amazon's Bezos keeps his chin up

It's a sure bet that Amazon.com chief executive Jeff Bezos won't repeat as "Person of the Year."

Last year Time Magazine's designation capped off an amazing run for Bezos and Amazon, the e-tail giant he founded in 1995. With record numbers shopping online, the Seattle-based company's stock reached an all-time high, its holiday sales beat expectations and Bezos and Amazon seemed to be the vanguard of a brave new retail world.

But this year has been a struggle for Bezos and his famously unprofitable company. The year started with the company's first-ever layoffs and is closing with some of its workers trying to unionize. In between, as investors cast increasingly wary eyes on e-commerce, Amazon saw its growth rate slow, its market value plummet and some of its partners wither and die.

Despite everything, Bezos remains upbeat. In a recent interview at Amazon's distribution center in Fernley, Nev., Bezos talked with CNET News.com's Troy Wolverton about Amazon's successes, defended its business strategy and discussed his and Amazon's future plans.

CNET News.com: What's been the biggest surprise of running Amazon.com?
Bezos: Well, the biggest surprise for sure--and it has no close contender--is just where we are today. I mean, I am the most surprised person on the planet about what's happened over the last five years.

This is not what happens. We started and wanted to build a small, profitable company. And of course we built a large, unprofitable company. That is, however, by design.

We saw that this was working incredibly well and we really wanted to invest in our business, invest geographically, invest in new product categories, make the most of this opportunity. But the fact that this opportunity even exists I think is just awe-inspiring surprising.

What's been the biggest disappointment?
It's pretty hard to be very disappointed when we as a company have won this huge lottery.

Start-up companies, to get anywhere, have to have all the planets aligned. And for start-up companies to turn into important, lasting companies, the planets, the stars and the globular clusters have to align. (laughs) It is a very rare event.

To get where you are today?
Yes. The 48th best-known brand name in the world across any industry or category. This, in only five years. To have 25 million customers. Anybody who would have predicted any of those things in such a short period of time would have needed to have been immediately institutionalized.

So what do you see as the biggest success of Amazon so far?
I'd say the best success is probably the reputation that we've earned for

Bezos on how the game changed in e-commerce

customer experience, customer obsession. You can't get a reputation like that in any way except by actually doing it.

We've always taken our promises to customers seriously. It's the one inviolate thing at Amazon.com. And I think our customers know it and I think they've responded to it. I think that's the reason that we have 25 million customers--many times the size of our nearest competitors--is because we really do care about that.

Regarding the mantra of "get big fast," do you have any second thoughts about that? Was that the wrong strategy?
No, it was absolutely the right strategy. If we hadn't pursued that strategy, you would not be interviewing me right now. It wouldn't be worth your time.

How would you have been different?
Well, we probably wouldn't have gotten the scale that we need to be a lasting e-commerce business.

E-commerce--as opposed to physical retailing--is a scale business. Scaled businesses are characterized by relatively large fixed costs and relatively small variable costs. And that's exactly the kind of business we have.

If you're in a physical retailing environment, if you double sales, you basically double costs. You have twice as many square feet. You have twice as many sales associates. That's not how our business works.

In our case, we make big investments in technology. If we write software to help people with a gift wizard, it doesn't matter whether we have 25 million customers or 1 million customers--it costs just as much to write that gift wizard. So those are very scalable investments.

The technology investments are, but what about the infrastructure investments?
Actually, they're very scalable relative to physical world commerce.

Even today, when our model is not showing its full strength because we're still honing it, we still have twice the sales per employee of even the very best mass merchants that have been honing their model for decades.

A number of different e-tailers across the Web, many of whom are crashing and burning right now, also attempted to get big fast. Was it right for them to follow your strategy?

I don't know, I think it depends a lot on the particulars. Every time and every business requires its own strategy.

In our case, we were so early that it was the right strategy for us. And you can argue that companies coming on the scene now have to take a slower approach.

Companies that Amazon invested in, such as Pets.com, Living.com and Kozmo.com, all tried to get big fast. What did you counsel them to do?

Bezos on getting big fast

Well, to the degree that we counseled them, and to the degree that they listened--what you really want to do is to build a cost structure that's sustainable for whatever level of business you're at.

I would claim that we always, even though we were working to get big fast, we were always quite cautious on our cost structure. The first really major investment we made in our cost structure was in 1999, just a year ago, when we invested $300 million in our distribution center network.

Get big fast does not mean build a huge cost structure. I think it's a very important distinction.

Next: How Amazon "got big fast" 

How Amazon "got big fast"

So what does get big fast mean?
It means make the most of what are usually narrow market windows.

So if you look at the original business plan for the company, we never got to the level of sales we have today. Even after five years, I think we maybe got to $100 million in sales. And that was a very optimistic business plan; very few companies ever get to $100 million in sales. We're 26 times that size today.

In the first 30 days after we opened the store, we shipped products to 45 different countries and all 50 states. At that time we realized that we were really on to something that customers want. How can we make it better? How can we invest in the customer experience? What kinds of extensions can we do? Can we do this in other countries? Should we advertise this business? In our first year we didn't spend a dollar on paid advertising.

How have the companies Amazon invested in deviated from that strategy?
I don't want to criticize their strategies, because at different points along the way you have to take gambles.

In our case we could afford to spend very little on marketing up-front because when we started, the Web was a very small place. It was very easy to be noticed if you had any kind of an interesting experience whatsoever.

Bezos does Jean-Luc Picard

You start a company in 1999 or 1998, where the Web is a very big place, maybe you have to spend a lot of money even in your first year to try and rise above the noise. There's a certain risk associated with that strategy and sometimes it's going to work and sometimes it isn't.

Pets.com is now dead, Living.com is now dead, Homegrocer has been absorbed. Is there some point at which you play Capt. Jean-Luc Picard, of the Starship Enterprise, and say, "this far and no further? We're not going to let Drugstore.com fail. We're not going to let an eZiba.com fail," or something along those lines?
No because the universe is not at stake. I mean we're not up against the Borg collective here.

We can do a lot to help our partners, but we cannot ultimately make them successful. We will do everything that we reasonably can, but to take the position that we would be a bottomless source of funds for a partner, would be a very bad business decision and very bad policy. And actually none of our partners would expect us to do that.

Now if the Borg ever do invade, we will draw the line! (laughs)

Where do you see Amazon five, 10, 15 years from now?
In that kind of time frame, you can only talk in terms of mission. And the mission is earth's most customer-centric company.

We have a very precise definition for what customer-centric means. It means listen, invent and personalize.

Listen is the most traditional meaning. So if you don't listen to your customers, you will fail.

Invent is all about innovation. It's not the customer's job to invent for themselves.

Bezos on his future at Amazon

Where some companies go wrong is they only listen. Even if they do a good job of listening, it's not enough because you have to do things your customers would never think to ask. That's where invention comes in.

Finally, personalization, which is unique to the Internet because that is the idea that if we have 25 million customers, we should have 25 million stores. That's a necessary constraint on our goal of universal selection: building a place where people can find anything they might want to buy online.

How much of a part of that future vision are you going to be? Where do you see yourself five, 10, 15 years down the road?
I'll try to be a part of this as long as these guys will let me, number one. (laughs) And number two, as long as I'm helping. And number three, as long as the rate of change is very rapid, because I am at heart a change junky.

So far the rate of change is accelerating: there is more change per unit time than there was five years ago. There's more than there was four years ago, three years ago, two years ago, one year ago.

Under what kind of circumstances would you see yourself stepping down, resigning?
It would primarily be if the rate of change were too slow.

You know, I'm very invested in this company in every way imaginable. I mean obviously I have a big equity stake in the company, but I also have a big emotional stake in the company. I care a lot about it.

And I'm not the only one. There are literally thousands of people in the company who care a lot about it.

And if I ever thought that somebody could do a better job, I would immediately start trying to recruit them! (laughs) Because I really, really want it to work.

Undoubtedly, one of the advantages that I have in doing a good job is that I do care so much and that I've been doing it for so long. So even if I didn't want to learn a lot about e-commerce I would have, and I actually did.