THE DAY AHEAD: Amazon's customer focus vs. shareholder interests

Larry Dignan
3 min read

Amazon.com Inc. (Nasdaq: AMZN) has been downright revolutionary when it comes to customer service. Shareholders may just want to revolt.

The conventional theory holds that customer and shareholder interests are aligned. Here's the view from analysts also known as Amazon apologists: By posting big losses (investing in the future), Amazon builds a "long-term value proposition" that will eventually pay off big time -- someday. In the meantime, the company loses 51 cents a share and 86 cents a share with charges in the second quarter. Sales remain impressive at $314.4 million, but the growth doesn't set records.

CEO Jeff Bezos maintains profits are evil. Too shortsighted he says. Amazon must build scale and distribution capacity. Nevermind that Amazon has no clue whether it will need all this capacity.

Amazon: Are customer, shareholder interests aligned?

Amazon spending will accelerate in the second half and into 2000. Amazon will spend $300 million on distribution in the short term -- an aggressive expansion plan to say the least. Revenue will be slightly above the second quarter growth rate of 7 percent in the third quarter.

Analysts being good troopers will downplay Bezos' disdain for profits and bump up revenue estimates based on Amazon's new toys and electronics stores.

This isn't about Amazon being great for customers -- 10.7 million customers don't lie. It is about Amazon's theory that customer satisfaction equals the shareholder variety.

The Amazon conference call last night was telling not for what was said -- nothing -- but for the tone of the presentation. Put simply, Amazon enjoys losing money ... your money.

The call begins with a warm fuzzy recounting of amusing Amazon milestones in the last four years. It's way too lighthearted for a company that's losing so much dough. Listen for yourself.

The most obvious example of the shareholder-customer disconnect is Amazon's approach to inventory.

Bezos reiterated his "err on the side of overcapacity" theme when it came to inventory. Officials also said Amazon is likely to guess wrong on inventory and have writedowns.

Basically the company is admitting the following: a) It is spending gobs to increase distribution and brick-and-mortar facilities; b) it has no idea if it will need all of it; and c) the company will make costly mistakes.

"We expect to make mistakes of various kinds," said Bezos. "We just don't want customers to pay for them."

It's no problem if shareholders foot the bill though.

You can completely buy into the Amazon story, but those inventory risks have to cause some worry. Inventory is the difference between Amazon the e-tailer and Amazon just another retailer.

Officials said they don't know what demand will be for its new toy and electronics stores, but it does know the shelves will be full. Again, good for customers, bad for shareholders.

"There will be a learning curve," said Bezos.

Amazon has to prove its as good as Wal-Mart in the inventory department. If it isn't Amazon will never make money. Shareholders better hope Bezos & Co. learn fast.

Amazon vs. Priceline

Another factor that may accelerate the "Amazon's story is getting old" movement is a little round-the-Net profit comparison.

More and more Internet companies are breaking even or posting a profit and Amazon earnings aren't on the First Call radar screen until well past 2001.

Amazon isn't comparable to other Net stocks, but shareholders could get used to profits.

The real thorn in Amazon's side could be Priceline.com Inc. (Nasdaq: PCLN).

Priceline also has a whopping valuation, but the management is making its way to profitability. Officials actually have said on the record that they hope to make money. Profits won't come until fiscal 2001, but at least officials don't hate the idea.

In 2001, First Call consensus calls for a Priceline profit of 3 cents a share.

And Priceline gets investors the growth. In its latest quarter, Priceline lost 10 cents a share on sales of $111.6 million. Sales were up a whopping 126 percent from the first quarter. And Priceline trimmed its losses.

Priceline looks like it has a better mousetrap. Amazon looks like it has a tired, old retailing formula. Like Amazon, Priceline is "investing in its future" via debt and secondary offerings, but its paring losses -- and making Amazon look bad in the process.