Turning to a global page

Turning to a global page
By Tim Clark
Staff Writer, CNET NEWS.COM

Most people wouldn't have pegged the founder of bookseller Amazon.com as the Net's leading merchant. Trained at Princeton in computer science and electrical engineering, Jeff Bezos cut his teeth on Wall Street, first as an in-house geek, later as a money manager.

The first success story in Internet retailing, Amazon.com is now the most visible symbol of consumer electronic commerce. And although the company is far from profitable--it loses more money every quarter--its stock remains a hit on Wall Street, climbing to 95 last week.

In spite of early legal wranglings with bookselling behemoth Barnes & Noble, Amazon--named for the world's mightiest river--had a two-year jump on its rivals and the gift of focus. Its motto became: "Obsess about customers, not competitors."

With a 41.9 percent stake in the company, Bezos holds 9.9 million Amazon shares. Despite that $1 billion honey pot, he remains a gregarious and self-effacing man with a nimble wit and keen intellect.

Bezos and Amazon have been genuine innovators in Internet commerce. The company's 30,000 "affiliates" recommend books, linking to Amazon, on their Web sites. Then they collect 15 percent commissions from Amazon when their visitors click to buy the title. It's now a widely copied program.

Amazon.com also has helped define an Internet community around a commercial site. Its editorial content changes daily, but Amazon also boasts reader book reviews, notifies customers via email of new books, and hosted an "interactive novel" in which John Updike penned beginning chapters and site visitors completed the story.

Community works: 58 percent of Amazon's sales go to repeat customers, and the site has shipped to 1.5 million customers, more by far than any consumer commerce Web site. Amazon also has created the Internet's first e-commerce brand, built not only by word-of-mouth, but also by sizable spending in offline advertising--print, radio, and TV.

"This is a critical category formation time," Bezos says. "Most of the customers out there haven't bought anything online. We want to be their first purchase if we can. We want to have a very deep relationship with them."

NEWS.COM: You've talked about doing research on what items would be appropriate to sell on the Net, and found that books had the greatest potential. What was the second?
Jeff Bezos: Music.

And after that?
I think videos, computer hardware, computer software--those are the things towards the top of the list.

And are those the items you are interested in adding to Amazon?
What we've always said is that we would focus on expansion into things where we could leverage. There are three things that businesses can often leverage: One is the brand name; two is the set of competencies; and three is our customer base. That does sort of mean things like music and videos because we can leverage our brand name, our skills, and our customer base.

Can you tell us about what kind of international expansion plans you may have or what your philosophy is in that regard?
We want to make it possible for anybody in the world to order a German-language book, Japanese-language book--not just an English-language book. So we need to have local customer service operations, local distribution centers, and so on, to really service those markets as if we were a local company there. This is a big project that we will be working on over time. It will take time to set up those operations and make that work.

OK, so there will be a special URL for Japanese books and that will be posted on a server in Japan? Is that the kind of thing that you would look at?
It would basically be a Web site in Japanese for Japanese people and for Japanese-speaking people anywhere in the world that would service those people with Japanese-language books. So it would be basically a Japanese version of Amazon.com. I'm just using Japan as an example, but we would focus on a group of countries and try to expand out from just the United States. In a different sense, we are already a very international company. Twenty-two percent of our sales are outside the United States. We ship regularly to over 120 different countries. But in the sense that you were talking about, we are not really a global company at all. We don't have offices outside the United States. We don't have local merchandising, local customer service, and distribution centers.

What countries are you considering the most?
Well, we've been mostly focused on looking at Europe and Asia. Those are the two big areas. If you look at the big book markets, sort of the natural places to look first, the biggest book market is the United States, and after that, Japan and Germany are the next two biggest book markets. So those are natural places for us to look, but we haven't announced any detailed plans in any of those countries.

Is this something that we might anticipate by the end of the year?
We don't actually disclose any dates on when we might do anything, just for competitive reasons.

What do you think is the most innovative thing that your company has done since you got started that 25 years from now, we'll look back and say, "Oh, that's what they did"?
That's a great question. I hope that 25 years from now people look and find something great that we did. I think that people will say that we kicked off this electronic commerce thing. That we were pioneers there, that we were one of the companies that started out doing this right. I hope also that 25 years from now, Amazon.com has demonstrated that it is an important and lasting company. We are cognizant all the time of the fact that there are lots of companies that made a big scene and then disappeared. And we are working extremely hard with the long-term view to make sure that we end up being an important company that makes a big impact on the world in a positive way. We are just going to keep focusing on that and we will let them figure out 25 years from now what the innovative things were.

I certainly think that the associates program is one of the most innovative things that we have done. We did invent that. It is interesting--it has been much replicated. I suspect it will be replicated more in the future. One Click Shopping I think is a major innovation and really does reduce the friction in making a purchase to almost zero for repeat customers. The idea of having exhaustive selection--when Amazon.com started there were smaller online bookstores, but none of them had the goal of having every book in print in stock, and that certainly has been our goal from day one. So literally that's something that matches the online environment very well. I think that's been innovative. So I think there are several things. I am hopeful that there will be a lot of innovation from Amazon.com in the future around this notion of personalization and customization of the store for each and every customer. We have made some progress there already. I tell people--and I believe it firmly--that we are at the Kitty Hawk stage of electronic commerce. We know 2 percent today of what we will know ten years from now, and most of that learning is going to revolve around personalization--the notion of making the store ideal for a particular customer, not for the mythic average customer.

NEXT: Competitors: Sharing the Net bookshelf

Competitors: Sharing the Net bookshelf

When it comes to competition, what concerns you the most?
Well, Andy Grove has taught us all to be paranoid, and we certainly work hard at following that very sage advice. I pay a lot of attention to Barnes & Noble because it is a company that has 30,000 employees and $3 billion a year in sales compared to us with about 1,000 employees and $260 million a year in sales. That's probably our No. 1 competitor and the company I pay the most attention to.

Who else?
Well, Borders has said that they will come online sometime in the first fiscal quarter of their year, which is sometime in February, March, or April. And I believe they will. I think they are very confident and they are very aggressive business people. I suspect they will come online sometime in that quarter with a solid Web site that does a good job.

What about more broadly? In your area everybody worries about Microsoft as well as they do in Silicon Valley. They have some obvious e-commerce interests. How about big corporations with publishing empires, like Bertelsmann?
Yeah. I think Bertelsmann can be a very strong competitor because of some of the assets that they have. They are late getting started doing this, so they'll have that as a disadvantage. The advantage that they have is that they own major book clubs in various countries around the world. They have already a relationship with those customers that they might be able to leverage. So I think that makes them a viable competitor for the future. I think especially in Europe, Bertelsmann is very strong.

They have strong AOL ties, right?
Bertelsmann owns 50 percent of AOL Europe and AOL Europe is doing very well. They have over 800,000 members at this point throughout Europe. Bertelsmann is a publisher in Europe, they have book clubs in Europe, they have online interests in Europe. They could be a very strong competitor in that space.

Does your AOL deal here also operate in Europe?
No. It's AOL.com, so to the degree that AOL.com is viewed by people in Europe--which it is, I'm guessing, but I would suspect that some 20 percent to 25 percent of AOL.com's traffic is outside the United States and some fraction of that is going to be Europe.

But what about Microsoft as a competitor?
Microsoft would be everyone's worst competitor, just because it's a company run by a group of incredibly smart people starting with, of course, Bill Gates, and then 40 people deep under that, they've got some of the best executives in America. I have seen no indication that they are interested in competing in our space. If they were planning to, I'd take them very seriously.

And is there anyone else you are worried about?
Well, the book space is an extremely competitive one already online. It's going to get more competitive with Borders entering into the space. It's not a great space for a new company looking for a place to start. There are probably better spaces that aren't quite as crowded with aggressive companies.

Yeah, but there is CUC, for example, which is coming in sideways and bringing in a huge group of customers.
Yeah, maybe. That's a completely different strategy that CUC is pursuing because they are taking the supermarket approach. They're selling a small selection of books--it's only about 400,000 books.

Which used to be a very large number of books until Amazon started.
Right. But their focus is to sell everything--insurance, annuities, television sets, every kind of consumer electronics, and so on. This is a big world--nobody is going to corner retailing on the Internet. I think one of the biggest misconceptions of people when they look at this space is that there is only going to be one winner. CUC can do fabulously well. CUC is equivalent to Price-Costco and Sam's Club, but Price-Costco and Sam's Club have done very well and at the same time other shops like The Limited and The Gap are going to have part of the market as well. Walmart has part of the market, even though they compete against their own Sam's Club and Price-Costco. And Barnes & Noble in the physical world with all their superstores does just fine, even though Price-Costco competes aggressively on books in that space. It's not a winner-take-all situation. CUC can be very successful and so can a bunch of companies. I don't know if they will be successful with their online strategy, but they might be.

Walk us through your business model.
We discount many books 40 percent off. All hardcovers and the 400,000 bestsellers are 30 percent off, all paperbacks are 20 percent off. We sell a $20 hardcover for $14, typically. If it's a very hot-selling book, then we will sell it for $12. And we do all the shipping. We inventory roughly the 200,000 best-selling books ourselves in our own distribution centers. We have a distribution center in Seattle that services the West Coast and Asia and we have a distribution center in Delaware that services the East Coast and Europe.

If we sell a book for $20, if that's our price, we would have discounted that book already, so it would have been a $28 book or something. Our gross margin on average on a book like that is about 20 percent or about $4.

NEXT: Feeling secure without SET

Feeling secure without SET

So how does the business ever become profitable?
This is scale business. And what happens is that the fixed costs of doing this business are very high and the variable costs of doing this business are extremely low. As a result, our major strategic objective has always been GBF. It's a mantra inside the company, and it means Get Big Fast. We need that in order to operate successfully what is a scale business.

At the same time, we are investing significant amounts of money in advertising and marketing in order to introduce ourselves to as many customers as possible, as soon as possible, as part of this Get Big Fast strategy.

We spend marketing dollars at a level which is disproportionate to a company of our size. And we do that because we believe this is a critical category formation time where, roughly speaking, maybe a dollar spent on advertising today is worth $10 spent on advertising next year because of this critical category formation time.

When is big big enough to make money though?
We have lots of internal projections and understandings about that, but we do not disclose when we think we will be profitable. We don't make any forward-looking financial projections as a matter of company policy.

These huge expenses for advertising can't be focused only on book market; another piece of it must be for positioning for the new products you are contemplating selling. Is that a fair guess?
It's certainly fair to say that we are going to enter into these new product areas. We have been very clear about that. And so certainly when we look at whether the things we are doing or not are sensible, we do know what we are going to do in the future and we can tie that all in and make sure it makes sense.

The repeat customer metric, is that an important one for you?
Absolutely. It's over 58 percent--58 percent of the orders we receive every day are from customers who have ordered from us in the past. That's a very important statistic and the reason is that we need to make sure that we are actually providing a high level of service for these customers. I mean, it would be useless to spend significant amounts of money on marketing and advertising to get an introduction to a customer, have them have a bad experience and never want to come back again.

How safe is it for customers to purchase items on Amazon? Have you had any incidents of credit card fraud?
Well, it depends on what you mean by fraud. If you mean has anybody ever tried to steal a customer's credit card number--that doesn't happen. And not just at Amazon.com. There's not a single known occurrence of that happening online. If you look at traditional credit card fraud, which happens every day in every store in the United States, every merchant that's doing any number of transactions experiences that. What that is, is somebody has already stolen a credit card number and now they go to try and use it. They do that at Macy's, Nordstrom's, and Bloomingdale's every single day. That's credit card fraud. And the credit card companies catch it and try to clamp down on it. I think if anything, our credit card fraud rates of that kind have been less than in traditional physical stores.

To get something from Amazon.com, you've got to give us a postal address, you've got to give us your name, we can cross-check the zip code of the billing address against the credit card company's records, which is sort of traditional things that merchants do. It's a very different situation. But I think it's very confusing because when people out there in the world hear "Internet" and "credit card fraud," they think, "I sent my credit card number across the Internet and it got intercepted." That's what doesn't happen. That's what people are worried about. People are not worried about regular old fraud that happens every day in every store across the United States.

The thing that people don't realize is that any store in the whole country, whether they're an online store or not--as soon as they start connecting their computer systems to the Internet, then they have a big file of important data on customers, like the customers' credit card numbers. Then maybe somebody could hack in and steal a million credit card numbers at once. So that's certainly a concern that every company should be worried about, not just Internet companies. And what Amazon.com does is we keep all those credit card numbers on a machine that isn't even connected to the Internet. So it's not even on our local area network inside our company. We call it CC Motel because the credit card numbers get in, but they don't get out. And then that machine is connected directly to the credit card processing companies by lease line. So those credit card numbers, once they arrive at Amazon.com, never touch the Internet again.

There's the protocol called SET, Secure Electronic Transactions, designed to do it differently and to make it safe.
It's safe now.

Will you support SET?
If a lot of people use it, we'll support it. If nobody uses it, we won't. But it's silly to say it's designed to make something safe that's already safer than any other way that's ever been designed. The least safe thing you do with your credit card today is to hand it to a random stranger in a restaurant who you've never seen before in your life. Giving your credit card number to a reputable merchant on the Internet is one of the safest things you can do with your credit card. And SET isn't going to improve that one iota. Now, if it becomes something that people want for perception reasons, we'll implement it. But there's no security issue today.

Have you implemented a lot of your knowledge about retailing in the real world to Amazon.com, or is selling on the Net completely different?
Probably some of the lessons translate, but probably most don't. There are a whole bunch of rules of merchandising that the physical store merchants have learned over the years. For example, there's something called the "hard right," and 90 percent of customers, when they walk into the store, turn to the right. That's why you put merchandise on the right and cash registers on the left in a physical store. You'll find that almost every time. What is the equivalent of the hard right online? Nobody knows today. These rules of e-merchandising are yet to be understood. Understanding consumer behavior online--this is the thing that we know just 2 percent about. A lot of it is going to revolve around personalization and customization.

Talk to us a little bit about the management inside your company. You're chairman, CEO, and president?
I'm really just the CEO. I happen to be the chairman of the board, too--that's pretty common.

Do you have a president or a COO?
No. We have one of the world's strongest management teams. We've got a great CFO, we've got a great person in charge of product development, we've got an unbelievably great chief information officer. If you look across the senior management team at Amazon.com, it's one of the things we did the best. The result of that we're benefiting from enormously now.

Do you anticipate renaming someone president or COO?
No, not any time in the near future. There's no reason to do that at this time. That's a strong signal to name a No. 2 person in the company. And we have a management team that works very well together and there's no reason to elevate somebody in that team above the others.

What's the last book you read?
I'm actually in the middle of reading a book called Reclamation, which is a science fiction book by Sarah Zettel. It's actually the best science fiction book I've read since the original David Britton trilogy of years and years ago.

And how many books do you read in a year?
I read about three books a month. Also, like many people out there, I buy about nine books a month. It's actually a bit of an occupational hazard, because I do buy more books than I probably should.