What’s going on at Amazon.com?

Nick Guyatt, Campus Greens

Amazon on the up

Like almost every e-commerce company, Amazon has adopted two rules of the ‘New Economy’ as the cornerstone of its hiring practices: first, all employees should be given a stake in the company through stock options; second, employees should be discouraged from collective bargaining or joining unions, since upward pressure on wages might make the shareholders nervous. The deal goes something like this: employees agree to work for very low wages (around $10-$11 for customer service workers in Seattle, for example – certainly not enough to pay rent in that inflated housing market), and Amazon offers stock options in return, which will presumably supplement the low wages and make both workers and the corporation happy.
 
 

Jeff sails into the sunset, courtesy of TIME magazine:"If I had a nickel for every time someone told me I'd fail..."

Options and NASDAQ watching

In the early years of Amazon, there’s some evidence that this bargain appealed to employees. Those who got into the company and its share-option scheme in the early years were depressed by the long hours and the low pay, but they could keep their eye on the Nasdaq and watch their options steadily climbing. Some people, though, were disgruntled by the poor working conditions and the fact that, even if you bought your options and the company performed brilliantly, the return on the 100 options you were allowed was never going to bring back more than a few thousand dollars. You can check out an entertaining story by Richard Howard of life in Amazon.com in its early years – here’s the link Howard makes a lot of good points about the crappy wage package and the limited range of the options program. Although Jeff Bezos might have become a millionaire, his humble warehouse and customer-service employees weren’t about to challenge Bill Gates for lakefront real estate.

How to turn a loss into a profit

Let’s say it’s 1995. You found a company called Nile.com that sells books. You realize that the internet is going to be an important medium for bookselling in the future, and that not many people currently buy books online. So you decide to sell your books really, really cheaply. You cut some corners to do this – you use existing wholesalers to actually buy the books, you have a skeletal staff processing orders, you don’t pay that staff so well. Most importantly, you forget about making a profit. You deliberately price your books at a loss. You start out by discounting the bestselling hardback books, since they’re the ones that’ll give you a high sales volume, and you offer, say, the new Stephen King or John Grisham at 50% of the cover value. No regular bookstore can compete with that, because there’s no way you can make a profit selling a book for 50% of the cover price. But you get a group of banks to lend you a ton of money so you can keep selling books at this price. The result is that you lose a lot of cash but you sell a lot of books – in the parlance, you develop ‘market share’ – and you then use the market share to suggest that you’re bound to make a profit in the future. Meanwhile, you take your company onto the stock market, and persuade investors to buy stock in the loss-making Nile.com on the assumption that, in ten years or more, it’ll be a huge profit-making corporation, the Wal-Mart of the internet.

That pretty much describes what Amazon’s done. Moreover, Amazon was for a time wildly successful at this game. Even though it was losing massive amounts of money, the rampaging stock market provided plenty of investors who were prepared to gamble on Amazon’s big losses – driving the share price up to more than $100 a share by the end of 1999. For the major executives and managers at Amazon, who’d got in at the beginning and boasted thousands of options, this meant huge profits. Ordinary employees, the folks who worked in Amazon’s warehouses and at their customer-service center in Seattle, had a mixed time. Those who’d been with the company from the early days could take up their limited number of options, and make a tidy profit quickly. Those who’d joined more recently, say when the share price hit $70 or $80, had a tougher choice. Should they cash out for a couple of thousand bucks, or just wait to see Amazon push higher and higher on the NASDAQ? Throughout 1999, after all, it seemed that the bull market would never come to an end.
 

Jeff surveyed the breadth of his domain and wept....

The rationale behind this ‘diversification’ was simple. Amazon owed a lot of banks a lot of money, and it had to satisfy its shareholders that it was growing strongly and creating new market share. If it stayed in books, it could make a little money pretty quickly, but it wouldn’t have much room for growth, and wouldn’t be able quickly to pay off the debts it already owed. So the company moved into virtually every other retail market. This had the desired effect of persuading Wall Street that Amazon was, indeed, the new Wal-Mart – but it also took its toll by pushing Amazon further into debt. Creating and maintaining retail facilities for all these new products was expensive, and building markets wouldn’t be a cheap process. For a while, investors continued to sink their money into Amazon shares, impressed by all these new markets and by the Amazon diversification. The simple and continuing fact of Amazon’s massive losses, however, made many people nervous. Would the corporation ever be able to pay off its huge loans? Was the move into new markets a chance for the company to recoup its earlier losses, or a chance for investors to throw good money after bad? As started to sell all these new products, its losses grew larger and larger – by 2000, Amazon was reporting losses of $300 million on a turnover of $1.6bn, and its share price had dived to around $25 – a loss of more than 75% since December 1999. The company was in trouble.

Downsize me!

In January 2000, just before Amazon released a quarterly financial report which presented bad news on the company’s continuing losses, 150 workers at were fired on an hour’s notice. In May, 260 employees lost their jobs at the company’s Seattle distribution center. In August, Amazon announced that it was about to ‘outsource’ customer service jobs to a company based in India, a process which would almost certainly lead to major job losses at the Seattle HQ – the Indian workers, for one thing, will be paid only around 10% of the wage of Seattle customer service personnel. Each of these announcements suggests that Amazon has followed much of corporate America in settling on ‘restructuring’ and ‘downsizing’ as a way of shoring up its share price. The equation is simple: Amazon feels that it needs to increase its stock price, and it moves against the most vulnerable and least well-protected element in its operations – its employees.

From the accounts of Amazon workers, any romance with the world of e-commerce is rapidly fading. Amazon employees have complained of the loss or downgrading of health benefits (which were described as “perks” by Amazon management, rather than entitlements), the stagnant and low wage levels, increasingly unreasonable shift changes, and rampant job insecurity. Washington state, meanwhile, is one of the worst places in America for employee protection under the law. Any worker, even a permanent employee with years of service, can be fired instantly, without any process of arbitration. This extremely insecure working environment – coupled with the constant threat of being replaced by ultra-low-wage temporary workers from employment agencies – has led many Amazon employees to try to get union representation. A union, at least, can negotiate on behalf of all Amazon employees, and build protections against arbitrary dismissal and corporate outsourcing into workers’ contracts.

Amazon’s argument against this is that it knows best what’s good for its employees. But the logic of this is hard to fathom. Amazon has 7,600 employees, more than 5000 of whom currently hold stock options which are ‘underwater’ – in other words, these workers were hired when the stock was above the price it’s currently trading at. Since many of these employees hold relatively few options, they’re basically being told the following: don’t rock the boat, accept the ‘restructuring,’ and you’ll be rewarded with a higher stock price and, perhaps, that glorious day when you cash your options. But ‘restructuring’ will probably lead to major job losses in Amazon’s US workforce, especially since the company is already enthusiastically transferring jobs to low-wage economies like India. So Amazon has a new bargain for its workers – you may lose your job, but you can keep your options.

If this made any sense, perhaps we’d be seeing Amazon employees rushing over the cliff quite willingly; jumping under the wheels of Amazon’s restructuring juggernaut and screaming ‘downsize me’; offering themselves on the altar of Wall Street in the knowledge that their options will let them live on in the afterlife of unemployment. But, as we’ve already noted, most of these employees barely have enough options to last them a few months – a few thousand dollars doesn’t stretch so far if you’re trying to feed and house a family in Seattle. And so Amazon’s employees are trying, reasonably enough, to form a union, and let Amazon know that it should tweak its business model before it puts its loyal workforce on the street.
 

Amazon in Winter

Since our last report, the organizing efforts of the Amazon employees in Seattle had achieved some success -- though they hadn't yet pushed
the majority of employees into accepting a union. In part, this was due to Amazon's scare-tactics, and the possibility of Amazon moving out of Seattle if the natives became restless.

On another level, though, the union effort was a small distraction from the bigger story of Amazon's lack of profits. The retailing business, in spite of Amazon's boasts to the contrary, is a seasonal affair -- and January has been the cruelest month for Amazon's employees. As Drew Levy noted in his scabrous Amazon article, even the 1999 'Man of the Year' award from TIME magazine wasn't sufficient in January 2000 to prevent Jeff Bezos from sacking workers. In 2001, however, Bezos must have been much angrier -- TIME had gone for George W. this time around (perhaps a logical progression from Bezos, on the promise-to-performance index), and Jeff was struggling to maintain Amazon's credibility. As January came around again, Bezos had to deliver news of a $545m loss in the fourth quarter of 2000 (up from $323m in 1999); and muster some evidence to show the investors that Amazon was serious about turning a profit.

As I mentioned above, Amazon has focused obsessively on 'market share' and turnover rather than making a profit since its founding. As long as Amazon continues to sell books and cds and the rest at rock-bottom prices, it won't make any money. When it raises its prices, online consumers will just head for another site -- or, heaven forbid, will remember that they can get books from the local store, without the wait or the shipping charges. Thus Amazon is caught between its wildly overambitious business model and its angry investors, the latter no longer persuaded by the former and calling for Bezos' head. In this situation, Bezos realises that the only way he can survive is to make sweeping cuts in what the analysts call "operating expenses" -- in English, the ordinary working folks who've built Amazon's customer base in the past few years.

And so Bezos' New Year's Resolution to investors was a terrible development of last year's bright idea -- lay off the staff to make the books look a little better. Instead of 150 layoffs, however, Amazon announced on January 30th 2001 that it was laying off 1,300 workers -- or around 15% of its staff. These included workers at a distribution center in Georgia and the entire complement of Amazon's flagship customer-service center in Seattle. (Amazon also announced that its Seattle warehouse will now operate only at times of peak seasonal demand.) The Seattle workers, funnily enough, were at the center of the union organizing drive in the 2000 holiday season. Just as the organizers had argued, the Seattle employees were completely vulnerable to Amazon's whims as long as they worked without a contract. Washington state, which has one of the weakest labor laws in the United States, would be a bystander -- Amazon was at liberty to dictate the terms of their dismissal.
 

Serious about profits

What's to be gained from the layoffs? Well, Amazon is getting rid of its highest-paid employees, which will make a dent in those 'operating expenses' and persaude Wall Street that Jeff is, as they say, "serious about profitability." The announcement of the layoffs coincided with Amazon's pledge to attain profitability by the final quarter of 2001, a prospect which seems rather unlikely for various reasons. (Click here if you'd like grounds for scepticism.) So Wall Street is pleased that Amazon is cutting costs -- probably mightily impressed, in fact, by the novel solution to the customer-service problem. You'd think that Bezos would find it hard to outsource service jobs like these, given the requirement for high levels of interpersonal skills, attentiveness, expertise, etc. But Amazon has set up shop in India, taking advantage of an English-speaking professional class which will take on the job for much, much less than the Seattle employees were getting. It's an ironic but unsurprising fact of globalization that American spending sprees will now be 'serviced' by folks who can't afford the goods in question, and have probably never been to the US. Of course, we're well used to outsourcing manufacturing -- but now you'll be chatting on the phone or over email to people whose dislocation from the American consumer paradise is profound. Will that be good for customer service?

The effects of Amazon's move on customers are a potential downside, for sure. Amazon's Seattle workers have prided themselves on the standard of service they've offered in the past few years. These workers used the Amazon site, understood the products from personal experience, and even owned stock in the company. It seems extremely unlikely that such thorough knowledge will survive Amazon's migration overseas; or that the customer-service reps at Amazon's remaining US centers, in North Dakota and West Virginia (where conditions are a pale shadow of those in Seattle), will be inspired to keep Amazon at the forefront of e-commerce in this regard.

The immediate losers, of course, are the Seattle and Georgia workers themselves. There's been the expected round of breast-beating from Bezos and co., which has hit the usual notes of disingenuousness. Bezos announced that the job cuts were "distressing for everybody," surely an exaggeration given the New York analysts' take that the layoffs would cheer the Street. Meanwhile, the 'distressed' workers were offered posts at Seattle's other outfits in North Dakota and West Virginia, a PR effort on Amazon's part given the fact that wages at those offices are half those paid at Seattle. Perhaps we should be grateful that Bezos ended the empathy there, and didn't offer to secure an Indian passage for his former employees. The ability of people to move beyond borders in search of jobs is pretty much taboo at such globalization palavers as Davos or the WTO forum -- but sending workers from Seattle to south Asia would at least confirm that, for workers in the 'new economy', the only way is down.
 

Did Amazon nuke its Seattle facility to wipe out any traces of union organizing? Not directly, though its devastating cutbacks reflect some old realities in the 'New Economy':

1. Many companies have little or no loyalty to their workers, in spite of their supposedly 'fun' working environments, stock-option bribes and free massages.

2. Companies like Amazon have to cut every corner to appease Wall St., and the interests of investors are often diametrically opposed to the interests of workers.

3. Amazon, like most other companies, will try to find the cheapest possible labor rather than pay a fair wage in the US -- it's no surprise, then, to hear that Amazon's Seattle customer-service reps are to be replaced by workers from India, who'll work for a fraction of the cost of living in Washington state.
 

If you're cross about all this, return to our Amazon index and/or blast a letter in their direction.
 
 

Postscript -- reasons to be sceptical about Amazon's profitability boasts

Jeff Bezos balanced the news of his layoffs with the boast that Amazon would be profitable by the final quarter of 2001. This seems unlikely for a few reasons. They're given below -- but you should really be at fool.com or thestreet.com or someplace like that (as long as those companies remain in business, of course) if you're looking for stock tips:

1. Amazon is a retailing business moving into a recessionary economy. Even if the company performs very well this year, it's a tough time to expect to turn your first ever profit.
2. Amazon's predictions of its growth have slowed consistently over the past 12 months -- the new prediction of 20%-30% growth is hardly realistic, if this trend continues.
3. Amazon, in a desperate effort to become profitable, has increased its book prices of late  -- with the entirely predictable result that book sales have slowed. If it tries this with CDs and videos/DVDs, sales in those key areas will also slow markedly. Again, another reason to suspect that profitability isn't around the corner.
4. Amazon has made substantial investments in internet companies, in the odd belief that its own success is more of a trend than a fluke. $339m of its 4th quarter 2000 losses were in markdowns on internet holdings. Of course, if the internet 'boom' continues instead to resemble a train-wreck, Amazon will pick up more losses in this area.
5. Amazon's tumbling share price has left it short of cash -- online investment pages have already speculated that this will cause a crisis for Amazon, possibly as soon as the summer of 2001.
6. Amazon's rush for the basement in hiring practices will have a negative impact on its customer service, which was one of its real achievement and which contributed to Amazon's success. When the 400 Seattle staff are taken out of the picture, we'll be able to see whether the money gained in taking them off the payroll is lost in cancelled orders as Amazon customers migrate to other retail outlets.
7. Amazon, like other internet companies, perennially attempts to claim profitability or mask losses by putting out the best numbers it can, and suppressing less healthy numbers. (For example, its 'pro forma' accounting system which excludes non-cash charges like options and write-downs from its accounts.) This may fool some folks, but it won't keep the ship afloat for long.