Features - April 18, 2000

Amazon Adventure
Jeff Bezos '86 is leading e-commerce into vast, uncharted waters

At 9:00 on a February morning, Amazon.com's workers stream through the main portal of their corporate headquarters, the art deco shell of an old VA hospital on a ridge in southeast Seattle. Sleepy-eyed, clad in jeans and slacks, lattes in hand, these New Economy workers look like Hollywood extras for the television show Felicity or Dawson's Creek-it's hard to find any suited bodies or gray hair. Inside, the hospital rooms have been divided in two and furnished with desks made from wooden doors hinged together with metal plates. Like the building, it's recycled chic. It's also democratic-everyone, including the CEO, has the same kind of desk. The functionality of the office is a reminder of where the company began-in the garage of its founder's rented Seattle home, atop desks cobbled together out of doors-and symbolic of its no-frills approach to its mission of becoming the online store that offers "Earth's Biggest Selection" of products.

Jeff Bezos '86, founder and CEO, arrives at his sixth-floor cubicle a bit later than most. He dedicates the start of each day to breakfast with his wife, MacKenzie Tuttle Bezos '92, who was a creative writing major at Princeton, and their newborn son.

The grand eminence of e-commerce, who was Time magazine's Person of the Year in 1999, is just a young guy in khakis, white shirt, no tie. His brown eyes are soft and lively, but what stands out most is his deep, honking laugh, which comes frequently. (He says his brother and sister used to refuse to sit with him at the movies because of it.) His engaging sense of humor springs from an instinctive feel for the ironies of life: for instance, he used to convene staff meetings in the café at rival bookseller Barnes and Noble because Amazon.com's first office was too small. Honk, honk.

Bezos was, by his own admission, something of a dweeb as an electrical engineering and computer science major at Princeton. "I was a nerdy student," he says. "I loved my studies as an engineer and got a fantastic computer science education. I'd look at student businesses like the pizza delivery and part of me would think, that's really cool. In retrospect I was overfocused on my classes, but only in retrospect."

Of medium height and build, balding at age 36, Bezos seems an unlikely revolutionary. But his whirlwind enthusiasm in bringing a fanciful notion to (virtual) reality has done nothing less than revolutionize the way America-and the world-do business.

Before he cracked the cover on Amazon.com,

Bezos worked for a small fund company in Manhattan, D.E. Shaw & Co. While trolling for business opportunities on the fledgling Internet, he came across data that indicated use of the new medium had grown 2,300 percent in 1993, the previous year. Anything growing at that rate, he figured, even if it were invisible today, would be ubiquitous tomorrow. He then drew up a list of businesses that he thought might profit from the Internet, looking for something that couldn't be done in the current business model.

Books, he reasoned, could not be properly catalogued in print, because there were too many of them; but he learned from veteran booksellers that they were catalogued. They cried out to be organized in a vast, electronic database-and then sold.

The rest is e-commerce history.

When Bezos launched his bookstore on the Internet in 1995, he figured he'd sell a book a day, build the business slowly. Instead, half a million customers ordered books in the first six months. Amazon.com was a novelty: Not only was it the first bookstore in cyberspace, but it offered every title imaginable, and customers could find them in a click or two.

"We never expected such fast success," Bezos says. "Our success made us want to invest more. Now, we want to build a store with tens of thousands of partners, where people can find anything and everything they might want to buy online. We want to build a store with standards that apply across time, country, . . . and culture."

More than 17 million customers in 160 countries have made Amazon.com the Web's leading online retail site. Seventy-three percent of orders in the fourth quarter of 1999 were from repeat customers, up from 72 percent the previous quarter. Bezos has made customer focus his mantra: "We listen to the customer. We also want to innovate new services on behalf of the customer. Companies often get that wrong. They don't develop what customers want," he says, adding, "We want to become earth's most customer-centric company. We will raise the bar on customer service for all companies. What Sony did for Japan-making Japan known for quality-was bigger than a company goal. It's a mission."

Bezos's obsession with customer service manifested itself this past Christmas, when-after 12 frantic months of building warehouses and inventory to prepare for retail's biggest day-an Amazon.com order placed at 8:05 p.m. December 23 was fulfilled and arrived in Hawaii at 3:55 p.m. on the 24th.

Asked about risks, Bezos laughs again, honk.

"How much time do I have?" he jokes.

"In my opinion Amazon could still become a footnote in the history of e-commerce," he says, more seriously. "Like all pioneers we could fail. Like Hayes, whose modems were once synonymous with quality, now gone. Failed because they lost focus, got bigger, and stopped taking risks. As a startup it was easy for us to take risks, but [even now] we have to continue to take risks.

"Our biggest obstacle is execution risk. In the fourth quarter we grew 90 percent in three months. There's no history that we know of where that's happened to a company with one billion dollars plus in sales. If it sounds hard, it's even harder to do. There's never been a business event as time-compressed as the Internet. Compare it to the automobile and the jet-their development was spread out over 20 years. Internet compresses time. Time compression requires speed and intensity."

Helping Bezos keep up the intensity are two other Princetonians: David Risher '87, Amazon's senior vice president for product development, and Jeff Wilke '89, vice president and general manager for operations. Both come from big-company backgrounds, Risher from Microsoft and Wilke from AlliedSignal (now Honeywell).

They'll be needed if Amazon is to keep up its breakneck pace of expansion. In the last quarter alone, Amazon opened five new "e-tail" stores. Its sale categories now include music, videos and DVDs, electronics, software, toys, video games, and home improvement, not to mention zShops, where you can buy gourmet food, among many, many other items. Amazon also partnered with Sotheby's to create an online auction site. To round out the first quarter, Amazon added 3.8 million customer accounts, a 170 percent increase over a year earlier.

With all its growth, however, Amazon.com has yet to turn a profit, and Wall Street, which has given the company lots of leeway, has been clamoring for more attention to the bottom line. The stock has been flat this past year. Critics decry the expansion of the company away from its purer-play Internet origin, and the ever-increasing amount of resources Bezos has committed to distribution, shipping, and warehousing. "I wanted to build a small profitable company, and instead we've built a famously unprofitable company," he says in response, then guffaws.

Amazon.com's boosters point to its customer base, low customer acquisition costs, top-notch customer service, and undisputed brand name.

"It's all about the long term," Bezos explained to shareholders in Amazon's 1999 annual report. "It took USA Today 11 years before it became profitable. And CNN, a long time. Both were private companies. What's unusual for us is not that we're investing in our company-it's the scale and the fact that we're a publicly held company. We will continue to invest aggressively and build the foundation for a multibillion-dollar revenue company serving tens of millions of customers with high efficiency and excellence. Our book business became profitable last quarter and will continue so in 2000. We also expect to have music and video profitable this year. We have a bunch of different companies, each at different stages of the life cycle, and some will become profitable before others."

Amazon.com also recently formed new online partnerships with drugstore.com, a furniture store called living.com, and online audio company Audible, Inc. Internationally, Amazon has had strong success in Britain and Germany, and Bezos predicts that someday half its sales will be outside the U.S.

To thwart possible takeover attempts and to have more cash on hand for buying opportunities, the company recently asked shareholders to approve the issuance of additional common stock in the amount of $220 billion.

What does the future hold? "Next, next, and next is Amazon," says Bezos. And a baby boy and a new house, secured by his 117.5 million shares of Amazon.com stock. He pauses, as if the future is so distant he can't imagine. "At some point," he continues, "assuming Amazon lasts, I'd like to do something philanthropic. I think giving away money would be as complex and challenging as running Amazon."

What Jeff Bezos did to Wall Street
Tech stocks ride on Amazon wave

by jane chapman martin '89

Do your due diligence on Amazon.com, and you'll come across a startling statistic. Its price to earnings ratio, your source will say, is Not Applicable. The short explanation for this dismissal of one of financial analysts' mainstay valuation measures is that Amazon.com has no earnings-thus, no P/E ratio. The long explanation is that Amazon.com and the many other nonprofitable Internet companies have completely upended the way the stock markets and financial analysts value stocks, bucking off traditional valuation measures like a feisty rodeo bull.

Historically, the P/E ratio has been one of the key factors in determining the value of an individual stock. One rule of thumb was that if a company's earnings growth rate-how much a company's earnings were expected to grow annually-exceeded its P/E ratio, then the stock was undervalued, and therefore a wise investment. But for technology companies that have no earnings-and even for those that do, whose earnings rates can't possibly keep up with their astronomical stock prices-that measure doesn't hold up anymore.

Instead, enthusiastic analysts-those driving what Federal Reserve Board chairman Alan Greenspan famously described as the market's irrational exuberance-are proclaiming a brave new economy, an economy in which traditional gauges of value don't apply. It's all about potential, they cry. Invest in the future.

However, investors might do better to look at the past. In an article for the January 2 New York Times headlined "Humbling Lessons From Parties Past," Princeton's Burton Malkiel *64, Chemical Bank Chairman's professor of economics and author of A Random Walk Down Wall Street, wrote, "The rules of valuation have not changed. Stocks are only worth the present value of the cash flows they are able to generate for the benefit of their shareholders."

He went on to remind new economy proponents of the similar booms in markets of the not-too-distant past: the electronics rage of 1960-61; 1972's "Nifty Fifty"-growth stocks such as IBM and Hewlett-Packard that were called "one-decision" stocks because the only decision was whether to buy (you were never to worry about selling); and the biotechnology fever that infected speculators during the early 1980s. All of these high-flyers crashed to earth when investors decided that real profits-and traditional valuation measures-mattered after all.

Still, says Yacine Ait-Sahalia, economics professor and director of the university's Bendheim Center for Finance, "People enamored of the Internet are not necessarily fools. There is some reality behind what is happening." There are compelling financial reasons, he says, why the Internet does make sense as an investment, and why investors should be looking at technology stocks. The Internet is providing "major cost savings across the economy," and improving efficiencies in business. One example he gives is online trading: Whereas in the past a discount broker might execute a trade for $100, today online brokers offer the same service for less than $10. But, Ait-Sahalia says, what happens is that "people get carried away too far, as indeed they have."

There are a few signs that the frenzy is beginning to subside. "The market is maturing," Ait-Sahalia says. The NASDAQ market, where most technology stocks are traded, went through incredible fluctuations during the first quarter of 2000 as investors swung wildly from new technologies to old-economy stalwarts; the eventual result was a technical correction for NASDAQ in the waning days of March. Investors are being encouraged to put their money in profitable companies that support the infrastructure of the Internet, such as Cisco Systems, Sun Microsystems, microchip manufacturers, and telecommunications companies; share prices of consumer-driven "e-tailers" such as Amazon have languished; and formerly dedicated online companies are searching for grounded partners, most notably AOL and TimeWarner.

Finally, Amazon.com's Jeff Bezos '86, who frequently refers to his company as "famously unprofitable" and has generally avoided making predictions as to when he might abandon his "the more we sell, the more we lose" business model, is starting to talk about the bottom line. In his annual report he announced that Amazon's book division had, in fact, made money in the last quarter of 1999, and that he expected its music segment also to turn a profit in 2000.

"No company cares more about long-term profitability than Amazon.com, or long-term returns on invested capital," Bezos declared on national television in January. The question is: Will the long term be too late?

Mint condition, must sell!

At eBay, Meg Whitman '77 runs the world's biggest garage sale

Imagine people setting up little booths in Jadwin Gym to sell items of one kind or another to a huge flow of people streaming through the doors. Its huge cavernous space is packed with booths. Instead of the house that Bill Bradley built, Jadwin becomes known as the place that sells everything, and then some. Buyers can pass magically through connecting doors to other Jadwin Gyms full of booths across the world.

Meg Whitman '77, president and CEO of eBay, the world's leading person-to-person online trading community, is explaining her company in a Princeton context. She continues: "eBay collects a small fee as the booth proprietors enter, then a small percentage of any sale they make." Of course, Jadwin isn't large enough to hold the 10 million buyers who are currently registered on eBay, and the 3.7 million items in 2,900 categories on display, with new items being added at the rate of 400,000 a day. More than half the items listed on the site sell.

It doesn't require a Harvard M.B.A. to understand that sellers want to be where the most buyers are, and buyers want to go where the most sellers are. What eBay, and its founder, Pierre Omidyar, managed to figure out was how to use the Internet to connect them. Some 1.78 million people visit daily, making eBay the most popular site on the Internet, ahead of number two, Amazon.com, with 1.13 million. Whitman says it's even better than that: eBay creates community-it brings people together. People meet each other. Have fun. eBay provides a personal service.

Whitman may not have founded eBay, but she's as enthusiastic as any Web visionary when she talks about the company she joined in early 1998. "It doesn't get any better than this-I have the world's greatest job," she says.

For Whitman, the magic of eBay, and the secret behind its incredible growth, is the bond the site creates between the buyer and seller.

"The strength of this company is its emotional connection," she says, standing by a blackboard in a conference room at eBay's headquarters, a sprawling brick complex in San Jose, California. The surrounding office is quiet, a warren of cubicles that keep replicating themselves as the company keeps growing. eBay just expanded into its sixth building in the complex. "As one example, fraud is practically nonexistent, but we do have occasional problems, like the time a woman won an auction for a computer. She sent a check for $900, but she never got her computer. We paid her the $200 insurance we provide for free, and she was profiled on Dateline. Within 24 hours, we had 6,000 e-mails offering $25 each. Five thousand dollars came in; we bought her a new computer and donated the rest to charity.

"eBay empowers people as entrepreneurs," Whitman continues. "They quit their day jobs-a truck driver who loved collecting Hot Wheels quit and now sells full-time on eBay. We have thousands of single mothers, disabled people, and senior citizens supporting themselves by selling on eBay. Art dealers no longer need showrooms and expensive inventory space. eBay is also a real meritocracy-you can't see people who are disabled, or how they dress, or whatever. We are an unbiased marketplace-we make the fewest rules and then get out of the way. Everywhere I go, taxi, airplane, people know eBay."

The so far short, happy life of eBay started famously as the brainchild of Omidyar, a computer engineer whose fiancée collected Pez dispensers. When she complained about the difficulty of finding other similar-minded collectors, Omidyar was inspired and set to work designing an Internet auction site, which he launched in the fall of 1995.

eBay was an instant success, and sooner than he could have dreamed, Omidyar was looking for money and help to grow the company. By 1997 he had his money, and he found his CEO a year later in Whitman.

Whitman's warm, dimpled smile belies her role as a boss hired to bring adult supervision-based on her experience in management and marketing at Disney and at Hasbro-to a youthful startup. And yet she projects energy and authority, occasionally writing and drawing to illustrate her points. She is smooth, composed, confident-the demeanor of a veteran.

One of Whitman's first tasks at eBay was to prepare the company for its initial public offering. When eBay went public in September of 1998, rising from $18 to $47 per share in a single day, the value of her stock options catapulted to a billion dollars.

"People thought I was out of my mind to leave my job at Hasbro," she says. "I was running their $600 million preschool division, making a ton of money. Let's try leaving two jobs-my husband, Griff Harsh, a neurosurgeon, was the director of the brain-tumor center at Massachusetts General Hospital. I came because I thought the Internet was going to change everything. I saw that eBay had an emotional benefit as well. I saw it as a community, a great opportunity for a great brand."

Viewers spend an average of one hour and 45 minutes on the eBay site each month, compared to Amazon visitors who spend an average of 13 minutes. Those are statistics to die for in the cluttered and cluttering world of e-commerce. Whitman says that loyalty comes from a feeling of ownership.

"Users feel like they have a real say in the direction of the community," she explains. "If a buyer doesn't like the way a seller behaves, he says so in our public forum. Future potential buyers can check out a seller's rep, and the other way around, too. We're a part of people's lives."

Though eBay originally started with collectors, and "they're still the heaviest users today," according to Whitman, "we've transformed eBay into a platform for selling just about anything. This is the place to find sports equipment-yesterday, we listed 1,500 golf items. We've opened up a car site-3,000 cars, 12,000 motorcycles, and 13,000 car parts. When I was in Washington, D.C., recently, Senator Kerrey tested me by asking if eBay had any of his favorite Puck cartoons. Sure enough, we listed 27 Puck cartoons. Someone else wanted to see antique poker chips. Turns out we had a lot of those: 2,700."

In the fall of 1999, eBay bought auction house Butterfield and Butterfield, and set up eBay Great Collections as a first foray into a higher-end market. In January, the 17th-century old master's painting by Jean Le Clerk, The Adoration of the Shepherds, was auctioned online with an opening bid of $60,000. The company set up specific trading sites for small businesses to buy and sell office products and equipment. It also has several regional U.S. sites and country-specific sites, including its newest site in Japan.

"We want to expand our international business and create a global marketplace. The international market will be triple the size of the U.S. market. We have users in over 200 countries already," Whitman says, "but people like to buy and sell in their own language and area. eBay Germany can only list items in German. eBay is in English. Our ultimate goal is to list in German and have it automatically translated into English. The technology doesn't exist yet to do that."

eBay has had some forgettable moments. Its temporary shutdowns-one last summer lasted 21 hours, during which Whitman slept on a cot in her office-made headlines and sent investors scurrying. Body organs and military weapons have popped up for sale before eBay nixed them. Recently, a teenage boy listed his soul.

The competition, too, is keener as other companies have developed auction sites. Whitman relies on eBay's sense of community and eBay's brand name to prevail. "We've become part of the pop culture of this country. Amazon and the others can't lift off in comparison," she declares.

eBay has another advantage over many Internet companies: It's actually profitable. Although this has been true for eBay from the beginning, it's also a credit to Whitman, who has imposed her corporate outlook-that is to say, a realistic business plan focused on the bottom line-on the company. eBay's profitability has also made it the subject of merger talks recently: At this writing, a union with Yahoo! is rumored.

Whitman's long days begin with a run on the treadmill at 5:30. Family time with her two teenage sons is spent skiing and on a family farm in Tennessee. Originally from Long Island, she came to Princeton to become a doctor. She took a chemistry course, but "I was hugely successful at selling ads for Business Today to the likes of Johnson & Johnson, AT&T-for a little sophomore to go in and sell ads at $2,500 a clip was not inconsequential. I'd make the presentation, close the sale-it was great fun!"

She chose economics as her major, writing a thesis on the marketing of American consumer products internationally. She also played squash and lacrosse. "I adored Princeton. I really grew up there. I learned how to write, how to be linear and logical about things. A corporate finance course under Uwe Reinhardt was one highlight. I remember thinking, he's great, this is cool."

Her future is, like eBay, virtual. "I've been here two years. I'll be here another five to eight years, while it's fun, while I'm adding value. As a company, eBay is on the five-yard line looking out."

Dan White is the former director of the Alumni Council and a freelance writer.

The next big thing?
Undergraduates run e-businesses in between classes

by ben grossman '02

While most university students are busy buying books and starting classes, a couple of their peers are busy meeting with venture capitalists and earning six-figure salaries. VarsityPlanet.com, a leading college student portal, and Digital Kiwi, an e-business consulting firm based on Nassau Street, are both companies owned and run by Princeton students.

Three university students-one of whom has since graduated-founded VarsityPlanet.com last February. Company president Jim Citron '00 described the Web site as one that "caters to college kids in its content, commerce, and community features."

The site features articles covering college sports, dorm life, and dating, all written by students from more than 40 colleges across the country. In addition, the Web site offers chat and messaging options, a free e-mail service, and a virtual store with commerce partners such as Dell, Buy.com, and Amazon.com.

Citron, along with cofounders Kevin Bourke '99 and Ryan Winter '00, had an exciting year attracting investors. "We closed close to $1,000,000 in a seed round over the summer, and we are currently pursuing our first institutional round," Citron said.

Though VarsityPlanet.com has yet to turn a profit and is not projected to do so for the next two years, the company has a staff of six people working full-time at its headquarters in Atlanta, Citron said. He and his friends created the company because "there's not a Web site all kids go to. We're positioning ourselves to be the leading college site for college students by college students where they can find everything in one place," Citron said.

A politics major, Citron said he spends about 30 hours per week working for his company, including trips to Atlanta every three weeks and frequent trips to Manhattan to meet with his advertising and development firm.

VarsityPlanet.com is launching a marketing program to spread word of the site. Citron said the initiative will begin with "a very comprehensive sales force that will have a presence on 30 campuses. [The schools] were all strategically chosen by their size and how wired they are."

Lou Ssutu, a California-based corporate attorney who invested in VarsityPlanet.com last year, commended Citron's efforts. "He's made remarkable strides to bring it from idea to fruition," Ssutu said. "This site is being created by folks who are in that environment. That's as true or as real as you could get."


This Kiwi flies high

Josh Rothman '02, the creative director of Princeton-based Digital Kiwi, describes his company as one that provides "Web services to our corporate clients, Web consulting, strategic consulting, and technical services." Rothman and the rest of Digital Kiwi's management team-which includes Paul Caldwell '02 and Chris Karr '02-have seen the company earn six-figure profits since they started last spring, he said.

The students formed the company because they saw a growing market for Internet consulting, Rothman said. "As the Internet matured, a lot of Web-consulting companies started. Their level of professionalism and expertise wasn't any different than what you could get out of Princeton students," he said.

Digital Kiwi has worked for Johnson & Johnson, American Dental Examiners, and the National Crash Analysis Center, a firm that studies automobile crashes. Rothman said

The company charges its clients an average of nearly $30,000 per account.

Though Rothman and his partners have enjoyed their experience with the company, he said he does not plan to pursue Web consulting as a career. "This isn't a long-term career option. I want to get a Ph.D. in English literature," Rothman said.

Adapted with permission from The Daily Princetonian.

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