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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