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the Software View: Amazon.com, a river runs through it (Part II)

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Now, dear readers, on with this week's episode of the Software View!

Gentle Readers, but technology is just one of the ways that Amazon.com is trying to rewrite the rules of retailing. Book store and other retail chains largely depend upon opening new stores to boost revenues - a huge cost that Amazon.com completely avoids. In the reverse of traditional retailers, Amazon.com has relatively high initial costs for things such as computer systems and editorial staff - which partly explain its red ink today. But unlike retailers, who must continually invest in new stores to hike revenues, Amazon.com can boost sales by simply getting more people to come to its single on-line store. Says Chief Strategy Officer Joy Covey: "I do not think we could have grown a physical store base four times in one year."

Even though Amazon.com is still a long way from making a profit, its basic economics suggest the upstart will someday look more like a fat-cat software company than a scrambling-for-profits retailer. Once Amazon.com gets enough customers and sales to pay off its initial marketing and technology investments - and as that technology pays off in falling labor costs - additional revenue drops to the bottom line. "Amazon.com is changing the business model of retailing," says Ann Winblad, a principal at Hummer Winblad Venture Partners. On September 23, 1997, Amazon.com first launched its customized-recommendation section. On October 28, 1997, the one millionth customer personally received the order from Bezos's hands. On November 18, 1997, the holiday-gift center is first opened. The title of the top-selling book at Amazon.com for 1997 is Into Thin Air: A Personal Account of the Mount Everest Disaster by author Jon Krakauer.

On March 2, 1998, Amazon.com Kids was launched. On April 17, 1998, Amazon.com purchased the company known as Bookpages, the United Kingdom's largest on-line book store. Then, on April 24, 1998, they purchased the company known as Telebook, Germany's top-selling on-line book store. They actually sell an authoritative selection of DVD's. Also, on April 24, 1998, they purchased the company known as the Internet Movie Database Limited (IMDb), an Internet web site specializing in motion picture and television show information, and announced that at some point in the future they expected IMDb to become the primary foundation for the world's largest video store.

On May 5, 1998, Amazon.com offered $325,987,100 worth of senior discounted notes. This is debt that does not have to be repaid for ten years. It is long-term capital. The sole managing company was Morgan Stanley Dean Witter. They also have equity capital in the bank.

In a bid to stay ahead and branch out beyond retail, on August 4, 1998, Amazon.com swapped $280 million in stock for two key companies, Junglee Corporation and Sage Enterprises (PlanetAll.com), that steer Amazon.com even more firmly toward becoming a shopping service rather than just a retailer. PlanetAll provided 1.5 million registered members with a computerized, Internet web site on-line Rolodex and Daytimer rolled into one. It lets visitors register their addresses, phone numbers, and other personal information and designate which friends - even members of an old Boy Scout troop - they want to keep in touch with. For Amazon.com, it is potentially a dandy reminder service to prompt other purchases. It could, say, send electronic-mails alerting people that Father's birthday is coming up - and perhaps even suggest a gift based upon his interests.

Amazon.com's purchase of Junglee, then a Silicon Valley-based company that produced product comparison software for Internet shoppers, came about when Amazon.com treasurer Randy Tinsley approached Bezos sometime in late Appril of the year 1998 and lobbied for the acquisition. After a half-hour debate during which Tinsley allowed that Junglee might resist a sale, Bezos's final words were, "We have a million other things to do - drop it." Two hours later, Tinsley called Bezos back to say he had called Junglee anyway and the management there was actually interested. "It shows you how much people listen to me!" Bezos jokes.

Junglee had a highly touted product feature- and price-comparison shopping technology service that Bezos hopes will give customers a way to find products that Amazon.com does not sell directly. Junglee's services funnel tremendous amounts of personal data and information about consumer behavior through Amazon.com's servers. Its purchase of Junglee put a spotlight on the category of services that compare prices across a range of retailers. In essence, all of them send out Internet software agents, or "spiders", to scour databases and return with results. Calling up a store's database and getting a price quote is difficult. You need to formulate your query in the database's language. Then you need to return the results to users in their various languages. And, if you are comparing products from a number of retailers, you must put all of the results together in a way that makes sense. Junglee copied databases to its own meta-database. That kind of database management has a host of business uses besides shopping, which is why Junglee used the same engine to search employment classified ads. Price comparison is not the only use of data retrieval technologies, but it is a good test case. The software developed by Junglee will really shine once vendors start describing their products for computers using XML tags. "We do not even necessarily have to be selling all of those things," says Bezos. "We just help people find things that are being sold elsewhere on the Internet." Amazon.com might take a cut of revenues from other retailers if its customers buy their products. Says marketing professor Rogers, who is a partner in consultancy Peppers & Rogers: "Their next mission is to be a service agent."

Right now, the terms of Internet shopping are defined by a few key gate way Internet web sites, with America On-Line, Yahoo! and Excite leading the pack. These sites call retailers their partners; in fact, as all Internet web retailers know, these so-called partners are really their clients. Retailers pay the Internet portals large sums of money, often in the form of a big percentage of their revenue, to bring customer traffic to their Internet web sites. If everything goes according to Bezos's plan, the balance of power will shift dramatically from Internet Web media portals like Yahoo! to electronic commerce stores like his Amazon.com. Do not think of Amazon.com as an on-line book seller. Do not even think of it as the Wal-Mart of the Internet and World Wide Web. Think of it as the department-store anchor tenant in the biggest mall in the world.

Bezos possesses a tantalizingly broad vision of enriching the on-line consumer experience. He and his company are embarking on a strategy likely to alienate some of the biggest Internet players. Their broader strategy is to create a major shopping destination on the Internet. Yahoo! and Excite have grown steadily by accumulating services that keep Internet surfers clicking through pages. Amazon.com appears to be collecting properties that will give its Internet web site the magic characteristic of "stickiness" - World Wide Web argot for features that compel users to spend more time in one place. It is very clear that Amazon.com is deciding it wants to be an electronic commerce portal. They will be competing with major retailers in key product categories. What they need now for their portal is content, building in different levels of functionality for their members to come and stay at Amazon.com. This, in turn sets Amazon.com up for a fight with the Internet Web media portals like Yahoo!

The concerns of the Internet Web media portals will certainly be an issue for Amazon.com, which depends upon them for some of its Internet traffic. An even bigger issue will be maintaining relationships with other retailers. On the one hand, escaping the clutches of the Internet Web media portals would save retailers millions of dollars annually in fees. Taking advantage of Amazon.com's own inter-network of thousands of distribution partners is also an attractive proposition for retailers. But, on the other hand, doing business with a major competitor is not very appealing. Analysts estimate that Amazon.com will spend nearly $200 million on marketing during the year of 1999, up fifty percent.

If Amazon.com is moving to create a comprehensive electronic commerce portal, the $23 billion question becomes what Amazon.com will sell directly, what it might sell for others and whether what worked for books will work across the board. Amazon.com's founder figured out how to sell books on the Internet, and now he wants to sell you everything else. Now, Amazon.com is extending its warm and fuzzy formula far beyond the bibliophile set. On November 17, 1998, the online merchant debuted a video store, as well as an expanded gift shop - the clearest sign yet that Bezos aims to make Amazon.com the Internet's premier shopping destination. Buyers who visit the Internet site can now find everything from Pictionary games and Holiday Barbies to Sony Walk men and watches. And Amazon.com is not apt to stop there. There exists a famous list of twenty products that Bezos drew up before he began his Internet Web business. He first started with dusty old books, then he added music, and movies in the wake of the April 1998 acquisition of the Internet Movie Database. Sources say Amazon.com is likely to hold a stake in Drugstore.com - a new venture soon to be launched by venture capital kingpin and Amazon.com investor Kleiner Perkins Caufield & Byers - and other alliances along those lines could produce a Wal-Mart - scale product line. (Amazon.com has even hired two former Wal-Mart executives.) Experts, for their part, say their data leads them to believe that the next big on-line shopping boom will be everything from software and apparel to flowers and travel packages.

To be continued ...

Sincerely,
Mark Kuharich

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