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the Software View: Amazon.com, a river runs through it (Part III)
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Gentle Readers, the following are different on-line marketing segments and Amazon.com's opportunities within each one. Books: Already the number one on-line bookseller, with $340 million worth of books sold in the first nine months of 1998. That is big - but just a fraction of the $82 billion that will be sold around the world annually. Music: Sales reached $14.4 million in the first three months of 1998, outdistancing number one on-line music seller CDnow. There is room to grow - music sales amount to $38.1 billion world-wide annually. Videos: Opened shop on November 17, 1998. Video sales, a $16 billion business world-wide, allow for potent cross-marketing with related books and compact discs. Consumer electronics: It is a $76 billion market for products such as hand-held game machines, digital cameras, and portable compact disc players, which have higher than average selling prices than books, compact discs, and videos. Games: Gifts such as Pictionary and Scrabble are likely to appeal to book buyers, too. Toys: It is a sprawling, $22.6 billion market that offers many tie-ins to books and videos - and it is a natural for quick gifts. Software: Amazon.com already sells some computer games, and the $5 billion world-wide consumer market fits well with books and compact discs. Health supplies: By investing in startup Drugstore.com, Amazon.com is capturing a piece of the $120 billion market for medicines and drugstore products. Apparel: A $14.3 billion market by mail-order catalog, clothing sales are growing on-line. Amazon.com customers are comfortable buying without touching the merchandise. Flowers: They are an easy sell for holidays and birthdays, and even a sliver of the $15 billion in United States sales would be a huge boost in revenues. Magazine subscriptions: A staple in physical book stores, they are an easy and logical addition to books. Travel arrangements: Travel includes high-ticket items and the potential for higher margins, plus the ability to sell related books and videos.
Kathleen Doler writes, "Amazon.com is THE success story of electronic commerce. The Internet book seller is a hit on Wall Street and with customers. By now, unless you are an aborigine living deep in the rain forest, you have heard about Amazon.com, Incorporated. Whenever anybody wants to talk up the possibilities for electronic commerce - or for creating an Internet on-line brand - he or she brings up the book seller's name. Amazon.com's moniker, chosen for its alphabetical advantage as well as its image of strength and size, has become one of the best-known brands of the World Wide Web. It is by no accident that Bezos named Amazon.com after the river that carries the greatest volume of water in the world. "He wants Amazon.com to be a $10 billion in per year sales revenues company," says early investor and board member Tom Alberg. What the name Amazon.com itself implies: a company that, like the river, will be big and deep and drain a continent. Amazon.com, which was founded in 1994, has continued to lead the market. And it is not just a virtual book store anymore. On June 11, 1998, it began selling music on-line, and on November 17, 1998, it opened a giant video store as well.
What does the great and powerful Amazon.com look like? Well, its offices in downtown Seattle are not the lush digs you might envision. In September 1998, Amazon.com was housed in a drab 1960's-style four-story cube called the Columbia Building - and the company, admired for its branding smarts, did not even have a sign marking its headquarters. Amazon.com occupied all four floors, above and behind the dry cleaners, print shop and Indian restaurant on the street level. The company also leased space in two other equally spartan commercial buildings nearby. To look at Amazon.com's crowded, grubby Seattle headquarters, you would never have suspected such grand ambitions: It is housed in an un-marked building across from Wigland, the Holy Ghost Revivals mission, and the Seattle-King County needle-exchange programme.
Frugality is clearly a corporate value. Unlike most of his Silicon Valley colleagues, Chief Executive Officer and founder, Bezos, is so cheap that not only does he pride himself upon having desks made from wooden doors, but he also eschews superfluous office equipment such as monitor stands and extra chairs. Computer monitors are propped up on stacks of telephone books; chairs for meetings are "borrowed" from those who leave them unguarded. His doors-turned-desks have four-by-four pieces of wood for legs. They are a symbol of frugality and Amazon.com's corporate culture. The wood and the brackets are about $70, and the labor is about $60. Bezos built the first four himself, and now they hire carpenters to come in and build them - 60, 70, and 80 at a time. But they are great desks. The other thing is that they are big. In the late twentieth century, you need a big desk. And this desk is earthquake-proof. In an earthquake, you want to be right there (Bezos points under the desk). By watching its overhead, Amazon.com can spend more on business expansion. Of course, there is one big bonus: Everyone gets stock options, which have made dozens of Amazon employees millionaires. But the usual Valley perks such as free neck massages? Yeah, right.
When Bezos describes his primary goals for the Amazon.com Internet web user interface, he becomes a whistle-stop campaigner for a new politics of consumerism. "We want to turn visitors into customers, and we want to make the experience as welcoming as possible," he says. Most important, Bezos made it irresistibly easy to purchase items. Amazon.com is the only on-line Internet music store with one-click shopping. For repeat customers, because they securely store your shipping address and credit-card information, when you find something you want to buy, you literally just click one button to send the items winging their way to your mailbox. During the focus groups when they were testing this, people did not believe it. It was too easy, so they had to put a little phrase on the thank-you screen that says, "Yes, you are done!" With a single mouse click, an order can be placed on its Internet site, making shopping a friendly, friction less, even fun experience that can take less time than finding a parking space at the mall. And to assure people that their purchase went through correctly, Amazon.com sends electronic-mail confirmations of orders - which are often upgraded to priority shipping for free.
The focus has been upon minimizing flash in favor of download speed, and upon accepting the limitations of what it is possible to do within the 640 by 480 pixels available inside a browser window upon a computer screen. "Every business has to deal with some scarcity, and in our case, it is computer screen real estate," Bezos observes. But even amid the tiny graphics and fast-loading pages, the entertainment value built intentionally into Amazon.com shows through. Rankings, for example - updated in real time for the company's best-sellers - tell shoppers exactly how well each book is selling. (It is not unheard-of for authors to purchase copies of their own books just so that they can see the book ticker bump up.) And dedicated collectors of literary rarities - the most notoriously exacting crowd around, with significant cultural trickle-down influence - can readily appreciate Amazon.com's attention to detail. Using the music keyword-search function, for example, you can pull up a listing of the six compact discs offered by Amazon.com that feature the oud, the traditional Middle Eastern stringed instrument.
As bandwidth and speeds increase, making it ever easier for consumers to browse through goods on-line, Bezos expects electronic catalogs to finally drive their paper counterparts into extinction. The bulletin-board discussions and review areas on Amazon.com will also grow more sophisticated, he promises. "You know, the potential exists in a broadband access world for every author to have a five-minute video snippet explaining who the intended audience is, why they should purchase that book, or that music compact disc, or that video, and you will be able to show the trailers from the videos."
The Internet web site also provides a variety of helpful suggestions and information. Bezos combined those pragmatic, small, and smart choices with a relentless focus on the customer's experience: tweaking the web site's interface to make it ever easier to understand, streamlining the ordering and purchasing process at every turn, responding immediately to every customer query. "We want people to feel like they are visiting a place," he says, "rather than a software application." For one thing, the company has an almost unheard-of two-years head start on key software that handles millions of transactions and personalizes the customers' experience. Also, they, for instance, were the first commercial site to use so-called cutting-edge "collaborative-filtering" technology, which automatically analyzes a customer's past purchases and suggests, makes recommendations customized to each buyer of other books that people with similar purchase histories bought: the ultimate in targeted marketing and a trick that confounds twentieth century mass-marketing.
The other thing that they have done is to create a huge amount of content to help people make purchasing decisions. To be able to buy music easily, you need to understand what it is. You need reviews. You need explanations. You need sound clips. They hired a staff of mostly freelance editorial people to write 750,000 words' worth of reviews for their music site. They had been working on it for more than a year, and they are high-quality reviews that help you decide whether you want this compact disc or not. They are not all positive. Some of them say, "That is not his best work. Try this instead." They also licensed third-party content.
Amazon.com has the lowest prices on-line for music - significantly lower than offline prices, too. You will save money even after shipping, even if you buy only one compact disc. They have tried to make it a music store, but it is also sort of an encyclopedia of music. So, if you pull up an artist's page, you can see who influenced the artist, and you can see cross-links to all of those artists. They also have lists of essentials. There are fourteen categories of music - rock, jazz, and so forth - and then 280 sub-categories. There is acid jazz, for example. It is a real category! They even have the music categorized by instrument. And then in many of these categories, they have lists of the essential compact discs to own. It is getting back to that idea of focusing on the customer experience. A lot of people say, "I am trying to get started with jazz, so what is the list of essentials?" They have probably a dozen or more jazz lists, depending upon the sub-genre.
There is something about the on-line world: immediate Internet feedback. If they have chosen poorly - if, say, there is a stupid jazz album on their list - they will get so much hate electronic-mail within such a short period of time that they will use the feedback, and it will be perfect. That is one of the advantages of being on-line. But they do have an in-house staff of music experts that they have built up during the year of 1997. There are things that everybody agrees upon, and then there is stuff that is sort of borderline. Besides spurring more purchases, there is another huge bonus for Amazon.com: It can gather instant feedback on customer preferences to divine what else they might want to buy. Such valuable information has proven forbiddingly effective in capturing new markets on-line. While it may appear as though the company is careening willy-nilly into new terrain, Amazon.com is in fact targeting areas its customers have already requested.
They have always said that they would expand into more areas where they could leverage all three of the things that businesses could usually leverage: brand name, experience set, and customer base. Music fits in under the brand name very nicely. And they believe that a large percentage of their customers will buy music from them, as long as they offer them the best service. And it is a similar business in a lot of ways, so they get to leverage their experience set as electronic commerce pioneers. Their philosophy is that they would rather be too late than be too early into these new business areas, despite the advantages of being first. They are cautious when it comes to expanding. They are a lucky company because they have never been constrained by capital. They have always been constrained by executive bandwidth. And they have historically done a good job of focusing. There are trade-offs between focusing and expanding the business, and they will try to make up for them in the appropriate ways.
In Amazon.com's first full quarter of selling music compact discs, ending last September 1998, it drew $14.4 million in sales, quickly edging out two-years-old cyberleader CDnow, Incorporated. Says analyst Lauren Cooks Levitan of Banc-Boston Robertson Stephens: "When you think of Internet shopping, you think of Amazon.com first."
Amazon.com has a lot of deals with the big Internet and World Wide Web portals, where they get exposure. But they do not consider themselves a portal. They are a destination site. Just like in physical retail environments, there are some stores that are not destinations that have to be in high-traffic areas, whereas movie theatres and big book stores are destination sites. People get in their cars and they drive specifically to go to the movies. And that is why at shopping malls, for example, movie theatres get great deals on real estate because they bring traffic to the mall. So, in the scheme of things, you prefer to be a destination site. And part of their branding strategy is to make sure that people know that they can type in "Amazon.com" from an Internet browser anywhere in the world and they will be in their store.
They are running the business at a loss in order to keep up this fast pace of expansion. Bezos said he did not expect to be profitable for five years. They have always been consistent with shareholders from the beginning, saying that they have a long-term focus and that they believe this is a critical category formation time, that they are investing at a rate that would be more proportionate for a larger company, that they are investing in technology and marketing, brand-building, and they think this is a great time to invest.
Consider this: On December 14, 1998, Amazon.com offered an easily searchable trove of over 4.7 million titles - fifteen times more than any other book store on the planet and without the costly overhead of multi-million dollar buildings and scads of store clerks. One of the ways that they think about revenue per employee is in comparison with traditional physical book stores. The revenue generation for each of their 1,600 operating employees is in excess of $375,000 annually, and for a typical physical book store - even a well-run one - that figure would be about $100,000. It is a way of demonstrating the compelling structural economic advantages of the on-line model. Each Amazon.com employee generates three times the revenue that book store clerks can. That is more than triple that of the number one bricks-and-mortar book seller Barnes & Noble Incorporated's 27,000 employees.
Of course, for now, Amazon.com has to spend millions on marketing to bring in new customers - about twenty-four cents per dollar of revenue last quarter, compared with four cents for traditional retailers. But it is little understood just how much leverage Amazon.com's low capital costs provide to support that spending. Here is how it works: Physical book stores, like Barnes & Noble, must stock up to 160 days' worth of inventory to provide the kind of in-store selection people want. Yet they must pay distributors and publishers forty-five to ninety days after they purchase the books - so on average, they carry the costs of those books for up to four months. Amazon.com, by contrast, carries only fifteen days' worth of inventory and is paid immediately by credit card. So, it gets about a month's use of interest-free money. That float - amounting to well over $25 million during 1998 - actually provides a large chunk of the cash Amazon.com needs to cover its operating expenses. In the third quarter of 1998, Amazon.com used a mere $600,000 in operating cash while jacking up its customer base by thirty-seven percent, or 1.4 million customers.
To be continued ...
Sincerely,
Mark Kuharich
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