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the Software View: Amazon.com, a river runs through it (Part IV)
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Gentle readers, let us compare and stack up Amazon.com's advantages versus Barnes & Noble's disadvantages. Amazon.com has to pay for and maintain only one Internet World Wide Web site versus Barnes & Noble having to pay the rent for 1,011 bricks-and-mortar retail outlets. Amazon.com can sell over 4.7 million titles versus Barnes & Noble can stock only 175,000 titles per super store. Amazon.com has only two percent book returns versus Barnes & Noble having 30 percent book returns. During the third quarter of 1998, Amazon.com's sales revenue growth was 306 percent versus Barnes & Noble's sales growth was only ten percent. Amazon.com possesses per year sales revenue per employee in excess of $375,000 versus Barnes & Noble's paltry per year sales revenue per employee of $100,000. Amazon.com has per year inventory turnovers 24 times versus Barnes & Noble has only three inventory turnovers per year. This means that Amazon.com can offer fresher and more recent titles than Barnes & Noble can. Amazon.com sports low long-term capital requirements versus Barnes & Noble's high long-term capital requirements. Finally, Amazon.com enjoys high cash flow versus Barnes & Noble's low cash flow. Amazon.com even has numerous initiatives to build direct relationships with content publishers. As for Barnes & Noble, "I bet you a year from now they will not even consider us direct competitors," Bezos predicts. "Clearly they do today, but we are on different paths ... we are trying to invent the future of electronic commerce, and they are just defending their turf."
These numerous disadvantages are what has kept Barnes & Noble at bay. It proved vulnerable when it came to the ways of the Internet. For one thing, it was late in arriving, and its store-trained executives took longer to learn the new rules of electronic commerce than Amazon.com's Internet-centric staff. "In the early days, there is a big advantage in not having that baggage," says William McKiernan, chairman of electronic commerce services provider CyberSource Corporation. Even after Barnes & Noble went on-line, it was slower to take advantage of the Internet's ability to customize its site to each shopper. That allowed Amazon.com to use its appealing customer experience as a branding tool far more powerfully than conventional advertising. Thanks to its well-known name and huge on-line marketing campaign, fifty percent of Internet users knew and recognized the Amazon.com brand without prompting, according to Intelliquest Information Group.
On-line shoppers are different from your average shopper. The obvious things are that they have higher-than-average income levels, and they have higher-than-average education levels. They still tend to be more male than female, but that is changing. And they tend to be busy, which makes the convenience factor more important for them. The majority of their customers use their Internet access at work. There are two reasons for that: First, they typically have better Internet connections at work because they are on T-1 lines and so on. Second, people are just too busy at home to do these kinds of things - everybody's life these days is hectic.
Customer experience on the Internet matters. And the reason is that word of mouth is so powerful on-line that if you do a great job of servicing your customers and providing them with the best possible service, you will turn these people into evangelists, and they will help you grow the business. So, that is what they have focused on. They have focused on just having a better store, where it is easier to shop, where you can learn more about the products, where you have a bigger selection, and you have the lowest prices. And you combine all of that stuff together, and people say, "Hey, these guys and gals really get it." Amazon.com tries to offer the world's most convenient shopping experience. They offer people an overwhelming value proposition, which they try to do through a variety of things - low prices, huge selections of things you cannot find anywhere else, ease of use, personalization, and instant recommendations.
Besides the huge selection and simple Internet pages that load fast, he created a sense of on-line community. He invited people to post their own reviews of books; some 800,000 are now up. He brought in authors for chats and more. The Internet and World Wide Web enable you to package books differently. They serialized a novel on the Internet site, and they got a lot of traffic. They had John Updike write the first installment of a serialized story and then for forty-five days after that, people came to their Internet site and competed to add to the story. And at the end, Updike wrote the final paragraph of the story. So, it was a serial collaboration with forty-five or forty-six authors. And it was hugely successful as a fun event that involved hundreds of thousands of Amazon.com customers. They did the same thing with a Doonesbury cartoon. Gary Trudeau did the first panel, and then these panels were all blank. Then each day, Gary selected the winner for the next panel submission. And then Gary did the last one. Also, the future points to digital downloading of books.
Bayers writes, "The new merchant, Bezos suggests, volubly and unstoppably, is a community builder, a facilitator, a networker. He cites Amazon.com's willingness to post negative book reviews as an example of harnessing the anti-manipulative truths the Internet allows consumers to root out. The Internet's famously de-centralized, open flow of information, he goes on, inevitably deflates the most extravagant hype of traditional retailing. And that shifts the balance of power - which since the origins of department stores and mass merchandising has favored the merchant - back into the hands of consumers. Amazon.com's scheme is, in effect, to form a strategic alliance with all that newly unleashed power. "This does not mean that you can not build a valuable, lasting enterprise in the on-line environment," Bezos says, "but it does mean that you better recognize the environment you are in, and not try to build an airplane to fly underwater."
Bezos has several management philosophies that drive him and that he uses in the company. One of them is telling employees to obsess over customers instead of competitors. You should pay attention to your competitors, watch out for them - Intel Corporation Chairman Andy Grove taught us all that only the paranoid survive, and he is right. But the thing that drives everything is creating genuine value for customers. Nothing happens without that.
In the month of September in the year of 1998, Bezos still owned forty percent of the company (he holds more than nineteen million shares outstanding), which makes him worth north of $9.1 billion. But this amazing success has yet to change his life and fun and games are few and far between. He still shares one car with his wife. The car is a Honda Accord. And they rent a tiny studio apartment ten blocks from the office - they are month-to-month renters. They are just too busy." Bezos works so much that he and MacKenzie have not found the time to move out. "Sometimes I yell at him because it is so hard to get together," says buddy Nick Hanauer. Bezos is facing down stratospheric wealth with a modesty that outsiders to technology culture often find odd (and maybe even unnatural), but which is surprisingly common in the industry, where twenty-somethings worth millions routinely rent along the freeway. When Weinstein teased Bezos about being listed upon the Forbes 400 roster of the richest Americans, for example, "Jeff said that the only real difference was that he does not have to look at the prices on a menu anymore." When he discovers a pair of shoes he likes, he will buy four pairs all at once and wear them in regular rotation for years. "One thing to keep in mind," Bezos says, "is for many of us, the wealth we have is paper wealth, and it will exist at that level only for as long as we continue to serve our customers well."
Robert Hof writes, "When giant retailer Wal-Mart Stores Incorporated sued upstart Internet book seller Amazon.com Incorporated on October 16, 1998, jaws dropped. Wal-Mart accused Amazon.com of raiding its executives to steal its computerized merchandising and distribution trade secrets. The amazing part: Wal-Mart said tiny, money-losing Amazon.com had caused it "economic damage" and continues to do so. Commenting about the suit, Bezos gave this calculation: "Even if all of our employees came from Wal-Mart, it would be less than two-tenths of one percent of their entire work force," he said - and then he burst into raucous laughter. He promptly bought three books - from Amazon.com, of course - on the subject of Wal-Mart to learn more about how the company works. What he found: Comments from Wal-Mart founder Sam Walton saying he trolled rivals for talent - which were then used in Amazon.com's court filings. Amazon.com has hired several Wal-Mart executives, including Richard L. Dalzell, who is now Amazon.com's chief information officer overseeing the company's crucial technology operations. This case signaled a watershed in the history of the Internet: the moment when cyberspace retailers began to turn the tables on earthly ones. There is a new expression making the rounds - "getting Amazoned," which means a traditional bricks-and-mortar retailer being knocked out by an Internet competitor.
Like many startups, Amazon.com has put nearly as much effort into hiring as it does into selling. Bezos has also turned hiring staff into a Socratic test. "Jeff was very, very picky," says Nicholas Lovejoy, who joined Amazon.com as its fifth employee in the month of June of the year 1995. In endless hiring meetings, Bezos, after interviewing the possible candidate himself, would grill every other interviewer, occasionally constructing elaborate charts on a white marker board detailing the job seeker's qualifications. If he ferreted out the slightest doubt, rejection usually followed. "One of his mottos was that every time we hired someone, he or she should raise the bar for the next hire, so that the over-all talent pool was always improving," Lovejoy says. Amazon.com's employees do not fit the corporate mold. In sales, marketing, distribution, and dress codes - In all of these areas, Amazon.com is obliterating the current corporate molds. And it is only natural that in a company where everything is being created from whole cloth, the people do not exactly fit either the Silicon Valley or the Microsoft mold. Dogs, sometimes including Bezos's golden retriever, Kamala (named after an obscure Star Trek character), and green-haired twenty-somethings with multiple piercings run loose, often around the clock. Says the Acting Customer Service Director Jane Slade: "We tell the temporary recruiting contractor agencies, 'Send us your freaks.'" The people at Amazon.com are lunatics. They are pathologically competitive.
To be continued ...
Sincerely,
Mark Kuharich
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