The Trials of Jeff Bezos

Baldwin Louie — Mon, 23 Apr 2001 15:00:00 -0700

At the time, it seemed like a brilliant stroke: Amazon.com, the retailer that launched and led the e-commerce revolution, would promote other online retailers on its site in exchange for hefty fees. For CEO Jeff Bezos and his company, the payments would be nearly pure profit and could quickly turn around his money-losing operations. So beginning in late 1999, Amazon signed a string of such deals with the likes of Audible.com, Drugstore.com, Greenlight.com, Living.com and others. Wall Street analysts gushed and predicted that Amazon.com could bring in an extra $500 million over five years.

But those deals don't look so clever anymore. As it turns out, the "fees" Amazon collected often took the form of stock in enterprises that were highly speculative. One by one, Amazon-affiliated startups collapsed, leaving some investors claiming that they were duped. Even though Amazon disclosed partial details of the agreements in its regulatory filings, it now faces more than a dozen lawsuits from investors.

That's just one of the headaches Bezos faces. Investors once reacted to his every announcement with enthusiasm. But for more than a year now, Wall Street has responded with nothing but skepticism, even scorn, as many of Amazon's efforts to calm investors with soothing spin and new initiatives have fallen flat. Even relatively positive news is coming up short. Last week's announcement of smaller-than-expected losses, followed by a new alliance with bookseller Borders and an upgrade on its debt by Moody's, might have given Amazon a boost but hasn't quieted increasingly vocal critics on Wall Street, who are calling on Bezos to do something dramatic to reverse the firm's fortunes.

Amazon consists of nearly 20 stores with about $2.8 billion in annual sales – but only books, music and videos generate operating profits. The others, such as toys, housewares and consumer electronics, as well as international operations, continue to lose money. And pro-forma operating profits for the entire business, which Amazon hopes to reach in the fourth quarter of this year, still exclude a lot of hefty bills, most notably interest on Amazon's $2 billion in debt.

Back at headquarters in Seattle, Bezos and his team say they are forging ahead on a steady course. But that course has been derailed. Tacitly acknowledging that it can't keep losing vats of money, the company has been scrambling to cut costs. During the past few months, it has tried everything from improving efficiency to cutting staff to shuttering warehouses. It also has sought to reinvent itself with new alliances.

It all sounds a little desperate - for good reason. These days, even Amazon's most reliable weapon, Bezos' disarming earnestness and goofy charisma, has lost its magic. After months of relative quiet, the affable, ever-smiling CEO has launched a full-blown PR offensive. But despite a flurry of interviews with news organizations, Bezos hasn't been able to generate much positive coverage. He has lost his Teflon coating.

NEW YORK - CBS (dossier) MarketWatch is about to announce a content deal with Conde Nast's personal finance site, CNCurrency.com, industry sources said Thursday.

The two financial sites will provide links to one another's sites, in addition to unique content, some of which they are already running in common. No money will change hands. A CBS MarketWatch official said the two companies had been in discussions since last December, and that the deal was scheduled to last for one year.

The deal marks one of the few times that Conde Nast has publicly reached out to another media company in an Internet venture (notwithstanding its purchase of Wired magazine this spring). Traditionally, Conde Nast has preferred to rely on its vast publishing empire to provide content for its sites, such as Swoon. However, Conde Nast has no magazine strength in the area of personal finance.

The CBS network and the Wyoming-based Data Broadcasting Corporation (DBCC) (DBC) jointly own CBS MarketWatch. In October, DBC registered with the Securities and Exchange Commission for a CBS MarketWatch initial public offering. Some industry observers, however, have doubted whether that venture will ultimately succeed, given general market volatility and recent high-profile IPO reversals by Internet firms.

CNCurrency.com is a multiyear, multimedia project of Conde Nast's. Earlier this year, preliminary copies of Conde Nast Currency magazine were bagged in with other CN titles to those magazines' subscribers. Conde Nast Currency is scheduled to begin regular publishing twice in 1999, company sources said.

One inside observer noted that the CNCurrency.com site is uniquely attractive to advertisers because, unlike many personal finance sites, its audience is heavily female (indeed, Conde Nast initially considered launching the title as a woman's personal finance magazine). The Web site often treats financial issues in a similar way to those found in women-oriented Conde Nast titles ("Careers vs. Relationships," or "For Love or Money.") Michelle Chaboudy, VP of marketing for CBS MarketWatch, said that approximately 70 percent of her site's readers are men.

Conde Nast does not release Web traffic figures for CNCurrency.com. However, a source inside the company said that the site gets "more than 1 million ad views per month," and that the number of visitors has grown by double digits since its launch in March of this year.

That new phenomenon was on full display last week, when it seemed Amazon's fortunes had finally turned. For the first time in months, investors had reason to cheer: The company announced that its losses during the first quarter would be smaller than expected. Shares jumped an impressive 75 percent, albeit the rebound was from a 30-month low of $8.37. Amazon credited efficiency improvements for the healthier bottom line.

Yet several analysts and market watchers remain skeptical. Amazon's report, they note, was preliminary and lacked important details. The report did make some points starkly: Sales growth in its biggest and only profitable businesses - books, music and video - has stalled. Meanwhile, analysts charge that Amazon's fastest-growing business, consumer electronics, is not making money. Bezos does little to dispel that notion. [See "Consumer Electronics Conundrum."] "We love the economics" of the consumer electronics business, he insists. But when pressed on whether it makes money, Bezos replies, "We don't break it down to the category level."

It's that reluctance to disclose details that has stoked criticism. Despite assurances that it has plenty of cash to pay its bills, Amazon has sought to discredit former Lehman Brothers analyst Ravi Suria, who in February raised the specter of creditors squeezing the company. Several news reports suggest some of the retailer's suppliers are doing just that, a point Bezos vehemently denies.

But Amazon has failed to respond to repeated invitations from the New York Society of Securities Analysts to offer assurances that the company's financial house is in order. Recently, Amazon sought to buy Evite, a party-invitation Web site, and tried to close the deal in time for first-quarter reporting. Why? Partly to get the few million dollars Evite had left on its own balance sheet, according to people familiar with the matter. Ticketmaster eventually bought Evite, and Amazon executives decline to comment on the situation. What's more, many analysts are tired of what they call Amazon's creative math, charging that the company's own forecast for fourth-quarter pro-forma operating profits hides what will be significant net losses.

Amazon still has its true believers. Some Wall Street investors who have been buying Amazon for months expect it to rebound, and they hope to make a killing on its depressed shares. [See "Amazon's True Believer."]

Last week, Amazon attempted to drum up excitement with another announcement: a deal to run the money-losing Net operations of bookseller Borders. The arrangement is modeled on Amazon's successful-to-date agreement with Toys 'R' Us, reached in September, in which the two companies divvied up the task of selling toys online. Toys 'R' Us focuses on buying and merchandising toys and owning inventory. Amazon handles the Web site, fulfillment and customer service - thus avoiding the expensive fiasco it suffered during Christmas 1999, when it overstocked on some toys and understocked on others. The combined Amazon-Toys 'R' Us site did well over the holidays, and the deal has been hailed as a model for future success.

But calling the Borders deal "son of Toys 'R' Us" would be charitable. Borders' online foray has been a money-losing disaster and has been a giant drag on the bookseller's stock price. Even Bezos admits that the alliance will not improve Amazon's bottom line for now. Unlike the toy deal, Amazon will not unload any inventory risk. The agreement looks a lot more like what Global Sports has been doing for years in the sporting goods industry. [See "Go Global: One Way to Make an Alliance."]

The announcement left the reporters and analysts gathered at a news conference in New York nonplussed. There were so few questions that the event broke up 20 minutes ahead of schedule. One prominent analyst described the deal as "a minor joint venture" and, exasperated at being lured to the conference by the presence of Bezos, said, "I've got to go back to my real job now."

Those who attended were betting on something far more sweeping. During the past few months, Amazon has been talking with a number of prospective partners, including giants such as Best Buy and Wal-Mart, hoping to repeat the Toys 'R' Us coup. But that's not likely to happen now. Brick-and-mortar retailers are no longer afraid of online retailers, and Amazon is now the one in need. "It is hard to imagine they will get something of the same magnitude," says Faye Landes, an analyst with Sanford Bernstein. "The world has changed, and no one is that desperate to have their dot-com bases covered."

Not so, says Bezos. He's still looking for more alliances, pitching Amazon's e-commerce infrastructure. "There are a lot of things we can do," he says. Maybe so, but whatever the company does will have to be pretty dramatic for Amazon to regain its old magic.

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The Trials of Jeff Bezos