The World According to Jeff Bezos

Baldwin Louie — Fri, 13 Apr 2001 15:00:00 -0700

EXCLUSIVE On April 11, Amazon.com CEO Jeff Bezos sat down with Industry Standard senior writer Miguel Helft to discuss a broad range of topics. This is an edited transcript of that conversation.

Q:Why is the deal with Borders important to Amazon shareholders if it will not meaningfully impact the bottom line?

Bezos:At the time when we announced the Toy 'R' Us deal we also did not reset [earnings] guidance. Obviously, we wouldn't have entered into a deal if we didn't think it was beneficial to Amazon.com and beneficial for Amazon.com shareholders. We are not disclosing the economic terms of the deal, but I do think that this is a financially beneficial deal for Amazon, a financially beneficial deal for Borders and a great deal for customers. We are going to be giving Borders customers everywhere access to the Amazon.com online experience.

Q:Is the Toys 'R' Us deal positive on the bottom line?

Bezos:We haven't broken out Toys 'R' Us specifically, and we will continue not do to so. But yes, we are obviously very pleased with that deal both from a strategic point of view and from a financial point of view. And I know for a fact that Toys 'R' Us would say the same thing. The basic point here is that we have built over the last six years a platform that not only allows us to serve our customers extremely well, but allows us to serve the customers of other leading companies well also. Over time, we think that is a significant opportunity. We just don't want people to get carried away in the short term. We think that's really important.

Q:Is one deal better than the other?

Bezos:I wouldn't want to rank them. These are wonderful examples of the flexibility of our platform. In the Toys 'R' Us case there is one Web site. In the case of Borders there are two Web sites. There are Amazon.com books, music and video stores, which will stay the same as they always were. And then there is the new re-launched Borders.com, which will be co-branded but will be its own site. It will have store location information, event information at Borders stores. That will be branded and largely identified with Borders and is designed for the Borders customer. The other thing that is different [is that] in the Toys 'R' Us deal, Toys 'R' Us owns the inventory. With Borders, Amazon owns the inventory.

Q:As you look to do more deals, which type of deal will you favor?

Bezos:I suspect that at this stage these kinds of deals will continue to be highly customized. I would guess that the third deal would be different yet again. That's just the sort of thing where we have a platform that consists of a lot of different assets. There is the Web site technology, there is the fulfillment technology, there is the distribution centers, the customer service centers. We can bring customers to the table. There are a lot of different things that we can do. And it really depends what we are trying to get out of the deal and what the partner is trying to get out of the deal.

Q:You have said for some time that you are interested in doing more of these alliances, and you have talked with companies such as Wal-Mart and Best Buy. Why didn't those talks work out?

Bezos:First of all, we would never comment on any specific conversations with any prospective partners. What I would say in general is that these are very complicated arrangements and they take time, in all cases, to work out.

Q:Many analysts say that when you did the alliance with Toys 'R' Us, you were in a position of strength. It was struggling with a difficult turnaround and was desperate to get its online store ready for the holidays. Similarly, Borders has been struggling with an unsuccessful, money-losing operation. What do you say to critics who believe you have a hard time doing deals with companies that are in a stronger position than you are?

Bezos:I can assure you that Toys 'R' Us did the deal with us out of opportunity, not need. And I can assure you that Borders is doing it for exactly the same reasons. Is it true that many, many physical retailers have found that the online business is a difficult business? Absolutely. It is a difficult business, just as physical retailing is a difficult business. Companies have to choose core competencies. Smart companies do. We are very, very focused. The lifeblood of our company is e-commerce. We wake up every morning and think about it and nothing else. And that's why you see so much innovation, and that's why our technology platform works so well. It is very, very difficult for companies that don't wake up every morning thinking about that first to have as good of an e-commerce offering. But that doesn't mean these companies have done this out of desperation, far from it. They are just smart to focus on their competencies. And they really want an online offering for their customers that is best of breed.

Q:Consumer electronics is already the second-largest category for Amazon. Yet, when you do an alliance like this, you are giving up some potential upside, as you are sharing some of the profits. Does it make sense to do a deal for a category as important as consumer electronics?

Bezos:Certainly the bar is very high for any of these deals. We are very choosy about who we partner with and on what terms we partner. Just as these partners are doing this out of opportunity, so are we. In a case like electronics, we are very happy to grow that business organically. It is growing very rapidly. We love the economics of that business. When we look at what we can do to inventory turns over time, when we look at the dollar gross profit per item, we see very attractive fundamental economics there that we think over time we can leverage to real bottom-line performance for our company. If in that context we can find some kind of partnership that makes sense financially for us, financially for the partner and for the customer, we would certainly take a good hard look at that.

Q:Conversely, isn't a deal with a consumer electronics seller essential given that you are not authorized to sell home entertainment products from many of the major brands such as Sony and Toshiba, Pioneer and Panasonic.

Bezos:Actually, we are open with about 300 electronics manufacturers today. We have 25,000 items in our electronics store, which is roughly five times as many items as you find in the largest big box.

Q:Yet, in the key categories I mentioned, you are forced to buy from distributors that obviously don't have as good of a price as manufacturers.

Bezos:Absolutely true. And that's the way we started in the book business. That's the way we started in music. Most people don't realize that only in the year 2000 did we finally go direct with the last of the music labels. This is par for the course for us.

Q:Does consumer electronics have positive contribution margins to the business today? Some analysts believe it doesn't. In other words, they argue that the more you sell, the more you lose.

Bezos:We don't break it down to the category level. We have a segment, which you can look at the [profit and loss] on. And we announced our Q4 results, you can look at the [profit and loss] of what we call our early-stage businesses. Clearly, electronics is the largest product category in that segment. And so you can sort of get an idea from looking at that. But we will again release those figures in just a couple of weeks.

Q:Are the analysts who say you are losing money there wrong?

Bezos:That's just a different way of asking the same question, but good try.

Q:Did John Doerr try to intervene with Lehman Brothers to tone down or halt the Ravi Suria report?

Bezos:No. He did not. He called them up, just as our investor relations group had already done, and said the report is inaccurate and we would like you to try and make it accurate before you release it. That's very different from trying to stop the publication. By the way, Lehman asked us to look at it. That's why they sent it to us in advance. They sent it to us and said, "Is this accurate?" And we said, "No. It's not. It is widely off the mark."

Q:Several analysts have criticized Amazon over the years, including some that put "sell" ratings on the company. You don't usually criticize their research. Why did Amazon feel it had to be so publicly critical of former Lehman Brothers analyst Ravi Suria when he issued his negative reports?

Bezos:Well, if you look at our harshest critics outside of that Lehman report that you are talking about, they question the valuation of Amazon.com. They question many things. But they don't question something as fundamental as whether or not the company is just going to run out of cash. That's the key difference. That is such an egregious piece of speculation that we felt it very important to set the record straight on that point.

Q:To this day, Lehman stands by Suria's report. Is this simply a matter of opinion?

Bezos:I don't think so. You'd have to ask them. I can't tell you. All I can tell you is the report is wrong.

Q:In early February, after seeing Suria's report but before the report came out, you sold some $12.2 million in Amazon shares. Did you check with Amazon's lawyers before the sale, and are you aware of a reported Securities and Exchange Commission investigation into the sale?

Bezos:I went through the normal preclearance trading process that every executive of every publicly traded company does, which is to get approval from the general counsel. That is a regular practice. I know the report you are referring to, the New York Times article. The Dow Jones News Service ran an article the same day saying the New York Times story was wrong. They had a source inside the SEC telling them there was no cause for action. We have never been contacted by the SEC. If that were ever to happen, we stand ready to immediately help. This speculation was so misguided, because the Lehman Brothers report you are talking about, while it was a negative report, there was absolutely no change in the report. This particular analyst being negative on Amazon.com is not news, much less material news. This analyst being negative on Amazon.com is [like] "Sun Rises in East. Dog Bites Man." There was no news there. A good indicator of that is the fact that after the report was issued, our stock price went up.

Q:There have been reports echoing Suria's concerns that some of your suppliers and creditors are worried about Amazon's viability and are beginning to tighten credit and payment deadlines. Are those reports wrong?

Bezos:Yes they are. We've got great relationships with our vendors. We have 10,000 vendors, and if you go through them, you will be able to find someone to say anything you want. But we have very good relationships with our vendors in all of our product categories.

Q:There are a number of shareholder lawsuits that allege Amazon misled investors when it signed up partners. The key allegation is that while Amazon implied that payments from partners would be in cash, they really were mostly stock, which now has lost its value. Do you feel you misled investors?

Bezos:Obviously no. I don't at all. Beyond us saying that there is no merit to the suit and we hope it will be dismissed, we are not going to comment on active litigation. If you look at class-action lawsuits, you'd be hard pressed to find a company who doesn't have one. Nike, Oracle, AT&T, you pick the company.

Q:On Monday, you said you would exceed bottom-line expectations. How do you think the slowing economy will affect meeting your targets over the year. People are spending less.

Bezos:When we gave guidance for the year [in January], we were appropriately conservative. Not overly conservative, but appropriately conservative.

Q:So, what you are saying is that you had already lowered expectations significantly in January?

Bezos:We had already seen significant slowing in the economy by that time. We just reiterated those expectations in a press release on Monday.

Q:Amazon has refused to participate in a New York Society of Security Analysts forum on corporate governance. The analysts there have been critical of what they call Amazon's inadequate financial disclosures. Why did you refuse to attend or send someone to attend?

Bezos:We get invited to a large number of investor and analyst conferences every year and, in fact, every month. We don't go to them all. In particular, we tend to go to ones that have hundreds of investors from major companies like Goldman Sachs and Morgan Stanley. It is really that simple.

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The World According to Jeff Bezos