Mighty Amazon

theodp writes "Fortune reports that the patent-pending practice of selling partners' used and new goods next to Amazon's own was CEO Jeff Bezos' response to the emerging threat of eBay. Seeing an opportunity to overtake the online auctioneer as well as a way to slow the need to add warehouse capacity, Bezos 'bet big and put hundreds of his best people on it.' While Bezos' decision caused a lot of discomfort at the time, including the Authors Guild protest and the subsequent e-mail campaign in Amazon's defense, today almost 20% of the e-tailer's unit volume is sold through others, yielding revenue that is almost pure profit."

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Article Text

[Anonymous Coward]

Mighty Amazon
Jeff Bezos has been hailed as a visionary and put down as a goofball. He's proved critics wrong by forging a winning management strategy built on brains, guts, and above all, numbers.
FORTUNE
Monday, May 12, 2003
By Fred Vogelstein

"Mr. Bezos, can you hold that bottle of water on your head so I can make sure I'm in focus?" "Mr. Bezos, when you jump, can you spread your arms and legs in the air?" "Mr. Bezos, while you're in the air can you turn your body 90 degrees and land in a sitting position?"

Jeff Bezos is having his picture taken jumping on a giant trampoline, and, remarkably, he looks like a man in his element. Most CEOs wouldn't pose for a photo like this in a million years. Risk life and limb to look undignified? Not a chance. But Bezos, who is 39, embraces the experience with the enthusiasm of a 10-year-old in an arcade. He cracks jokes about his receding hairline, he chats up the photographer about his equipment, he even helps the photo assistants rearrange the shot. "We ought to try this on the vomit comet," he says mid-jump, referring to the plane astronauts use to simulate weightlessness. "That would be really cool." He protests only once, after 30 minutes of jumping, when the water bottle he keeps placing on his head for the photographer springs a leak. "Next time we do this I think I'm going to need a stunt double," he says. When it's all over, he pulls out his own camera and orders everyone onto the trampoline for a group shot.

Anyone who knows Bezos understands that it doesn't take much to get the founder and CEO of Amazon.com to start acting up. In good times and bad, Bezos has always been a man of exaggerated gestures, whether he is dressing up like a four-star chef to promote Amazon's kitchen store, climbing atop a conference table on all fours to signal his interest in a business presentation, or just unleashing his famous braying honk of a laugh. During the Internet bubble his oversized personality made him seem fun and inspiring, and he shrewdly used that to make himself and his company one of the most talked about business stories in a generation. When Amazon's stock price fell and its losses continued to mount, he endured whispers that his behavior made him look clueless.

Today only three questions about Bezos's behavior are relevant: Is he as goofy as Bill Gates? Is he as goofy as Michael Dell? And is he as goofy as the late Sam Walton? Such comparisons would have been laughable when conventional wisdom had Amazon joining the dot-com trash heap. Not anymore. Amazon has started to thrive. While most of American business is still sputtering, Amazon's revenues, at $4 billion, are growing by more than 20% a year. Marketing, inventory, and warehouse operating costs, once so high they made old-fashioned retailers look efficient, are now so low that only Dell's and very few others' are better. Amazon's operating profit margin, at 5% in the all-important fourth quarter, beat that of most retailers, and approached Wal-Mart's 6%. And Amazon is generating so much cash--$135 million last year, rising to an estimated $300 million this year--that it just paid off 12% of its $2.3 billion debt. At a recent $30, Amazon's share price is at a two-and-a-half-year high, making it one of the top stocks over the last five years, even taking into account its rise and fall during the bubble. It has outperformed Dell, Cisco, Microsoft, Wal-Mart, and GE, to name a few.

And while Amazon still hasn't turned a profit yet, it's headed toward profitability so fast that investors have stopped worrying about whether it will ever make money. Now they simply debate how much. Profitability has taken awhile because the company borrowed heavily during the bubble to finance its growth, and interest-related expenses still suck away a lot of what flows to the bottom line. Its relatively new electronics, tools, and kitchen business is losing money too, though at a rapidly shrinking rate. But with costs falling and revenues and operating profit rising each quarter, it's exp

I don't see how patents are good in this case

[reverendG]

Jeff Bezos and Amazon are one of the pioneering companies, doing what no one thought they could, and doing it right. Amazon has become my favorite marketplace; the only time I actually go to the store and buy something is when I need groceries. If there is something that I want to check out before I buy, I'll go to Best Buy, check it out, and then go home and order from Amazon.

I think that Amazon should be rewarded for having the gumption and wherewithal to blaze this trail, but I don't see how patenting things like "One click purchasing" or the idea of selling used items next to new ones can be beneficial. They have already demonstrated that they are winning market share because of a commitment to improving efficiency and technology, and those are the best reasons to retain market share. Not preventing anyone else from doing something similar.

Nearly classical economics

[Walter Wart]

A lot of people don't like Amazon's practice of patenting everything under the sun. I don't like their practice of patenting everything under the sun. Ultimately it is destructive to the long term development of the industry in the same way that the new NDA-driven brand of industry/university research is to science. But these articles give some idea of the why.

Bezos wants to make money and survive. And it's darned hard to run something like Amazon like a business. Now this should be obvious. But it brings back memories of my days as an economist (oh, the shame! the shame!)

They, like ebay, are working in as close to a frictionless economy as we are likely to get. If any facet of their business can be done more cheaply by someone else, they're screwed. We're even seeing one of the previously fictional economist's assumptions becoming true. The market setting prices immediately through the auction mechanism.

How does a firm survive in nearly classical economic conditions? It reduces costs at every point and provide barriers to entry to new firms, and damn the effect on every other part of the information industry. You also see it in the way that they provide "like goods" ("People who shopped for this also shopped for this") and pricing that varies from person to person for the same item based on their best guess as to what that person is willing to pay right now.

This is particularly true when they are competing with ebay which really doesn't have any pricing mechanism except for the pure market-driven auction one.

An interesting view on nearly classical economics

Re:Nearly classical economics

[KrispyKringle]

Granting a limited monopoly in the form of a patent is arguably bad enough for innovation when patents are granted for actual technological advances, say, the cotton gin (or, probably more accurately, there is a very careful balance between encouraging innovation and hindering it). Granting a limited patent for a true invention makes some sense; if it were immediately clear how the cotton gin functioned, no one would gain anything by investing the money to invent it when others could simply rip off the designs for less investment afterwards.

However, granting monopolies for business practices makes far less sense. Business plans typically do not involve huge R&D expendetures the way actual technological advances do. Instead, business plans are "gee whiz" ideas to run a business more efficiently, an end result which is ultimately more profitable for the business to implement regardless of having a monopoly on the practice or not.

If Amazon were not granted a patent for "One-Click," would they not use it? Of course not; the idea took very little investment to develop and makes their business far more profitable, regardless of its use by competitors. Patents are not necessary to inspire innovation when it comes to business practices; the necessary motive is the increased efficiency and profitability. Further, issuing a profit for a new business practice means that there can be no direct competition between Amazon and anyone else, since no one else can use Amazon's same sales methods. Therefore, there is no driving incentive for Amazon to increase their product value or profitability, and, indeed, fewer, not greater, incentive to innovate (the same problem which arises with more traditional trade monopolies).

It's difficult to show any likly benefit in innovation from business practice monopolies, but the cost is clear.

What a joke.

[Anonymous Coward]

I rarely order from Amazon these days since most of their popular paperbacks are now selling at list price. I used to buy in bulk and save a lot of money. Now there's no point unless the book's not on the shelf at my local bookstore. Which brings me to my current order.

I placed an order for four books last week. None were in stock at the local bookstore and I figured I'd just order from Amazon and have them delivered to my door. I picked the free delivery option which groups the books into as few shipments as possible. During the checkout procedure I was advised that I would be receiving two shipments. One with the three books that were currently in stock, a second with the book that is being released at the end of the month. Seemed perfect. Until I got my order confirmation email.

"Delivery estimate: February 18, 2004 - February 25, 2004"

Wha???? That's over 9 months from now. Do they have to grow the trees to make the paper? I figured it was a glitch and waited for my shipment notification. Didn't get anything. A few days later, my order status still hadn't changed so I inquired. I got four responses.

Response 1, CSR A: Sorry about that. Technical glitch. It's been fixed and your order has been upgraded to 2-day delivery at no charge.

Response 2, CSR B: "I've checked into your order and see that the shipping instruction to "group my items into as few shipments as possible" was selected during the order process. This option can extend the estimated ship date for your order beyond the individual item availability estimates which are listed on our web site." ... "...[Book 3] is now back-ordered, and our supplier has not been able to let us know exactly when they expect to have more in stock."

Response 3, CSR A: Whoops. CSR B is right.

Response 4, CSR C: Looks like someone else already took care of this.

Odd. All three of the books that were supposed to be in the first shipment still show up as "ships in 24 hours" both in my order status page and the product description pages. I'll wait and see what happens.

Monday rolls around. I check the order status again. Oh, Goody! Two of the books have shipped. Funny. They shipped Sunday. That's a neat trick. And one of the books that was shipped is supposed to be out of stock. And one of the books that didn't ship is still listed as in stock and is supposed to be shipped today. Oh, well. At least something's on its way. Well, it will be this evening when the Sunday shipment is picked up.

Tuesday morning. Track the first package. Odd. It's still at "Billing Information Received". This is the UPS phrase for "They've told us they have a package but we don't have it in our hands yet." I check my amazon order status. Says the same thing but now I see that the other book that was supposed to ship monday has been bumped back. It's not going out until sometime between the 15th and the 20th.

So I placed the order a week ago and nothing's gone out. Half of my order is supposedly sitting on the loading dock. A quarter of the order is eluding the pickers.

Way to go, Amazon! From now on, I'm ordering my books through the mom-and-pop downtown. If I'm going to pay list price, I may as well support a local business even if I do have to get off my ass to go pick up the items.

HUGE FEES, but they get away with it

[Gregory S Patterson]

An anecdotal comparison: I own an item that's been out of print for quite a while and is rather rare. Being a broke college student, I naturally was looking into selling it. A little searching showed that the item sells on ebay regularly for around $80-100; on amazon (where people go who don't know how to use ebay or are afraid to) it goes for $170-200.

Simple choice, right? Well get this, ebay's fees (in my case) are $0.93 plus 2.75%. Amazon charges $0.99 plus 15%! I really hate paying huge fees when they're doing hardly any work, but the visibility is what they're selling.

Sell on ebay: $90 minus $3.40 fees = $86.60 NET PROFIT

Sell on amazon: $170 minus $26.49 fees = $143.51 NET PROFIT

Would you give up $56.91 purely to avoid supporting an "evil" company and their stupid patents? For most people, it's just not worth it. I hate his guts but Bezos is smart as hell.