VideoThe foosball tables are still there, as are the desks made from sawhorses, plywood, and old doors. And no one wears a tie, not even CFO Thomas J. Szkutak. But if some E-commerce trappings are alive and well at Amazon.com headquarters, others are not. Red ink, for example, has disappeared—at least for now. The company posted its first indisputably (that is, GAAP-based) profitable year in 2003, propelled by strong holiday sales and a weakened dollar, which boosted overseas results.
That has prompted plenty of backslapping in the halls of Amazon's headquarters, a former hospital with an improbable Art Deco design and a postcard view of downtown Seattle and Puget Sound. As it prepares to celebrate its 10th anniversary, Amazon.com is a very different company from the so-called E-tailer that, at the time of its initial public offering in 1997, had to caution would-be investors not to confuse it with Amazon Natural Treasures, a retailer and E-tailer of rain-forest products.
Few would make that mistake today. While still sometimes referred to as an online bookstore, Amazon now boasts a product line that staggers the imagination, from apparel, sporting goods, and jewelry to new services including a feature that lets customers make "1-Click" Presidential campaign contributions.
Behind Amazon's breadth of products and services are myriad business arrangements: some products the company owns, inventories, sells, and ships; others it sells on behalf of third-party retailers. Some of these third-party products Amazon ships and fulfills; others are shipped and fulfilled by the third parties themselves. Among those third parties are thousands of mom-and-pop E-tailers that collectively make Amazon's Marketplace division a perpetual online garage sale surpassed only by E-bay.
With 39 million active customer accounts (based on the number of E-mail addresses from which orders originated in 2003), Amazon seems to be making good on its promise to offer the "Earth's biggest selection of products," or as Szkutak puts it, "to build a place where people can find, discover, and buy anything they want online." To do that, he says, the company has learned—sometimes the hard way—to "start with the customer and work backward."
Working backward has changed Amazon from an online retailer to an E-commerce platform. Today, it is not a store so much as a channel, a place where brand-name third-party retailers, smaller businesses, and just plain folks can hawk their goods to a worldwide clientele. This past holiday season, shoppers traipsed through Amazon to buy products from Gap, Toys "R" Us, True Value Hardware, and Kitchen Etc.—and maybe some kid in Idaho who was trying to unload his slightly dog-eared Harry Potter library. Assembling such a vast collection of partners and building the systems that allow customers to buy from an individual as easily as they buy from a retail giant has not been easy, and analysts praise Amazon's achievements. "Amazon has knocked 10 steps down to 1," says Adam Sarner, a research analyst at Stamford, Connecticut-based technology research firm Gartner Inc. "This is what they mean by 'customer convenience.'"
Jonathan Gaw, a research manager at technology research firm IDC, says, "No one else has this kind of expertise, because no one else has invested the capital to build this kind of infrastructure."
Amazon.com was once viewed as a leading member of the E-commerce vanguard, but most of the followers have fallen by the wayside. True, the survivors—E-bay, MSN, AOL, Yahoo, and Google—have become household names, but success remains precarious and depends on, among other things, the ability to be nimble. Amazon built its brand initially on low-priced books and waited for customers to come bargain-hunting. Today it pulls out all the stops to get people to visit, from "never-before-seen" Bruce Springsteen concert footage to a "secret message" from Madonna. If that sounds like the sort of pop-culture gimmickry one might expect from, say, AOL, there's good reason: the E-commerce giants are out to eat one another's lunch. When Google, for example, announced Froogle, a new service that allows users to search for a product name and be directed only to sites that sell that product, Amazon launched a new subsidiary, A9, devoted to Web searching, and even located its offices close to Google in Silicon Valley. Similarly, the boundaries between the business models of E-bay, Yahoo, and even Microsoft can be hard to discern, as all of these companies seek to protect themselves and to copy whatever seems to work.
Little wonder why Erik Brynjolfsson, a professor at MIT's Sloan School of Management and director of its Center for eBusiness, calls Amazon "the world's largest consumer laboratory." Indeed, the reason Amazon survived for nine years without an annual profit is that it had a long-term vision for building its technology infrastructure, a research-and-development strategy more like a pharmaceutical company. "Our technology and content expenses were $156 million and $167 million for the nine months ending September 30, 2003, and 2002, respectively, representing 5 percent and 7 percent of net sales," Szkutak notes. He says those expenditures will continue, but not at the expense of profitability. "Do I expect us to someday sustain year-over-year profitability? I wouldn't be here if I didn't," he says.
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