Rush to Judgment

by Susan Webber

A new book anoints Amazon.com as an unqualified online success story - a premature assessment given recent events

Timing is everything in book publishing. Given the lead time involved, an author takes considerable risk: a once-hot subject may turn stale, a late-breaking development can undermine the central thesis.

Robert Spector, in Amazon.com: Get Big Fast, has had the bad luck to write about a formerly celebrated company that has become a falling, if not a fallen, star. Moreover, in taking a narrow and one-sided view, he took a bet on how things would turn out for Amazon and lost.

Despite the myriad ways that Amazon.com could illuminate the Internet phenomenon, Spector has taken the most mundane, uninformative approach possible. He serves up the Amazon myth unquestioned and unedited: boy genius starts business in a garage, attracts super-competent and slavishly dedicated followers, and goes from triumph to triumph. The preface makes clear that Spector struggled with how to focus the book as Amazon kept morphing, and the lack of a strong narrative thread shows. Some anecdotes are repeated, a sign of haste, and many themes, like the desk as corporate icon (mirabile dictu, the early desks were built by hand!) are irrelevant.

The book reads as if Spector cobbled it together from secondary sources and a few interviews of ex-employees, and never applied critical thinking. He sometimes misreads what his sources say. For example, to illustrate Bezos's appetite for fun, Spector recounts how he spent days planning a scavenger hunt for a girlfriend's birthday. Bezos's game apparently did not go over as intended. She recalled, "Aside from the birth of my three children, I can't remember when I've had such an exhausting experience."

Spector occasionally makes valid observations but then fails to follow through. He correctly identifies inspired public relations as key to Amazon's success, but does not explore how it came about. Similarly, Amazon's dedication to customer service is legend, but how did Amazon ascertain what good customer service meant in a new medium? And how much of Amazon's service is truly effective?

Despite the eroding enthusiasm for the e-tailing, Amazon is still an important case study. Amazon.com's stock, after all, has held up relatively well. Spector does highlight Amazon's recent flurry of investments, partnerings, and plans to enter new markets. These moves, one could argue, have supported the stock. However, even a passing look at Amazon's financials reveals that they are deteriorating: its gross margins are narrowing, its sales costs alone greatly exceed its gross margin, and its free cash flow, which was positive in 1998, became very negative in 1999 due to large investments in distribution centers.

No, Bezos has instead borrowed a concept from quantum physics and improved upon it. One of its better understood but still nonintuitive notions is indeterminacy: in the quantum world, particles exist in multiple states, but when observed, are in only one state. Hence Heisenberg's uncertainty principle (the act of observation affects where something is) and the Schrodinger's cat thought experiment (a cat in a box will die once a certain level of decay of an isotope is achieved. Open the box, and the cat is alive or dead; keep the box closed, and the cat exists in a strange alive/not alive state).

Amazon once had a clear strategy: initially, to be the biggest Internet bookstore, and later, the biggest Internet retailer, both of which it achieved in rapid order. Rather than announce new worlds to conquer (a limiting exercise, since the law of large numbers means that Amazon's revenue growth rate must inevitably decline), Bezos has managed to keep the concept of what Amazon will be as loose and undefined as possible to make it a vehicle for the imagination of journalists, analysts, and the investing public. Is it a portal? A venture capital firm? An aggregator and seller of consumer information? Yes, no, and more... This isn't just weird science; it's pure alchemy.

But Bezos's latest trial balloon, that Amazon will focus on its brand a la Coca-Cola, and divest itself of its distribution assets, signals that the end game is nigh. Bezos had set the goal of achieving profitability in its longest-established businesses - books, videos, and CDs - this year. It appears that he may not reach this target. Radically restructuring his business would have the effect of obscuring year-to-year comparisons, and of course, would also greatly reduce Amazon's ongoing capital investment needs.

And the analogy to Coke and its bottlers is strained. The notion that Bezos can get someone to buy his warehouse operations is implausible (who would want to buy single purpose assets and be heavily dependent, if not totally dependent, on an unprofitable customer?) Although he might achieve his restructuring via a spin-out to shareholders, the merits of this move are still dubious. You can't take an unprofitable business system, split it in two, and create two profitable entities.

Amazon, like other Internet companies, does not exist apart from the physical world. These real-world demands inevitably bring it into closer correspondence with old economy companies. Bezos's legerdemain cannot hide the fact Amazon is consuming more and more cash when the capital markets are becoming less receptive to Internet smoke and mirrors.