A Look At Amazon.com

Yesterday, we talked about Jeff Bezos, the founder of Amazon.com. Today we'll talk about his creation.

When we left our story in 1994, Jeff and MacKenzie Bezos had just left Texas with the borrowed capital needed to fund a start-up company. The couple headed toward Seattle for two reasons. It was home to Microsoft and the other dot.com operations that had swelled the population of the city between 1990 and 2000. Jeff knew he needed a lot of computer programmers. Coincidentally, Seattle was also the location of the west coast warehouses for Ingram Book Group, one of the largest wholesale book distributors at the time (today, the world's largest).

The first challenge was what to name the new enterprise. MacKenzie thought Jeff's first choice "Abracadabra" was too long. Jeff shortened it to "Cadabra," but their attorney thought that sounded too much like "cadaver." Jeff liked the idea of Amazon, the largest river in the world, and the company was launched in July, 1995.

From the beginning, Jeff has followed his own star, ignoring disgruntled shareholders who have complained about the slow growth of the company. Four years after the start of Amazon, he was named Time's Person of the Year, but it was another four years before Amazon turned its first annual profit. Since 2003, the company has logged a profit each year. Even so, as of September 2007, Amazon's accumulated deficit was still at $1.58 billion.

How can such a successful company have such a huge deficit?

The answer, according to MarketWatch, lies in a "combination of discount prices, free shipping and heavy investments in technology." BusinessWeek said, "Most worrisome to investors is Amazon's . . . binge on new technologies."

In November 2006, I posted a list of some of the companies Bezos purchased or developed. Here's the updated list:

• Amazon Associates: an affiliate marketing program. By linking to Amazon products and services, an Associate can receive up to 8.5% in referral fees for doing so. Launched in 1996.
• Internet Movie Database: an online database (http://www.imdb.com/) of information about actors, films, television shows, television stars, video games and production crew personnel. Acquired 1998.
• PlanetAll: a Web-based address book, calendar, and reminder service. Acquired in 1998.
• Junglee: an XML-based data-mining startup. Acquired in 1998
• Alexa: a website (http://www.alexa.com/) that provides information on the web traffic to other websites. Acquired 1999.
• Accept.com: an e-commerce company developing technology for business and consumer transactions on the Internet. Acquired 1999.
• Exchange.com: a website that operates the popular Bibliofind.com, a seller of used and antiquarian books, as well as Musicfile.com, which features music memorabilia and rare recordings. Acquired 1999.
• Amazon Marketplace: a service that let customers sell used books, CDs, DVDs, and other products alongside new items. Launched 2001.
• Search Inside: a feature that makes it possible for customers to search for keywords in the full text of many books in the Amazon catalog. Launched 2003.
• A9.com: an Internet search engine from Amazon.com. It went live in 2004.
• Joyo.com: a Chinese e-commerce Web site. Acquired 2004.
• BookSurge: a print-on demand company. Acquired in 2005.
• Mechanical Turk (MTurk): an application programming interface (API) allowing programs to dispatch tasks to human processors. Beta testing since 2005.
• Amazon S3 (Simple Storage Service): an online storage service that is inexpensive, scalable, responsive, and highly reliable. The service charges storage fees of 15 cents per gigabyte per month and data transfer fees of 20 cents per gigabyte.Launched 2006.
• Amazon Grocery: website service selling non-perishable food and household items. They offer Super Saver Shipping (free shipping to a single location for purchases over $25 USD). Launched 2006.
• EC2 ("Elastic Compute Cloud"): a virtual site farm, allowing users to use the Amazon infrastructure with its high reliability to run diverse applications ranging from running simulations to web hosting. Beta testing since 2006.
• Amazon Unbox: a digital video downloading service that offers thousands of television shows, movies and other videos from more than 30 studios and networks. Launched 2006.
• Amazon MP3: a new music store which sells downloadable tracks in MP3 format. Beta testing since 2007.
• Brilliance Audio: the largest independent publisher of audiobooks in the U.S. Acquired May 2007
• Vine: a program to offer top product reviewers free access to pre-release products from participating vendors. Launched August 2007.
• Amazon FPS: a payment service specifically targeted at developers. Launched August 2007.
• Kindle: an e-book to download books, newspapers, magazines and blogs. Launched November, 2007.
• Simple DB: a database system that permits users access to a high performance database system. Launched December 2007.
• Audible.com: seller of audiobooks, radio and TV programs, and audio versions of magazines and newspapers. Sale announced January 2008.

There was an article in BusinessWeek about Amazon's split personality that made a lot of sense to me. Here's an excerpt:

The real problem with Amazon is not a matter of measures but the fact that Bezos' operation now houses two very different businesses. On one side stands the familiar on-line retailer, pitching a plethora of goods such as books, toasters, and plasma TVs. The other consists of an information-technology company that provides merchants with a software platform for Internet sales. Amazon, in other words, is playing both ends of the supply chain -- it's a retailer, and it's a supplier of software to other retailers . . .

The two Amazons have little in common. Their economics, for instance, differ fundamentally. The retailing business relies on micro-thin profit margins. Despite Amazon's strong brand, it remains pinned under relentless pricing pressure. To draw customers, it's even been forced to offer cheap or free shipping on most purchases, further squeezing its margins.

Renting out a software platform, by contrast, means big profits . . .For investors, it's becoming difficult to figure out exactly what kind of company Amazon is.

Even worse, the two business models suffer from inherent conflicts. As a retailer, Amazon competes directly with the customers of its software business. The many merchants that piggyback on Amazon's site, including giants like Target and Office Depot, have to worry about directing their customers to the storefront of a price-slashing competitor intent on expanding into ever more product categories.

The question now is how Amazon's divided loyalties will play out as it juggles the readers and writers it serves.

They need to remember that readers are often writers, and writers are some of the most passionate readers . . . and customers.