General Electric Essay, Research Paper

Amazon.com opened its virtual doors in July 1995 with a mission to use the Internet to transform book buying into the fastest, easiest, and most enjoyable shopping experience possible. Their customer base and product offering have grown considerably since their early days, they still maintain their founding commitment to customer satisfaction and the delivery of an educational and inspiring shopping experience. Today, Amazon.com is the place to find and discover anything you want to buy online. Twenty nine million people in more than one hundred sixty countries have made Amazon.com the leading online shopping site.

Jeff Bezos, Founder and CEO of Amazon.com has always been interested in anything that can be revolutionized by computers. Intrigues by the amazing growth in use of the Internet, Jeff created a business model that leveraged the Internet?s unique ability to deliver huge amounts of information rapidly and efficiently. He founded Amazon.com as an Internet retailer of books, music, and other information based products that offers services traditional retailers cannot lower prices, authoritative selection and a wealth of product information.

The company?s stock has fluctuated greatly in the past 52 weeks as has many of its contemporaries in the dot-com world. Amazon is one of the few lucky ones to survive the dot-com crash that has taken place. The stock has seen better days. As of today it was trading for around fifteen dollars a share. The 52 week high and low are 89 and 8 respectively. Founder and CEO Jeff Bezos has been quoted recently in Business Week as saying ?the company is not the stock.? Bezos described it as the following ?that back in the year 1999, when the stock market was booming and Amazon stock prices were booming, we had about 14 million customers buy from us in that year. In 2000, when the stock was busting, we had about 20 million customers buying from us. So if the stock is the company, somebody forgot to tell the customers.?

Just as he’s trying to convince everyone that Amazon.com is behaving in a more fiscally prudent manner, and is not going to run out of money by year’s end, Bezos contradicts himself by throwing away millions of dollars on a promotional sale of the new Harry Potter book.

Yes, Amazon has taken a beating on Wall Street recently. And yes, it seemed as if the company was finally getting admonished for its get-consumers-at-any-price attitude. But apparently, the message has not been heard. Amazon appears dead-set on doing what it has always done best: posting a loss.

Here’s what Amazon is doing with Harry Potter and the Goblet of Fire. To promote the book, the Web e-tailer is discounting it 40 percent, from $25.95 to $15.57. But wait, there’s more. The first 250,000 customers get FedEx overnight shipping, a service that usually costs $13.98, at the standard shipping rate of $4.29. More than 300,000 Harry Potter books have been sold by Amazon.com, which means Amazon.com is going to eat a lot in shipping charges.

But the reason this giveaway is so baffling is that it’s unnecessary. Amazon probably could have sold nearly as many books with a 20 percent discount, and with no promotion on the shipping. Why? Because Harry Potter is a phenomenon. People will do nearly anything to buy the new book. There are plenty of Harry Potter fans who want to be assured of getting the new book but don’t want to bother with the lines at local bookstores or cope with the very high chance that stores will run out of copies.

Yet Amazon still seems to think that it needs to compete on price, not on service and convenience. If I’m at all like the typical customer, Amazon isn’t winning my loyal business based on price. I buy because of the convenience of knowing that what I want is in stock and that I can have it shipped directly to whom I want without worrying that the item will never arrive. And I rest easy knowing that Amazon will solve problems, should they arrive. In short, I trust the company.

That’s not enough to convince Amazon, however. The company is set on capturing market share through giveaways and promos. But this is precisely the sort of action that has gotten so many dotcoms into trouble. The bottom line: Any customer who buys exclusively on price isn’t worth having.

Until now, investors have been willing to fund Amazon’s extravagant practices — they focused on revenues, not operating costs and profit margins. But that day is fast fading. Unfortunately, the bad habits are not.

If consumer e-commerce firms are ever going to become viable businesses, i.e. make a profit, they are going to have to change their ways. Of course, no one wants to go first, fearing consumers will rush off to some other dotcom that offers a lower price. But, ironically enough, Amazon is in the best position to be among the first to delve into this brave new way of doing business. First-mover advantage got the company this far. It might be worth trying again.

One of the things Amazon has done over the last six years is build a platform. They wanted to make the Web site very easy to use. They wanted the distribution centers to work reliably. They wanted customer service to work reliably. All of this stuff together made them very good at e-commerce and, I think, widely recognized as the best possible online shopping experience.

What they’re finding is that there are a lot of physical-world companies, Toys `R’ Us (TOY) and Borders (BGP) being the first two examples, that have found it’s very difficult to do a good job online. They have teamed up with Amazon so that they can focus on their in-store experience, which is a very difficult business in its own right. By partnering with Amazon, they can have a top, A-plus quality offering for their online customers. Amazon does all of the shipping and fulfillment as well as all the physical handling of the merchandise.

The bricks-and-mortar companies don’t know how to do the back-end part of the business because it’s completely different. Amazon is the only company that has a distribution network that ships millions of different items to millions of different customers.

If you look at the distribution center network of a leading retailer like Toys `R’ Us, it’s built to ship cartons of product to stores, not single items to customers. It’s a completely different thing.

The way Amazon looks at this platform is that it’s assembled from a number of pieces. There is the Web site, which has personalization and one-click shopping and search technology. All the things that are designed to make it easy. There is customer service and fulfillment. There is access to Amazon.com’s customer base. I suspect that different partners will want to assemble an offering out of different pieces.

Cumulatively, Amazon has lost a fair amount of money. When will Amazon start making money? For five years, they’ve declined to even answer that question. The reason was they didn’t feel they had enough visibility to responsibly answer it. Now Amazon feels they do. In the year 2001, they expect to use about $200 million in cash, and so will end the year with about $900 million in cash. So they’re very comfortable with their cash position. In fact, just this week Moody’s Investors Service, the credit rating agency, came out and said that they were moving Amazon from a “stable” to a “positive,” and said that by their analysis Amazon has at least 18 to 24 months of cash.

Most of the change that Amazon is driving is in operating efficiencies. If you look at what they did over the last five years, Amazon followed the strategy of “Get big fast.” That was a really important thing to do. It worked.

The only way that I know how to think about Amazon.com is in the very long term. The sector that they are in is highly volatile. The stock actually traded below its IPO price for a while. So you could have bought, at the time of the IPO, Amazon stock for roughly $1.25. It’s up by a factor of seven or eight even today, which over three and a half years is not a bad return. The people who bought and held from the IPO may curse themselves for not selling at $100, but this is, in many cases, their best investment ever.

I have long warned individual investors–I started doing this two years or so ago–to stay away from Amazon.com and other Internet stocks; not because of the absolute price levels, but because of the volatility. They are not individual investor stocks. They are not “sleep at night” stocks.