Sun, May 19, 2002 page10

• The survivor fails to sway big investors

  BUNGLE IN THE JUNGLE Although Amazon closed at a 52-week high last week, many investors remain skeptical that the dotcom company's business model will work

  • NY TIMES NEWS SERVICE
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  Jeff Bezos is feeling a tad cocky lately. That might seem like a dog-bites-man observation for the founder of Amazon.com, a man so obsessed with brain power that he started a science-and-literature summer school for children after his freshman year at Princeton and once hired only college graduates to staff the customer-service phone lines at his company.

  Still, it's been a rough turn of the millennium for Bezos, now 38. At the peak of the Internet mania in 1999, Amazon's stock soared above US$100 and he was Time magazine's Man of the Year, lionized for guaranteeing "that the world of buying and selling will never be the same."

  

  Jeff Bezos, CEO of Amazon.com stands in Times Square recently, happy to have survived the dotcom shake-out.

  PHOTO: NY TIMES

  Then a harsher reality set in. Amazon's stock plunged, to as low as US$5.51 in last fall, and at least one bond analyst, Ravia Suria, then at Lehman Brothers, was predicting that the hemorrhaging giant would run out of cash. (Since its inception in 1995, the company has lost roughly US$3 billion and at the height of dotcom hoopla in early 2000 was accumulating losses at the rate of US$300 million a quarter.) Bezos even found himself serving as the main foil of a comic monologue in a popular one-man play, 21 dog years: doing time at Amazon.com, by Mike Daisey, a former customer service agent.

  "It was a lightning-quick trip from Internet poster boy to Internet pinata," Bezos says with his famous high-pitched, delighted guffaw. He was not always so amused by the criticism -- after Suria released his harshest reports in late 2000, Bezos' minions went on the warpath, offering a point-by-point refutation to practically anyone who would listen.

  But these days, Amazon appears to be entering yet another phase of its very analyzed public life. It is winning plaudits from investors for the speed at which it has cut costs over the last year while maintaining sales growth. The company reported an actual profit at the end of the fourth quarter last year. Its first-quarter results, reported in April, showed that sales were up 21 percent from the quarter a year earlier, to US$847 million, while losses had narrowed to US$23 million from US$217 million. Despite a string of high-level management departures, an increase in Amazon stock sales by a few important insiders -- including Bezos himself -- and abundant, persistent skepticism among Wall Street analysts about the long-term viability of Amazon's business model, investors sent the stock to a 52-week high of US$20.40 last Tuesday. It closed on Friday at US$19.16.

  Because Amazon is so inextricably linked to its founder, a wave of Bezos revisionism is also beginning to crest. "He rode that out through the whole process and is probably going to get the respect he should for building just a magnificent company," said David Shaw, chairman of DE Shaw & Co, the investment firm where Bezos worked just before starting Amazon, and a longtime mentor.

  To Bezos and his friends, Amazon's latest status as dotcom survivor is more than just deserved vindication for him. It is a validation of their much-maligned original vision: that the Internet is a revolutionary new form of commerce and that only companies that became big early, even while ignoring profitability, will survive.

  "The mistake that companies make is that when the external world changes suddenly, they can lose confidence and chase the newest wave," Bezos said in an interview last week, indulging in a swipe at the all the dotcoms that had promised to be the Amazons of this or that product category and then failed. "There was a lot of commotion," he said. "We kept our focus."

  Partly revolutionary

  While Bezos says he himself never bought or perpetuated the "myths of e-commerce," it is clear that he still conceives of himself more as visionary than mere merchant. "There are parts of what we do that are revolutionary," he said, listing as groundbreaking departures Amazon's ability to offer a wide selection -- because of the unlimited shelf space of the Internet -- and to personalize each customer's shopping.

  Still, not everyone is ready for his valedictory lap. Many Wall Street analysts, while impressed with Amazon's improvements, say the company's grandiose ambitions to sell everything from Indian spices to dog chow have not panned out.

  "Look, they've shown us that the book business can be a very nice, profitable business online," said Mark Rowen, a senior Internet analyst at Prudential Securities. "The only problem is the book, video, music market is limited, and ultimately if Amazon is going to justify its market capitalization, it is going to have to show that other categories are viable on the Internet. So far, they have not shown that sales of other merchandise can grow rapidly and be profitable."

  In fact, for the first quarter this year, sales of books, music and DVDs and videos accounted for US$443 million, or more than half of Amazon's revenue. Its next-largest domestic category and its hope for the future -- electronics, tools and kitchen equipment -- brought in only US$126 million. Sales from its international division were US$225 million. Significantly, both of the nonbook divisions had big losses. Internet services provided to other companies like Toys `R' Us account for the company's only other rich profit stream beyond books. But the service business is vulnerable, because the slowdown in e-commerce has given name-brand non-Internet companies greater leverage to negotiate better deals.

  In recent months, Amazon.com has also lost four important executives. Warren Jenson, the chief financial officer, who joined the company only in 1999 and is widely thought to be the most important architect of the company's newfound financial discipline, announced in March that he would leave sometime in the near but undefined future. Jenson's announcement followed on the heels of the departures of David Risher, an Amazon veteran who had been the head of its US retail and marketing division, or some two-thirds of the entire business, and the heads of Amazon Europe and its subdivision Amazon France.

  Bezos says that he is sorry about the resignations of Jenson and Risher, but that he has the bench strength to ensure that their successions are smooth. "We have a great team in place," he said.

  The bursting of the dotcom bubble and the fiscal discipline it imposed have also contributed to Amazon's evolution from an exciting, mold-breaking company to a more conventional corporate citizen. The loss of mystique has taken its toll on the quality of mid- and low-level employees willing to sign with the organization.

  "Starting in 2000, the environment really changed," said Ginger Dzerk, who now lives in New York but who worked for Amazon in customer service and then merchandising from 1997 to last May. "They did a restructuring, with layoffs, with no warning, and that was disconcerting to everyone. Then it began to get more corporate.

  Service with a snarl

  "Instead of hiring overqualified people," Dzerk added, "they started hiring pretty much anyone who could use a computer, and that had a huge effect on morale and productivity. You went from having people who could problem-solve to having people who just wanted to get off the phone. Customer service problems at the time really began to soar."

  Dzerk, who was laid off in a restructuring in last year, says she declined subsequent offers of different positions within the company because she wanted to keep her buyout package.

  Without addressing the specifics of customer service, Bezos said Amazon still had its pick of employees. "Our attrition rates are way down from 1999; then, it was very tough to recruit and retain top talent because there was so much competition," he said. "Since that time, the hiring situation has flipped on its head. The only time people leave us is if we have put obstacles in the way of their doing their job well."

  Some outsiders, however, have noticed a toll on Amazon's vaunted consumer relations. "With its strong need for lower operating costs, we are concerned the company will no longer be able to offer exceptional customer service, which has been its basis of competition historically," Holly Becker, an Internet analyst for Lehman Brothers, wrote in a report late last month.

  "Lately, we have noticed that consumers need to be increasingly patient with the company. We recently placed a book order for a title listed on Amazon as 'usually shipped within 24 hours,' but it was actually not shipped for almost two weeks."

  Amazon begs to differ. "We consistently find that taking costs out improves the customer experience," said Bill Curry, a company spokesman. "That's because we are eliminating errors and inefficiencies so the result is faster and more reliable."

  Curry said internal data showed that the company's e-mail backlog had dropped substantially in recent years and that contacts per customer had also declined. The American Customer Satisfaction Index from the University of Michigan "rates us as an 84 on customer satisfaction in 2000 and 2001, and that is the highest ever for a service company regardless of industry," he said.
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