Online Extra: Q&A with Amazon's Jeff Bezos

The e-tailer's chief says too many Netrepreneurs weren't building real companies, but stocks that they could flip

Jeffrey P. Bezos was the poster child for e-commerce's rocket ride upward, and now he's the poster child for dot-com excess. In a recent interview with BusinessWeek Senior Correspondent Robert D. Hof, the CEO of laid out what he thinks his erstwhile dot-com colleagues did wrong, and why the Internet is more likely to change commerce than most people now expect. Here are edited excerpts of their conversation:

Q: Are you surprised by how fast e-commerce companies have hit the wall?


The rapidity of the downturn is extraordinary. The speed of it's astonishing.

Q: Why did it happen?


I don't know. It's clear to all observers at this point that we were in the midst of a tech bubble of fairly large proportions, and bubbles do pop quickly. That probably explains most of it.

Q: What did all those dead dot-coms do wrong?


If you look at all the companies that invested a lot of money and disappear[ed] or are in the process of disappearing, some fraction of these companies -- maybe 30% -- were never trying to build real companies.... They were trying to build stocks that they could flip.

Then, there's a bigger group -- most of the other 70% -- of folks that were genuinely trying to build companies. But what they did was they built cost structures that anticipated the ability to raise substantial amounts of capital in the future. And when the capital rug got pulled out from under them, there was no way to downsize the cost structure to a point where they could continue operations. They were counting on continued euphoria.

That actually would have worked, because there's a self-fulfilling prophecy aspect to it. If you can continue to get access to capital to fund acquisition of customers to get to a scale to support your high-cost structure, then the whole thing hangs together and makes sense. But there's a big risk in that period of time while you're acquiring that scale, and that big risk is financing.

The financing risk hit in a very sudden way that did not allow any of those medium-sized Internet companies to downsize their cost structures. They had big server farms, they had big-overhead staffs, they might have had big distribution centers... that couldn't be easily reduced.

Q: Who's in a position to survive?


The small companies that have very low cost structures, those companies get to continue. On the Internet, companies are scale businesses, characterized by high fixed costs and relatively low variable costs. You can be two sizes: You can be big, or you can be small. It's very hard to be medium. A lot of medium-sized companies had the financing rug pulled out from under them before they could get big.

Q: Except it looks like even some of the big ones might not make it or remain independent -- even Amazon.


It's very difficult for people to look at all these companies going out of business and say that any company is going to be immune from that. In our case, our business has never been stronger.

Q: Is the Internet just not cracking up to be as good a sales channel or media platform as folks might have hoped?


It's very clear that people had higher expectations for the next couple of years than are likely to be realized. But it's also very clear in my opinion that people have much lower expectations than are likely to be realized over the next 10 years.

The fundamentals here are very compelling. Look at e-retailing. The key trade that we make is that we trade real estate for technology. Real estate is the key cost of physical retailers. That's why there's the old saw: location, location, location. Real estate gets more expensive every year, and technology gets cheaper every year. And it gets cheaper fast.

Q: Amazon needs a lot of real estate, too, though.


Actually, we don't. If you look at the amount of real estate we have, it's teensy tiny compared to a retailer of our size. A retailer of our size would not only have 500 huge stores, it would also have a distribution center network as large as ours to supply the stores. So if you do the math... we are less by more than a factor of 10. So it's not the same thing at all.

Q: Is one reason most independent dot-coms failed the fact that so far, most haven't done fundamentally new things online that weren't done offline?


I'm not sure that's a primary factor. The Internet so far has demonstrated that it's not very good for me-too companies.

Q: Why haven't there been significant category killers online -- besides,say, Amazon in books?


It's surprising to me, but in retrospect it makes more and more sense. When we open a new category, it's basically the same software. We get to leverage the same customer base, our brand name, the infrastructure. It's very low-cost for us to open a new category, whereas to have a pure-play [single-line] store is very expensive. They'll end up spending much more on technology and other fixed costs than we will just because our earlier stores are already covering those costs.

Q: It seems that multichannel retailing may offer some advantages Amazon doesn't have. How do you see Amazon competing just being online?


We do have the scale to be an independent, online-only company. Some of the brick-and-mortar companies do have the staying power to invest more slowly. Most of the physical retailers are indeed in a good position. Rapid transitions favor startups, and slow transitions favor the incumbents. This is true for any technological transformation. They have a chance to adapt their model and learn new skills.

Q: So the fact that we're slowing down may give them an advantage?


Absolutely. It's a huge advantage for those folks. We're a very lucky company because we started when we did, and we have five times the traffic of our nearest e-retailing competitors, 30 million customers, the 48th best-known brand name, just edging out Pampers. We've built the scale that we need to stand on our own in this universe.

In some way, we're one of the incumbents, astonishingly enough. So in some ways, this transition is helpful to us, though it's very painful in the short term. We can proceed more deliberately now, which can be done much more cost-effectively than it was in land-rush mode.

Q: In your darkest hour, do you ever understand why people think Amazon won't make it?


The human brain is an incredible pattern-matching machine. They see all these other companies go out of business, and they wonder: How can be any different?

Q: How do you view how your business model has changed, and are more [alterations] coming soon?


It's still a rapidly changing environment. It's highly likely that we'll continue to make changes in our direction from time to time. We have added marketplace features, services for other companies, such as the Toys R Us arrangement. It's more of a services business. It's not so much a change in the model as a supplement. We view it as a new business.

Q: We're at the bottom of the well for perception of the Internet right now. Does that make it more difficult for Amazon to function and survive?


In some ways, it's much easier. It is very difficult to get people to focus on the most important things when you're in boom times. And in boom times, you have to deal with the reality of competitors doing irrational things. At this point in the cycle, we find it's very easy for people to be focused, and you don't have the same sort of irrational behavior in the marketplace. It's definitely healthier. It's only a very slow year when compared to a year ago and 1999.

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