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

The e-tailer's CEO says it won't run out of cash and becoming more efficient is now more important than growing bigger

Jeffrey P. Bezos, chief executive of Amazon.com Inc. (AMZN ), is on the hot seat. After promising an operating profit in this year's fourth quarter, he's trying to revitalize growth in Amazon's core books, music, and video businesses while pushing to expand sales of new product offerings such as consumer electronics and kitchen gear. In a recent conversation with BusinessWeek Senior Correspondent Robert D. Hof, Bezos explained why he thinks Amazon has turned the corner. Edited excerpts from their conversation follow:

Q: Is the Internet all it's cracked up to be?

A:

I very much believe the Internet is indeed all it is cracked up to be. This is a really big deal. People forget already how much utility they get out of the Internet -- how much utility they get out of e-mail, how much utility they get out of even simple things like brochureware online.

Now two years ago, I constantly argued against people who said that half of shopping was going to go online, and all these outrageous claims that people were going to stop shopping in physical stores. That wasn't true two years ago, it isn't true now. I think over time, and I've always said over 10-plus years, that perhaps 15% of retail may move online. I still think that's true. It's already roughly 5% in books.

Q: Are there certain kinds of technology you see emerging in even the next year that might speed up online purchases?

A:

All these technologies are getting better in the next year. The three fundamentals are processing power, disk space, and bandwidth. The latest figures that I've seen show that microprocessors are still right on track, following Moore's Law, price-performance doubling every 18 months. You look at disk space, and you have even better than Moore's Law, price-performance doubling every 12 months. If you look at bandwidth, it's getting better, getting cheaper even faster than disk space. It's doubling every nine months.

Now the exciting thing about that is not that the costs get lower. The exciting thing about that is that for the same amount of cost, you can double the user experience. That is a very important component of the fundamental long term bet of e-commerce.

Q: What are the key skills in a CEO, or for that matter in your staff, that become more important in this kind of environment?

A:

Well, I think that the single most important thing for a company in this kind of environment is to stay heads-down focused on the customer experience and focused on the business metrics -- and not allow ourselves to be distracted by the capital-markets environment, for example.

Q: What do you think will determine who survives and who fails going forward here?

A:

One of the big differentiators will be whether the company is really focused on building a lasting company or, as unfortunately [was the case with] some of the companies that were formed in '98 and '99, formed on building a stock that they could flip. Those companies that were formed with the intention of building a stock instead of building a company, it's very difficult to see how those companies are going to survive.

Q: What have you learned during this downturn about building a business online?

A:

One of the things that we've always understood, but we understand even more deeply now, is just how much of a scale business this is. It's turning out to be even harder than we had anticipated for single-line or medium-sized e-commerce companies to be successful. The fixed costs are so high. The variable costs are lower than physical-world retailing, but the fixed costs are higher.

Q: Some folks think you're running out of money. You don't agree. Why?

A:

I can walk you through the cash flow myself. We ended '99 with $700 million in cash. We raised $700 million in cash shortly thereafter, so effectively we ended '99 with $1.4 billion in cash. And we ended 2000 with $1.1 billion in cash. We used about $300 million in cash. We told people that we would have about $900 million in cash at the end of this year. So we can't be any more clear, and there it is. This myth that we're going to run out of cash is not so.

Q: Are you adjusting how you lead and manage in this downturn?

A:

The main change here is that we're putting a lot more emphasis on operating efficiency and balancing operations efficiencies with growth. And that is a direct result less of the environment than of the size of Amazon.

When you have annualized sales of $3 billion a year, a hundred basis points is $30 million a year. Whereas when you have sales of $60 million a year, a hundred basis points is only $600,000 a year. So when you have $60 million a year in annualized sales, as we did at the time of our IPO three and three-quarter years ago, the smart thing to do is to focus on growth so that you can get to a position where the smart thing to do is to focus on efficiency. Two years ago, I spent most of my time focused on our business plans for growth. Now, I spend most of my time focused on our business plans for operating efficiency.

Q: What gets you up in the morning? Is it any different from what motivated you before?

A:

The thing that motivates me is a very common form of motivation. And that is, with other folks counting on me, it's so easy to be motivated. We have millions of customers counting on us. We've got thousands of investors counting on us, and there are thousands of employees all counting on each other. It's not difficult to be motivated in that environment. The hardest time to be motivated was six years ago, when it was just me. Then you can quit at any time and nobody cares.

Q: Are there any decisions you've made over the past couple of years that you might do differently in retrospect?

A:

Well, the big one is our investment strategy -- investing in some of these medium-sized companies, Living.com and Pets.com. That was a significant amount of investment capital. And I was a very passionate believer that there was a good chance these companies could succeed. And obviously I was wrong.

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