Picking on Amazon.com

Written by John Ellis on . Posted in Breaking News, Posts.

Here’s another example.
Last month Inside.com, a site devoted to news of and commentary about the media
business, went up on the Web. The site didn’t officially launch, mind you;
it just provided a tasting menu of what would soon follow. Quicker than you
could say Kurt Andersen, a gaggle of pundits gathered to declare it dead, finished,
doomed, a fool’s errand.

Let’s see. Inside.com
has enough money to stay in business for two years even if they receive not
one penny in revenue during that time. As it happens, Inside.com has revenue;
probably not as much as they would like, but they are selling subscriptions
and they are selling advertising. It will probably be a while before anyone
can confidently predict what the future holds for Inside.com. In the meantime,
what’s not to like?

What’s not to like
is success. And perhaps no one’s (or company’s) success is more despised
across a wider spectrum of opinion than that of Jeff Bezos and his brainchild,
Amazon.com. There are many reasons why Bezos and Amazon are so despised, but
chief among them is that he has redefined the customer experience through adroit
use of digital technologies. That has caused any number of companies untold
grief, as anyone from Barnes & Noble or CVS or Tower Records or Merrill
Lynch can tell you.

All of these old-economy
companies have lots of friends in the press, and last week, on the thin reed
of a bond analyst’s report, the pundits were out in battalion-strength
force, proclaiming the imminent demise of Amazon.com. What made it eerie was
the glee with which they took to the task. What made it stranger still was the
certainty of their stance.

The proximate cause of this
bilious deluge was sensible enough. The aforementioned bond analyst, an employee
of Lehman Brothers, pointed out that $2 billion of Amazon.com’s convertible
debt was coming due. It will convert to equity if a share of Amazon.com stock
trades at or above the exercise price of the bonds when they are called due.

Unfortunately, Amazon.com’s
stock has fallen well below these "target" prices and thus the company
is in danger of defaulting on its obligations. To make matters a bit worse,
Amazon.com’s free cash flow has deteriorated, thus making debt repayment
(without the equity conversion) even more problematic. This raises the possibility,
said the Lehman analyst, of Amazon running out of cash in the year 2001.

Fine and fair enough. Amazon.com’s
convertible debt problem is, short-term, a serious problem that the company,
as one might expect, is taking steps to correct. There are any number of ways
they might do this (strategic partnerships, rollovers, new lenders, preferred
offerings, what have you). It seems likely they will arrive at a solution privately
and then announce it publicly, in due time.

The reason it seems likely
a solution will be reached is simple: Amazon.com is a great company.
It may well be one of the greatest companies in the world. It is certainly one
of the best-positioned companies in the world. And its future success, assuming
that it does not get whipsawed to death in one of Wall Street’s manic-depressive
downer mood swings, seems all but assured.

Why? Look into the conservatively
appraised future. In the next 10 years, the following things will happen: The
cost of computing power will continue to plummet. The cost of broadband will
be one-third of what it is today (if not less than that). Virtually every American
household with income over $22,000 per annum will be connected to the Internet.
More than a billion people, worldwide, will be connected to the Internet. And
all of those people, every last customer in the developed and underdeveloped
world, will be able to use voice recognition technology to get done whatever
it is they need to get done. (Microsoft just announced that it would soon introduce
a voice recognition technology-driven device that will connect to the Internet.)

The major impact of this
extraordinary technological change is that it makes each and every customer
a very powerful customer indeed. Today, you go into a supermarket and you take
whatever the sales and coupons give you in terms of discounts on brands. But
in a few years, if you’re a loyal Pepsi customer or a loyal Kellogg’s
customer, then those products will always be discounted for you–and if
they’re not, Coke and Post will be there to make you a better offer. And
it doesn’t take much imagination to realize that this state of affairs
will apply to virtually everything you buy, day in, day out, for the rest of
your life.

And the company that already
does this better than anyone else in the world, with the possible exception
of Wal-Mart, is Amazon.

com. Amazon.com has raised the business of customer service to the level of
art. They’re fantastic at it. Which is why they have 20 million customers,
the majority of whom aren’t just customers, but devoted customers. The
goal of Amazon.com is that someday soon, you will be able to go to its site
and buy whatever you want, from wherever you might be, at any time of day or
night, at a fair (and often discounted) price. And it will be on your doorstep
or in your refrigerator or at your office or in your mailbox as soon as it is
humanly possible to get it there.

Free cash flow is deteriorating,
rant the pundit partial-birth abortionists. So what? is the correct response.
Any company as ambitious as Amazon.com, any company that has grown as big and
as breathtakingly fast (Amazon didn’t exist in 1993), any company that
scales itself to serve 100 million customers, is going to have cash flow problems.
The question is, does that company have a reasonable chance of succeeding down
the road?

In the case of Amazon.com,
perhaps the strongest brand on the Web or anywhere else, the answer is a resounding
yes. Even in the near term, Amazon.com’s prospects appear brighter by the
day. Although the dot.com stock market crash took a ton of value out of the
company’s stock, it mortally wounded many of Amazon’s keenest competitors
(in terms of customer service). As more and more of those companies reach the
end of their burn rate fuse, Amazon will be there to pick up their customers.
And as more and more customers go online, more and more business will click
to the best customer service brand on the Web.

There was a time, not so
long ago, when the pundits would gather on op-ed pages and in the business sections
to rue the shortsightedness and quarter-to-quarter mindset of American business.
Now these same pundits gather to say Amazon.com’s first quarter in 2000
wasn’t up to snuff. No kidding: the first quarter of 2001 won’t be
much to write home about either; nor will the first quarter or 2002, 2003 or
2004. The first quarter of any year in the retail business is always the weakest.

It’s not about the
first quarter of this year or next. It’s about building a company that
can deliver the best customer experience imaginable on a global scale. The company
that does that in retailing will make tons of money. And the company most likely
to succeed at this is Amazon.com.

The fact is, it takes decades
to build a truly great company. It took Ford Motor Co. 15 years just to turn
itself around and it already was a great company. It took General Motors longer
than that. It took Toyota 30 years to become a world-class manufacturer and
marketer. Amazon.com has already become a world-class retailer. What it might
become in the next 10 years is the greatest retail outlet ever.

One thing is certain: When
the convertible debt issue is resolved or patched over, the news item will appear
inside the business pages and there will be no commentary about it. The pundits
will have moved on to proclaim some other new venture dismal, doomed and done
for. Two or three of them might even be moved to write a book on the subject.
And after they’ve finished their books, their publishers will scramble
for one thing: placement on Amazon.com.