http://msnbc.msn.com/id/8371010/
Amazon at 10: Ten vital questions for the next decade
By Carol Tice
Puget Sound Business Journal (Seattle)
Updated: 8:00 p.m. ET June 26, 2005
When Amazon.com marks the 10th anniversary of its Web-site debut on July 16, there'll be lots to celebrate. Founder Jeff Bezos set out with a pair of oft-stated goals -- to change the way people shop and to make retailing history. On both counts, it's mission accomplished. But the future may present a more complicated puzzle.
Few consumer brands leapt to the forefront of the collective consumer consciousness faster than Amazon. The company won over shoppers with its ever-widening selection of goods and services that quickly became must-haves for other online retailers -- reviews from consumers, free shipping and customized offers based on previous purchases, to name just three.
The questions skeptics had about Amazon at the start have been answered: Shoppers will buy goods online and Amazon is turning a profit.
But with success has come ever-rising expectations. Now, the company faces a tough new set of questions.
The early novelty of e-commerce has worn off, and shareholders have recently called for Amazon to focus more on net earnings and less on customer giveaways. Investors have shown their displeasure with the company's recent earnings by driving down the value of Amazon shares about 30 percent over the past year -- kind of a crummy 10th-anniversary present.
The decade has flown by at Internet speed since that Fourth of July weekend in 1994, when the Princeton-educated Bezos piled his belongings into his dad's '88 Chevy Blazer, drove from Fort Worth, Texas, to Seattle with his wife, MacKenzie, and started Amazon in his rented Bellevue home. From that humble beginning, Bezos saw his new company raise $54 million in its 1997 initial public offering and defy skeptics who predicted the company would become Amazon.toast. Bezos currently holds $3.6 billion worth of Amazon stock.
Against the odds -- Bezos himself told Time magazine in 1999 the company's chances of success were just 30 percent -- Amazon survived the dot-com crash and found a home on the "bookmarks" bars of online shoppers worldwide.
Amazon prefers to keep its plans for the future to itself. But with e-commerce now a crowded and increasingly competitive field, the big question is where Bezos, and Amazon, are headed next.
Will Bezos stay or go?
A Bezos retirement would leave no obvious successor: The company hasn't had a president since Joseph Galli lasted 13 months back in 2000.
Bezos, 41, does have other interests, notably Blue Origin, his Seattle-based suborbital space vehicle company. But Amazon says Bezos has no plans to head off into the sunset, and those who've worked with Bezos believe it.
"I would be very surprised to see him retire anytime soon," said Mark Hanlon, who was among Amazon's first dozen employees.
Bezos may scale back his hours, though, said analyst Shawn Milne at the San Francisco office of Friedman Billings Ramsey. "Clearly, over the next decade, I'd expect to see less and less of him on a daily basis," Milne said.
How many categories of merchandise will Amazon have in the future?
Amazon plans to continue opening virtual stores. But each new store seems to make less of a splash.
Milne sees Amazon continuing to add a broad range of general merchandise in the future, steering away from categories that already have online market leaders, such as auto.
But Amazon's opportunities may extend well beyond those retail boundaries. Amazon ranked No. 2 on a recent Forbes list of the 20 brands from which customers were most likely to accept new offerings outside of the company's existing categories. What if, in other words, the future might bring Amazon-branded insurance plans and cruise ships?
That's not to say all of Amazon's current categories will survive. One-cent books, it's been noted, are obvious money-losers. But Amazon presses onward. Earlier this month the company decided to enter the audio-book download business, even though its longtime partner in the category, publicly held Audible, recently said the amount of business it got through Amazon.com was immaterial.
When will Amazon's international Web sites be as profitable as domestic sales?
The company answer, offered by Bezos at the annual meeting in May: not anytime soon. Though they brought in $3 billion of Amazon's $6.9 billion in total sales last year, the international sites -- excluding Canada -- had gross margins of 18.8 percent, compared with 26.6 percent gross margins in Amazon's North American business.
As Amazon brings the French, German, British, Japanese and Chinese international sites up to speed with the range of products and services offered on Amazon.com, the company expects better profitability and higher sales. But adding all those categories may take a while.
Amazon's international sales growth rate appears to be slowing, from 58 percent in the first quarter of 2004 to 24 percent during the same period in 2005.
The hardest slog is likely to be in China, where Amazon spent $75 million to buy local site Joyo.com last year. As Bezos recently noted, infrastructure there is so crude that many Amazon packages must be delivered by bicycle messenger.
Winning over foreign customers may well prove tougher than Amazon imagined. In France, Business Week recently reported that nationalistic shoppers are buying more from homegrown sites, such as FNAC.com and Cdiscount.com, than from Amazon. The company laid off 52 staffers in France last year.
Can Amazon maintain its cachet as one of the best known e-commerce brands?
Likely yes, brand-watchers say.
A seismic shift in e-commerce could make Amazon's popularity fade, though. For instance, the new media darling of e-commerce is Craigslist, the bare-bones site that offers regionally organized, plain-text listings of everything from apartment rentals to items for sale.
Another threat to Amazon's brand dominance could be the growing presence of brick-and-mortar retailers on the Internet.
Traffic on Walmart.com in December increased 42 percent to 23.8 million visitors, while Amazon's traffic increased 14 percent to 42.5 million, according to Nielsen/Netratings.
Nonetheless, Girvin Strategic Branding and Design's Creative Director Ann Bradford in Seattle said she expects Amazon will stay on top.
"They're an incredibly smart team of executives with a marketing strategy that has proved to be quite agile," she said.
At retail design company Kendall Ross in Seattle, Principal Tim Ross said Amazon has achieved enough mass that it will be hard to unseat.
"Until there's a major technology shift," he said, "they're going to do just fine."
Will Amazon run its own toy store again, and could it do so profitably?
Amazon may have to. The company has said it stands ready to operate its own toy store this holiday season if its longtime partnership with Toys R Us falls apart. The toy retailer is suing Amazon and was recently bought by an investment group.
If the partnership disintegrates late in the year, that could be bad news for Amazon. The toy industry runs on long lead times. With the months before the holidays ticking down, time is running out for Amazon to nail down orders for the season's hottest toys.
As far as doing the job itself, Amazon has some recent experience. It already operates toy sites on some of its foreign Web sites. But the last time Amazon ran its own domestic toy site, in 1999, the company wound up writing off $39 million in unsold inventory.
The lowballing dot-coms Amazon faced in 1999 are mostly gone now, which should be good news for pricing and help margins. But there's a powerful new toy retailer in cyberspace that could cause Amazon headaches: Manufacturing giant Hasbro recently debuted its own e-commerce site. If Toys R Us goes its own way, it could be a competitor, too.
What will it take to get investors excited about Amazon stock again?
The answer is simple, said analyst Steve Weinstein at Pacific Crest Securities in Portland.
Recently, Amazon has had sales growth but at the expense of margin growth. Investors would prefer to see both sales and margins grow at the same time.
"You'd like to see Amazon not give up market share while also not having to sacrifice the margin," he said.
Will free shipping last forever?
Likely yes, at least in some form, despite complaints from investors and analysts. For instance, TheStreet.com columnist Peter Eavis recently called for Bezos's ouster because the free-shipping ploy is such a profit drain, costing Amazon $55 million in the first quarter alone.
Having offered free shipping since late 2000, Amazon would have a hard time weaning customers from the practice.
One possible way out of the free-shipping trap may come from Amazon Prime, the service introduced in February, where customers pay $79 for unlimited "free" shipping for a year. Eventually, Amazon could limit free shipping to Amazon Prime members, thereby rewarding frequent customers and encouraging others to join the club.
Amazon isn't tipping its hand on this topic. Spokeswoman Jani Strand would say only, "We remain focused on providing customers with low prices in the form of free shipping programs, and are extremely pleased with the Free Super Saver Shipping program as well as Amazon Prime."
How important will Amazon's Web Services division become?
The Web Services technology is crucial now, enabling more than one-quarter of Amazon's online sales. Bezos recently told Business Week, "Amazon Services could be our most important business."
Some tech experts believe the division -- which helps third-party merchants sell on Amazon -- is such a winner that it should be spun off as an independent company. The division has been on an upswing recently, signing up Sears Canada, Marks & Spencer, bebe, Oshkosh B'Gosh and other well-known brands in the past few months.
Nicholas Carr, author of "Does IT Matter?," said a spun-off Web Services division could unlock shareholder value and probably attract new customers. Because Amazon doesn't disclose sales and profits for Web Services, Carr said Amazon investors don't appreciate how well the high-margin business is doing.
Carr also theorizes that some retailers may be reluctant to do business with a Web Services group that's owned by one of their biggest competitors. Standing on its own, Carr said, Web Services might be able to land lots of new accounts.
What was the biggest missed opportunity?
Two theories: First, disgruntled auction merchants say their area, which could have turned into a major profit center for Amazon, is a virtual ghost town. Indeed, a search of the categories being featured on Amazon's auction area earlier this week showed pages of listings with no bidders.
Collector's Paradise owner Randy Tusha in Mesa, Ariz., said he's seen his sales on Amazon shrivel from $4,000 a month in 2000 to $400 a month in the past year. Tusha said the site, which was once a featured tab on Amazon's main page, is now buried.
"I'm a seller, and I have difficulty finding it," he said.
Former Amazon employee Mark Hanlon, who worked on the auction site, said eBay had already achieved critical mass when Amazon auctions debuted in March 1999. Shoppers tried Amazon, but in the end many returned to eBay. Amazon doesn't disclose auction sales volume, which suggests that auctions have not evolved into a major moneymaker.
Some Amazon-watchers wonder if eBay's acquisition of the Shopping.com Web site for $620 million earlier this month may turn out to be a bigger problem. The acquisition put the comparison-shopping site in the hands of Amazon's rival, precluding Amazon from buying the site itself.
Former Morgan Stanley research analyst David Jackson, who now writes The Internet Stock Blog, wrote that Amazon could have benefited by offering ads and placement on Shopping.com to its third-party merchants. Now, eBay's deep-pocketed ownership of Shopping.com may lead to a higher profile for comparison-shopping sites, increasing price pressure on retailers such as Amazon.
What's the next big thing?
All indicators point to A9, the company's Web-search site introduced last September, on which the company likely spent a chunk of its $251 million technology budget last year. Amazon has been mum on how it plans to make money from A9, but Editor Chris Sherman of the e-mail newsletter Search Daily said he can think of three ways Amazon could turn A9 into a profit center:
* With its images of shopping streets in major cities, A9 has pictures of many small businesses. Sherman said Amazon could offer those businesses low-cost or free Web-site hosting, then sell ads on the sites to bring in cash.
* A9 could become the search provider for many other sites that want a search bar but don't have the money to develop their own search technology and don't want to use Google.
* A9's evolving technology could improve customers' experience on Amazon.com and lead to more sales.