Amazon answers the critics

Everyone carries around with them a selection of what I like to call “”cocktail facts.””

These are easy-to-remember bits of trivia that are trotted out at cocktail parties when people feel the need to contribute to conversations on subjects they know nothing about. You may not own any Britney

Spears CDs, for example, but you might have heard on the radio that she once performed in the Mickey Mouse Club. If the topic is tennis, you might recall John McEnroe’s famous temper. And if the discussion turns to the ups and downs of e-commerce, you may well remark that even the best-known name in Internet retailing, Amazon, has never been profitable. Ever.

That particular cocktail fact has been washed away, however, by all the champagne Amazon chief executive Jeff Bezos and his staff have been swilling since the company posted its surprisingly positive earnings on Wednesday. It has taken seven years for Bezos to prove the skeptics wrong by announcing net profits of US$5.1 million. Seven, in this case, seems to live up to its reputation as a lucky number — isn’t this exactly the kind of recession where a dubious proposition like Amazon should be announcing its closure? As a comeback, this is spectacularly timed.

There have been just as many people in the technology industry waiting, even salivating for Amazon’s demise. Amazon was a dot-com before it became fashionable to call yourself a dot-com (and when it no longer became fashionable, Amazon quietly dropped the domain from its marketing). It passed from a novelty — a bookstore on the Internet! — to a symbol of the uncertainty surrounding e-commerce. Though it has since branched out to offer music, DVD and health care products, the company has specialized in fairly low-margin items. As Internet use surged, experts dismissed the business-to-consumer (B2C) market. The smart money, they said, was in the development of business-to-business (B2B) electronic exchanges. Then they watched as exchange after exchange failed to survive the challenges of linking suppliers and customers.

At a time when it seemed you could do anything on the Internet, Amazon “”kept its head down,”” as Bezos said, and concentrated on doing only a few things very well. It listened to its customers and advisors, working to improve its operational efficiencies. In its first major marketing blitz, Amazon placed ads in magazines like the New Yorker with just a few lines of copy and the company name set against a backdrop which showed a sea of books floating into infinity. Apparently this was a fairly accurate depiction of its supply chain; inventory management has been a major reason the company has been able to stave off shrinking product margins.

When Amazon branches out, it does so in a way that builds upon its core competencies. In the last few years it has taken a stake in Drugstore.com, Pets.com and developed an in-house auction capability to let its customers become their own eBay. When eBusiness Journal covered its foray into online auctions, Bid.com chairman Paul Godin told us he welcomed the competition because Amazon was bringing credibility to the business. Once you’ve established customer trust, adding selection to the product mix is a natural, evolutionary progression. No wonder powerhouses like AOL invest US$100 million to form alliances with Amazon.

Of course, US$5.1 million is not going to secure Amazon’s future. Analysts and investors will now be waiting to see how well the company can sustain its earnings growth. You might expect Bezos and co. to play it safe at this point, but recently the company announced plans to offer free shipping as a way of driving volume. This is the kind of well-calculated risk only a seasoned innovator would take.

In time, as high-tech old timers look back on the dot-com boom and bust, plenty of big names will be tossed around as examples of e-commerce failure. That’s when someone who knows nothing else about the market will pipe up with their cocktail fact: Amazon survived.

sschick@plesman.com

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