A successful entrepreneur explains why it's almost impossible for his famous cyber-business to turn a profit.
Previous Internet entrepreneurs captured Wall Street's dollars by claiming they'd get filthy rich at some point in the future. But 33-year-old Jeffrey Bezos practically goes out of his way to insist that on-line bookseller Amazon.com has hardly any hope of making a profit. Bezos, whose stock rose from $18 to close at $23.50 a share in its first day of trading, this past May, seems by his honesty to have reassured investors that he must really know something. Executive editor Jeffrey L. Seglin set out to learn whether Bezos is just being cagey--or if profit is simply an irrelevant yardstick in cyberspace.
BEZOS: There are two dimensions in which Amazon.com completely dominates big-chain superstores: selection and price.
INC.: Aside from making the decision not to stock all the titles you offer, how have you been able to compete in those dimensions?
BEZOS: One way is our centralized distribution model. For a superstore to have nationwide coverage, it has to have approximately 500 superstores. Then consider, say, the 150,000th best-selling book--the marginal book a chain can barely justify carrying. The chain has to have 500 copies of that book, because there must be one copy in every store. But the optimal holding quantity for it on a nationwide basis is one copy.
INC.: If I'm a superstore, what's to stop me from starting a competing on-line bookstore?
BEZOS: There's nothing about our model that can't be copied over time. But you know, McDonald's got copied. And it still built a huge, multibillion-dollar company. A lot of it comes down to the brand name. Brand names are more important on-line than they are in the physical world.
INC.: You're using technology to collect information about people and their buying habits. Is that ultimately the business you'll be in?
BEZOS: No. What will always drive our business is transactions and sales of products.
INC.: In your prospectus you seem to acknowledge that the company isn't entirely efficient in that area. When people place an order, you get a tremendous amount of information from them. But none of it flows directly into your internal accounting system. Wouldn't there be a reason for linking those?
BEZOS: Only efficiency--just to eliminate some people who have to move the data from one system to another manually. When we look at ways to make things more efficient, making those two things seamless is just not a priority.
INC.: In your prospectus you say, "The Company's view...is that it will incur substantial losses for the foreseeable future."
BEZOS: We're not just covering ourselves. We're disclosing the facts of the situation. We're going to be unprofitable for a long time. And that's our strategy.
INC.: Presumably, at some point you probably don't want to be showing a loss.
BEZOS: Long term, the only way companies generate value is by making profits.
INC.: Are there things that need to happen for you to reach that point?
BEZOS: Only one. The key thing is sales growth.
INC.: But your sales must grow faster than what you spend to get them, right?
BEZOS: No, it's not the rate of growth. It's achieving a certain scale .
INC.: So how do you see that happening?
BEZOS: Given an assumed revenue ramp and a particular business plan, it's straightforward to calculate a break-even point. We've done that. But we don't disclose it.