Picking on Amazon.com
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.
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.
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