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New York Times, January 5, 2008 column


The New York Times




January 5, 2008


Talking Business

Put Buyers First? What a Concept

My Christmas story — the one I’ve been telling and retelling these last 10 days — began on Friday, Dec. 21.

It was early in the morning, and I had awoken with the sudden, sinking realization that a present I had bought for one of my sons hadn’t yet arrived. It wasn’t just any present either; it was a PlayStation 3, a $500 item, and a gift, I happened to know from my sources, that he was hoping for.

Like most things I buy online, the PlayStation had come from Amazon.com. So I went to the site and tracked the package — something, thankfully, that is a snap to do on Amazon. What I saw made my heart sink: the package had not only been shipped, it had been delivered to my apartment building days earlier and signed for by one of my neighbors. I knocked on my neighbor’s door, and asked if she still had the PlayStation. No, she said; after signing for it, she had put it downstairs in the hallway.

Now I was nearly distraught. In all likelihood, the reason I hadn’t seen the package earlier in the week is because it had been stolen, probably by someone delivering something else to the building. Even if that wasn’t the case, the one thing I knew for sure was that it was gone — for which I could hardly blame Amazon.

Nonetheless, I got on the phone with an Amazon customer service representative, and explained what had happened: the PlayStation had been shipped, delivered and signed for. It just didn’t wind up in my hands. Would Amazon send me a replacement? In my heart of hearts, I knew I didn’t have a leg to stand on. I was pleading for mercy.

I shudder to think how this entreaty would have gone over at, say, Apple, where customer service is an oxymoron. But the Amazon customer service guy didn’t blink. After assuring himself that I had never actually touched or seen the PlayStation, he had a replacement on the way before the day was out. It arrived on Christmas Eve. Amazon didn’t even charge me for the shipping. My son was very happy. So, of course, was I.

It has been years since I looked in on Amazon. Once upon a time, of course, it was a highflying Internet stock, one of the handful of Internet companies — along with Yahoo, eBay and AOL —whose stock only seemed to go in one direction: up. Henry Blodget made his bones, in no small part, by being a screaming Amazon bull.

Then came the bust, and Wall Street began to see Amazon in a decidedly different light. It was just another retailer, the bears said, that happened to sell goods online — and had immense, unanticipated infrastructure and technology costs. Its founder and chief executive, Jeffrey P. Bezos, spent huge sums of money on such “frills” as free shipping, which depressed its operating margins. Indeed, those margins — which got as low as 3 percent — were more akin to Wal-Mart’s than that of a big-time tech company. At one point, in mid-2000, a bond analyst named Ravi Suria made his bones by predicting that the company could run out of cash. The stock dropped into single digits.

So when I looked up Amazon’s stock price after my little Christmas miracle, I was amazed to see that it had risen around 140 percent last year. (It closed yesterday at $88.79.) The company grew somewhere around 35 percent in 2007 (the final numbers aren’t in yet), with revenue likely to come in around $15 billion, and well over $1 billion in free cash flow. Its margins had risen to around 6 percent, and it consistently made money.

When I spoke to analysts and investors, they had all kinds of reasons for Amazon’s performance last year. “They finally reached a point where their R&D spending was not expanding as fast as their revenues,” said Citigroup’s Mark S. Mahaney. He and others also talked about Amazon’s success in international markets, its fast-growing (and high margin) merchant market, which allows merchants to sell goods alongside Amazon, and its rapidly expanding Web services business. Mostly, though, the investing community pointed to those healthier margins as the main reason for the stock’s run-up. Legg Mason’s legendary fund manager, Bill Miller, who has made a small fortune for his investors by betting big on Amazon, told me that “Wall Street is almost fanatically focused on margin expansion and contraction.”

But I couldn’t help wondering if maybe there wasn’t something else at play here, something Wall Street never seems to take very seriously. Maybe, just maybe, taking care of customers is something worth doing when you are trying to create a lasting company. Maybe, in fact, it’s the best way to build a real business — even if it comes at the expense of short-term results.

It is almost impossible to read or see an interview with Mr. Bezos in which he doesn’t, at some point, begin to wax on about what he likes to call “the customer experience.” Just a few months ago, for instance, he appeared on Charlie Rose’s talk show to tout Amazon’s new e-book device, the Kindle. Toward the end of the program, Mr. Rose asked the chief executive an open-ended question about how he spent his time, and Mr. Bezos responded with a soliloquy about his “obsession” with customers.

“They care about having the lowest prices, having vast selection, so they have choice, and getting the products to customers fast,” he said. “And the reason I’m so obsessed with these drivers of the customer experience is that I believe that the success we have had over the past 12 years has been driven exclusively by that customer experience. We are not great advertisers. So we start with customers, figure out what they want, and figure out how to get it to them.”

Anybody who has spent any time around Mr. Bezos knows that this is not just some line he throws out for public consumption. It has been the guiding principle behind Amazon since it began. “Jeff has been focused on the customer since Day 1,” said Suresh Kotha, a management professor at the University of Washington business school who has written several case studies about Amazon. Mr. Miller noted that Amazon has really had only one stated goal since it began: to be the most customer-centric company in the world.

In this, it has largely succeeded. Millions of people instinctively go to Amazon when they want to buy something online because they have come to trust the company in a way they trust few other online entities. Amazon’s technology, its interface, its one-click buying service — they are all incredibly easy to use. Its algorithms offer “suggestions” for further buying that actually appeal to its customers. Its Amazon Prime program — for a $79 annual fee you get two-day free shipping — is enormously popular. Unlike what happens at certain other technology companies, when you have a problem, the customer service telephone number isn’t hard to find. It is even willing to correct mistakes that it didn’t make, as I discovered over Christmas.

All of this, however, comes at a price. Indeed, as I’ve written before, customer service isn’t cheap. Certainly, a fair amount of the hundreds of millions of dollars Amazon has spent on R&D has gone toward developing, say, the Kindle, but a good deal of it has also gone toward improving the customer experience. Amazon is willing to lose money on some of its most popular items, like the latest Harry Potter novel. And even with Amazon Prime, it must surely swallow millions of dollars in shipping costs. Indeed, in a presentation to analysts in late November, the company’s chief financial officer, Thomas J. Szkutak, showed one slide that read, “Over $600 Million in Forgone Shipping Revenue.” And that was just for one year.

Wall Street, however, has never placed much value in Mr. Bezos’ emphasis on customers. What he has viewed as money well spent — building customer loyalty — many investors saw as giving away money that should have gone to the bottom line. “What makes their core business so compelling is that they are focused on everything the customer wants,” said Scott W. Devitt, who follows Amazon for Stifel Nicolaus & Company. “When you act in that manner many times Wall Street doesn’t appreciate it.” What Wall Street wanted from Amazon is what it always wants: short-term results. That is precisely what Dell tried to give investors when it scrimped on customer service and what eBay did when it heaped new costs on its most dedicated sellers. Eventually, these short-sighted decisions caught up with both companies.

But Mr. Bezos refused to give in. “He was spending his time on long-term value creation,” Mr. Miller said. There aren’t many chief executives who can so easily ignore the entreaties of the investment community, but Mr. Bezos turned out to be one of them. Of course it helps that he owns over 100 million shares of the stock — and is the company’s single largest shareholder.

And it also helps that his dogged pursuit of a better customer experience has turned out to be exactly right. Yes, it’s true that its international business has been growing rapidly, but that’s not the only reason Amazon is back in high-growth mode. Amazon says it has somewhere on the order of 72 million active customers, who, in the last quarter, were spending an average of $184 a year on the site. That’s up from $150 or so the year before. Amazon’s return customer business is off the charts. According to Forrester Research, 52 percent of people who shop online say they do their product research on Amazon. That is an astounding number.

There is simply no question that Mr. Bezos’s obsession with his customers — and the long term — has paid off, even if he had to take some hits to the stock price along the way. Surely, it was worth it. As for me, the $500 favor the company did for me this Christmas will surely rebound in additional business down the line. Why would I ever shop anywhere else online? Then again, there may be another reason good customer service makes sense. “Jeff used to say that if you did something good for one customer, they would tell 100 customers,” Mr. Kotha said.

I guess that’s what I just did.

Copyright 2007 The New York Times Company


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