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October 27, 1999

Amazon.com Says $197m Loss Is Money Well Spent

By CBR Staff Writer

By Rachel Chalmers

Sporting brand new toy and consumer electronic stores, Amazon.com Inc, the Seattle, Washington-based internet retail giant, recorded sales of $356m for its third quarter ended September 30 1999, compared with $154m for the corresponding quarter of 1998. Even as its sales skyrocketed, the famously unprofitable company continued to lose money. Third-quarter net loss reached $197m, including $111m of merger-, acquisition- and investment-related costs, as well as stock-based compensation charges. The loss represents money invested in growing the business, and on that front, the former bookseller had plenty to report.

Cumulative customer accounts increased by 2.4 million to reach 13.1 million; the figure was 4.5 million this time last year. Repeat customer orders accounted for 72% of orders, up from 70% last quarter. As well as the toy and electronics stores, Amazon.com added zShops for third parties to sell their wares, and an All Product Search to attract more shoppers than ever. The looming holiday season presents special challenges. Professing itself unable to accurately estimate demand, the company has decided to stock up inventory. Distribution square-footage has been increased fourfold from 1998. Though the season’s increased sales will boost top-line revenues, executives warn that the holiday buying rush will see gross margins decrease as fulfillment and marketing expenses climb. In fact the company intends to spend more than ever on marketing, describing its brand as a precious asset as hard-won and as easily lost as a good reputation.

That’s not to say that the holidays will be bad for Amazon.com. In early October, the company introduced a Wish List service, where subscribers can designate their gifts of choice for the benefit of their family and friends. Apparently, this was the number one customer request during last year’s gift-buying frenzy. The company reports that since Wish List was introduced, it has been adopted faster than any other feature Amazon.com has offered its customers, which augurs well for strong gift sales this season. Try this, said a jovial CEO Jeff Bezos, pick someone you don’t know and send them a gift off their wish list. It feels great! That’s easy for him to say.

Other initiatives launched over the quarter include Amazon.com Payments, which extends the company’s 1-click payment feature to the zShop merchants, and Amazon.com Anywhere, designed to let customers check the status of internet auctions from wireless devices like phones and PDAs. The freshly-launched Palm VII supports the feature, once memorably described as a cash register in every pocket. The company has also expanded its management team, hiring Warren Jensen from Delta Airlines and Jeffrey Wilke from AlliedSignal’s Pharmaceutical Fine Chemicals unit. It’s still hiring. Bezos commented: My only regret is that we lack the management bandwidth to expand even more aggressively.

As the analyst conference call progressed, it became clear that the executive party line was well-rehearsed. Phrases like delighting our customers, obsessive service and conscious decision were repeated again and again. What the management team must justify is the enormous and ever-increasing cycle of spending in which the company is engaged. While the company promises that operating loss will be down to a single digit as a percent of sales by the fourth quarter 2000, the question remains: could any business possibly be worth what Amazon.com has sunk into this one? The team believes it can. The internet endows it with unprecedented efficiencies. As president Joseph Galli put it: We invest less to launch a business than a single-product company. As ever, Bezos had the last word: As we find new opportunities, we will continue to invest in them. If Amazon’s shareholders don’t like it, they can always sell.

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