For anyone pondering the mysteries and marvels of the Internet era, the first week of February provided two benchmark moments: the disclosure of Amazon.com Inc.’s fourth-quarter results and the announcement by Ford that the giant manufacturer of automobiles and much else intends to make a personal computer (some 300,000 in all) inexpensively available to every member of its global family.
Amazon first. In the fourth quarter, traditionally the most profitable for all retailers (booksellers not least), Jeff Bezos’ Wunderkind racked up losses of $323 million, a 543 percent year-to-year increase in spilt scarlet. This news proved sufficient unto the day, in the topsy-turvy world of Net valuations, to send the stock up by 21 percent. I have often observed that, in the many lines of work in which I have some firsthand experience, trade publishing is the only one in which success is invariably a complete surprise. Fitting that Amazon, the publishing trade’s biggest on-line customer, should ring its own variation on this theme, whereby it seems that only failure will be rewarded by the market.
I have before me the account of Amazon’s announcement by The New York Times ‘ Saul Hansell as (presumably) short-formed (issue of Feb. 4) in The International Herald Tribune , which I intend to make my paper of record now that I am officially resident in the civilized borough of Brooklyn (you may henceforth write me at 66 Water Street, No. 5C, Brooklyn, N.Y. 11201) and can regard the beefy, bumptious goings-on on the far bank of the East River with the same amused contempt with which a civilized Frenchman might gaze across La Manche at the White Cliffs of Dover.
Mr. Hansell’s excellent summation makes several points that seem to this correspondent to call for comment. Perhaps “comment” isn’t the right word. All I really wish to do is to call attention to aspects of Amazon and its promotion that somehow either get overlooked or deserve closer-that is to say, rational-scrutiny.
I say this with heavy heart, however, because whatever doubts I have about Amazon, speaking as a Wall Street old-timer, as a customer I love it. According to Mr. Hansell, Amazon’s average customer spent $116 last year, an increase of 9 percent over 1998. I would be very surprised if, in 1999, I hadn’t spent close to 50 times that amount at Amazon. But love Mr. Bezos and his dream child though I may, I must be flinthearted in evaluating it as a business. Conceptualize it though I try, I can’t escape the conviction that, whatever its manifest virtues as a retailer of intellectual property, Amazon remains at the end of the day hostage to the economics of hand-laborers being paid $10 an hour to take books out of one box and put them in another.
In my experience, big stock market troubles follow hard on periods of mass delusion in which commodity businesses are thought to have transformed themselves into something more rarefied, magical and exempt from the arithmetic. By “commodity” is usually meant a good or service more or less in the form it reaches the final buyer, but “commodity” can also refer to stages further back up the line but no less crucial to the profit-loss outcome. Sadly for Amazon, as opposed to, say, Nike or Chrysler, its fundamental labor equation cannot be modified either by going overseas or by automation.
I may be wrong. Still, the fact that Amazon ended the Christmas selling season with an inventory of $221 million, up ” sevenfold ” (according to Mr. Hansell) from the prior year suggests that whatever is rotten is not limited to the state of Denmark. A 7X inventory spike mismatches unfavorably with both a 37 percent increase in customer base and a 167 percent increase in sales, laudable as both the latter may be. You don’t need seven times the goods to service 37 percent more customers or even double-and-then-some the sales. Amazon generated $676 million of sales in the last quarter-which probably accounts for one-third of its annual volume (at a minimum)-and still ended up with $221 million on its shelves. This suggests an uncomfortably (not to say dangerously) low rate of inventory turn. A rate that would be uncomfortable, to say the least, in a corner bookshop, but-I would think-ultimately lethal for an enterprise being held afloat by wave after wave of public financing.
That $221 million, incidentally, is after $39 million of “writedowns of inventory.” For better or worse, preponderantly the latter, the book business is supposed to be about returns, so inevitably one asks: What inventory was written down? Back-list? Leather-bound sets of Macaulay? I doubt it. Which leaves big current titles. Harry Potter and Grisham, that sort of thing. Is Amazon buying these on a nonreturnable basis? On what terms? I can only imagine at deep, deep discounts on big mass-market titles, but if these discounts aren’t deep enough to spin a profit, the hair on the back of my neck really begins to bristle.
Moreover, given my oft-repeated enthusiasm for the singular genius of American trade publishing, I can’t forbear inquiring, in a mild voice and with a smile, just who is carrying the Amazon inventory financially: the company or its creditors? At $221 million, we are looking at a number large enough to furrow even the most confident brow at Bertelsmann or Holzbrinck. And not merely in the credit bullpen, but upstairs in the corner office. A number, moreover, that is large enough in absolute dollars to cause a ripple effect right through every level of the credit arrangements of the publishing industry, touching the innocent as well as the slippery.
Then there’s the 60 percent increase in distribution and fulfillment margins, up in 1999 to 16 percent of sales from 10 percent the year before. When I read this, my mind reverted to something I wondered about before Christmas but which the Street seemed uninterested in talking about. If I understand Mr. Bezos correctly, his single largest “partner,” in terms of operating dependency and transaction frequency (if not absolute dollars) isn’t Doubleday or Random House, but the United States Postal Service. The U.S.P.S. is in many ways admirable, but few hold it up as among the most efficient, cost-effective businesses going. I’m not sure how I feel about betting on a business that in turn bets, if not the house, a number of the better-furnished rooms on Uncle Sam’s ability to deliver my goods. If you read Mr. Hansell’s report carefully, and put the sentences in the order they ought to go analytically, it’s hard not to infer that Old Whiskers had something to do with Amazon’s 40 percent decline in gross profit margins (from 21 percent in ’98 to 13 percent last year), which is attributed to pipeline problems.
None of this troubles the Street, naturally. Net analysts strike me as the intellectual and semantic heirs of those medieval scholastics who, at the mere shake of a trope, could send cherubim and seraphim, dominions and powers pirouetting like Rockettes on the head of a pin. In explaining away the Amazon numbers, they done themselves proud. Here’s Anthony Noto of Goldman Sachs & Company: “The price to pay was the inventory, but at the end of the holiday season they came away with customers who are still satisfied.” As St. Thomas Aquinas might ask: What exactly the hell does that mean? And here’s one Jamie Kiggen of Donaldson, Lufkin & Jenrette Inc.: “The fact that their customer acquisition cost is as low as it is while their revenue per customer has trended upward over time shows that they have a business than can become quite profitable.”
Say what? Still, I do like that “quite.” But “quite” isn’t what old blowhards like me pay an infinite multiple of (non)earnings for.
The bottom line on Amazon, as I see it, is that it’s all about the top line: Everything is geared to volume, customer count, other gross (no pun intended) numbers. But at the end of the day, which is the time the creditors come calling, and carriages turn back into pumpkins, it’s the line at the bottom end of the financial statements that counts.
I think this is something Ford understands. Its decision to computerize its workers is one of the two truly enlightened institutional initiatives of my lifetime. The other was the G.I. Bill, whose beneficial effects we continue to feel in this country, even after a half-century.
I think Ford’s decision, once it finds imitators and takes global hold (as I have no doubt it will), may prove no less reverberant. Socially and financially. It isn’t just the workers, you see, it’s their children who will reap the great benefit. Children all around the world.
How fitting that this
remarkable, rich, enlightened, providential gesture should be made by the descendants in authority of the first Henry Ford, who-way back when-grasped the truth that if he paid his workmen $5 a day, they would be able to buy the cars they were building and make him even wealthier. And they did.
What Ford has done epitomizes what Tocqueville meant when he suggested that the singular genius of this great nation was for “self-interest rightly understood.” Taken all in all, what Ford is doing deserves a Nobel Prize, if not for peace, then for something. It makes me proud to be an American. I just wish I wasn’t so worried about Amazon.
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