The Book on Amazon.com

She stands poised in her heavy black boots, a tattoo on one arm, an X-Acto knife in hand. The UPS man heaves the boxes up, and she and her longhaired partner start slashing. A quick turn of the box, like a cowhand wrestling a bull, and then a short, deft slice, splitting out a plastic-wrapped slab of books. * The grunge workers at Amazon.com, the Seattle online bookseller, fan out like wayward librarians. Each drags a large metal cart of books and waves a hand-held scanner like a laser gun, the red beams of light letting the computer know where each volume is placed on the gray metal bookshelves. * Two laser printers, dubbed Beavis & Butt-head, spit out the day’s lists of customer orders that the workers match to the temporarily shelved books. Tacked high on a post in the basketball arena-sized warehouse are handwritten deadlines: 4:30 p.m. for the West Coast, 6:30 p.m. for the East. * The scene is full of the realities of old-fashioned trade, like timely delivery, inventory and gross margins. And therein lies Amazon.com’s paradox. To succeed as the first major business in the budding world of online commerce, Amazon.com must first master the essentially physical realm of books. And that’s just the first of many challenges in a cyberspace adventure that, depending upon whom you believe, is either the next light bulb or another Edsel. * Internet surfers are well-acquainted with Amazon.com. From its Web page, you can choose from 2.5 million titles, shipped to your doorstep, or click through an online book lovers’ bazaar. Anyone who visits the site can post a review of any book on its list or check into a “chat’ room to hash out the merits of Stephen King’s latest. And later this summer, Amazon.com’s customers probably will begin receiving electronic book recommendations based on the purchases of like-minded buyers--a high-tech twist on the venerable book club.

Amazon.com marks its second year of operation this month just as the future of online shopping--once hailed as the “killer app’ that would carry the Internet into the mainstream--seems more uncertain than ever. Nobody really knows whether large numbers of consumers will take to shopping by computer, forsaking catalogs and the convenience of telephone shopping or even the ordinary pleasures of seeing and touching products in a real store. IBM recently zapped its World Avenue shopping mall on the Web, sending shudders through the industry. “That’s not a good sign,’ warns Steven Zenker, a portfolio manager at McCabe Capital Managers. “IBM had a lot of money behind it. If they can’t make it work, can it work?’ Adds Neil Weintraut of 21st Century Internet Venture Partners: “We’re still looking at a 2-month-old baby. We’re trying to decide if it’s a successful lawyer or doctor when it hasn’t gotten to kindergarten yet.’

The expectations for Amazon.com have been higher than a yuppie parent’s. When it filed its offering with the Securities and Exchange Commission in March, the company was so confident of its prospects that it raised the offering price twice. At the opening bell May 15, the stock shot up from $18 a share to $30--placing the upstart’s initial market valuation at about half a billion dollars. But by the day’s close, the stock had settled back to an earthly $23.50, and it sank to $16.75 the following week. What happened? The same week of Amazon.com’s offering, Barnes & Noble, the world’s largest bookseller with annual sales of $2.45 billion, launched its competing online bookstore (on America Online and a dedicated Web site) and filed suit against Amazon.com, challenging its slogan, “Earth’s Biggest Bookstore.’ Goliath had spoken.

The cyber cheerleaders, it seemed, had overlooked Amazon.com’s underbelly: that very real, very physical warehouse. Before Amazon.com can sell anything, publishers or distributors must first ship the books to the company’s centralized Seattle warehouse, where individual orders are packaged and sent to customers. The just-in-time inventory comes with a price: Amazon.com actually stocks only its 2,000 or so best-selling books and must order the rest on a piecemeal basis. Inventory may not gather dust, but as a relatively small buyer, Amazon.com’s margins are slim, an estimated 16%. If you want non-bestsellers (the majority of the book business) Amazon.com may be about as fast as that river it’s named after.

“The virtual bookstore was [Amazon.com’s] early model,’ argues Steve Riggio, the feisty chief operating officer of Barnes & Noble. “I don’t think it will cut it in the long term.’

Indeed, Barnes & Noble already has a 350,000-square-foot New Jersey warehouse stocked with 400,000 titles for its 435 superstores, 566 shopping-mall bookstores (under the B. Dalton name) and a $30-million dollar catalog business; by fall the retailer promises next-business-day shipping on 400,000 titles ordered online--a capability Amazon.com currently doesn’t match. The company may also find it difficult to compete on price; Barnes & Noble’s gross margins are about double Amazon.com’s--an industry-leading 40%.

But Amazon.com has so far proved scrappy. In June it matched Barnes & Noble’s discounts of 30% on most hardbacks and 20% on all paperbacks. The company has increased to 2.5 million the number of titles it offers, even though critics say about a million of those are thought to be out of print and extremely hard to find.

The tenor and timing of Barnes & Noble’s entry into online bookselling and its lawsuit seem only to increase the likelihood that Amazon.com will be seen as the noble challenger. The lawsuit and subsequent advertisements deriding Amazon’s marketing claims, Weintraut says, “were widely viewed as a cheap shot. It was reflective of a competitor scared, as opposed to one feeling secure.’

But the skirmish may also offer a preview for countless other industries of exactly what works best in cyberspace. Will it be the classic Internet start-up, armed with venture capital, ideas and marketing promise? Or the traditional retailer, digitizing its brand, leveraging its inventory and capitalizing on its existing retail might?

So far, most Internet retailing successes have been products or services that naturally lend themselves to electronic selling: stocks, airline tickets and computers. What separates books is that they remain an odd combination of the physical and the virtual--they’re paper and binding, but they’re also thoughts and ideas. A clothing retailer can easily glean someone’s size and style preferences from purchases. An online bookseller might learn what you like to read and perhaps even what you believe.

To Amazon.com and its many backers, electronic bookselling will rejuvenate publishing and reading, once thought to be doomed by the inexorable advance of technology. “The sense of community created by the old independent bookseller is vanishing,’ notes Jack Romanos, president of Simon & Schuster’s Consumer Group, a leader among major publishers in incorporating high technology. “Being an optimist, I’d like to think that some of that could be re-created through online sites.’ Alberto Vitale, chairman and CEO of Random House, sums up the possibilities: “It could be very big.’

Last year, Euromonitor, an international market-research company, estimated U.S. book sales at a whopping $26 billion, of which Amazon.com, with its $16 million in sales, did not compose even one tenth of one percent. Though it impressed Wall Street by eclipsing its entire 1996 sales in the first quarter this year, Amazon.com is a long way from being a major business, let alone a profitable one. To make it, the company must gain the acceptance of mainstream America. Amazon.com’s No. 1-selling book of 1996--”Creating Killer Web Sites’--didn’t exactly climb the New York Times bestseller list. And after walking its Seattle warehouse, I can report that a lot of the “books’ Amazon.com sells are pseudo manuals for programmers. So far, Amazon.com has built a large portion of its business on selling nerd books to nerds.

But after scanning the orders I saw printed out, I was surprised at the variety of reading done by Amazon.com’s customers. The same geeks who’d order “NT Server & Workstation’ would type in their credit card numbers for a Dean Koontz novel. And a lot of these geeks were in Europe, South America, even China. A large percentage of Amazon.com’s sales have been abroad, a trend that matches other industries. With worldwide book sales reaching $82 billion last year, it’s a tempting market. Coca-Cola has already done it with soda pop, and Nike with sneakers. Why not words?

It’s hard to overestimate how much is riding on this little Northwest online retailer, which, as of March, had lost $9 million real dollars to generate sales of $32 million. Amazon.com is leading the way on forging what drooling marketers call a virtual community, an electronic meeting place where people can share mutual interests and spend money. Books are just the start. If we want the whole package, Amazon.com may be the place we can order our dreams online.

*

From Jeffrey Bezos’ office window, one sees evidence of the legendary frugality of the founder and chief executive of Amazon.com. This may be downtown Seattle, but it isn’t exactly a high-rent district. Across the street stand a pawnshop, a wig store and the Green Tortoise Hostel. Homeless men mill about, drinking out of paper bags. Bezos understands the power of example, of managing and marketing by metaphor. He says he buys the best computers and hires the best people and scrimps nearly everywhere else. The only sign announcing Amazon.com’s headquarters is a sheet of paper stuck in a plant in the lobby.

Bezos’ cramped office is no bigger than his assistant’s, and his desk, like those of many of his employees, is an unfinished door with 4-by-4s for legs. But there’s a mood of fun and curiosity. Amazon.com has the buzz of an Internet start-up, though the geek talk has a literary ring. Degrees in English literature are more common than those in computer science, and the ranks of customer-service representatives have included a Rhodes scholar.

Bezos’ office emphasizes function--a sleeping bag in the corner for late nights and three white shirts on hangers--but I’m struck by what’s on the white board up on the wall. By chance, on the flight up from San Francisco the night before, I sat next to a marketing guru who recently had been interviewed by Bezos for a job. Bezos, he said, had talked excitedly for an hour about something called “affinity marketing.’ My seatmate breathlessly described the possibilities: all kinds of products and services that might one day be marketed to Amazon.com’s high-income “virtual community.’ When I asked for examples, his answer was all encompassing: “Anything you do in your leisure time.’

Waiting for Bezos to arrive for our interview, I scrawl down a few of the couple dozen words on his white board: music, cars, computers, real estate. Could these be the affinity markets, the new opportunities Bezos is considering? Before I can scribble down any more, Bezos bounces in, wearing his trademark white shirt and khakis, chuckling when I kid him about the lunch he’s brought--a lumpy scrap of pizza with teeth marks. Bezos loves to laugh, and when he does he often doubles over his diminutive frame. He’s one of those rare people whose imperfections--a receding hairline, crooked nose and floppy ears--just make him appear friendly. He looks like an eager puppy.

As told by Bezos, the mercurial rise of Amazon.com already has a Horatio Alger ring. He spent his summers at his grandfather’s cattle ranch in Cotulla, Tex., from the age of 4 to 16, laying water lines, building fences, fixing windmills and even, he laughs, “castrating cattle.’ He wanted to be a physicist and began studying the lofty discipline at Princeton. By his sophomore year, he realized that his talent was in computers.

“Have you ever driven a bulldozer?’ Bezos asks, bouncing forward in his chair, flashing the whites of his eyes. “I’ve driven a DC Caterpillar. I even helped repair it. At core we’re tool-loving people. Computers give you so much leverage.’ Bezos pauses, setting up his favorite word. “It can be huge.’

Bezos leveraged his computer skills on Wall Street, where he became a quantitative hedge-fund manager for D. E. Shaw & Co, the investment firm, and its youngest senior vice president. The kid fond of big tools became an integral part of a company that he says changed the way things were done in statistical arbitrage. “We turned the business upside down,’ he says. “Normally there’s a human trader running the show with a sophisticated [computer] support group. We reversed that model. It becomes man helping machine. As soon as you make that shift, it’s deep.’

In the spring of 1994, Bezos surfed the World Wide Web for the first time and happened upon a site projecting annual Web growth at an astounding 2,300%. “This is going to be huge,’ he remembers thinking. Next, he was thinking what he could sell. After scratching out a list of 20 ventures that included music and clothing, he settled on books. Why? To Bezos, the billions spent annually on books represented a “huge’ market. And he felt people would be comfortable buying books their first time online.

A few weeks after his epiphany, Bezos quit D. E. Shaw, called a moving van and “packed and had our things taken before the van knew where they were going.’ Bezos’ short list for the physical address of the world’s first electronic bookstore included Boulder, Colo., Portland, Ore., Seattle or Lake Tahoe on the Nevada side. Sales taxes dictated a small state. California and its 28 million book buyers were out, not to mention the bibliophiles of greater Los Angeles, the nation’s largest book market. So, as Bezos legend has it, the moving van was instructed to simply head west. The next day Bezos phoned and told the driver he’d decided on Seattle, in a state with only 5 million inhabitants. But Seattle also boasts a host of high-tech workers and is just six hours from Roseburg, Ore., a major book-distribution center.

Bezos flew to Texas, picked up a beat-up family car, and--while his wife, MacKenzie, drove west--pecked out a business plan on his laptop and punched out calls on his cellular. He took a detour to Northern California to interview potential vice presidents of development. He still had no idea where he was going to live or how he would fund his scheme, but he had no time to waste because “when it’s growing 2,300% a year, weeks are important.’

True to high-tech form, Amazon.com opened for business in July 1995 in Bezos’ suburban Seattle garage. Venture capital jump-started the company, first $2 million and then $8 million last spring from the vaunted John Doerr, a key investor in Netscape and other celebrated high-tech start-ups. Part of the cash went into refining the practical aspects of electronic commerce. Function preceded style and content. Low on graphics, Amazon.com’s Web page loaded fast, even with low-speed modems, and made it easy to find and buy books. Automatic e-mails informed customers of the progress of their orders, down to the minute they shipped.

It has become an article of faith among Amazonians that the company took off mostly because of good word of mouth on the Web. True, people did talk it up like they would an art-house movie, spreading the word in chat groups and e-mail. But Paul Hilts, technology editor at Publishers Weekly, says the real edge wasn’t Web talk. “What Amazon.com did differently was to take out newspaper ads and start spreading money around.’ Several other Web bookstores exist, notably Book Stacks Unlimited (books.com) and online adjuncts to major publishers and independent bookstores. But they didn’t buy big ads in the New York Times Book Review in the spring of 1996. Last year, to garner just $16 million in revenue, Amazon.com spent $6.1 million on sales and marketing. The ad money and the glitzy venture capital created a buzz that led to stories in the Wall Street Journal, BusinessWeek and the New Yorker.

By enabling customers to celebrate or castigate authors, Amazon.com flipped the traditional author-reader relationship on its head. Suddenly, in a single e-mail, you could trash a mega-author or praise an unknown novelist--and your electronic diatribe would stay up for all the world to read as long as Amazon.com continued selling the book. You could be a personal friend or an enemy of the author and weigh in without ever having read the book in question; nobody cared and nobody seemed to be checking. Take Paul Theroux’s novel “Kowloon Tong’: In mid-June, Amazon.com featured but one customer review on it. “This novel has almost no relationship to reality,’ sniped jjmichon. “Don’t waste your time with this one.’ The unimpressed amateur critic rated “Kowloon Tong’ a one out of 10.

*

Perched on the windowsills of another shoe-box office, four Amazon.com staffers hammer out the week’s problems with executive editor Rick Ayre, a veteran of PC magazine. “I think it’s an attractive scroll,’ Ayre opines after a chug from a 32-ounce sports drink the color of a fuel additive. He’s talking about Amazon.com Journal, the Web site’s literary magazine, a series of linked articles and interviews. Nick Allison, a bookish-looking senior editor, wants software that will know when you last visited the Journal and adapt accordingly. One staffer chuckles about the half gigabyte a day (the digital equivalent of about a thousand novels) Amazon.com is already gathering on its customers’ buying habits and interests.

What no one in the meeting talks about are the privacy concerns raised by this tracking of personal digital trails. Nor do recent pledges by Microsoft and Netscape to limit the data they collect on people seem to be a part of this discussion. You get the feeling that the “deep shift’ Bezos talks about dreamily, when people will help the machine, isn’t that far off.

Increasingly, Amazon.com is doing the steering in this virtual community. “Eyes,’ an automatic notification system, alerts customers to new books from favorite authors and on subjects in which they might have an interest. Customer reviews are now superseded by pithy, sunny reviews from Amazon.com, fair-use quotations from the New York Times and occasional reviews licensed from Kirkus. Potential bestsellers, such as Thomas Pynchon’s “Mason & Dixon,’ are flogged in the Journal (“Thomas Pynchon fans rejoice--’Mason & Dixon’ is here and well worth the wait. Buy your copy now!’). “The value,’ Ayre admonishes his staffers, “is the relationship our experts build up with our users.’

This is the “second phase’ of computing that Bezos talks excitedly about--a “revolutionary change’ in the way things are done. “Inevitably we’ll be redecorating the store for every customer,’ he suggests, and farther down the road, the former hedge-fund manager says Amazon.com might “predict what books you love.’ It’s not science fiction. Early versions of this limited artificial intelligence should be available on Amazon.com and Barnesandnoble.com this summer. The geek term for it is “collaborative filtering,’ a technology with roots in computer dating. Tell the computer what books you love--and hate--and it will match you with the favorite books of like-minded readers. Soon Amazon.com will be asking Grisham fans if they might also enjoy Scott Turow, and perhaps the nonfiction best- seller, “A Civil Action,’ by Jonathan Harr. “It’s an obvious application,” says Random House’s Vitale. “Other services that trade online are using it.’

But like so much of electronic commerce, it is far from clear whether people want these technologies and services. “It’s slightly scary, isn’t it, being personally typed?’ suggests Kathryn Court, senior vice president and publisher of Penguin Books. “It seems narrowing, the opposite of what reading is all about.’ And Court wonders if computers will be superior to the old practice of local booksellers recommending books they’ve read to their customers.

But computers can do things people can’t. Amazon.com, boasting more than 80,000 visits a day, is a natural for advertising, and it’s not farfetched that people’s book preferences could lead Amazon.com to direct a whole chain of electronic “affinity’ pitches--in other words, taking your affinity for certain kinds of books and projecting an interest in potentially “lifestyle-com- patible’ consumer goods. Say if you buy Clancy, you’ll buy Jeeps, vodka, cigars . . . .

This is a touchy subject, and it’s not surprising that Bezos declines to say whether affinity marketing is in Amazon.com’s future. It’s also hard to predict whether the company’s still heavily cyber-savvy clientele will take kindly to commercials. “We have never attempted to sell an ad,’ Bezos notes, though he won’t rule it out in the future. But this summer, I noticed something new: Click a specific book, and Amazon.com may pitch you the two or three other titles most often purchased by buyers of that book. It’s the beginning of what appears to be an impressive and useful service, but how far will customers want it to go? If the pitches wander afield from the world of books into cars and cigars, where does the virtual bookstore end and crass marketing begin? Who really owns that private and potentially valuable customer profile?

The cyber marketers emphasize that this is, after all, the Internet, that business will be “listening’ to customers, and if you don’t like pitches you’ll be heard. I’m not so sure. In talking to Internet experts, I kept bumping into an emotional undercurrent, the sketchy expectation that Amazon.com would be fairer, cooler, more attuned to Net etiquette than current and future competitors. Perhaps, but they still want your number. Barnesandnoble.com may be cluttered with advertisements, but only Amazon.com demands that you hand over your phone number when you place an order.

Barnes & Noble appears to be ready to pay whatever it takes to get your electronic business. As a test, I ordered books the same Thursday morning from both firms. Amazon.com promptly e-mailed me, confirming my order, and then nine hours later informed me the book had been shipped (I paid $7.95 for two-day delivery). After confirming my order, Barnesandnoble.com took two days to e-mail me that it had been shipped, then, without my asking for it, upgraded my order to one-day shipping. UPS delivered it on Saturday for a penny less than did Amazon.com, which trudged in Monday afternoon.

The price was another surprise: $25.42 from Amazon.com, $25.41 from Barnes & Noble (including two-day shipping and a 30% list discount) for a book that retails for $24.95 in stores where discounts range from 10% to 30%. The upshot: Electronic bookselling is only significantly cheaper if you’re buying a book that’s not discounted in stores.

*

Amazon.com may also find it difficult to match the Tom Clancy factor, which is to say Barnes & Noble’s tremendous sway with publishers and authors. (The week of Amazon.com’s public offering, Clancy chatted on Barnes & Noble’s site on America Online, proving the retailer’s might.) Barnes & Noble announced that the New York Times’ 50,000-plus book reviews would be linked to its online bookstores and said more joint ventures were on the way. Nearly every top publisher pays “co-op’ dollars to Barnes & Noble to prominently display its major titles. It’s an undeniable fact of publishing, as critical as the role of the New York Times Book Review in the sales of a book, and the online world may only strengthen this tightly controlled web of promotional ties. “Barnes & Noble can cut a deal with Dilbert creator Scott Adams for his next book,’ says Craig Bibb, a retail analyst at Paine Webber. (The author has already appeared on a Barnes & Noble chat). “They would give preferred placement at the stores. Amazon can’t compete with that.’

Then there’s the other shoe the industry is waiting to drop. Borders Books is expected to begin electronic bookselling later this year (borders.com). And Amazon.com isn’t merely competing with the kings of retailing; it’s being indirectly challenged by its major distributor, the Ingram Book Company, which supplies 59% of its titles. Ingram recently signed up Crown Books, the 125-store Lauriat’s chain, and cbs.sportsline.com to sell books online.

In the meantime, the $54 million raised through Amazon.com’s public offering may provide a brief cushion, even against a giant retailer. “We will not allow ourselves to be at a disadvantage in anything that’s important to our customers,’ Bezos promises. “Speed, price--we’ll be competitive.’ If need be, he says, Amazon.com may even subcontract major suppliers to send out books.

Bezos believes the giant booksellers’ advantages evap- orate online. “We’ve been doing this 23 months,’ he says. “That gives us an extraordinary advantage.’ Minutes after issuing his corporate challenge, Bezos unlocks an unmarked door and, leads me into a noisy room crowded with tangled nests of multicolored cables and a couple of refrigerator-size Digital Equipment computers. This is the hardware and software that automatically replenishes Amazon.com’s online book- store, responds to searches for obscure volumes and records your every keystroke. My first reaction is surprise at how small and ordinary it seems, followed by amazement when I consider the expectations housed within the confines of a room not much bigger than a major bookstore’s checkout station.

But whether history favors Amazon.com-style pioneers is an open question. It wasn’t innovation that allowed Microsoft to eclipse IBM and achieve a near monopoly on basic personal computer software; nor has a lack of innovation stopped Microsoft from whittling away at the market share of Netscape, whose revolutionary World Wide Web browser effectively started the Internet explosion. In the same vein, will the deep pockets and old-fashioned marketing clout of Barnes & Noble and Borders, as many critics believe, ultimately erode Amazon.com’s advantage?

It’s a bet Bezos is willing to take. “In most markets two or three companies have brand names,’ he says. “There’s Nike, Adidas and Reebok; Hertz and Avis. The Internet is the same.’