Glitch at Amazon Points Up Vulnerability of Web Firms
Amazon.com has garnered fame and a strong market niche by promoting itself as the bookstore that’s as big as the World Wide Web. Last week it discovered what it feels like to be a mom-and-pop grocery whose only store is snowed in.
The online retailer was shut down for about 12 hours Wednesday by what the company called “simple technical problems.”
Those simple problems had sizable implications. The company had to make contact with customers who tried to buy books during the shutdown, offer them a 10% discount on its stock the next day, and shoulder a dive in its otherwise soaring stock in the wake of the incident.
Amazon stock fell $2 on Thursday and an additional $4.25 on Friday, ending in the two days after the breakdown at $51.13, down more than 10%.
Although few analysts believe the shutdown will significantly affect the company’s overall sales, it was a pointed reminder of the vulnerability of companies that depend so heavily--if not exclusively--on the Internet to conduct their business.
“If you are Web-based and it’s your only channel of distribution, it’s an issue,” says Marc Usen, an analyst at Salomon Bros. who covers Internet companies.
With sales of just $38 million in its last quarter, the loss of a single day of sales would only amount to about $400,000 in lost revenue for Amazon. But Wall Street is valuing the company at $1.4 billion in market capitalization on the assumption it will continue to grow rapidly. Given such extreme expectations, it’s natural for Wall Street to take seriously any sign of problems.
Nor is Amazon the only company to feel the sting of technical failure in its key distribution and communications channel. Shares of E-Trade, a prominent online brokerage company, plunged by about 65% after it had trouble handling the heavy trading generated during October’s stock market collapse.
Amazon made light of last week’s problems, saying it was an internal problem that was fixed within a few hours and that the site remained closed longer only because the company has a policy of making extensive checks of its systems before going back online.
During that period, customers were greeted with a message that said: “We’re sorry! Our store is closed temporarily. If you enter your e-mail address, we’ll notify you as soon as we reopen.” Those who entered their e-mail addresses were offered a 10% discount on anything they purchased the next day.
The Amazon site also went down for several hours in June. The company said it could give no assurances it wouldn’t happen again. “It’s like Macy’s saying they won’t lose electricity again” after a blackout, said Amazon spokeswoman Kay Dangaard. “You can’t tell investors that it’s not going to happen again.”
But Amazon’s systems and the Internet on which it depends are far more fragile than the electricity grid. For one thing, Amazon is a relatively new company and knowledgeable programmers say it is operating on a patchwork infrastructure that requires major reworking to effectively handle the huge traffic it is experiencing. Although the company is building a new system, it is unclear when it will be in place. The company refuses to comment on its computer systems.
Equally worrying, experts say, is the dependence of companies like Amazon on telephone companies that have yet to learn how to handle heavy loads of Internet traffic with the reliability with which they have learned to handle voice traffic.
Analysts say system problems are less likely to affect a bookseller than an online brokerage or a service provider like America Online, on which people may rely for critical business.
And, fortunately, so far the problems have been few and short-lived. “These problems have been fairly sporadic and not debilitating to any company,” says analyst Lee Doyle.
