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Sunday, July 26, 1998 - Page updated at 12:00 AM

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Inside Amazon.Com -- Its Stock Is Soaring, But Frugality Still Rules

Seattle Times Business Reporter

Soon after Jeff Bezos hired the first employee of his new company, then called Cadabra.com, he went out to his garage and made him a desk. From scratch.

"I called him to ask `How tall do you want your desk? I'm cutting the legs right now,"' Bezos recalled with a booming laugh.

Bezos later changed the name of his start-up to Amazon.com, moved out of his garage and went on to transform commerce on the Internet.

With a catchy name and a couple million dollars from friends, family and other investors, Amazon.com began to sell books on the World Wide Web in July 1995. This week, it posted sales of $116 million for the three-month period between April and June, up 300 percent from the same time last year.

Without opening a single store or posting a cent of profit, the Seattle-based company has taken a place among the most recognized retailers in the country and made Bezos a billionaire.

Today, hundreds of Amazon.com employees sit at desks identical to the one Bezos built by hand four years ago - a wooden door with 4-by-4s for legs, now made by a local woodworking company.

"These desks serve as a symbol of frugality and a way of thinking. It's very important at Amazon.com to make sure that we're spending money on things that matter to customers," said Bezos, 34. "There is a culture of self-reliance. (With the low-tech desks) . . . we can save a lot of money."

The company's penny-pinching culture hasn't changed since Bezos

worked out of his garage, but nearly everything else has.

As sales grow and Amazon.com's brand name becomes increasingly established, the stock price keeps rising. And rising. At its all-time low on May 22, 1997, Amazon.com traded at $7.87. On Friday, the stock closed at $124.25. That means if you bought 100 shares last May, your $787.50 investment would now be worth $12,425.

For Bezos, the stock gain is more of a distraction than a cause for celebration, and he fears distractions more than he fears any competitor.

Although the company has set aside roughly 9.2 million shares of stock to award its employees - making four senior executives worth tens of millions dollars - the staff is actively discouraged from talking about the stock or following the market.

Bezos holds a meeting with all Seattle-area employees every three months to tell them, among other things, to ignore Wall Street.

"I tell people that if our stock price goes up 30 percent, one of the dangers is that we start to think we're 30 percent smarter. That's just not true. If you think that way, then when the stock price goes down 30 percent, then you'll have to think you're 30 percent dumber," he said.

"I ask people around here, think about how do we create real value five years from now, because we can actually affect the stock price five years from now, whereas none of us has any control over what the stock price is tomorrow."

CEO drives a Honda

Bezos' personal life mirrors his business sense: Despite holding stock worth $1.3 billion, he drives a Honda Accord and pays rent month to month for an apartment in Belltown, a district of downtown Seattle. While Bezos can't control what goes on in his employees minds, he can - and does - shape the corporate environment.

Though Amazon.com is valued around $6.3 billion - the stock price multiplied by the number of shares - you would never guess it by walking around the company's offices in the Columbia Building on Second Avenue.

Phone books are stacked under computer terminals. The stained, gray carpet and dirty walls haven't been cleaned since the previous tenant moved out, and office improvements have amounted to little more than a dizzying maze of cubicle walls.

The corporate attire matches the surroundings: neckties are far less common than nose rings, and hot days bring out shorts and bare feet.

But the slack dress code does not mean Amazon.com promotes casual work ethics.

"Salaried associates should clearly understand that they will frequently work extended hours to help the company succeed. . . . You can work long, hard, or smart, but at Amazon.com, you cannot choose two out of three," states the employee manual. The message? expect to do all three.

The emphasis on productivity is so heavy, a computer function that allowed workers to see how many books were being sold that day was discontinued because it was too much of a distraction, according to a former manager. The company says the function was erased because it could provide sensitive information to competitors.

Obsessed with security

Security seems to be a companywide obsession. A spokeswoman refused to disclose how many employees the company had (there were 614 last year), parts of the distribution center are off limits to photographers, and workers are told never to speak to reporters "even to answer apparently innocuous questions," according to the manual.

Sources familiar with the company say that employees do in fact closely monitor the stock price. But unlike, say, Microsoft, where workers have been known to have stock prices flash across their computers, the company's narrow focus is generally shared.

While Amazon.com may have an atypical corporate culture, its history mirrors hundreds of other young high-tech companies.

A Texas native, Jeff Bezos became intrigued by the possibilities of Internet commerce while devising computer systems at a Wall Street investment firm.

After whittling down a list of products that he believed could be efficiently sold online, Bezos came up with two possibilities, books and music. Both could be sold via an Internet site linked to an enormous distribution center, and thus offer more selection than a bricks-and-mortar store, he figured. Bezos settled on books because no single retailer owned a significant chunk of the market. Barnes & Noble and Borders each account for less than 12 percent of the nation's total book sales.

Although Bezos incorporated his fledgling business as Cadabra.com, he quickly discovered that people thought he was saying "Cadaver.com," and changed the name to Amazon, the Earth's longest river.

After moving to Seattle in 1994, Bezos cast about for investors, hitting up friends, family and friends of friends. One of the people he approached took his business plan to three people in the publishing industry.

"They very intelligently marked it up and said what was wrong with the idea and why they didn't think it was something they would bet on. Of course, this person did not invest. So the one person who did not invest probably got better advice than most of the people who did," said Bezos.

After getting enough money to set up the site, Bezos acquired several million dollars from venture capitalists.

`This is an investment phase'

While Amazon.com is touted as an Internet company, that doesn't accurately describe how it functions. Customers place their orders on its Web site, but the books are sorted by workers in distribution centers in South Seattle and New Castle, Delaware.

Trucks start pulling into the South Seattle facility at 5:30 a.m. and don't stop until late afternoon. The company would not divulge how many books come through the warehouse or even how many trucks arrive daily, citing competitive concerns.

Each book contains a bar code that is scanned by hand, and then placed on a bookshelf. Later, the book is retrieved and matched with an order. The book is then packaged, put in a large aluminum bin, and trucked to the post office. Generally, the process takes two to three days from order to delivery.

Part of the appeal of Amazon.com is the ability to order rare or out-of-print books. A shelf in the Seattle warehouse contains the special orders: on a recent morning, "Cherry Ames, Rural Nurse" shared space with "Trout Fishing in America," and "Barry Goldwater - the Conscience of a Conservative" among other titles.

Two years ago, the top-selling book on Amazon.com was "Creating Killer Web Sites." Last year, the No. 1 title was Jon Krakauer's "Into Thin Air," which suggests the company has broadened its customer base from computer geeks to the general public.

Amazon.com does not have to pay rent for retail space or maintain large sales staffs, so it can offer more titles that are often cheaper - anywhere from a few cents to a several dollars - than rivals Barnes & Noble, which has 1,011 bookstores nationwide, and Borders, with 2,142 stores.

At least, that's the idea.

$64.1 million in losses

As of June 30, Amazon.com had lost $64.1 million, and profits aren't likely for at least another year, according to most analysts' projections.

The losses are the result of an aggressive advertising campaign and internal-investment strategy, said Bezos.

Amazon.com's marketing and sales expenses more than tripled to $26.5 million in the three months ending June 30, from $7.7 million a year ago. Besides television and print ads, Amazon.com runs radio spots in which an announcer phones the Pentagon, Denver airport and the Boeing 747 factory in Everett to ask if their buildings are big enough to house "the world's biggest bookstore." The banners hanging on five downtown buildings with the phrase "Amazon.com wouldn't fit here" play off the radio ads.

"This is an investment phase for Amazon.com. We've been totally straightforward with everybody from the beginning that that's our strategy, and a lot of people believe in our strategy and some people don't. Reasonable people could disagree," Bezos said.

"Some people could say, `I'd be more comfortable if you rejiggered your business plan so you could make money now and grow from profits.' We believe that would be a short-sighted strategy. People who don't believe that, I'd say don't invest in our stock."

Despite the heavy losses, Amazon.com is heralded by most Wall Street analysts, who agree with its business plan and say the company is well run.

"They should be investing back into their business, and they are," said Ryan Jacob of IPO Value Monitor, a New York-based research firm. "We believe they are taking a prudent course."

The company, it seems, has become the stock du jour for two kinds of investors, those who see a potential windfall from book and music retailing on the Internet, and those who buy the stock in hopes of catching a market updraft and making a quick buck.

Most investors are individuals. Only 23.8 percent of Amazon.com shares are owned by banks, mutual funds or pension managers compared with 36.4 percent at Microsoft and 46.4 percent at Boeing.

Most investors bet on a company's potential. For Amazon.com, that means it must expand its offering from just books. In June, it began offering music CDs on its Web site. Videos are next.

But providing a slew of items on the Internet isn't easy.

The people who buy CDs generally make less money than book buyers, and are less likely to use credit cards, said Rick Ayre, Amazon.com's vice president and executive editor. That's a marketing challenge with no easy solutions, he said.

Despite the booming stock and investor enthusiasm, Amazon.com is still a young company with an uncertain future. Barnes & Noble and Borders are both aggressively marketing their Web sites, and the competition will undoubtedly become tougher. Finding enough programmers, writers and warehouse workers to fuel its rapid growth is a constant challenge.

Given the vastness of the Internet, Amazon.com must also keep focused on doing a few things well. The stratospheric stock price may prove a temporary distraction, but company executives know the real danger may lie in trying to do too many things at once. Without discipline and a clear vision, the plain wooden desks and no-frills office become nothing more than a corporate gimmick.

"Not only do you have to avoid the bad ideas, but you have to avoid many of the good ideas for reasons of focus," said Bezos.

"Ideas are important, but they are relatively easy. What's hard is taking that list of hundred ideas and ranking them and picking the three that we're actually gonna do. That's intellectually one of the most challenging things that happens every day in a company growing this fast, that sort of brutal triage of ideas."

Alex Fryer's phone message number is 206-464-8124. His e-mail address is: afryer@seattletimes.com

Copyright (c) 1998 Seattle Times Company, All Rights Reserved.

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