In the face of Kindle price cuts and wild iPad sales, Jeff Bezos is taking Amazon into new markets and onto every device he can. Will it be enough?
Jeff Bezos has been dismissed before. For most of the dot-com boom, he was assumed to be a one-shot wonder, inches away from having his bookstore, Amazon.com, (amzn) extinguished by Wal-Mart (wmt). Now, with Apple’s (aapl) mad rush into books and readers, people are starting to wonder again. But Bezos, judging by a sit down interview with Fortune last week, isn’t sweating.
So far, the numbers show he doesn’t need to. Last quarter, the company reported a profit of $299 million, up 68% from a year ago. Its ebookstore, which started with some 60,000 titles, now offers upwards of 600,000. And though the company won’t disclose hard numbers about its Kindle user base -- Bezos has said Kindle owners number somewhere in the millions -- its visibility in the hands of executives, soccer moms and twenty-something professionals reinforces its high-profile status as a go-to device for voracious readers.
But last week, Amazon slashed the price on its second-generation Kindle from $259 to $189 to undercut Barnes & Noble (bks), which dropped the price of its own eReader, the Nook, from $259 to $199, and announced a Wi-fi-only version for $149. Earlier this week, Barnes & Noble reported a larger-than-expected loss totaling 89 cents per share, eight cents more than what analysts had predicted. It significantly lowered its earnings forecast for 2011 but indicated it would shift more of its resources to the growing ebook market.
And while Bezos doesn’t view the iPad, and tablet devices overall, as a threat -- “It’s really a different product category” -- the iPad’s overnight success, along with Steve Jobs’ announcement that users had downloaded 1.5 million books in less than 30 days is a sign that the competition for eReaders’ dollars could be heating up – and soon.
One day after Amazon slashed the price on its Kindle, Fortune met with Bezos at Amazon’s new headquarters in downtown Seattle, a sprawling 10-building campus of glass, steel and concrete, to discuss the company he built from scratch and where it’s going from here.<!-- more -->
Fortune: Obviously, the Kindle’s price drop was in response to Barnes & Noble's price cut on the Nook. Did the iPad and its overnight success play a role, too?
Bezos: No. The iPad… I think there are going to be a bunch of tablet-like devices. It’s really a different product category. The Kindle is for readers.
Fortune: So far you’ve been capturing consumers. Amazon accounted for about 80% of all electronic book sales last year. How has it grown so fast, and can you keep it up?
Bezos: It’s hard even for us to remember internally that we only launched Kindle a little over 30 months ago.
Our strategy with the ebookstore is ‘buy once, read everywhere.’ If you want to read on your iPhone, if you want to read on your BlackBerry. We want people to be able to read their books anywhere they want to read them. That’s the PC, that’s the Macintosh. It’s the iPad, it’s the iPhone. It’s the Kindle. So you have this whole multitude of devices and whatever’s most convenient for you at the moment.
We think of it as a mission. I strongly believe that missionaries make better products. They care more. For a missionary, it’s not just about the business. There has to be a business, and the business has to make sense, but that’s not why you do it. You do it because you have something meaningful that motivates you.
Fortune: As the devices mature and the market grows, do you think the idea of what a “book” is will shift?
Bezos: I think the definition of a book is changing. It’s getting more convenient. Now you can get a book in less than 60 seconds.
But in some ways, books are also staying exactly the same. The whole narrative isn’t changing. The book is not really the container for the book. The book itself is the narrative. It’s the thing that people create.
There’s another way that it’s not changing, and that’s that the book -- the physical book -- is designed to disappear and get out of the way so you can enter the author’s world. So when you’re reading a physical paper book, you’re not thinking about the ink and the glue and the stitching. All of those things vanish so you can focus on the author’s words. The Kindle’s designed to be the same so when you’re reading, the whole device vanishes, so that you’re left with the author’s world.
Fortune: In the past, you’ve been a big proponent of lower prices for ebooks and an open opponent of the book publisher agency model, which allows the publisher to set the final retail price whether there’s an intermediary retailer or not. Now that you’ve switched to an agency model, will ebookstores like Amazon’s get hurt?
Bezos: No. First of all, there are a bunch of publishers of all sizes, and they don’t all have one opinion. There are as many opinions about what the right thing to do is as there are publishers. So you’re seeing that some of them are being very aggressive on prices, pricing their books well below $9.99.
Others are trying to do everything they can to make prices as high as possible. And what you’re going to see is a share shift from one group of publishers to this other group of publishers.
Fortune: Do you expect a significant share shift? When do you see that happening?
Bezos: It’s a significant shift and we’re seeing it already.
Fortune: What about your work continues to “rev you up"?
Bezos: When I wake up every morning, during my shower time, what I’m thinking about is new things that we can do.
We’ve got Amazon Prime. Customers love that. How can we make that program even better? What kind of inventions can we do to reduce our cost structures and our fulfillment centers so we can afford to sell products for even less? Those kinds of things are incredibly motivating for me, and I like the rate of change, I like the opportunity, the “canvas” upon which we can invent new things. And I am not alone in Amazon in that regard. We have a big team of people who are genetically predisposed to have fun while inventing new things. It’s sort of in our DNA.
Fortune: If you stopped someone on the street five years ago and asked them what Amazon was, they’d probably say it was an online bookstore. What do you expect people will say when asked about Amazon five years from now?
Bezos: I would hope people would say that Amazon is earth’s most customer-centric company, and that we work backwards from customers. Many companies sort of look at what their skills are and they work forward from their skills. They say this is what we’re good at, and this is what we’ll do. It’s a very different approach from saying here is what our customers need, and we will learn whatever skills we need.
Fortune: Speaking of picking up new skills to address consumer needs -- you’ve addressed some customer needs by making substantial forays into cloud computing with S3, Elastic Compute Cloud, and the Relational Database Service. What’s next for cloud?
Bezos: One of the things you’re seeing is that companies without any legacy are no longer building any data centers. They’ve already stopped. So that’s a testament to how powerful this model is. That the only people still building these data centers are the people that are temporarily corralled into that model because of their legacy. That model is more expensive, less flexible. It’s not just more expensive, but it’s also capital expenditures instead of pay-as-you-go variable costs like it would be if you were using Amazon web services.
And what we’re starting to see now -- and we’ve been seeing it for the last couple of years -- is big enterprises starting to use Amazon web services. So that if you ask what’s coming over the next five years, you’re going to continue to see that transition where even companies with legacy are starting to use Amazon web services. I think it’s very exciting.
Fortune: Of course, you’re also starting to go head-to-head with big enterprise with this business, right? Companies like IBM (ibm) see themselves in this space.
Bezos: We started working on Amazon web services six years ago. People forget because it’s grown so much, it’s more on our radar screens now, we’re doing it an innovative way. It’s not a me-too product. It’s a leader in this new industry, and so we don’t think of it as we’re entering this industry with all these big companies. We look at it as we’re doing something completely new.
Fortune: It’s come a very long way in a very short period of time.
Bezos: The right analogy here is the electricity grid. A hundred years ago if you wanted to run your factory, and you needed electricity, you had to become an expert in power generation. You had to buy your own electric power generator. You had to maintain it. You had to make your own electricity. And today, because of Amazon web services, you don’t have to be in the power generation business.
It’s not a differentiator for companies. So if you’re going to build your own data center and buy your own server hardware and manage all your own networking gear, and all of the things that you have to do, it has to be done at an A-plus quality level. But it’s just the price of admission. It’s not your secret sauce. It doesn’t help you differentiate from your competitors.
Fortune: In the past, you’ve said that a company learns just as much as by its failures as it does by its successes. Do you still believe that?
Bezos: Well, the key is that the company has to experiment, and what you want to try and do is reduce the cost of experimentation so you can do as many experiments per unit time as possible so you can do as many experiments per week, per month, per year as you can --and they’re not experiments if you know they’re going to work.
So you want to do a lot of these experiments, and many of them will fail, and that’s okay. Because if you’re doing enough of them, there will be some winners. That’s the only mindset you can have if you want to invent. At Amazon, we’re very focused on invention. If you look at the things we focus on, we’re never trying to create a "me-too" product offering.
And by the way, there’s nothing fundamentally wrong with "close following." It’s a very common business strategy. You just say we’ll wait. Let all of our competitors do all the experiments. Most of them will fail, but we’ll watch very carefully, and as soon as something looks like a success, we’ll follow very closely. There’s nothing wrong with that, it just happens to not be our strategy.
Fortune: It’s certainly a safer route to take.
Bezos: It’s safer, but in a fast-moving arena like the Internet, it also can be difficult. It’s not easy to follow closely. It also can be a challenging strategy. I just happen to think the exploration and inventing strategy is more fun. It’s got its own strategies, but it’s way more fun.