Amazing Amazon

January 30, 2008, 9:33 PM UTC

By Josh Quittner

Er, what recession? Online retail giant Amazon beat the Street Wednesday reporting $207 million in net profit for the fourth quarter. That’s a 112 percent increase over the $98 million the company hauled in during last year’s holiday season. Amazon also reported revenue of $5.67 billion beating estimates that were generally in the $5.4 billion range.

The company reported record sales, record operating profits and its fastest annual growth rate since 2000. That news wasn’t altogether surprising. Last month, the company also reported the busiest day ever at Amazon and even bested eBay , for the first time, claiming a record number of visits to its site in December. Nor was it surprising that the stock took a pounding after hours: Yet again, Amazon’s gross margins were closer to 6% than the 10% analysts wanted to see.

What is surprising — if you haven’t been paying attention, that is — is that, on a day when the Fed cut prime by another 50 basis points, Amazon is genuinely upbeat about the future. The Grand Plan is working. Indeed, Amazon anticipates 31% to 38% sales growth in the current quarter — the meltdown in the economy notwithstanding.

So what gives?

Amazon is a hit with consumers for the same reason it sometimes disappoints investors. Jeff Bezos famously refuses to manage quarter to quarter. His time horizon is more decade to decade. He wants to build a business that lasts, and the only way you do that is by thrilling your customers. He’s sung the same song since Day One of his long march: “Our focus has always been to be extremely competitive and to give customers the best prices and be very sharp at that,” he told analysts yet again yesterday.

“Focusing on the customer experience” is a mantra Amazonians chant endlessly, to an almost annoying degree. When reporters on Wednesday asked CFO Tom Szkutak questions about the world’s dire economic outlook and how that will affect consumer spending in the months ahead, he characteristically answered: “We’re focused on what’s best for the customer and improving the customer experience.” And: “We’re all about making sure we offer a great value proposition for customers.” And so on and on and on. It was effective: The press conference lasted 15 minutes because it was clear that nothing new would be divulged here.

It’s not that Szkutak was dodging the questions, exactly. The thing is, questions about the future don’t really compute to these guys. Amazon’s long-term game has always been about three things: Selection, price, and convenience. And when Bezos was laying down big bets (over the howls of Wall Street) in the late 1990s, building hugely expensive distribution centers around the country (and then the world) it was to ensure that the most logical, cost-effective logistics system would be in place when the customers finally arrived in number. That’s hell on margins for a while. But it brings in customers. And that — if it works long term — creates what Bezos Wednesday described as a “flywheel effect:” More customers means more sales and more sales means that Amazon gets to enjoy greater pricing power over its suppliers. Lower sales means more customers and the cycle begins anew.

Said Bezos: “Lowering prices is easy. Being able to afford lower prices is what’s difficult. We’ve been working on that for many many years now — and expect to be working on that for our entire corporate existence.” Today’s numbers show that Amazon’s customers, at least, have figured that out.

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