Bezos to Shareholders: Better Days Ahead

Describing 2000 as a “brutal year,” Amazon.com (Nasdaq: AMZN) chief executive officer Jeff Bezos told his company’s shareholders that the long-range outlook for e-commerce remains rosy, with 15 percent of all retail sales eventually moving online.

In a letter sent to shareholders Saturday to accompany Amazon’s annual report, Bezos also acknowledged that Amazon itself lost money investing in the dot-com “land rush,” that the e-tail world favors large businesses over medium-sized ones, and that advances in technology will enable online merchants to widen their profit margins.

He also underscored forecasts for pro forma profits for Amazon by the fourth quarter of this year.

“While there are no foregone conclusions, and we still have much to prove, Amazon.com today is a unique asset,” Bezos wrote in the letter, which has become an annual tradition since the first in 1997.

Painful Year

Bezos opened the letter with a one-word description of the past year: “Ouch.” He also noted what most shareholders undoubtedly know: that Amazon’s stock has lost more than 80 percent of its value in the past year.

The CEO also commented in detail on Amazon’s decisions to invest heavily in other e-tail pure plays such as Living.com and Pets.com, both of which closed down during 2000 and caused Amazon to lose “a significant amount of money.” Though he did not include it on the list, Amazon’s investments also included Kozmo, which closed last week.

“We made these investments because we knew we wouldn’t ourselves be entering these particular categories any time soon, and we believed passionately in the ‘land rush’ metaphor for the Internet,” Bezos wrote.

Time Ran Out

In fact, Bezos maintained in the letter that given more financing and more time, both Pets.com and Living.com might have survived. However, he said that Amazon chose not to provide either with additional capital, given their short-term outlooks.

“In retrospect, we significantly underestimated how much time would be available to enter these categories, and underestimated how difficult it would be for single-category e-commerce companies to achieve the scale necessary to succeed,” Bezos wrote.

Future Bright

Bezos predicted that e-commerce growth will be fueled by improvements in customer service and the decreasing cost of bandwidth and computing power. Given current improvement rates, Amazon will be able to dedicate 60 times more bandwidth per customer five years from now for the same cost, Bezos said.

“Similarly, price performance improvements in disk space and processing power will allow us to, for example, do ever more and better real-time personalization of our Web site,” Bezos wrote. “We still believe that some 15 percent of retail commerce may ultimately move online.”

Currently, less than 1 percent of all retail sales in the United States are made online.

Profits Priority One

Bezos said a slimmed-down Amazon will view 2001 as “a year of focus and execution,” with profits by year’s end the single most important goal.

“We have a plan to get there,” Bezos wrote. “It’s our top priority, and every person in this company is committed to helping with that goal.”