Silicon Insider: When Did Amazon Get Profitable?

I was wrong.

It's interesting how muted the response was to the news last week that — after six years in business and as the poster child for the dot-com boom and bust — finally announced real profits.

Amazon had announced profits before, but they were always a little fishy, leaving off the table little things like stock options and losses on investments. But there was no doubt about the fourth quarter of 2001: Driven by an extraordinary burst in the Christmas shopping season (apparently there was more fear of bombs at Borders than anthrax in Amazon boxes), Amazon finally crossed over into the Land of the Black Numbers.

So why the comparatively dampened coverage of the news? One obvious answer is that we are still in the aftershock of the bursting of the dot-com bubble. After looking at our demolished stock portfolios, we don't want to hear about e-commerce or e-commerce companies.

On top of that, most people who owned Amazon stock two years ago, when it went to more than $100 per share, had bailed out by last spring when it went below $10. Anybody that was left, who hung on for the three month rally that followed, were no doubt driven off on July 24 when the stock fell nearly 20 percent in a single day.

Since then, Amazon's stock price has made a long, slow climb, regaining all that it has lost since that dark summer day. But, except for analysts, nobody has much noticed.

There is a second, more subtle reason for the muted response to the news. It is that the same media that predicted the demise of Amazon are not especially thrilled to see it, Lazarus-like, return from the grave. Rather, we were prepared to write our Death of Amazon lamentation, complete with the ritual headline about how the emblematic company of an emblematic era had emblematically given up the ghost.

Sideways From Books

Why were we in the media so down on Amazon? Well, we weren't at first. Nobody in the word business ever objects to a successful bookselling business — certainly not reporters, all of whom secretly dream of that big best seller that finally liberates them from the newsroom. The idea of a delivery system that finally brought the Byzantine world of publishing into the digital age was certainly heady.

But there was always something a little weird about Part of it Jeff Bezos, whose wide-eyed look and excited patter seemed a little too much like a demented gnome. Then there was the business itself. The books we could understand, though it was hard to see where the profits lay. But then Amazon went sideways — into CDs, then video, then furniture and appliances, then after eBay in auctions, the used goods.

The company, unbelievably cash rich from its inflated stock prices, also went on an acquisition tear, buying, as Bezos now admits, not only companies in markets in which it wanted to compete, but also in markets it might someday maybe want to compete in.

To the outside observer, this all started to look like a New Economy version of the Old Economy joke: the one about losing money on every item, but making it up in volume. Don't worry, Bezos kept telling the slack-jawed analysts, we'll just keep getting bigger and — soon — the profits will come.

But the profits never came. And the skepticism about Amazon that followed, combined with an outrageously high Nasdaq, the surfeit of dot-coms with absurd business strategies, and the government's attack on Microsoft, that finally popped the bubble.

And now, here we are, two years later, after a thousand or more companies have died, Nasdaq remains under 2,000 and hundreds of thousands of people have lost their jobs, and now Amazon suddenly decides to start making money. It's enough to make a business reporter wish he stuck to obituaries and box scores. No wonder the response has been, "Oh … yeah. That's great. … Congratulations."

Was the Success in Spite of Strategy?

So while Bezos is literally laughing himself silly and opening the champagne, the task for us chastened media dogs is to figure out why we were wrong and what lessons we can learn.

The easiest answer to that, and I think the wrong one, is that Amazon's strategy — grow as fast as you can and profits will follow — is both correct and universally applicable to companies in the future. On the contrary, the closer you look at Amazon's success the more it seems that it came in spite of that strategy.

At the core of the company's success are the businesses it began with: books, CDs and videos (now DVDs). All are easily shippable, high margin items that are usually the result of either impulse buying (requiring a short ordering process and quick deliveries) or deep expertise (requiring a vast catalog).

Bezos' genius was to recognize that the Internet, combined with the infrastructure (UPS, Fed Ex, etc.) of the modern world, made online shopping for these items not only desirable, but preferable.

That was, and remains, the key to Amazon's business. Almost everything else has been fluff, distraction or a money sinkhole. Bezos won't say this publicly, but he knows it, as is apparent by the slowing M&A activities at the firm. That's not to say Amazon won't find another good business someday, but it will find it slowly and judiciously.

This more realistic appraisal of Amazon's success also challenges the "grow fast and profits will follow" model. In fact, the real reasons that Amazon is now profitable are: The company cleaned up its business by streamlining operations, improving performance and cutting costs; and its customers assimilated the buying process into their daily lives.

Lessons of Success

I've said it before — the Internet, like every other great technology before it, will see its biggest growth and its biggest payoffs only after the boom is over and the world's attention has turned elsewhere.

These days I buy most of my books, and all of my movies and music, from Amazon. I don't think about it. And when I can watch a show on TV or listen to a song in my car and merely push a button at that moment to order it, I'll buy even more from Amazon. So will millions of other people.

As long as Amazon understands this, it will only get richer and richer. If, instead, Amazon concludes the recent good news is vindication of its original strategy, then it will be only downhill from here.

What are the real lessons from Amazon's success?

1) Run a good business, keep costs down, and don't get distracted.

2) Even in the digital age, over the long run it's better to be the oldest than the biggest, to be familiar and forgotten rather than a flash in the pan.

3) Don't read your press clippings.

So, two cheers for Jeff Bezos and! Consider my next order an apology.

Michael S. Malone, once called “the Boswell of Silicon Valley,” is editor-at-large of Forbes ASAP magazine. His work as the nation’s first daily high-tech reporter at the San Jose Mercury-News sparked the writing of his critically acclaimed The Big Score: The Billion Dollar Story of Silicon Valley, which went on to become a public TV series. He has written several other highly praised business books and a novel about Silicon Valley, where he was raised. For more, go to And you can talk back to Silicon Insider via e-mail.