Speaking in Amazon's Defense

It seems funny to think of writers worrying about "space limitations" when penning their screeds for Web publication. After all, the Web is bottomless, as a friend of mine says -- hmm, not sure I like the connotations of that! -- and Web pages can be as long or deep as needed. So why worry about the length of something?

Because Web readers like short pieces, that's why. And here at RealMoney.com and TheStreet.com, short, tight articles are part of the theology. Columnists try to squeeze thoughts into 800 words or so, and when we run longer ... well, maybe we won't run, period.

So Tuesday morning, when I was writing about the present realities at Amazon.com (AMZN Quote), triggered by the rumors (which proved true) about Chief Operating Officer Joe Galli leaving for greener pastures, I had to cut out a section I really hated to lose. I want to take a second whack at this, and expand on the material I wound up cutting.

I want to do this because I think it is absolutely critical to understanding Amazon's situation -- and more, because I think it applies to almost every dot-com.

Consider this a defense of Amazon, a rebuttal of what I wrote earlier, if you will, penned on behalf of Amazon by yours truly. Amazon, of course, had absolutely no input into this, but they're smart people, and if they had the chance, I think they'd try to counter my two points with these answers.

Trouble is, they'd be wrong.

No. 1: I wrote, "First, I'm deeply disappointed that Amazon has diverged so much from its business plan."Amazon.com was supposed to be a lean, mean dot-com machine, enjoying all the benefits of that world, vs. all the costs and problems of bricks-and-mortar bookselling. But it has become the opposite, an expensive, high-cost operation stuck selling low-price, low-margin goods.

Yes, Mr. Seymour, but wait a minute: In Web-based businesses, flexibility is all. The ability to turn on a dime, to change the business virtually in midair, is a hallmark of a well-run Web operation. Speed, after all, is one of the most valued characteristics of a Web-business management team.

Um-hmm. Sure is. I preach that daily, and it's true: Managing in the Web Era, especially managing Web businesses, is a midair act, with few fixed points of reference and no eternal verities.

Save one, perhaps: Tell your constituencies what you're doing. Sure, change fast, rejigger the business, reorient. Set new priorities. But when you make fundamental changes in the business model, especially the cost-and-revenue part of that model, give your investors -- whether angels, VCs, institutions or public shareholders -- a clear sign of what you're doing.

I think Amazon.com has done a good job with many things, but I think being explicit in public on the fundamental, structural changes it has made in its approach to the business doesn't appear on that list of things well done.

As a result, many investors are in a business that is not being run the way they think it is being run.

No. 2:I wrote, "Amazon has become a high-cost purveyor of low-price goods, bearing thin to negative margins, thanks in large part due to its commitment to superb customer service." Great customer service is a noble thing, and I like it myself, as a frequent Amazon customer. But it changes the cost model. And if you want to get to profitability, you have to hold down the costly things.

Oh, Mr. Seymour! You are such a hypocrite! You say you like good customer service, and imply that that's one reason you're an Amazon customer. Then you turn around and knock us for providing good service!

Listen, we're serious about this. Talking about customer service with other e-commerce players is always an odd experience. Many give the notion that they give superb lip service, talk a good game. Then you go to their site and find limited help. You send them an email and it goes unanswered for weeks.

Not at our Amazon, Mr. Seymour.

OK, granted, all. Amazon has not only the best customer service in the online world, but maybe the best in retailing, period. Nordstrom, Neiman's, Executive Jet Aviation, Tiffany, all those other places in the physical world that offer great service could learn a thing or two from Amazon.

But when you have high costs from that noble effort on one side of the ledger -- real, tangible costs -- you have to make some kind of adjustment on the other side of the ledger to fund those costs.

But Amazon's revenue and pricing models are not keyed to the costs of selling great service. Amazon sells, as I said, relatively cheap stuff at relatively cheap prices, with relatively thin (and sometimes, nonexistent) margins. Sorry, but that doesn't add up.

Now that Amazon is beginning to leverage off that good reputation it has built for customer service in its books-and-music salad days, trying to sell that loyal customer base high-ticket items with much fatter margins, maybe things will come into alignment. Surely that's what lies behind Amazon's repeated comments about getting profitable pretty soon.

But while Web companies do have to build for the future, do have to buy customers for a while, and do have to incur losses in the process, there comes this ugly morning when you have to wake up and examine the underlying numbers.

With more volume, and especially with a product mix tilted much more sharply away from books and CDs toward riding mowers and TV sets, laser-based surveying systems and antique Persian rugs -- all available now, but only a tiny fraction of overall sales -- Amazon has a good chance to reaching profitability.

If it can bring itself to rein in its "Tiffany for the price of Target" schiziness.

The prosecution rests.