JOE GALLI, President and COO, Amazon.com

Moderators: Thank you. Well, welcome back for the DFC's final event, which is the concluding keynote address by Joe Galli. For most of the students here, we are reminded of Marketing D30, an exhaustive analysis we prepared for the Black & Decker case. Well, Joe, as illustrated in the case, is responsible for reestablishing market leadership for the Black & Decker brand name as they introduced new products and significantly improved customer service. After a highly successful 19-year career at Black & Decker, he joined Amazon.com in June 1999. Please welcome Joe Galli, president and chief operating officer of Amazon.com (applause).

GALLI: Thank you. It's an absolute pleasure to be here at Northwestern. I've only been at Amazon.com for eight months, but I've learned that we do have a very special relationship at Amazon with Northwestern and with Kellogg.

In fact, last evening we had our annual masquerade ball at Amazon.com - 2,000 people dressed up in, let's just say, highly eccentric costumes of all kinds. And it was a rather late evening, in fact, so if I'm a little groggy, you please forgive me.

But I ended up being cornered by a gentleman who is a - on the board of trustees at Northwestern. This is a gentleman named Ben Slivka, who we recently were very fortunate to recruit away from Microsoft. And Ben is an absolute brilliant technology leader at Amazon.com, and he was raving and raving to me about Northwestern, and he was thrilled that we were participating in this session.

So, anyhow. We have many, many other members of the Amazon family that have passed through Northwestern, and we're really excited to be here with you tonight.

Let me just start off by telling you a little bit about a decision I made last year that a lot of people ask me about.

I did spend 19 years at Black & Decker, the last six years as president of the company, the final four as worldwide president. And when I left Black & Decker, I was fortunate because I had some opportunities to look at different kinds of companies, and I made a decision that became a little more public than I would have liked to join Amazon.com as opposed to pursuing perhaps a more conventional path.

And people ask me all the time, why did I choose Amazon.com? And the answer to that question is real simple: I felt that after moving up the career path for 19 years, and after being in a traditional setting for that period of time, that I had to immerse myself in the new economy, in the world of e-commerce.

And after spending time with Jeff Bezos and John Dorr, who's a venture capitalist on the board of Amazon.com, I felt strongly that Amazon was the pioneer of e-commerce, that this company the leader in the space, and that I would be crazy not to put myself right in the center of what will be the most exciting, transformational technology of our time.

In fact, one suggestion I would make to any business student today is that, whether you either go to work for an Internet company or a company that supports an Internet company or a traditional company, boy, you've got to understand the Internet, and you need to understand the implications of what the Internet will do, because the Internet will change every company in every industry in every country. And that change is going to happen so fast, and it's going to be so significant that much of our conventional thinking about business is going to be rendered obsolete when this revolution is over.

And after being in the middle of this for eight months, I can tell you what's happened already is about two percent of what's about to happen to the world of business and commerce as a result of the incredible power of the Internet.

So I joined Amazon.com, and the last eight months have been just an incredibly exhilarating ride. Working with Jeff Bezos and the team he's assembled has been an extraordinary experience.

The Amazon.com team is a very strong and talented team. Jeff has worked very hard to assemble a wide range of very capable people from different companies and different industries in an effort to build a diverse, world class management team to take this company forward and to build something that we think could be one of the greatest companies ever created.

The vision of the company is real simple. We want to be earth's most customer centric company. We want to be the company that people think of when they want to buy anything online, any good - any form of - any product, any service, in any country. We want - when people think of buying something online, when they think of e-commerce, we want those people to think of Amazon.com.

That's an incredibly broad charter, and it creates all sorts of questions about how can you stretch your brand, and my goodness, can you really pull that kind of thing off? And we love those kind of questions because we believe that the power of our model is so significant, and we believe that the more different products that we add, the stronger our overall enterprise gets. And I hope to help clarify a little bit of our thinking to you here today.

To give you a batch up on the strategy, let me just tell you about what happened in the fourth quarter.

The fourth quarter this year was a defining moment in e-commerce. There were - you may recall back in the fall there was a tremendous amount of buzz about all the dot coms that were formed and spawned by the venture capitalists and heavily funded, and many of these e-commerce dot coms that launched last year or the year before our business model, many of them took a very large, call it a disproportionate percentage of their funds, and plowed it right into TV, into marketing, into advertising. And there was this race to attract customers to the Website in the fourth quarter. And in fact, as many of the experts predicted, e-commerce, in the fourth quarter of this year, exploded in terms of growth, and it was a Web Christmas. It was an unbelievable tidal wave of demand that we saw in terms of people going to the Internet for the first time to shop and buy Christmas and holiday gifts online.

But the defining moment came in terms of fulfillment, because most companies that rushed to get a Website up, to capture some of that demand that was moving online, most companies failed to put the right infrastructure in place, the right fundamentals in place, the right foundation in place, the right fulfillment capability in place, and therefore, disappointed the customers.

And what we were most proud of in the fourth quarter, in fact, we feel very fortunate that our team pulled off an absolutely heroic performance in the fourth quarter. And we shipped over 99% of our customers' orders in December, and in fact, we were delivering holiday gifts through December 23rd, and all other e-commerce sites shut down their commitment back around December 19th, December 18th, and virtually all of the companies delivered only 90% of the orders that they received.

So we think it was a defining moment, because now as we move into the year 2000, what we find is that this race to launch dot coms and to get a VC to fund them is now changing, and in fact, it's a little harder decision now to start up a small Internet company that will move into competition with Amazon.com, because the Amazon.com brand really did become synonymous with e-commerce in the fourth quarter, and this is the brand that people do trust, because we were fortunate enough to be able to fulfill our orders this fourth quarter. And we believe now that our strategy is easier to communicate, and it's more clear why we're doing what we're doing because of what happened in the fourth quarter.

So let's step back for a second. Eighteen months ago, Amazon.com was a bookstore, we were earth's largest bookstore, and the decision was made to take the platform that was created to sell books online and to expand that platform into an unlimited selection of different goods and services.

And in fact, in the last 18 month period, the company has introduced music and video and toys and consumer electronics and software and home improvement products and auctions and a concept we call Z Shops. And we've rolled out operations in the U.K. and in Germany, in addition to our U.S. operation.

So that's all been done in the span of the last 18 months. And the goal here is, people say, my goodness, aren't you concerned that the Amazon.com brand is a brand that means books? How are you going to sell TV sets and cement mixers under the Amazon.com brand?

And our goal is to establish Amazon.com not as a bookseller but as e-commerce. We want - when you think of Amazon.com, we want you to think of e-commerce. We want you to think of us any time you need to buy anything or learn about anything online.

And in fact, that strategy is working better than we thought. Over 50% of our revenue in the fourth quarter was from items that weren't books, so over half the company sales now are in things other than books, which is the - which is where we started. And as you know, we're just scratching the surface.

One of the obsessions of the company is selection. We believe that, because the Internet allows you to have unlimited selection, we don't have any walls, we don't have planograms, we don't have the constraints of Wal-Mart or Home Depot or Sears, and because of that, we intend to continue to expand the selection at Amazon.com into something that will be a breathtaking array of products, including many, many obscure items that people have such a hard time finding in the physical world.

We think that selection is a magnet. It's a service that we provide to help people in their shopping needs. And the research we do continues to reinforce that this breathtaking selection in Amazon.com is something that people are really excited about. It's far more important than price, by the way, although we do believe price is an important element of our strategy.

But you will continue to see the company expand selection, and you'll continue to discover items in the store that are obscure items that are unusual, that you wonder what on earth is this item doing at Amazon.com? And the answer is, it's - these obscure items are there because we want to have the place where you can find anything you want to buy online. And we want to - once you decide to buy it, we want to get it to you in a world class way.

So selection is this major part of our strategy, and we thought it was really important last year to make a declaration in terms of selection and that's why we rolled out so many stores in the course of 1999. And you'll of course see more of that coming this year.

There's an important component of the Amazon.com formula that you should know about that is really the foundation of the company, and it's really broken down into three core competencies that are perhaps easy to understand but really hard to do, and they're not the glamorous part of the company, but these are the three reasons why our company enjoys the success that it does.

And the three areas are: distribution, capability, our customer service network and our technical platform. And let me just touch on those three areas.

In distribution, we'd decided long ago that although we're a virtual company, and we don't have stores, and therefore we have an inherently more efficient financial model than Wal-Mart or Sears or Home Depot because we don't have to spend eight or $10 million dollars to put up a store, we never have to buy a store, we're a virtual company, but we still need to have fulfillment capability, as opposed to outsourcing fulfillment to distributors and to manufacturers.

And the reason we feel strongly about that, the reason we feel strongly about having our own distribution capability, is because we want to control the customer experience, and we believe that consumers in this country and worldwide have never really seen the kind of customer service that we can provide if we really achieve our mission and do it right.

So we built out a network of distribution centers this year in anticipation of the dramatic growth that we're seeing with online shopping.

So in 1998, we had two distribution centers in the United States, one in Seattle and one in Delaware, and over the past 12 months, the company put up distribution centers in Atlanta, in Kentucky, in Nevada, in Kansas, and we acquired one in North Dakota. And so we added that distribution capability, 3.2 million square feet, to the existing two DCs that we had originally in Amazon.com.

The reason we put all those DCs up, and we did spend $320 million doing it, and we - and there was quite a bit of press written about it, but the reason we put all those DCs up is because we wanted to allow the company to grow without constraint. And in fact, those DCs can really fulfill orders that would be well in excess of $10 million dollars in revenue, and we're going to report revenue this year that's something over 1.6 billion. So we're using just a small percentage of our overall capacity.

So you say, well, that doesn't - why would you put up all those DCs so early? That seems like an unbelievable amount of money to spend in advance of the sales. And in the world of the Internet, the answer to that question is, in the world of the Internet, the pay as you go model leaves you in the dust. And when you're in a land rush environment, it's our feeling that you've got to be bold and put yourself in a position to capture the market as it's emerging, and it's emerging very quickly here in the world of e-commerce.

So we put those DCs up, and that's why we were able to race so many new initiatives to market in the course of 1999. And in fact, that's why we were able to fulfill over 99% of our orders, and the other companies that we compete with really struggled through that process.

So we have these distribution centers up, and it's our vision now, as we go forward, to revolutionize the way in which goods flow from manufacturers through our distribution network and on to the consumer. And that can be to the consumer's home or office or job site.

So we're trying to take that distribution system that we've put in place, and we are working very hard to reengineer the entire supply chain in a way that's never been done on earth before.

There's never been a company that's really thought through how to take goods from the manufacturer all the way to the end consumer en masse, where you can ship one book at a time, or one television at a time, or 30 books at a time or 300 at a time. And by the way, the reason nobody's ever done this, because it's really hard and it's really complicated. And I could tell you, after being there for eight months, it's not going to be something that'll be easy to copy.

But we have such a head start at this process, and we're so excited and encouraged about the progress that our team has made, that it's looking like this strategy is a very powerful part of our model at Amazon.com.

We recruited an - we'll call it an unconventional leader of our distributor network this year, a gentleman named Jeff Wilkie. Jeff Wilkie was at Allied Signal, and he was a general manager of a pharmaceuticals unit, and he's a Princeton/MIT guy that specializes, not in distribution, but really in 6 Sigma and different kind of operational excellence.

And initially, some folks from Wall Street asked me about the choice of Jeff Wilkie, they thought it was a curious choice because it wasn't yet another Wal-Mart distribution executive that we recruited (laughter). And we said, if we continue to recruit Wal-Mart distribution executives, what we'll end up with is a iteration of what Wal-Mart's already done.

And what we want to do at Amazon.com is not copy Wal-Mart, we want to revolutionize the supply chain. We have to do something very different.

And Jeff Wilkie brings - and this guy's actually a brilliant operational leader, the best I've ever seen, and he's done amazing things in the short time he's been with the company.

And I'm so happy that we didn't fall for that warmed over Wal-Mart strategy direction, and we're coming up with something different. So we will be pioneers when it comes to the logistics and supply chain, and the prospect here of doing something that's really special for our customers is very exciting.

Customer service is the second foundation element of the company. If you've ever - how many of you are Amazon.com customers? OK. Hmm. We've got to work on the percentage here at Northwestern. But this is somewhat encouraging.

So as you know if you're a customer, and if you're not a customer I encourage you when you go back tonight to your dorms or your apartments sign up immediately and try this so you can see for yourself.

So if you're a customer, as you know, when you buy something from us, we are obsessive about keeping you posted on the status of your order. And if you ever call us, we really do try to bend over backwards to help you with your order.

And in fact if we make a mistake, and we do make mistakes, we try to make as few as possible, but if we ever make a mistake on an order, our customer service people have been carefully trained to do whatever is necessary to keep you as a customer happy with Amazon.com.

And in fact this customer service is one of the brilliant strokes that Jeff Bezos installed early on in the formulation of the company. We don't recruit typical customer service people in our CS installations. We look for very intelligent, articulate, highly motivated people that work our phone lines. Of course, they all are incentified with stock options, and they're all very much an integral part of the company. And in fact over 20% of our customer service representatives are bilingual or trilingual because over 20% of our business is outside the U.S. And we have so many customers that call us even in the US that speak a foreign language.

So that customer service capability that we've got is really an extraordinary dimension of the company. And I can insure you, it's really hard to build customer service.

And what we've tried to do with this is to develop a 7 by 24 capability that's never been seen in the history of commerce.

So on Christmas Day you could call us at 6 a.m. or on Thanksgiving Day you could call us, and we had people working the phones and working e-mails so that our customers would always have the ability to check on their orders or to buy something and to get some help.

So many, many of the other - of the hundreds and hundreds of other dot coms have learned that customer service is not something you can just pick up the phone and outsource and have somebody else handle for you. Just like distribution. Many, many other dot coms have learned that it's not so simple to handle these - to put these elements in place, and these are things we're fortunate - we feel fortunate about having done.

The third part of our infrastructure is our technical platform. This is something that people sometimes don't understand.

We've created one of the world's greatest technology companies, and although we're called a retailer, many people, in fact, Mary Meeker, who is an analyst at Morgan Stanley, calls Amazon.com a software factory.

And the reason is, we have over 1,000 software engineers, programmers, and these are brilliant folks, and their mission in life is to change the way people will buy and discover things online, and to develop a technical infrastructure that's something that is superior to anything else in the world today.

So that technical platform is something we worked very hard to build, and we believe that now that we have this platform in place, we have the ability to take that platform and launch some additional initiatives that will monetize our company and help our customers and partners, and I'll share a little bit of that with you as I go.

So with those foundations in place, we believe that we're - Amazon.com is uniquely positioned as we go forward to capitalize on what may be the fastest growing industry of all time, and that's e-commerce.

In fact, if you look at just the retailing part of the world, there is a $5 trillion market called retailing that we think we can pursue, and that doesn't even include the B2B space, which is massive, and that doesn't include the services space, which is significant. And all those areas are opportunities for Amazon.com to pursue with the platform and the model and the branding that we have in place today.

And you're going to read a lot about us in the coming months as we continue to enlarge our presence online, leveraging that platform.

Let me talk for a moment about the power of the platform and our philosophy about working with other companies. We, in our last conference call with Wall Street, we shared a strategy that said we have worked really hard to build this brand name, Amazon.com, and this technical platform, and we believe now that we can enter into relationships with other companies that will be really good for our customers, and really good for our partners, and really good for Amazon.com from a financial standpoint.

And in fact we launched a credit card deal with a company called NextCard, an online Visa card Internet company. This is a deal where Nextcard agreed to pay Amazon.com $150 million over the next five years. We'll launch an Amazon.com Visa card, we'll market it on the site, and we believe we can offer our customers a superior credit card experience. And of course for our investors this is a wonderful way to augment the profit stream of the company.

We launched a deal last fall with a company called Ashford.com, which is the leading luxury goods e-commerce company. They sell loose diamonds and Mont Blanc pens and some fabulous objects. And this was a deal where Ashford.com decided that in order to launch their company the right way, the best move they could make was to team up with Amazon.com. They actually gave us a percentage of their company, in terms of equity, and they're going to pay us $60 million over the next year in exchange for Amazon.com delivering a percentage of customers to the Ashford site.

And this is a relationship that we would never be able to pursue if we didn't have the brand or the platform that we have in place today. But now that we have that brand and platform, we are able to develop these win-win relationships that are very good for our partners and very good for our company, and good for our customers because it expands selection.

Last night we announced a relationship with a company called GreenLight. This is an on-line auto play. So this is a company selling cars online. And GreenLight announced that there will be a relationship between Amazon.com and GreenLight, and in exchange for over $80 million over the next five years, we will help GreenLight get customers and market cars through the Amazon.com customer base.

And so you see what we're doing is we're pursuing our vision of allowing customers to buy anything they may want to buy online. In some cases we'll do it through out own network. In other cases we'll do it with a third party like GreenLight. When we do it with a third party it's good four our customers because they get more selection. It's good for our shareholders ultimately because the financial implications are really good for our company. And it's good for GreenLight because these companies - start-up companies today are increasingly learning that if they don't team up with someone like Amazon.com, it will be very tough to get traction in a very competitive space.

So you will see a lot more of this kind of thing as we shared with Wall Street as we go forward, and this is a major part of the strategy, a major part of Jeff Bezos' vision early on, is to build something so powerful and so special that many people will come to you, to want to work with you and to develop these win-win relationships.

The other thing I thought you'd be interested in is our global plan. We last year developed Amazon.com UK and Amazon.com Germany. So we have integrated operations in both the UK and Germany. Both of those groups represent our fastest growing businesses.

We had a phenomenal year in Europe in 1999. We have a 50,000-square meter warehouse in Germany, brand new warehouse, that will be operational in the second quarter. We have a 50,000-square meter warehouse in the UK, also will be up in the second quarter.

And we're developing a cluster strategy in Europe where we take our UK mother ship and we'll serve surrounding countries like Ireland and Scandinavia, and then out of Germany we'll serve Austria, Switzerland and the eastern part of Europe. And you'll continue to see us develop clusters and expand in Europe and in fact world-wide as time goes on.

We feel very fortunate today. Over 20% of our orders that we take here in the U.S. are from customers that live outside the U.S. In fact, we shipped products last year to over 140 countries. And the Amazon.com brand has amazing presence worldwide, and this is the power of the Internet. It's just so global and it's just so pervasive.

And so we get so many e-mails from our customers all over the world that want us to set up operations, it's an interesting part of the overall model.

So anyhow, the company is very much a global company, and I think what you'll see as time goes on is that Amazon.com will expand our product lines in more countries and offer more services and more innovations here, and hopefully this foundation we have in place will allow us to do that in an increasingly accelerating fashion.

So let me talk to you a little bit about the kind of place Amazon.com is to work and the kind of people that we hire.

We have a unique culture in the company. It's an extraordinary culture. The company has a very special esprit de corps. It's like a family and it's a very team-oriented environment. It's not political. It is an environment where people are very achievement oriented. There are a lot of very smart people that are very driven and they work very hard because there's a vision in the air, in the halls of the company, and the vision is we want to change the world. We want to make the world a better place in terms of commerce. We want to help people in the way they shop which is a fundamental in anyone's life.

And so you have this unbelievable energy level in the company today, and people who visit us walk away after meeting five, six, eight people at Amazon.com, and they will routinely comment on the consistency of the vision and the energy and the excitement with the people in our company.

We, because we're growing so fast, and we're only a five-year-old company, we do give people a lot of responsibility very quickly. We have a lot of very young people in very big jobs. And in fact we just recently reorganized the company to create roles that will be compelling for high potential people that come into our company.

These roles are general management positions and we've basically broken down the company into businesses, business units. So we have a book business and a music business and a video business and a home improvement business.

And in fact there's eight of these general manager roles in the U.S. right now and that will expand significantly in the course of the next year in the U.S. and world-wide. And those general managers in the company have P&L responsibility and they really are CEOs of their business. They work with the suppliers, the technical platform and the distribution fulfillment, and they market the product lines, and the general mangers really search through the site to look for opportunities to cross-market and integrate their thinking with the other stores. And that job has become the really cool job at Amazon.com, and that job is a fantastic position to learn how to be a CEO because that's exactly what the job is, is the chief executive of a business.

So we've - Jeff and I have worked really hard to try to put more and more accountability in the hands of an individual in a general manager position, and we still have work to do here, but we believe that as the company marches forward and advances to profitability and beyond that that accountability, that general manager structure, will be an integral part of that, because you get what you measure in the company.

So we tend to recruit people at Amazon.com that have the ability to go - to achieve great things in the business and to achieve positions of significant responsibility and leadership. We want the future general managers of the company.

And that's why we work so hard on campus recruiting. We want to bring people into our company that will do a great job in product management roles and in operation roles and that can grow on into these general manager/president roles as the company grows. And this is actually our greatest constraint today.

We are the fastest growing company to ever get to a $1.6 billion sales run rate. So no other company has ever grown this fast. And the thing that holds us back and keeps us from growing faster is the bandwidth, management bandwidth. And that's why Jeff has worked so hard to try to bring management into the company, and that's why we are so focused on campus recruiting.

But it's not an easy place to work, and it's funny, people look at the world of dot coms and it's a very compelling, exciting arena today. There is certainly opportunity from a financial standpoint to do much better than you could do in a traditional company because of the stock option orientation. And yet it's difficult because there is a tremendous amount of effort needed to keep up with the intense pace in a place like Amazon.com.

The Internet goes so fast that the intensity, the speed in which decisions are made, the pace in which things get done, is 2x, 3x over a traditional fast-paced company.

In some cases we make the decisions before we should but you have to or else if you end up making no decision, you lose. You lose on an opportunity.

And at Amazon.com what Jeff has inculcated into the company is a spirit of innovation that's really extraordinary.

So we have people that roam the halls that are really brilliant people that think all day about really far-out innovations, and we have meetings every day about new ideas, new initiatives.

People all throughout the company will routinely recommend ideas that no one in the senior management has thought of but that might be the next really cool innovation, the next big idea for Amazon.com.

So it's a place that breeds this innovation, and it's an incredibly energized setting, and it's a place where the intensity and the pace is so fast that it's not for everyone, but for people who come there and like it, there's nothing, there's nowhere else they'd rather be. And that's why there's so much loyalty and commitment to the company. So it really is an extraordinary setting.

So it's interesting, people talk to me about the Amazon.com future and the volatility of the company, and the stock price goes up and down, and boy, when is the company going to make money. And as you get into the company, and as you get into the world of the Internet, what you learn is that there are a couple of certainties.

One certainty is that the Internet is going to transform every company, every business that anybody gets involved in. And so once again, if you - as you move on from business school, I just really encourage you to be really focused and really good on this Internet part of the equation. And if you're in an Internet company, you really see how traditional companies deal with this transformational technology.

There are so many companies still in a state of denial that you can't believe it. We have thousands of suppliers and we work with a lot of partners and we, of course, we're recruiting a lot of competitors every day.

And what we see is that there is - most companies still don't get it. They still don't quite understand the speed of the Internet, how the Internet puts the power into the hands of the consumer. They don't understand how the Internet changes pricing models. And I would just really encourage everyone to make sure you don't fall into the trap of thinking this too will pass, and the traditional structures will prevail, because everything is about to change.

And the volatility of Amazon.com and the fact that the company is in an investment phase and loses money today is something that gets a lot of ink, but something that we - we're really excited about our future and we just believe that if we stay focused on customer experience and stay true to our mission, we believe that what we're building will be an incredible profitable company long-term that will fundamentally change the way people shop, and that will be a very exciting development and something that's really a lot of fun to work on.

Anyhow, I hope I've given you a little bit of a sense of Amazon.com. I would now love to open it up for questions and answer, and maybe clarify what you have on your mind about the company.

AUDIENCE: What exactly (inaudible) with a traditional software company. People?

GALLI: Well, I think it depends on - OK, if the company is a manufacturer or a retailer there's a big difference, right? I think manufacturers have to learn that selling to a company like Amazon.com is very different than selling to Wal-Mart or Home Depot.

For example, Amazon.com - many manufacturers spend a lot of money on things like full color packaging or point of purchase materials or expensive displays for stores. And all those costs are a waste of money in the Internet.

And so our model - we need manufacturers to give us a box with a great UPC code and to save all the money on in-store materials and, by the way, the sales representatives who call on stores, all that is a waste of money on the Internet. It's unnecessary because we sell online.

So what we need is lower prices and we need a different - so manufacturers need to get it, and some of them are getting it, and they're capitalizing on the Internet. And others are terrified because it's a change.

Retailers are going through an interesting time. Wal-Mart was built with a model where their stores have a lot of autonomy, and in fact they have different pricing in every store. And the Internet says you have one price everywhere.

So it will be interesting to see, and I don't now what will happen. How traditional retailers will respond to the Internet with some of the fundamentals like store autonomy in pricing I don't know. I do think though that all companies will have to figure out an on-line strategy. Next. Yes?

(Question from the audience)

GALLI: Our distribution model's very different than Webvan. We believe that our model is to have vast selection across a wide array of products in very large automated DCs and to deliver to the consumer in a time frame that the vast majority of consumers have, based on our research, have said is appropriate.

And we are focusing on selection and service, and we believe that the capital efficiency of our model is very compelling and will result in much lower prices.

At the same time we recently announced an investment in a company called Kozmo. Kozmo is a one-hour delivery service that's had phenomenal success in Manhattan, San Francisco, and now in Seattle. And we invested in Kozmo because it's a different model and we want to learn about the last mile, and we think Kozmo's got a very compelling model as well. Yes?

AUDIENCE: Yes. Given that many of us in this room have made or will soon be making a transition to an e-commerce environment from a traditional environment, I was wondering if you could give us any advice or insight on that process given that you just left Black & Decker and came to Amazon.

GALLI: Yeah. I think that you have to do is when you go from a traditional company to an e-commerce company, you have to forget all you learned about politics and what you want to do is bring a results orientation, and you forget optics. In traditional companies you tend to worry about how the presentation is formatted, and is the binder thick enough to impress, and if you're in the office on Saturday you impress the boss. Those optics things are irrelevant.

In the Internet it goes so fast that you don't waste time on things other than what really matters. And that's what I love about it.

In terms of the technology, it's interesting. Skills that make you successful in traditional companies also make you successful in technology companies. And the skill that's in the greatest demand today in Silicon Valley is leadership. Not technology, not strategic planning, not operational excellence, but just leadership.

There are so many really bright people that skip the part in their careers of learning how to manage other people and mentor other people and develop and coach people and do performance appraisals and upgrade their organizations and restructure organizations. That whole process of leadership and mobilizing large groups of people, and convincing people to take actions you want them to take, that's a skill that's in great demand today.

So one of the things we're trying to do at Amazon.com is create an environment where we breed leaders, leaders in e-commerce. And we think if we can pull that off it might be one of the greatest things we can do.

So if you're making a transition from the traditional world to e-commerce, it's important to remember that you don't want to leave all their skills behind because some of this skills that really work in a traditional world are also highly effective in e-commerce. Just none of the baloney. Yes?

AUDIENCE: Joe, how do you stay focused and disciplines and make good sound operational decisions in an environment where you've recognized that you're not going to make money, where you don't have that, "Look, I've got to make a profit this quarter" pressure that's just always riding on an operation? How do you stay focused?

GALLI: Well, first of all, you can make your - if you're in a phase of investment and you're not at profitability, you can still make your numbers. So the focus - the accountability is on making a financial commitment. That financial commitment currently results in a loss, because the level of investment exceeds the current sales level, and we do hold our people accountable, and we have moved to a model where there will be increasing levels of accountability for the P&L and the balance sheet, push down as low as we can.

We believe in pushing the financial accountability down as low as we can and we believe that will lead to - that will greatly accelerate the pace in which we achieve profitability. So we're doing that today.

The other thing is, we're re-learning some things. Our business goes so fast that some of the things that work in Procter & Gamble and IBM and Black & Decker and GE and traditional companies just won't work here. The planning cycle, the measurement systems are too slow. And if we put traditional measurement systems in place it will restrict our growth and limit our opportunities.

And there are so many entrepreneurial people in Silicon Valley coming up with so many new concepts that we won't let Amazon.com fall behind. So we're trying right now actually to revolutionize the way in which we run a company. And that's - it's going to always include accountability, and we'll always be focused on making numbers. But it will look something different than what traditional companies do because it has to, because we go faster.

AUDIENCE: Joe?

GALLI: Yes?

AUDIENCE: One of the things that they teach us here in marketing is that you need to really know who your market segment is. And it seems like with Amazon.com, even before that you started off with books, but now Amazon wants to like sell everything to every single person, and basically you really don't have a segmentation strategy because you want to like sell to everybody.

So - I mean, can Amazon really do that? Can a business really sell to everyone, to everything, and really stay competitive?

GALLI: So we have a very clear segmentation strategy. Our customer is the on-line shopper. All online shoppers are Amazon.com's customer. And that's all we want. (laughter)

We'd be completely satisfied to capture the online shopping market in the world today, and we'll leave the rest for the other companies. (laughter)

We do believe - we believe actually - it's a little bit counter-intuitive. We believe the more products that we add, the better we get and the more compelling our store is. Here's why.

When you enter your credit card into the computer, let's say you're part of the demographic segment of Middle America, you're a little bit reluctant to make that first e-commerce plunge. You put your credit card in, you're not sure, you're nervous. You really don't want to spread that credit card around to 10 or 12 different companies. You want to go to a brand that you trust.

So here you discovered Amazon.com, you buy a book. Now you learn, hmm, I can buy all my electronics, all the toys for my children. I can buy tools for my workshop. I can buy all the software I need.

And what happens is as you add categories, what Amazon.com really does become is the online shopping source for all of your needs. And we believe the more categories we add, the stronger the brand becomes based on the charter of Amazon.com being online shopping. The Amazon is earth's largest river. Amazon.com is earth's largest store. And that's an integral part of the company.

So we actually feel strongly that our brand is strengthened every time we introduce a new category. We think we'd dilute the brand if we opened up a store. That would change the segmentation of the company. Next?

AUDIENCE: Joe?

GALLI: Yes?

AUDIENCE: Oh, I beg your pardon.

(Question from the audience)

GALLI: Well, actually our customers - first of all, we have the strictest privacy rules in e-commerce. No one can approach Amazon.com's investment in the whole notion of privacy and firewalls and the way we manage information.

We do have the most extensive database ever created in e-commerce, and we keep all the information from every transaction that's ever gone through Amazon.com.

Now your question is an interesting one though because our customers - the vast majority of our customers love the fact that we do something called collaborative filtering.

What we do, if you buys books from us, we will actually recommend to you here are videos and here's music you might like, and we do that based on the correlations that we're fortunate enough to have from all the 16 million customers that we've got.

So actually one of the real selling points of shopping at Amazon.com is that we will personalize the shopping experience for you, and we've only done 1% of what we will do.

So we want to take that data, aggregate it, and create a store increasingly that's your store. So you'll visit Amazon.com and you'll find the items you buy in a repetitious way, very easy to find, and you'll find other things that relate to your personal interests.

And again, that may not be for everybody, but for the vast majority of our customers, they love that aspect. Yes?

AUDIENCE: You said earlier the segmentation of the market (inaudible) Amazon's (inaudible) retail stores. They have like Wal-Mart, different prices in different stores (inaudible) price. But it seems like one of the interesting things of the Internet is one price per product. So it seems that one of the very interesting things (inaudible) pricing model. (inaudible) things like (inaudible) are coming in (inaudible) Do any of these - is it a possibility that you think any of these pricing models (inaudible) Amazon would fall under.

GALLI: So we introduced last year the dynamic pricing model with our auction business, and we believe there are certain classes of product where an auction is better than a fixed price model.

But we we've also done a ton of research and what we find is that the alternative pricing models represent a tiny fraction of what consumers say they are interested in.

So in other words, generally those sorts of models are more complicated to deal with, require more time which violates the basic premise of e-commerce and the whole notion of convenience.

Now there will always be some. There will always be a percentage of people that will want to spend the time or that will be interested in that kind of pricing, but it's again our experience that dynamic pricing is still what the vast majority of people are interested in.

With that said, we are doing extensive research and we have a very good command of what's going on, on the Web. And if our customers are looking for a different way to price, that's something we'd be interested in pursuing. Yes?

AUDIENCE: It's been said that in '98, Amazon - thank you - it's been said in '98 Amazon acquired JungleE in order to kill price-based comparison shopping and sort of destroy the category.

GALLI: That's not a nice way to say that.

AUDIENCE: But of course even if that's true, it has of course re-emerged in the form of companies like My Simon which of course has been acquired CNet. Other companies like eWonders and Frictionless Commerce, etc. How does Amazon see itself kind of responding to comparison shopping, and then if the answer is Z-Bubbles, how does that not cannibalize your own business?

GALLI: OK. We bought JungleE because the technology that was within the company was just extraordinary, and we were fortunate to have many of the members of the JungleE team that now pervade Amazon.com. And that was the greatest reason why we made the acquisition.

In terms of comparative shopping, we believe that anything that's done online to attract more consumers to the Internet and to make the Internet a better experience overall is good for Amazon.com, because we - and we also believe that most people who shop at Amazon.com don't rate price as their number one reason for shopping in our store with our service.

People shop at Amazon.com, the number one reason is for convenience. Number two is for selection. Number three is they trust the brand and they trust the fact that we have their credit card and they know us, and price needs to be competitive.

Comparative shopping tools tend to lead people to a lot of sort of vapor companies and a lot of smaller Internet companies that don't have a lot of credibility and have a model that's very different than ours, models that typically feature a Web site, no warehouse, no inventory, and you give them your credit card, and then they go try to find a TV set at a distributor, and then they try to ship it to you. And you'll find that the experiences can be bad.

So we actually like it when a consumer strays and tries another Internet site. And what we find, you wouldn't believe how frequent this occurs, people will be Amazon customers, they do comparative shopping, they go buy from someone else, and then they find out they need to come back home, and they come back to Amazon.com. (laughter) Who else? Yes?

AUDIENCE: Wal-Mart just recently announced the strategy to outsource basically their entire e-commerce initiative -

GALLI: I noticed that.

AUDIENCE: - to (inaudible) partners. And they also have a strategic deal with AOL which is fairly significant. What challenges do you see that causing for Amazon.com, and do you think Wal-Mart's strategy will be successful?

GALLI: It's an interesting question. Wal-Mart is a great company, and Sam Walton was a visionary leader, and we have tremendous respect for Wal-Mart. We - and, by the way, I have a personal interest in Wal-Mart - the CFO of Wal-Mart was formerly the CFO of Black & Decker, who I worked with for 10 years, so now he's down at Wal-Mart, so it's a small world. It's an interesting thing.

But to be honest with you, Amazon.com's focus is not on Wal-Mart or any competitor. We focus on our customers, and we believe that if we do a great job for our customers and we pursue our model of universal selection and unsurpassed service, that it doesn't matter what people like Wal-Mart or Target or Home Depot or Sears do, we'll still be able to get our share of the world of e-commerce.

The great thing about our model is that Wal-Mart doesn't have to lose for us to win. Wal-Mart is going to be a very large company. They have a very large market cap, 130 billion in revenue, 250 billion in market cap, and of course Wal-Mart will continue to flourish on into the future.

We do think that Wal-Mart's announcement was particularly encouraging to our team at Amazon.com because what Wal-Mart basically said is that look, we've been trying to develop an Internet store in Bentonville, Arkansas, for the last nine months.

In fact you may recall the press in the fall, Wal-Mart - actually IBM said that Wal-Mart is going to launch the mother of all Web sites. So you have mighty IBM teamed up with mighty Wal-Mart and after almost a year of effort the announcement four days after their launch of their Web site, after the analysts were less than impressed with what they put up online, four days later Wal-Mart announced that they weren't going to do it themselves after all, but they were going to move it to Silicon Valley, give a venture capitalist the Wal-Mart brand name in perpetuity, hand over 20% of the equity of the Wal-Mart.com Web site to a venture capitalist, so nine wealthy people in an office building now own 20% of it, and they're going to go out and hire a young Internet style CEO to run it because it's so different than Wal-Mart's mother ship.

So every engineer in Bentonville, every technologist in Bentonville was humiliated by that admission that they couldn't do it in their headquarters. And our people found it to be yet another declaration that this e-commerce stuff is not so easy after all. Who else? Yes?

AUDIENCE: We heard a very interesting presentation from George Shaheen about Webvan, and I'd like to ask about some of your customers who use Webvan, myself for example. I use Webvan pretty regularly, so I go to their Web site, order what little food I want to buy, and pretty - it's - been very loyal customer because it's very easy for me to do. What will stop me in the future just buying my music and my videos from Web Van as well and no longer going to Amazon?

GALLI: First of all, we own a stake in a company called HomeGrocer.com which has a strategy that's similar to Webvan. It's not quite as capital intensive, and we think because of that we'll be able to expand it faster.

But we do have with HomeGrocer.com a strategy of delivering groceries right to your door, and we're in different markets than Webvan today. So we understand the model.

The answer to your question is there will be nothing that will keep Webvan from selling you music or videos, and we fully expect that they will do that. They're going to need to, to cover the fixed capital that they're going to invest in the company. They're going to need sell a lot more than groceries.

But there's still going to be a world for Amazon.com which is the same sort of positioning. Web Van doesn't have to lose for us to win. I'm sure they'll be successful. I'm sure they'll sell a lot of things. But I also believe that the Amazon.com brand means something different than Webvan, and I think the Amazon.com brand and customer service and the selection we've got is very compelling to many online shoppers who are experienced with us today.

I could tell you that when you visit our Web site right now, what you see is about two percent of the technology that you'll see over the next five years. So we've done about two percent of what we think we can do in terms of technology. So we're going to pioneer a whole series of shopping innovations that will give people more reasons to buy from us and perhaps choose us over other options.

So anyhow, I have a lot of respect for what they're doing and it will be interesting to watch and see it unfold with that capital intensive model. Yes?

(Question from the audience)

GALLI: Ah, the profit question. It took 11 questions before we got to the profit question. (laughter) So that's very good. I have heard that question before. Thank you. I really appreciate you bringing that up because I was looking forward to getting into this.

Hey, the profit question of Amazon.com is a really good question, because what we're doing is really different. We're building a very large company and we're building this large company at a faster pace than traditional companies would go, and we're doing that because the capital markets have encouraged us to lose money, invest more now, more money than we'd have to invest if we were in a profit mode, so that we can achieve this land rush objective and get this company positioned to capture as much of the e-commerce market as we can.

Our view is that, let me assure you, there is no company more committed to long-term profitability than Amazon.com. What we're interested in building is a company that will be extremely profitable long-term. And that profitability will help us serve our customers.

You don't get to serve - our mission in the company is to serve customers, and you don't get to serve customers unless you make money, unless you're profitable. We will be highly profitable and there will be many reasons for that.

But we're not going to fall for sort of the conventional thinking. We're not going to fall into the trap that says, well, this is the quarter we have to be profitable, and then we have to start managing strictly to Wall Street, because that would - in a category formation phase with so many opportunities and with the Amazon.com brand basically having unlimited potential, that would really restrict where this company will go. And we intend to unleash this company's potential and not restrict it.

With that said, you'll see our march toward profitability will become very clear in the year 2000 and very clear in the year 2001.

You'll see our operational excellence improve dramatically. Last year we built five DCs. The last thing you can do when you're putting up 3.2 million square feet of revolutionary distribution center space is to optimize the way - the productivity side of the equation.

What we optimized last year was customer experience. We wanted - if you're a customer, we wanted you to get your shipment no matter what it cost. And we spent whatever money was necessary to deliver our orders through the holiday season. Well, that's not an environment that offers the most profitability.

This year you'll see us relentlessly pursue more productivity and still achieve customer satisfaction.

Same is true in customer service. Right now we're spending a lot more money in customer service then we'll need to as the company grows and leverages.

We've put far more money in technology than we need to for a company of our size. Why? Because we wanted to build the best privacy, the best firewalls.

We wanted to build a Web site that goes down less frequently than any Web site that you work with, and in fact we have a great track record.

And that costs a lot of money. Now that's an up-front investment that you make that you leverage as sales go from $1.7 billion to $10 billion to $50 billion, all of a sudden those investments become tiny, but today they're large on a P&L that only has a $1.7 billion sales line. So all this is a way to say that you'll see the company progress toward profitability.

And remember in our last conference call, and I shared with you that the most recent business development relationships that we've announced, Nextcard, Ashford.com, now GreenLight.com, and you'll see more of these, we are now monetizing our platform with third parties, with partners who pay us significant levels of money for access to our customer base. That is a very powerful element of the profit model. Who else? Yes?

AUDIENCE: What is Amazon.com doing on the Internet - what was it - intellectual property side rather than the operational side?

GALLI: We have a very strong view on intellectual property. We invest millions and millions more than any other company in developing patentable breakthroughs, technology breakthroughs, when it comes to e-commerce. And we will protect those because we believe that the investments we're making there require protection.

So, for example, we launched a suit against Barnes and Noble because they copied one-click. One-click is a fundamental Amazon.com development.

We spent millions and millions pioneering this shopping breakthrough, and it was copied by our competitor, so we feel that's unfair and it breaks the law and we're going to protect - we're going to operate within the law and protect our intellectual property. So you'll see us do a lot of that.

There is a very small percentage of the intellectual property that we own that's really public. So many companies that enter the e-commerce space don't realize quite how broad the protection is that we have in place today. And this is one of the real strengths of the company, and yet another reason why many people on Wall Street like the stock. Yes?

(Question from audience)

GALLI: Well, it's interesting. B2B is - we're already in B to B. We sell enormous quantities of books to companies.

When an IBM executive says, "This Michael Dell book is something everybody should read," we get the order for 500 copies. And you go to our DCs and you'll see B2B orders going out every day.

So we already have tremendous relationships. Basically every administrative assistant in the country has entered the credit card into Amazon.com and orders routinely for a boss whatever book or other thing that boss tends to want to buy. So we believe that that's an opportunity for us.

We also acquired a company called Tool Crib of the North last year. Tool Crib of the North is the number one mail order company in the tool and equipment space, and the customer base is contractors, electricians, plumbers, carpenters, factories.

And we put that Tool Crib of the North product line up on our Web site, and we now have the ability to ship those products to an oil platform off the Gulf Coast or to any job site or construction project in the country. And you'll see us pioneer and develop that B2B opportunity. The fact is, we would never - the B2B and B2C, which is really kind of a hot description now down to Silicon Valley - our company would be dramatically restricted if you called us a B2C play. And some people have erroneously classified us as a retailer or as a B2C company, and we're a service provider. We're an e-commerce company, and e-commerce includes B2B and B2C. So stay tuned. Yes?

(Question from the audience)

GALLI: Yes. We prefer to refer to these as win-win relationships, and we think that - we have a strategy of acquiring stakes and affiliates when we can't develop an initiative on our own. We think it's wise for us, if we are impressed with the management team and we think the company is as obsessed with the customer as we are, then we'll make an investment.

So, for example, we bought a large stake in Drugstore.com and Pets.com and HomeGrocer.com and Gear.com and Della&James. We now have a stake in Ashford.com, in GreenLight.com. And it's our view that those relationships in time will create win-win commercial arrangements.

So for example, in the fourth quarter HomeGrocer.com decided to invest some money in Amazon to get some customers, to get more traffic to their site. So they pay us a fee, we send out an e-mail, customers move to the HomeGrocer site. The Amazon customers like it because they learned about a great service, HomeGrocer. And it's good for our shareholders because it's a terrific way to monetize our site. So you'll see a lot of that happening in the future. Yes?

AUDIENCE: Was the fact that they're funded by Kleiner Perkins (inaudible).

GALLI: It's helpful but we entered into relationships - we don't care if a company starts up with Kleiner Perkins or Benchmark or Sequoia or any of the other VCs. We happen to have a great relationship with John Dorr and Kleiner Perkins so we have access to many, many opportunities at Kleiner, but we've also done deals with other people.

So the VC world is one where the VCs always have a primary objective of taking their investments and maximizing the return, and they will team up with any company that will allow them to do that. Yes?

QUESTION: Joe, what is the biggest threat? I mean the major concern to the growth of your company, Amazon.com? How do you counter - I mean how do you react to the - how do you react to it?

GALLI: Sorry. Ask me the first part of your question again.

AUDIENCE: What is the biggest threat?

GALLI: Biggest threat. The biggest threat we have at Amazon.com is that we get complacent and we don't focus on our customer.

The second we begin to believe our own press clippings, the second we believe that our brand and our customer franchise is invulnerable is when we will fail. So we have to stay even more obsessed with the customer, and in fact we have to provide a better customer experience every year than we did the year before. And the bar always goes up, because where we are today is a place where many people will try to copy.

So that's what I worry about. I worry about complacency. I worry about reading our own press clippings. I worry about not raising the bar on customer experience. And so far, so good, but we've got to be very thoughtful about them.

OK? Wow, there are a lot of questions. This is great.

AUDIENCE: Joe? Joe, -

GALLI: OK, go ahead. Good.

AUDIENCE: When you rolled out the Z-shops there was some talk about whether or how that would affect your reputation as being the best service provider. How has that played out in the months since you rolled that out?

GALLI: Yeah, Z-shops is a strategy we felt we had to do because it helps us achieve our objective of selection. We can't provide universal selection in our own warehouses, so we had to create a platform where we could have third-party sellers offer their wares on Amazon.com.

We do try to make it very clear to our customer that these orders aren't fulfilled by Amazon.com, and our customer service people do a very good job of that. In some cases some of these Z-shop merchants are outstanding. In other cases they're still learning and getting up to speed.

So we try to tell our customers look, we offer this for the selection. We want you to have access to these things, but you need to know it's not Amazon.com, so you may not get Amazon.com-class service. And we think the selection part of that and the fact that it's separate means that it actually enhances the experience at our store.

MODERATOR: Take one more?

GALLI: OK. Yes?

(Question from audience)

GALLI: Yeah. So the question is, what about - are customers going to get tired of the spam mail and the barrage of e-mails that come out from e-commerce companies. I have to tell you that we are - a decision to send an e-mail out to our customer base - we have over 16 million customers, and that's a huge decision at our company, and we debate it and we think through it, and we have very strict guidelines in terms of frequency.

And if you're a customer of ours, you'll notice that you don't get all that many e-mails from Amazon.com because we think the whole notion of spamming is really annoying.

So there's a point of diminishing returns. There's a point where if you have the occasional helpful e-mail, people actually like it, but you can't cross that line. So I'll tell you, we won't cross that line and we'll err on the side of less versus more. So far the feedback has been really good about our discipline that way.

OK, can we - OK, let's take one last question. Go ahead.

(Question from audience)

GALLI: So I shouldn't comment on things that deviate from the subject matter, but anyhow, I appreciate the question.

MODERATOR: Thanks.

GALLI: So thank you very much. I appreciate your interest in Amazon.com. (applause)

MODERATOR: If I could ask everyone to have a seat please. Everybody please have a seat. We've got just a couple of minutes. Joe, we want to thank you on behalf of Kellogg DFC. Got a little gift for you here. Appreciate you coming out.

GALLI: Thank you. Thanks a lot. (applause)

MODERATOR: Thanks a lot. Thank you.

GALLI: Wow! Thank you very much.

END

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