Jeff Bezos' risky bet

updated 3:40 p.m. ET Nov. 3, 2006

It was one of the Web's typical flash frenzies, a gaggle of geeks seeking the new, new thing. At 2 a.m. on Aug. 24, a new venture called Elastic Compute Cloud quietly launched in test mode. Its service: cheap, raw computing power that could be tapped on demand over the Internet just like electricity. In less than five hours, hundreds of programmers, hoping to use the service to power their MySpace and Google wannabes, snapped up all the test slots. One desperate latecomer instant-messaged a $10,000 offer for a slot to a lucky winner, who declined to give it up. "It's really cool," enthuses entrepreneur Luke Matkins, who will run his soon-to-launch music site on the service. The creator of this très cool service: Amazon.com Inc.

Yes, Amazon founder and Chief Executive Jeffrey P. Bezos, the onetime Internet poster boy who quickly became a post-dot-com piñata, is back with yet another new idea. Many people continue to wonder if the world's largest online store will ever fulfill its original promise to revolutionize retailing. But now Bezos is plotting another new direction for his 12-year-old company, which he will lay out on Nov. 8 at San Francisco's Web 2.0 Conference, the annual gathering of the digerati crème. Judging from an advance look he gave BusinessWeek on one recent gray day at Amazon's Seattle headquarters, it's so far from Amazon's retail core that you may well wonder if he has finally slipped off the deep end.

Bezos wants Amazon to run your business, at least the messy technical and logistical parts of it, using those same technologies and operations that power his $10 billion online store. In the process, Bezos aims to transform Amazon into a kind of 21st century digital utility. It's as if Wal-Mart Stores Inc. had decided to turn itself inside out, offering its industry-leading supply chain and logistics systems to any and all outsiders, even rival retailers. Except Amazon is starting to rent out just about everything it uses to run its own business, from rack space in its 10 million square feet of warehouses worldwide to spare computing capacity on its thousands of servers, data storage on its disk drives, and even some of the millions of lines of software code it has written to coordinate all that.

Another big idea from Jeff Bezos? Go ahead and groan. It's fine with him. Even after all these years spent battling back claims that his company would be "Amazon.toast," he's still bounding up and down stairs two at a time to exhort his band of nerds on to the Next Big Thing. And now, more than ever, he's determined to keep going for the big score, even if people think he's crazy. In fact, Bezos, 42, sounds downright eager to confound a new generation of skeptics. "We're very comfortable being misunderstood," he says, letting loose one of his famously thunderous laughs. "We've had lots of practice."

Techies impressed, but will what about Wall Street?
But if techies are wowed by Bezos' grand plan, it's not likely to win many converts on Wall Street. To many observers, it conjures up the ghost of Amazon past. During the dot-com boom, Bezos spent hundreds of millions of dollars to build distribution centers and computer systems in the promise that they eventually would pay off with outsize returns. That helped set the stage for the world's biggest Web retail operation, with expected sales of $10.5 billion this year.

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What it didn't translate into was the consistent profit growth many investors had expected by now. Lately profits have fallen, dragged down by spending on new technology projects and on free-shipping offers that Amazon considers marketing in place of TV ads. Analysts expect full-year net income this year to come in at about $180 million, or half of last year's total. Most worrisome to investors is Amazon's three-year-plus binge on new technologies. So far this year its spending on technology and content, including hiring hundreds of engineers and programmers to produce all these new services and buy more servers to run them, is up 52%, to $485 million. As a result, operating margins, at 4.1% for the past four quarters, now come in at less than Wal-Mart's 5.9%. Even Barnes & Noble Inc., that doughty bricks-and-mortar book chain that many expected to get remaindered by the Web, has higher margins, at 5.4%. "I have yet to see how these investments are producing any profit," gripes Piper Jaffray & Co. analyst Safa Rashtchy. "They're probably more of a distraction than anything else."

All that has investors restless and many analysts throwing up their hands wondering if Bezos is merely flailing around for an alternative to his retail operation. Eleven of 27 analysts who follow the company have underperform or sell ratings on the stock — a stunning vote of no confidence. That number of sell recommendations is matched among large companies only by Qwest Communications International Inc., according to investment consultant StarMine Corp. It's more than even the eight sell opinions on struggling Ford Motor Co.

Neither analysts nor investors think Amazon's business is in danger of collapse. It's just that they're slowly losing confidence in Bezos' promises. The company's 2007 price-to-earnings ratio of 54 is much higher than its peers', even than high-flying Google Inc. at 35. But Amazon's stock is down 20% since the start of the year. A 12% one-day jump on Oct. 24 reflected slightly better-than-expected third-quarter results, but also investor relief that Bezos plans to slow the growth of new tech spending.

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