Interview with Amazon CEO Jeffrey Bezos

"What this alliance does is take the best parts of both companies and put them together"

Both Amazon.com Inc. and Toys 'R' Us Inc. surprised the world on Aug. 8, when they announced plans to merge their online toy stores into one store on Amazon's site. The deal brought together the king of the Web with the preeminent toy-store chain. Amazon Chief Executive Jeffrey P. Bezos talked with Business Week Senior Correspondent Robert D. Hof on Sept. 29 about how the deal came together and what he hopes to accomplish this coming holiday season.

Q: What was the impetus behind the deal with Toys 'R' Us?

A: We get to take all of our toy selection and all of Toys 'R' Us' toy selection. When you take all of that selection, and you take the best of both worlds, you're going to dramatically improve the customer experience. Toys 'R' Us can get better allocation of the hot toys than anybody else in the world. So with the Sony PlayStation II, [Sony] had to cut their allocation in half. Even though everybody is going to wish they could get more, companies like Toys 'R' Us are going to fare better than most.

Q: Was there any deciding moment in the deal negotiations?

A: Our teams met as early as January with very vague meetings. John Eyler [CEO of Toys 'R' Us] and I didn't get involved in the deal and meet until maybe four weeks before the announcement. By the time we got together and started talking about it, 98% of the deal had already been ironed out and was in near-final form. There were just a couple of minor issues that John and I discussed. From that point, it proceeded very quickly.

Q: How did you decide to do such an intimate alliance -- unlike your other deals, which essentially send customer traffic to other sites?

A: These guys, with $11 billion in sales, have access to the hot toys. We are widely recognized as having the best Web site, logistics, and customer service. What this alliance does is take the best parts of both companies and put them together.

Q: The fact that Amazon.com controls the customer, since the store is on Amazon.com's site, seems unusual given Toys 'R' Us' stature.

A: Nobody controls the customer. But in terms of providing the customer experience, we both wanted Amazon.com to do that. What is widely recognized today, but not two years ago, is that doing a great job of servicing customers online is incredibly hard -- and totally different from servicing customers in the physical world. It would have taken Toys 'R' Us three, four, maybe even five years to learn that. In one fell swoop, they were able to eliminate all of their execution risk and dramatically accelerate their drive toward profitability in their dot-com business.

Q: Is Amazon ready for the holiday toys rush?

A: This is our sixth Christmas, and we've gotten better every year. This year, we're more prepared than we've ever been.

Q: Did you have any hesitation about allying with a chain that has a reputation for an unpleasant store experience?

A: That [perception] is true. John Eyler would agree with that. That's why he was hired there. His strength is in merchandising. One of the dinners I had with him, we talked for two hours about the changes he made over the years at FAO Schwarz, and there were just dramatic improvements in the merchandising area that were driven by John Eyler. That is something that you're going to see rapidly change in the Toys 'R' Us world.

We did focus groups with Toys 'R' Us customers and with heavy Amazon.com customers, asking them what they think about Toys 'R' Us and what they would think about a combination. Everybody was very positive about it. The reason was that the Toys 'R' Us brand today, while what you said is true, is strongly associated with extreme selection of toys, which is really key. The Amazon.com brand is also associated with selection, which fits together nicely, but also with service and reliability.

Q: Were there any issues or obstacles you needed to work through?

A: There were a couple of issues surrounding the various numbers in the deal, which we haven't disclosed. They pay us three components -- a lump-sum annual fee, a revenue share, and per-unit fee. Obviously, when you're negotiating numbers, one side always wants them higher and one side always wants them lower. But these were minor things because of the groundwork that had already been laid.

Q: I would think that after the deal was announced on Aug. 8, you would need to have the logistics and arrangements in place within a matter of weeks to be ready for the holidays.

A: You're absolutely right. The bulk of those arrangements are now complete. There's still more to do in terms of receiving additional product from them. But the store launched exactly five weeks after the deal was announced. Literally, the two teams worked around the clock, bleary-eyed, to make that happen. We wanted to launch in early September so that we could keep refining through October, before we get to the peak months of November and the real peak month, December.

Q: Aren't the computer-systems-integration challenges enormous?

A: There is some of that. But because we are handling the shipment of the toys to customers, there is less of that than you might think. From a logistics point of view, they are a supplier to us. We have relationships with thousands and thousands of suppliers, and we integrate with their systems all the time.

Q: Will we see more agreements like this from Amazon.com?

A: It has to be a win-win deal for both sides. It has to be something that will genuinely improve the customer experience. If we can meet those two criteria, then we are totally open to any such deals. Every agreement would be different in some ways. The economics will be different. I would be shocked if there was ever a perfect clone of this business. I do think there could be other things like this.

Q: A lot of experts think so-called multichannel retailers, which sell both online and either in stores or through catalogs, will come to dominate the Web. Do you see this deal as a way of leveraging the physical retail channel for your online business?

A: What we're bringing to the customer is Toys 'R' Us' sourcing and our experience in making an easy-to-use Web site with reliable service and delivery. Usually when people are talking about clicks-and-mortar, they're talking about different synergies. Supposedly people want to do returns to stores, and it's just not true -- they hate it. "Multichannel" is too fuzzy for me. Is this deal "multichannel"?

Q: It is for Toys 'R' Us, but not really for Amazon.
A: Yeah, I think that's right.

Q: So, you think there is a sustainable way to sell only online?

A: There is no question about that. The reason we do a deal like this is not because of need, but because of opportunity. Toys 'R' Us and Amazon.com could have successfully done this independently of each other.