Who's Writing the Book on Web Business?

We also want to "redecorate the store" for every customer. We can let people describe their preferences, analyze their past buying patterns, and create a home page specifically for them. If you're a big mystery reader, we can show you the three hottest new mystery novels and highlight one from an author you've bought before.

These interactive features are going to be incredibly powerful. And you can't reproduce them in the physical world. Physical stores have to be designed for the lowest common denominator.

You've explained the competitive opportunity. How do you create competitive advantage against potential rivals?

People who just scratch the surface of Amazon.com -- "oh, you sell books on the Web" -- don't understand how hard it is to actually be an electronic merchant. We're not just putting up a Web site. There are very few off-the-shelf tools that help do what we're doing. We've had to develop lots of our own technologies.

For example, customer service is a critical success factor in any retail business. But it's absolutely make-or-break online. If you make customers unhappy in the physical world, they might each tell 6 friends. If you make customers unhappy on the Internet, they can each tell 6,000 friends with one message to a newsgroup. If you make them really happy, they can tell 6,000 people about that. You want every customer to become an evangelist for you.

We do 90% of our customer service by email rather than by telephone. Fourteen of our 110 employees do nothing but answer email from customers. If we had an 800-number call center, 10 companies would be competing to sell us high-quality software. There are no companies selling software to manage email centers. So we had to develop our own tools. In a way this is good news. There are lots of barriers to entry.

You moved from New York to Seattle to start this business. Why?

It sounds counterintuitive, but physical location is very important for the success of a virtual business. We could have started Amazon.com anywhere. We chose Seattle because it met a rigorous set of criteria. It had to be a place with lots of technical talent. It had to be near a place with large numbers of books. It had to be a nice place to live -- great people won't work in places they don't want to live. Finally, it had to be in a small state. In the mail-order business, you have to charge sales tax to customers who live in any state where you have a business presence. It made no sense for us to be in California or New York.

Obviously Seattle has a great programming culture. And it's close to Roseburg, Oregon, which has one of the biggest book warehouses in the world. We thought about the Bay Area, which is the single best source for technical talent. But it didn't pass the small-state test. I even investigated whether we could set up Amazon.com on an Indian reservation near San Francisco. This way we could have access to talent without all the tax consequences. Unfortunately, the government thought of that first.

Is the rise of online retailers like Amazon.com bad news for traditional retailers?

Amazon.com is not going to put bookstores out of business. Barnes & Noble is opening a new superstore every four days. Borders is opening a new superstore every nine days.

I still buy half of my books at bookstores. Sometimes I want the book right now, not tomorrow. Sometimes I just like to get out of the office and go to a nice environment. What you're going to see -- and it's happening already -- is that physical bookstores will become ever-nicer places to be. They are going to have more sofas, better lattes, nicer people working there. Good bookstores are the community centers of the late 20th century. That's the basis on which they're going to compete. There is plenty of room for everyone.

William C. Taylor is one of the founding editors of Fast Company.