Employees soon learned of a new motto: Get Big Fast. The bigger the company got, Bezos explained, the lower the prices it could exact from Ingram and Baker and Taylor, the book wholesalers, and the more distribution capacity it could afford.
The assumption was that no one would take even a weekend day off.
Nicholas Lovejoy suggested to Bezos that the company subsidize bus passes for employees, but Bezos scoffed at the idea. “He didn’t want employees to leave work to catch the bus,” Lovejoy says. “He wanted them to have their cars there so there was never any pressure to go home.”
Another reason Bezos pushed to go public was that competition was looming online in the form of the reigning giant of the bookselling business, Barnes & Noble.
The chain store was run by Len Riggio,
The Riggios wore suits and came on strong. They told Bezos and Alberg that they were going to launch a website soon and crush Amazon. But they said they admired what Bezos had done and suggested a number of possible collaborations, such as licensing Amazon’s technology or opening a joint website.
For the next year, Amazon.com and BarnesandNoble.com competed, each asserting that it had a better selection and lower prices.
Amazon’s IPO, on May 15, 1997,
But the IPO raised $54 million and got widespread attention, propelling the company to a blockbuster year of 900 percent growth in annual revenues. Bezos, his parents, and his brother and sister (who had each bought ten thousand dollars’ worth of stock early on) were now officially multimillionaires.
This was a key part of Amazon’s early strategy: maximizing the Internet’s ability to provide a superior selection of products as compared to those available at traditional retail stores.
We believe that a fundamental measure of our success will be the shareholder value we create over the long term. This value will be a direct result of our ability to extend and solidify our current market leadership position. The stronger our market leadership, the more powerful our economic model. Market leadership can translate directly to higher revenue, higher profitability, greater capital velocity, and correspondingly stronger returns on invested capital.
That year, more than a dozen Walmart employees moved to Amazon.
Critics charged that the idea behind 1-Click was rudimentary and that its approval by the U.S. patent office was a symptom of lazy bureaucracy and a broken patent process.
network effects—products or services become increasingly valuable as more people use them.
Thus did Jeff Bezos become one of the original investors in Google, his company’s future rival, and four years after starting Amazon, he minted an entirely separate fortune that today might be worth well over a billion dollars.
They agreed on five core values and wrote them down on a whiteboard in a conference room: customer obsession, frugality, bias for action, ownership, and high bar for talent. Later Amazon would add a sixth value, innovation.
While employees embraced Amazon’s newly articulated values, many resisted the breakneck pace of the work. As Amazon’s growth accelerated, Bezos drove employees even harder, calling meetings over the weekends, starting an executive book club that gathered on Saturday mornings, and often repeating his quote about working smart, hard, and long. As a result, the company was not friendly toward families, and some executives left when they wanted to have children. “Jeff didn’t believe in work-life balance,” says Kim Rachmeler. “He believed in work-life harmony. I guess the idea is you might be able to do everything all at once.”
When the 1999 holiday season ended, employees and executives of Amazon could finally take a breather.
Jeff Bezos was named Time’s Person of the Year, one of the youngest ever, and credited as “the king of cybercommerce.”9 It was an incredible validation for Amazon and its mission.
As a new millennium dawned, Amazon stood on the precipice. It was on track to lose more than a billion dollars in 2000, just as the sunny optimism over the dot-com economy morphed into dark pessimism. As he had been doing over and over since the company’s very first days, Bezos would have to persuade everyone that Amazon could survive the cyclone of debt and losses that it had created for itself during a singularly feverish time.
In 2000 and 2001, the years commonly thought of as the dot-com bust, investors, the general public, and many of his employees fell out of love with Bezos. Most observers not only dismissed the company’s prospects but also began to doubt its chances of survival. Amazon stock, which since its IPO had moved primarily in one direction—up—topped out at $107 and would head steadily down over the next twenty-one months.
Instead of Get Big Fast, the company adopted a new operating mantra: Get Our House in Order. The watchwords were discipline, efficiency, and eliminating waste. The company had exploded from 1,500 employees in 1998 to 7,600 at the beginning of 2000, and now, even Bezos agreed, it needed to take a breath.
The Amazon we know today, with all of its attributes and idiosyncrasies, is in many ways a product of the obstacles Bezos and Amazon navigated during the dot-com crash, a response to the widespread lack of faith in the company and its leadership.
The haymaker was this: “We believe that the company will run out of cash within the next four quarters, unless it manages to pull another financing rabbit out of its rather magical hat.”
The prediction generated sensational headlines around the world (New York Post: “Analyst Finally Tells the Truth about Dot-Coms”2). Already freaked by the market’s initial decline, investors dropped Amazon, and its stock fell by another 20 percent.
It seemed like a perfect fit. Toys “R” Us was adept at choosing the right toys for each season and had the necessary clout with manufacturers to get favorable prices and sufficient supplies of the most popular toys. Amazon of course had the expertise to run an online retailing business and get products to customers on time.
That fall, Amazon announced a new initiative called Marketplace. The effort started with used books. Other sellers of books were invited to advertise their wares directly within a box on Amazon’s own book pages. Customers got to choose whether to purchase the item from Amazon itself or from a third-party seller. If they chose the latter, either because the seller had a lower price or because the product was out of stock at Amazon, the company would lose the sale but collect a small commission. “Jeff was super clear from the beginning,” says Neil Roseman. “If somebody else can sell it cheaper than us, we should let them and figure out how they are able to do it.”
That July, as a result of the Sinegal meeting, Amazon announced it was cutting prices of books, music, and videos by 20 to 30 percent. “There are two kinds of retailers: there are those folks who work to figure how to charge more, and there are companies that work to figure how to charge less, and we are going to be the second, full-stop,” he said in that month’s quarterly conference call with analysts, coining a new Jeffism to be repeated over and over ad nauseam for years.
Over the next year, Amazon executives quit in droves. They left because their stock had been vested or because they no longer believed in the mission or because their comparatively low salaries and the depressed stock price guaranteed that they were not getting wealthy anytime soon.
The company reached incredible levels of attrition in 2002 and 2003. “The number of employees at that point other than Jeff who thought he could turn it into an eighty-billion-dollar company—that’s a short list,” says Doug Boake, who departed for the Silicon Valley startup OpenTable. “He just never stopped believing. He never blinked once.”
Kim Rachmeler shared a favorite quote she heard from a colleague around that time. “If you’re not good, Jeff will chew you up and spit you out. And if you’re good, he will jump on your back and ride you into the ground.”
In January 2002, Amazon reported its first profitable quarter, posting net income of $5 million, a meager but symbolic penny per share.
Two other technology icons, Steve Jobs and Larry Ellison, were adopted, and the experience is thought by some to have given each a powerful motivation to succeed.
In 1968, Jackie called Ted Jorgensen on the phone and told him she was getting remarried and moving to Houston. He could stop paying child support, but she wanted to give Jeffrey her new husband’s surname and let him adopt the boy.
Four-year-old Jeffrey Preston Jorgensen became Jeffrey Preston Bezos and started calling Miguel Bezos Dad. A year later, they had a daughter, Christina, and then a year after that, another son, Mark.
Bezos took a series of odd jobs throughout high school. One summer he famously worked as a fryer at a local McDonald’s, learning, among other skills, how to crack an egg with one hand.
Bezos scored straight As at Miami Palmetto, got early admission to Princeton University, and not only became valedictorian of his high school but won the Silver Knight, a prestigious statewide award sponsored by the Miami Herald.
“Whatever image he had of his own future, it always involved becoming wealthy,” Ursula Werner says. “There was no way to get what he wanted without it.” What exactly did he want? “The reason he’s earning so much money,” Werner told journalists who contacted her in the 1990s, seeking to understand the Internet magnate, “is to get to outer space.”
“He absolutely thinks he’s going to space,” Hanauer says. “It’s always been one of his goals. It’s why he started working out every morning. He’s been ridiculously disciplined about it.”
In a speech at Carnegie Mellon University in 2011, Bezos said that Blue Origin’s goal was to drive down the cost and increase the safety of technology that can get humans into space. The group was “working to lower the cost of space flight to build a future where we humans can explore the solar system firsthand and in person,” he said. “Slow steady progress can erode any challenge over time.”
Internet magnate Elon Musk, with SpaceX, and billionaire Richard Branson, the founder of an enterprise called Virgin Galactic, are pursuing some of the same goals.
He gave Blue Origin a coat of arms and a Latin motto, Gradatim Ferociter, which translates to “Step by Step, Ferociously.” The phrase accurately captures Amazon’s guiding philosophy as well. Steady progress toward seemingly impossible goals will win the day. Setbacks are temporary. Naysayers are best ignored.
In every significant way, Amazon was becoming a larger and more complicated business. It had 2,100 employees at the end of 1998, and 9,000 at the end of 2004.
Amazon employees had been using Microsoft’s PowerPoint and Excel spreadsheet software to present their ideas in meetings. Bezos believed that method concealed lazy thinking.
Bezos announced that employees could no longer use such corporate crutches and would have to write their presentations in prose, in what he called narratives.
Some Amazon employees currently advance the theory that Bezos, like Steve Jobs, Bill Gates, and Larry Ellison, lacks a certain degree of empathy and that as a result he treats workers like expendable resources without taking into account their contributions to the company. That in turn allows him to coldly allocate capital and manpower and make hyperrational business decisions while another executive might let emotion and personal relationships intrude.
Amazon lost money on Prime membership, at first. But gradually Wilke’s organization got better at combining multiple items from a customer’s order into a single box, which saved money and helped drive down Amazon’s transportation costs by double-digit percentages each year.
Amazon introduced Search Inside the Book on October 2003—and for the first time in three and a half years, there was a feature story on the company in Wired magazine, celebrating its significant innovation.
At ten years old, Amazon could be a deeply unhappy place to work. The stock price was flat, there were strict limits on annual raises, and the pace was unrelenting.
Raman’s teams also improved the software for pricing bots, which were automated programs that crawled the Web, spied on competitors’ prices, and then adjusted Amazon’s prices accordingly, ensuring that Bezos’s adamant demand that the company always match the lowest price anywhere, offline or online, would be met.
Amazon Web Services, or AWS, is today in the business of selling basic computer infrastructure like storage, databases, and raw computing power. The service is woven into the fabric of daily life in Silicon Valley and the broader technology community. Startups like Pinterest and Instagram rent space and cycles on Amazon’s computers and run their operations over the Internet as if the high-powered servers were sitting in the backs of their own offices.
Mechanical Turk quietly launched in November 2005. Now any Internet user could perform what Amazon called human-intelligence tasks, typically earning a few cents per job. Other companies could list jobs on the Mechanical Turk website, with Amazon taking a 10 percent cut of the payments.11 One of the first applications, from a company called Casting Words, paid workers a few cents per minute to listen to and transcribe podcasts.
Bill Miller, the chief investment officer at Legg Mason Capital Management and a major Amazon shareholder, asked Bezos at the time about the profitability prospects for AWS. Bezos predicted they would be good over the long term but said that he didn’t want to repeat “Steve Jobs’s mistake” of pricing the iPhone in a way that was so fantastically profitable that the smartphone market became a magnet for competition.
Startups no longer needed to spend their venture capital on buying servers and hiring specialized engineers to run them. Infrastructure costs were variable instead of fixed, and they could grow in direct proportion to revenues. It freed companies to experiment, to change their business models with a minimum of pain, and to keep up with the rapidly growing audiences of erupting social networks like Facebook and Twitter.
But the emergence of Amazon Web Services was transformational in a number of ways. Amazon’s inexpensive and easily accessible Web services facilitated the creation of thousands of Internet startups, some of which would not have been possible without it, and it provided larger companies with the ability to rent a supercomputer in the cloud, ushering in a new era of innovation in areas like finance, oil and gas, health, and science. It is not hyperbole to say that AWS, particularly the original services like S3 and EC2, helped lift the entire technology industry out of a prolonged post-dot-com malaise.
People had been talking about this for years, ever since Project Gutenberg, a nonprofit founded in the early 1970s in Champaign, Illinois, with a mission to digitize the world’s books and make them available on personal computers. Eberhard and Tarpenning had a different idea. They wanted something mobile, so people could take whole libraries of e-books with them in dedicated electronic-reading devices. That spring they started NuvoMedia and developed one of the world’s first portable e-readers, which they called the Rocket e-Book, or Rocketbook.
Eberhard had founded a computer-networking company in the 1980s and had been around the Silicon Valley block a few times. (Later he would cofound the electric-car company Tesla.)
In late 1997, the NuvoMedia founders and their lawyer took a Rocketbook prototype to Seattle and spent three weeks in negotiations with Bezos and his top executives.
Eberhard couldn’t bring himself to agree to limit his future fund-raising opportunities, so Bezos’s concerns became a self-fulfilling prophecy. Once it was evident that the companies were at an impasse, Eberhard and Tarpenning got on a plane and flew to New York to meet with Len and Stephen Riggio of Barnes & Noble.
The Gemstar debacle did more than just demolish the future prospects of the Rocketbook and SoftBook. It seemingly dampened all interest in the very idea of digital reading. BarnesandNoble.com stopped selling e-books altogether after the Rocketbook disappeared, and Palm sold its e-book business at around the same time.5 E-books seemed like a technological dead-end and a hopeless medium—to almost everyone.
In 2004, seeking a digital strategy for Amazon amid the gathering power of a revived Apple Computer, he started a secretive Silicon Valley skunkworks with the mysterious name Lab126. The hardware hackers at Lab126 were given a difficult job: they were to disrupt Amazon’s own successful bookselling business with an e-book device while also meeting the impossibly high standards of Amazon’s designer in chief, Bezos himself. In order for Amazon to furnish its new digital
April 2003 Apple introduced the iTunes music store, and in just a few years Apple leapfrogged over, in quick succession, Amazon, Best Buy, and Walmart to become the top music retailer in the United States.
“We were freaking out over what the iPod had done to Amazon’s music business,” says director John Doerr. “We feared that there would be another kind of device from Apple or someone else that would go after the core business: books.”
Bezos ultimately concluded that if Amazon was to continue to thrive as a bookseller in a new digital age, it must own the e-book business in the same way that Apple controlled the music business.
By that time, Bezos and his executives had devoured and raptly discussed another book that would significantly affect the company’s strategy: The Innovator’s Dilemma, by Harvard professor Clayton Christensen. Christensen wrote that great companies fail not because they want to avoid disruptive change but because they are reluctant to embrace promising new markets that might undermine their traditional businesses and that do not appear to satisfy their short-term growth requirements. Sears, for example, failed to move from department stores to discount retailing; IBM couldn’t shift from mainframe to minicomputers. The companies that solved the innovator’s dilemma, Christensen wrote, succeeded when they “set up autonomous organizations charged with building new and independent businesses around the disruptive technology.”9
He didn’t want to force customers to connect the device to a PC, so the only alternative was to build cellular access right into the hardware, the equivalent of embedding a wireless phone in each unit.
Robinson-Patman Act, the 1936 antitrust law that prohibited manufacturers from selling goods to large retailers at a lower price than they sold to their smaller competitors.
Unlike traditional retailers, Amazon returned few unsold books, often less than 5 percent. The big book chains regularly returned 40 percent of all the books they acquired from publishers, for full refunds, an arrangement that is nearly unique in retail.
Amazon had an easy way to demonstrate its market power. When a publisher did not capitulate and the company shut off the recommendation algorithms for its books, the publisher’s sales usually fell by as much as 40 percent.
In Amazon’s early years, when the likes of Sony and Disney refused to sell directly to the company, Bezos had been on the short end of this Darwinian dynamic. He had learned the game firsthand. Now the balance of power was shifting. Now suppliers needed Amazon more than Amazon needed them.
On November 19, 2007, Jeff Bezos stepped onto a stage at the W Hotel in lower Manhattan to introduce the Kindle.
eBay, which had started as a third-party auctions platform, recognized that many of its customers wanted a more Amazon-like fixed-price alternative but failed to self-administer the necessary bitter medicine in a single dose. It spent two years working on a separate destination for fixed-price retail, called eBay Express, which got no traffic when it debuted in 2006 and was quickly shut down. Only then did eBay finally commit to allowing fixed-price sales to share space alongside auctions on the site and in search results on eBay.com.2
Amazon reported $14.8 billion in sales in 2007, which was more than two of its earliest foes combined could boast: Barnes & Noble pulled in $5.4 billion that year, and eBay $7.7 billion.
“The second thing is that he is not tethered by conventional thinking. What is amazing to me is that he is bound only by the laws of physics. He can’t change those. Everything else he views as open to discussion.”
By law, manufacturers are not allowed to set retail prices, but they can decide whom they want to carry their products, and they make those decisions judiciously. Shoe brands like Nike and Merrell viewed Amazon as a dangerous discounter, a company that would very likely consign their new in-season products to the bargain bin in an effort to garner new customers and gain market share. As a result, the top brands were reluctant to supply Amazon with merchandise, and the website’s shoe selection was sparse.
Hsieh saw that the acquisition could offer a sizable payout for employees at a moment when many desperately needed it. The Zappos board ultimately decided to sell to Amazon; the vote was bittersweet but unanimous.
The great recession that started in December 2007 and lasted until July 2009 was in some ways a gift to Amazon. The crisis not only drove Zappos into Amazon’s arms but also significantly damaged the sales of the world’s largest offline retail chains, sending executives scurrying into survival mode.
“If there is going to be a ‘Wal-Mart of the Web,’ it is going to be Walmart.com. Our goal is to be the biggest and most visited retail website.”
Walmart then lowered prices on ten new books by high-profile authors, such as Stephen King and Dean Koontz, to ten dollars each. Amazon matched the price on those same books within a few hours. Walmart.com then lowered its prices again, to nine dollars, and Amazon matched it again. It was just the kind of price pressure from Walmart that Amazon executives had always worried about—but it came ten years too late to do Amazon any harm. Now Amazon was large enough that it could easily withstand such losses.
Publishers remained particularly troubled by Amazon’s $9.99 price for new releases and bestsellers. They were living the nightmarish reality of every manufacturer—this was the reason that, for example, Nike refused to supply shoes to Endless.com. Amazon, the publishing executives felt, was consigning their in-season products (new books, rather than shoes) to the bargain bin immediately upon their release.
In the early fall of 2009, two publishers, HarperCollins and Hachette, experimented with windowing select e-books—that is, delaying e-books’ release until the hardcover versions had been out for a few months. But consumers reacted badly and gave these titles withering reviews on Amazon.
So we told the publishers, ‘We’ll go to the agency model, where you set the price, and we get our 30%, and yes, the customer pays a little more, but that’s what you want anyway.’ ” Jobs’s patronizing statement was potentially incriminating. If publishers had engaged in a joint effort to make customers pay “a little more,” that was the foundation on which antitrust cases were built. The Justice Department sued Apple and the five publishers on April 11, 2012, accusing them of illegally conspiring to raise e-book prices.
Missionaries have righteous goals and are trying to make the world a better place. Mercenaries are out for money and power and will run over anyone who gets in the way. To Bezos, at least, there was no doubt where Amazon fell. “I would take a missionary over a mercenary any day,” he liked to say. “One of those great paradoxes is that it’s usually the missionaries who end up making more money anyway.”2
Amazon had avoided sales-tax collection for years with various clever tricks. In states where it had fulfillment centers or other offices, like Lab126, it skirted the definition of what constituted a physical presence by classifying those facilities as wholly owned subsidiaries that earned no revenue. For example, the fulfillment center in Fernley, Nevada, operated as an independent entity called Amazon.com.nvdc, Inc.
In Texas in 2011, the legislature passed a bill that would force online retailers with distribution facilities in the state to collect sales tax, and Amazon threatened to close its fulfillment center outside Dallas, fire hundreds of local workers, and scrap plans to build other facilities in the state. Texas governor Rick Perry promptly vetoed the bill.
There is a clandestine group inside Amazon with a name seemingly drawn from a James Bond film: Competitive Intelligence. The group, which since 2007 has operated within the finance department under longtime executives Tim Stone and Jason Warnick, buys large volumes of products from competitors and measures the quality and speed of their services. Its mandate is to investigate whether any rival is doing a better job than Amazon and then present the data to a committee that usually includes Bezos, Jeff Wilke, and Diego Piacentini, who ensure that the company addresses any emerging threat and catches up quickly.
Quidsi could now taste its own blood. That month, Diapers.com listed a case of Pampers at forty-five dollars; Amazon priced it at thirty-nine dollars, and Amazon Mom customers with Subscribe and Save could get a case for less than thirty dollars.10 At one point, Quidsi executives took what they knew about shipping rates, factored in Procter and Gamble’s wholesale prices, and calculated that Amazon was on track to lose $100 million over three months in the diapers category alone.
Manufacturers are not allowed to enforce retail prices for their products. But they can decide which retailers to sell to, and one way they wield that power is by setting price floors with a tool called MAP, or minimum advertised price.
Dyson pulled its vacuums from Amazon in 2011, though some models are still sold on the Amazon Marketplace by approved third-party merchants. Over the past few years, companies such as Sony and Black and Decker have taken turns yanking various products from the site. Apple in particular keeps Amazon on a tight leash, giving it a limited supply of iPods but no iPads or iPhones.
Hastings himself says that Amazon was never truly serious about an acquisition of Netflix because “the basic operating rhythms” of the DVD-rental space, which required multiple small fulfillment centers to send discs out and then receive them back, were so different from Amazon’s core retail business. “It made no sense for them to be an aggressive bidder because it didn’t really leverage their strengths,” he says.
Lovefilm’s attorneys were astonished at the intractable positions taken by Amazon’s negotiators. The talks lasted more than seven months, and the acquisition was finally announced in January 2011. Amazon ended up paying close to two hundred million pounds, or about three hundred million dollars—roughly the same amount Google had offered despite the fact that Lovefilm had expanded its subscriber base and its digital catalog of movies in the intervening year and a half.
Managers in departments of fifty people or more are required to “top-grade” their subordinates along a curve and must dismiss the least effective performers.
Still, evidence of the company’s constitutional frugality is everywhere. Conference-room tables are a collection of blond-wood door-desks shoved together side by side. The vending machines take credit cards, and food in the company cafeterias is not subsidized. When a new hire joins the company, he gets a backpack with a power adapter, a laptop dock, and some orientation materials. When someone resigns, he is asked to hand in all that equipment—including the backpack.
“If you look at why Amazon is so different than almost any other company that started early on the Internet, it’s because Jeff approached it from the very beginning with that long-term vision,” Hillis continues. “It was a multidecade project.
The family can hire drivers; they can buy limousines and private airplanes. Yet they still own a modest Honda, albeit a larger model than the Accord of a decade ago, and MacKenzie often delivers their four children to school and then drives her husband to work.
Bezos and MacKenzie seem to share the skill of efficiently dispersing their time across many personal responsibilities and multiple projects. For Bezos, in addition to his family and Amazon, there’s Blue Origin, where he typically spends each Wednesday, and Bezos Expeditions, his personal venture-capital firm, which holds stakes in companies such as Twitter, the taxi service Uber, the news site Business Insider, and the robot firm Rethink Robotics. Since August of 2013, Bezos has owned the Washington Post newspaper and has said he wants to apply his passion for invention and experimentation to reviving the storied newspaper.
Bezos and MacKenzie are personally involved in the Bezos Family Foundation, which doles out education grants and mobilizes students to help other young people in impoverished countries and disaster zones. The foundation is run by Jackie and Mike Bezos, and Christina Bezos Poore and Mark Bezos, Jeff’s siblings, are directors.
Will Amazon move to free next-day and same-day delivery for Prime members? Yes, eventually, when Amazon has so many customers in each urban area that placing a fulfillment center right outside every city becomes practical.
Will antitrust authorities eventually come to scrutinize Amazon and its market power? Yes, I believe that is likely, because the company is growing increasingly monolithic in markets like books and electronics, and rivals have fallen by the wayside.
On the corner of 7th Avenue and Westlake Avenue North in Seattle, in an area that locals call the Denny Triangle, the future of Amazon is rising from a construction site. The company is building a 3.3-million-square-foot high-rise urban campus it calls Rufus 2.0, after the long-dead corgi that affectionately patrolled its first offices many years ago.