Amazon

“This is still day one in such a big way.” – Jeff Bezos

The Everything Store by Brad Stone is a tremendously good book. Below are my notes and thoughts.

Bezos on what makes Amazon unique:

At Amazon...

  • We are genuinely customer-centric
  • We are genuinely long-term oriented
  • We genuinely like to invent

“Very few companies have all three of those elements.”

On point of view, or thinking differently:

Alan Kay: “Point of view is worth 80 IQ points.” Examples in the book of unique points of view:

  • When Amazon launched book reviews, he received an angry letter from a publisher telling him his business was to sell books, not trash them. “We saw it very differently,” Bezos said. “When I read that letter, I thought, we don’t make money when we sell things. We make money when we help customers make purchase decisions.”
  • D. E. Shaw, where Bezos worked before starting Amazon: “While the rest of Wall Street saw D. E. Shaw as a highly secretive hedge fund, the firm viewed itself differently … [as a] versatile technology laboratory full of innovators and talented engineers who could apply computer science to a variety of different problems. Investing was only the first domain where it would apply its skills.”

Bezos "stealing" ideas:

  • “I don’t think there was anybody Jeff knew that he didn’t walk away from with whatever lessons he could.”
  • “Good artists copy, great artists steal” (Picasso). 
  • "Stealing" ideas from Jim Sinegal, CEO of Costco
    • Sinegal “didn’t have an exit strategy” – “he was building the company for the long term.”
    • “It was all about customer loyalty.”
    • “Costco buys in bulk and marks up everything everything at a standard, across-the-board 14 percent, even when it could charge more. It doesn’t advertise at all, and earns most of its gross profit from the annual membership fees.” 
    • Sinegal doesn’t regret educating Bezos: “I’ve always had the opinion that we have shamelessly stolen any good ideas."
    • Stone doesn’t make the connection, but Prime looks a lot like Costco’s membership fee. 

Competition:

At the outset: “There was competition already. It wasn’t as if Jeff was coming up with something completely new.” At least not at first, but he was thinking about it very differently than the others. 

When Barnes & Noble launched a competing website and sued Amazon, there was a highly publicized Forrester Research report in which Amazon was referred to as “Amazon.Toast. "Jeff to employees: “Look, you should wake up worried, terrified every morning. But don’t worry about our competitors because they’re never going to send us money anyway. Let’s be worried about our customers and stay heads-down focused.”  

Bad news? Assemble the SWAT team:

In early 1998, Mark Breier, the VP of Marketing, showed Bezos a survey that the majority of consumers did not use Amazon.com and were unlikely to do so because they bought very few books. Bezos instructed Breier to assemble a “SWAT team” of recent hires from Harvard Business School to research categories that had high SKUs, were underrepresented in physical stores, and could be easily mailed. Breier: “I brought him very bad news, and for some reason he got excited.” Bezos had the playbook in his head from the beginning. Breier seemed to have nudged him to the next phase. 

On Marketing:

“Over the first decade at Amazon, marketing VPs were the equivalent of the doomed drummers in the satirical band Spinal Tap; Bezos plowed through them at a rapid clip, looking for someone with the same low regard for the usual way of doing things that Bezos himself had.”

“We spend only forty basis points on marketing.” 

Athletes: On hiring Harrison Miller to lead the rollout of a new category—toys: “Miller knew nothing about toy retailing, but in a pattern that would recur over and over, Bezos didn’t care. He was looking for versatile managers—he called them ‘athletes’—who could move fast and get big things done.”

Articulating culture in 1998: customer obsession, frugality, bias for action, ownership, and high bar for talent.

The flywheel: lower prices → more customer visits → increased volume (direct and third party) → increased efficiency from fulfillment and compute infrastructure → lower prices

Coordination: As Amazon grew, coordination became more difficult. At an offsite, a group presented ideas to improve communication between groups. Jeff stood up with a red face and the infamous blood vessel in his forehead pulsing and said, “I understand what you are saying, but you are completely wrong. Communication is a sign of dysfunction. It means people aren’t working together in a close, organic way. We should be trying to figure out ways for teams to communicate less with each other, not more.” The right question wasn’t, How do we communicate better? It was: How do we improve effectiveness. He later said, “A hierarchy isn’t responsive enough to change. I’m still trying to get people to do occasionally what I ask. If I was successful, maybe we wouldn’t have the right kind of company.”

The Innovator's Dilemma as a manual. The Innovator’s Dilemma had a significant impact on Jeff Bezos (and, being an avid reader, many other books did as well). 

  • Steve Kessel ran the book category for a few years until about 2004, when Bezos asked him to take over the emerging digital business. 
  • Bezos: “If you are running both businesses you will never go after the digital opportunity with tenacity.”
  • Bezos had learned that he needed to set up a new and independent business to pursue a disruptive technology properly
  • He told Kessel: “Your job is to kill your own business.”
  • Bezos was influenced by the book Creation by Steve Grand in which Grand described his approach to a 1990s video game called Creatures. Creatures gave players the ability to “guide and nurture a seemingly intelligent organism on their computer screens.” His approach was to allow complex, higher-level behaviors to emerge from simple computational blocks called primitives.
  • Bezos: “Developers are alchemists and our job is to do everything we can to get them to do their alchemy.”
  • Can this apply to businesses as well? What if within a business the functions—Product, Marketing, Sales, etc.—were primitives on top of which young, relatively untested leaders built new, experimental businesses?
  • How many large, successful businesses emerged unexpectedly as the result of solving an internal problem? Palantir is one example.

Gut calls, intuition, vision. One recurring theme in the book is Bezos’s “gut calls”—times when data wasn’t available, was inconclusive, or even pointed to a conclusion contrary to what Bezos believed and Bezos proceeded in line with his intuitions anyway. A few examples:

  • Prime. “In many ways, the introduction of Amazon Prime was an act of faith.” 
    • “The service was expensive to run, and there was no clear way to break even.” 
      • Diego Piacentini, a senior executive running international operations, said, “We made this decision even though every single financial analysis said we were completely crazy to give two-day shipping for free.”
      • Bezos, however, knew from “gut and experience” that it had the potential to change customer behavior—and the overall company—dramatically. He had seen Super Saver Shipping lead to bigger orders and purchases in new categories. He had seen the increase in spending due to lower friction from 1-Click ordering. 
      • And Bezos was right: “The service turned customers into Amazon addicts.” 
      • And costs did come into line. The fulfillment 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 a year.”
        • This led me to recall this quote from the philosopher Albert Hirschman (source): “Creativity always comes as a surprise to us; therefore we can never count on it and we dare not believe in it until it has happened. In other words, we would not consciously engage upon tasks whose success clearly requires that creativity be forthcoming. Hence, the only way in which we can bring our creative resources fully into play is by misjudging the nature of the task, by presenting it to ourselves as more routine, simple, undemanding of genuine creativity than it will turn out to be.”
  • AWS and pricing. The AWS team, having some sense of Bezos’s philosophies, initially proposed EC2 pricing at $0.15 an hour at which they would breakeven. Bezos unilaterally changed that $0.10.
    • Bezos believed Amazon had a natural costs advantage and that at such pricing IBM, Microsoft, Google, etc. would hesitate to enter the market. 
    • Stone doesn’t mention this, but I wonder if it was also another platform vision, another flywheel. Perhaps Bezos saw that compute infrastructure would become another flywheel connected to the distribution infrastructure flywheel. Increased usage of the distribution infrastructure flywheel led to lower prices, whereas increased usage of the compute infrastructure flywheel led to product innovation. 
  • Kindle pricing. Bezos priced the books at $9.99. “There was no research behind that number—it was Bezos’s gut call.” The price for digital books was the same as that for physical books, typically $15, so it meant they would lose money, but Bezos believed that publishers would eventually lower their prices on digital books to reflect their lower costs. 
  • Kindle wireless. Wireless connectivity to a cellular connection had never been tried before, but Bezos believed that consumers should be able to download a book easily without having to connect to wifi. Bezos faced resistance on both the engineering and the economics but pushed them to do it anyway. 
  • Random customer anecdotes. “Random customer anecdotes, the opposite of cold, hard data, also carry tremendous weight and can change Amazon policy. If one customer had a bad experience, Bezos often assumes it reflects a larger problem and escalates the resolution of the matter inside his company with a question mark.” Wilke: “It’s an audit that is done for us by our customers. We treat them as precious sources of information.”
    • This is why Medallia is an incredible product and on track to be an incredible business.
  • Distribution centers. “[Amazon’s accounting group] fretted about opening seven costly distribution centers and even about having gotten so deeply immersed in the muck of distribution in the first place. Bezos insisted the company needed to master anything that touched the hallowed customer experience, and he resisted efforts to project profitability. ‘If you are planning for more than twenty minutes ahead in this kind of environment, you are wasting your time,' he said in meetings.”

Bezos on Blue Origins, his space travel venture: 

  • “Slow steady progress can erode any challenge over time.”
  • The group’s motto: Gradatim Ferociter, which means “Step by Step, Ferociously.”

Miscellaneous notes:

  • Ignore what other people think.
  • Think. Don’t use PowerPoint. Use six page written narratives.
  • Work backward from the outcome you want. Example: write the press release for a product before starting development.
  • Bezos is a big fan of Nassim Taleb’s book The Black Swan. A key lesson: avoid narrative fallacy. Favor experimentation and clinical knowledge over storytelling and memory. 
  • Nurture the idea. “When a company comes up with an idea, it’s a messy process. There’s no aha moment” 
  • At D. E. Shaw, Bezos was “constantly recording ideas in a notebook.”

  • Alan Kay: “It’s easier to invent the future than to predict it.”

  • “[Bezos] embraces the truth. A lot of people talk about the truth, but they don’t engage their decision-making around the best truth at the time.”

  • “Jeff almost always prefers to build it.” 

Amazon's early timeline:

  • July 5, 1994: founded
  • November 1, 1994: www.amazon.com registered
  • April 3, 1995: first order
  • July 16, 1995: site goes live
  • Early 1996: revenue growing 30-40 percent a month
  • 1996 revenue: $16m
  • 1997 revenue: $144m (which was than what Bezos had predicted as “best case” revenue for 2000 when he was raising capital in 1995)
  • 1998 revenue: 3x growth?

Funding:

  • Early 1994 – early 1995: $10k from Bezos, $5k from Shel Kaphan (first employee), $84k in interest free loans from Bezos
  • Early 1995: $100k from Bezos’s parents (Bezos told parents there was a 70 percent chance they could lose it all)
  • Mid 1995: another $145k from Bezos’s parents
  • Late 1995: $1m at $5m (post-money?) valuation from local investors investing about $50k each (20 of 60 approached)
  • Mid 1996: Projecting $16m in sales, Kleiner Perkins, with its $60m valuation, beats out General Atlantic’s initial $10m valuation, investing $8m (Bezos insisted that Doerr, not a junior team member, join the board)
  • May 5, 1997: IPO (raising $54 million)
  • 1998-2000: $2.2 billion in bonds
    • May 1998: $326 million in junk bonds
    • February 1999: $1.25 billion in convertible debt at 4.75 percent
    • Early 2000: $700 million bond offering