And then there was the brilliant innovation of product reviews. Prior to the Internet, few general retailers offered reviews of the products they were selling. A supermarket doesn’t say one brand of toothpaste is higher-rated by shoppers than another. Quite the opposite in fact: a traditional retailer wants to be seen as a neutral broker. But Amazon felt it needed to mimic a real-world book retailer in one key aspect: acting as a source of recommendations. So, Shel Kaphan hacked together a rudimentary rating system over a weekend and initially designed it to provide editorial content from Amazon itself. But this soon evolved into allowing reviews from anyone and everyone. User ratings and reviews were controversial, as, obviously, authors resented bad reviews getting posted prominently alongside their books on the sales page. But to its credit, Amazon stuck to its guns, believing that honest reviews, as well as a reputation for helping customers make smart purchasing decisions, would be a key differentiator compared with offline retail.
In coming years, all these innovations would combine to give birth to the famous recommendation engine. Tying in with the cookies and session ID systems, the recommendation engine would parse your own browsing history, your own purchasing history, as well as the purchasing history of everyone else on Amazon, to help give users that classic prompt: if you liked x, then you will probably like y. Today, this is a key component of not just ecommerce, but of things like Netflix and music-streaming services like Spotify. Initially for Amazon, however, it was just another differentiator from offline retail, a way to prove that ecommerce could do things traditional retail could never dream of.
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AMAZON’S FULL WEBSITE launched to the public on July 16, 1995. The only graphics included the early Amazon logo (which was a field with a river running through it, and a giant A) and tiny pictures of the covers of featured books that Amazon was promoting. All books on the site were discounted by a blanket 10%, but the spotlight books were discounted 20% to 30%.
Sales were slow. Early on, a dozen purchases constituted a good day. But that was a good thing because everything was being done by hand. When an order came in, Amazon turned around and ordered the book from the distributor, who shipped the book to Amazon’s meager offices. Then, the handful of Amazon employees, Bezos and Kaphan included, reboxed the books and shipped them to customers. The company had one public-facing email address and all the employees would take turns responding to customer inquiries.
Over its first week in business, Amazon rang up $12,438 worth of book sales. But it was able to ship only $846 worth out to customers.15 By October, Amazon had its first hundred-order day. And though those numbers sound good for a business blazing an entirely new trail, the fact of the matter was, it would not be enough to sustain operations for very long. For one thing, around the time of the site launch, Amazon had moved into a larger space at 2714 First Avenue South in the SoDo neighborhood of Seattle, across the street from the headquarters of Starbucks. They were a real business now, and they were trying their best to learn to act like one, which did not come cheap.
In later SEC filings, we can see that despite steadily growing sales, by the end of 1994, Amazon lost $52,000. In its first full year of operations, 1995, Amazon was able to sell half a million dollars’ worth of books, and yet it was still in the red to the tune of $303,000.16 And that brings us to the question of financing, which, if you’ll notice, we haven’t really mentioned up until this point. That’s because for as long as he possibly could, Bezos was determined to self-fund the business. Drawing from the money he had socked away over his years on Wall Street, as well as with a mixture of credit card loans and personal guarantees, Bezos was able to fund the company through early development. In the summer of 1995, in the name of her family trust, Jeff’s mother, Jackie, invested $145,000 in the company, a literal friends-and-family round. But that wouldn’t be enough to keep the lights on very much longer.
So, in the summer of 1995, Jeff Bezos started to try to raise money for Amazon for the first time. He didn’t want to approach big-name venture capital firms, and instead solicited from Seattle connections he knew personally. The business plan Bezos shopped around to these local investors was projecting $74 million to $114 million in sales for Amazon by the year 2000.17 On the strength of these projections, Bezos was able to raise $981,000 by the end of 1995, giving away around 20% of the company.18 Of course, those investors would do quite well, because that best-case scenario they bought into was not even close to what Amazon would eventually achieve. By the year 2000, Amazon would record $1.64 billion in net sales, more than fourteen times Bezos’s rosiest estimate.
The true turning point for the company came when Amazon was featured on the front page of the Wall Street Journal on May 16, 1996. Under the headline “Wall Street Whiz Finds Niche Selling Books on the Internet,” the Journal described Bezos as “a whiz-kid programmer on Wall Street” who “suddenly fell under the spell of one of the iffiest business propositions of modern times: retailing on the Internet.”19 The impact of the article was instantaneous. Almost overnight, Amazon went from being a tiny curio on the corner of the Internet to becoming the standard-bearer for a whole new industry. The search engines and AOL came calling, interested in forming partnerships. Just as important, the big-name venture capital firms that Jeff Bezos had deliberately avoided until now began circling as well. Amazon held out for the crème de la crème, and successfully landed an $8 million investment from Kleiner Perkins for 13% of the company, with no less that John Doerr agreeing to sit on Amazon’s board of directors.20
“Jeff was always an expansive thinker, but access to capital was an enabler,” Doerr has said of Bezos.21 Suddenly, a new motto was making the rounds at Amazon, a phrase that would become the standard rallying cry for every dot-com–era business: Get Big Fast. Netscape coined the term originally, but Jeff Bezos and Amazon turned it into something just short of an official motto. In essence, the initial thinking behind Get Big Fast was practical. The publicity surrounding the Wall Street Journal article no doubt alerted bigger competitors to Amazon’s existence. Borders and Barnes & Noble were now aware of Amazon, if they hadn’t been already. In the Journal article, it was noted that Amazon had been on track to do about $5 million in revenue that year, which represented the yearly sales of a single Barnes & Noble superstore. Bezos knew Amazon would have to do better than that, and quickly, before Barnes & Noble launched a website of its own. If the “Earth’s biggest bookstore” really could go toe-to-toe with the entire book-retailing industry, it was time to put the pedal to the metal.
To this end, Bezos and Amazon began spending the recently raised capital infusion on people: warehouse staff, technical support, product reviewers, etc. So many people were brought on board so quickly that an early Amazon HR manager sent a much-remembered pronouncement to local recruiting firms to “send us your freaks,” the oddballs and misfits who might not suit a typical office or typical company, but might be able to thrive in the chaos of a Get Big Fast company.
In November of 1996, Amazon moved again, into new digs in South Seattle, across the street from a pawn shop and a strip club that advertised “12 beautiful women and one ugly one.”22 This new building housed a proper distribution facility, boasting 93,000 square feet of space.23 This move coincided with the hiring of Oswaldo-Fernando Duenas, a 20-year veteran of FedEx who was the first person at Amazon with extensive logistics and warehousing experience. Also around this time, roughly the fall of 1996 through the spring of 1997, Amazon hired veterans of Kraft Foods and Symantec to handle marketing, an ex-Microsoft engineer, brought in to handle product development, and an executive from Barnes & Noble to head business expansion.
Barnes & Noble had certainly taken notice of what Amazon was up to. In late 1996, the Riggio brothers, Leonard and Stephen, who had built Barnes & Noble into the 466-store juggernaut that made it the Wal-Mart of the book-retailing industry, flew out to Seattle to have dinner with Bezos. According to Tom Alberg, an advisor to Bezos at the time, the Riggios
said they admired what Amazon was doing, but when and if Barnes & Noble got around to selling books online, it would crush Amazon. According to Alberg, the Riggios originally wanted some vague partnership, with Len Riggio saying, “I want to invest. I want to own 20 percent of you. I don’t care what the price is.”24 But Bezos didn’t take the bait.
The question was, if Barnes & Noble created a website, could it do so better than Amazon? Bezos calculated that they could not. In short, he would lure the offline retailers onto a battlefield of his choosing, which was the web. He trusted that the web offered Amazon an advantage in skill sets that would prove decisive. While the offline retailers would spend millions to copy Amazon’s operations online, Amazon would meanwhile be outflanking them by moving into new markets.
Barnes & Noble launched its own website on May 12, 1997, and locked up an exclusive agreement with AOL to become that service’s exclusive bookseller.25 This was back when accessing AOL’s 8 million early online subscribers was invaluable for young web companies hoping to compete. And of course, Barnes & Noble attempted to leverage customer familiarity with those 600-odd physical stores scattered around the country. Very smart people looked at the competitive situation and declared that Amazon was doomed. In September of 1997, Fortune magazine had a story with the title “Why Barnes & Noble May Crush Amazon.” In the article, the author posited, “Anything Amazon.com can do on the Internet, so, too, can Barnes & Noble.”26 Famously, Forrester Research released a report in early 1997 entitled “Amazon.toast.”27
But Amazon fought back with the Netscape playbook. It IPOed on May 15, 1997, gaining the now-requisite flood of media attention. Shares went out at $14 to $16 per share, but closed on the first day of trading at $23.50.28 It wasn’t a mind-blowing first-day pop like Netscape or Yahoo, but investors had been intrigued by Amazon’s strong growth numbers. In 1996, sales were $15.7 million. In 1997, sales would top $147 million.29 At the time of the IPO, Amazon was recording a 900% growth in revenue.30 The promised efficiencies of the ecommerce model that Bezos had so much faith in were actually panning out. Amazon was turning over its inventory 150 times a year; traditional physical bookstores like Barnes & Noble turned inventory only 3 or 4 times a year.31
Just as Bezos had anticipated, he, not the Riggios, was the incumbent on the web. Barnes & Noble had to spend tens of millions of dollars to create a website, and even after doing so, it never drew significant numbers of shoppers back from Amazon. Amazon, meanwhile, was steadily poaching customers from Barnes & Noble’s website, while at the same time chipping away at offline retail sales. It wasn’t clear, in fact, that having a nationwide chain of stores offered any sort of advantage whatsoever against an online insurgent. This was antithetical to everything people understood about retail sales. Being local neighbors, Howard Shultz, CEO of Starbucks, once met with Bezos to propose some sort of partnership that would allow Amazon to place merchandise in Starbucks’s own stores, perhaps in a bid to emulate Barnes & Noble’s cafés. Shultz told Bezos, “You have no physical presence. That is going to hold you back.” Bezos shot back that physical presence wasn’t necessary: “We are going to take this thing to the moon.”32
Disruption is the word that has come into common parlance to describe the nature of these encounters and the Barnes & Noble/Amazon battle would be the first of the great contests between online disrupter and offline incumbent. So, it’s interesting to note: Amazon didn’t exactly trounce its initial competition. Barnes & Noble is still around (though Borders is gone). Bookstores are still around, unlike, say, video rental stores or music stores. Amazon didn’t surpass Barnes & Noble in total revenue as a company until 2004.33 Amazon didn’t even become the biggest book retailer in the world until 2007.34 But it didn’t really matter, because just as had been the plan all along, while the incumbent booksellers raced to copy Amazon, Amazon was already moving toward new horizons. Jeff Bezos didn’t care if Amazon ever definitively “won” in books, frankly, because his real aim was to take increasingly bigger bites of other markets, and then other markets, and other markets, until one day, Amazon had a piece of every market.
It seems that at some point between researching the web at D. E. Shaw and the Kleiner Perkins investment, Jeff Bezos convinced himself ecommerce really was a markedly superior way of doing business. Like Andreessen and Clark at Netscape, Bezos saw the horizons on the Internet as being unlimited. Time and again, in several different interviews and speeches, Bezos would talk of how this was “day one” of the Internet revolution. Bezos believed Amazon had a chance to not only establish ecommerce as a viable proposition, but also to disrupt the entire system of buying and selling everything. Bezos wasn’t just thinking about books, but about retail itself, a business model that went back millennia to that first day merchants gathered in a central location to hawk their goods to a local population. In Bezos’s vision, the products would come to the people. First books, then anything else. In the end, he would make the everything store a reality.
As Amazon executive Joy Covey remembered, Bezos “always had a large appetite. It was just a question of staging the opportunities at the right time.” Amazon launched its music store in June of 1997 and its movies store in November of 1997.35 A mere 120 days after launching the music store, Amazon.com could claim to be the largest online seller of music. The motto on the top of the website was changed from reading Earth’s Largest Bookstore to now read Books, Music and More, and eventually would simply say Earth’s Biggest Selection.36
In the mid-nineties, a cautionary tale began to be bandied about the business world: beware because your industry could suddenly be Amazoned! No matter what you sold or what service you provided, you had to be on the lookout for a web startup (often Amazon itself) that might come along and attack your market. This upstart might seem like a tiny pretender at first, but their web magic would start wooing customers, and before you knew it, that little dot-com might have a bigger market cap than you did. A key factor that would contribute to the coming dot-com bubble would be the untold billions that companies in all industries spent in an attempt to be proactive and come up with an “Internet strategy.” To avoid being Amazoned. Bezos himself would later say of his first competitor’s sudden efforts to compete on the web, “Barnes & Noble isn’t doing this because they wanted to. They’re doing this because of us.”37
7
TRUSTING STRANGERS
eBay, Community Sites and Portals
It’s often remarked upon that Silicon Valley has a prominent utopian streak. When founders of today’s billion-dollar chat apps talk earnestly about how their inventions are “changing the world,” they are part of a long tradition of grandiose digital idealism indigenous to the tech industry. A lot of this comes from geography and timing. Silicon Valley came into being in the 1960s and 1970s. Cold War–era defense- and space-research spending seeded the technology industry in the Valley, while the nearby counterculture havens of Berkeley and San Francisco infused flower-power thinking among the denizens. So, Silicon Valley has always been equal parts egghead libertarianism and acid-tinged hippie romanticism. Both of these worldviews mesh quite well actually when it comes to believing that technology can be used to better mankind and free it from all manner of oppression, repression and just everyday drudgery. The Internet was another in a long line of technological miracles that many believed would elevate minds and free souls from all sorts of impediments. For the libertarians the Internet was great because it had few rules and no governance. For the hippies, the Internet promised free expression and a democratization of ideas.
Steeped in this milieu was a French-Iranian immigrant named Pierre Omidyar. Omidyar had been involved in the Silicon Valley startup scene even before the Internet Era started. When Microsoft purchased eShop, the startup he worked at, Omidyar’s share of the windfall made him a millionaire. Not even thirty at this point, he had no intention of retiring. Omidyar came from the libertarian side of the Valley’s intellectual duality. With that philosophical bent,
he found himself wondering if perhaps the then-exploding web could be a sort of laboratory for realizing that long-held libertarian dream: a perfect, frictionless, regulation-free marketplace. His insight was that the traditional classified ad—say, selling a used coffee table by buying a few lines in the newspaper—just wasn’t an efficient use of market dynamics. With a normal ad, you simply said, “I want $100 for this table.” And if someone agreed that that was a fair price, then you got your $100. But what if $100 wasn’t the right price? What if you could have gotten more for your coffee table? What if the buyer could have paid less? There was no way of knowing. In a perfect marketplace, the market price is the correct price because buyers and sellers (ideally, multiple buyers and sellers) can haggle to arrive at an optimal result. Classified ads did not allow for that haggling. But what if you could create an auction scenario in classified ads? That way you could find the true market price for any item because the buyers and sellers would arrive at the final price organically. As Omidyar described it, “If there’s more than one person interested, let them fight it out. The seller would by definition get the market price for the item, whatever that might be on a particular day.”1 In other words, Omidyar didn’t just want to bring classified advertising to the web; others like The Monster Board for employment classifieds and Match.com for personals were already doing that. He wanted to see if the web could create the perfect classified platform by introducing the auction element.
On the Friday night before Labor Day weekend in 1995, Omidyar holed up in his home office on the second floor of his town house and began writing code for his auction idea. By the end of the long weekend, he had cobbled together a crude website that allowed users to do three simple things: list items for sale, view items that were on sale, and place bids on those items. He hosted the site on his home server and published it to the web via his $30-a-month account with a local ISP. He called the site AuctionWeb. But he hosted it as a subsite on his personal webpage, ebay.com. So, the URL was ebay.com/aw.
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