The Everything Store: Jeff Bezos and the Age of Amazon

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The Everything Store: Jeff Bezos and the Age of Amazon Page 6

by Brad Stone


  Parking was scarce and expensive. 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.”

  That fall, the company focused on customizing the site for each visitor, just as Bezos had promised his original investors it would. Its first attempt relied on software developed by a firm called Firefly Network, an offshoot of the MIT Media Lab. The feature, which Amazon called Bookmatch, required customers to rate a few dozen books and then generated recommendations based on their tastes. The system was slow and crashed frequently, and Amazon found that customers were reluctant to go through the extra effort of evaluating books.

  So Bezos suggested that the personalization team develop a much simpler system, one that made recommendations based on books that customers had already bought. Eric Benson took about two weeks to construct a preliminary version that grouped together customers who had similar purchasing histories and then found books that appealed to the people in each group. That feature, called Similarities, immediately yielded a noticeable uptick in sales and allowed Amazon to point customers toward books that they might not otherwise have found. Greg Linden, an engineer who worked on the project, recalls Bezos coming into his office, getting down on his hands and knees, and joking, “I’m not worthy.”

  Similarities eventually displaced Bookmatch and became the seed that would grow into Amazon’s formidable personalization effort. Bezos believed that this would be one of the insurmountable advantages of e-commerce over its brick-and-mortar counterparts. “Great merchants have never had the opportunity to understand their customers in a truly individualized way,” he said. “E-commerce is going to make that possible.”13

  As the company and its technologies evolved, one person was having a ridiculously good time: Shel Kaphan. He was forty-three years old and had led the remarkable effort to hack Bezos’s vision into existence, completely buying into the gospel of a bookstore with limitless shelf space that spread knowledge to all corners of the earth. He was the mother hen of the technology systems: during the move to the Pecos Pit building, he put the company’s two servers, dubbed Bert and Ernie, into the back of his Acura Integra and drove them over there himself.

  Kaphan had taped a fortune-cookie message to the PC monitor on his desk. It read Let no one cause you to alter your code.

  Kaphan and Bezos occasionally took walks around the city to discuss the business and Kaphan’s concerns about technical issues and future plans. On one walk, Kaphan asked Bezos why, now that they had accomplished some of their earliest goals, he was so bent on rapid expansion. “When you are small, someone else that is bigger can always come along and take away what you have,” Bezos told him. “We have to level the playing field in terms of purchasing power with the established booksellers.”

  One thing was bothering Kaphan around that time. He had enough experience with technology startups to know that the arrival of venture capitalists usually coincided with an influx of new, high-powered executives. He walked into Bezos’s office that year and wondered aloud, “We’re growing pretty quickly now. Are you going to replace me?”

  Bezos didn’t waver. “Shel, the job is yours as long as you want it.”

  In early 1997, Mark Breier, a former executive at Cinnabon and one of those new executives Kaphan had anticipated, invited his department to his Bellevue home for a day of meetings. That afternoon, Amazon’s marketing vice president introduced employees to a game called broomball. Breier’s father had been an engineer at IBM in Bethesda and had seen the game played on ice during trips to IBM’s offices in Canada. In Breier’s land-based version, players swatted a kickball on the lawn with brooms and other random implements from his garage.

  It seemed like goofy fun, but there was an undercurrent of intense competition. In other words, it perfectly expressed the temperament of Jeff Bezos, who stopped by the meeting and threw himself into the inaugural Amazon broomball contest with gusto. At one point, Andy Jassy, then a new recruit from Harvard, made his first significant impression at the company by inadvertently hitting Bezos in the head with a kayak paddle. Later, Bezos dove after the ball into some hedges and tore his blue oxford shirt.

  Breier’s tenure at Amazon was short and rocky. Bezos wanted to reinvent everything about marketing, suggesting, for example, that they conduct annual reviews of advertising agencies to make them constantly compete for Amazon’s business. Breier explained that the advertising industry didn’t work that way. He lasted about a year. 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. Breier’s broomball creation, however, became a regular pastime at Amazon employee picnics and offsite meetings, with employees covering their faces in war paint and Bezos himself getting in on the action.

  As Shel Kaphan had suspected, Breier’s arrival at Amazon was just the beginning of an influx of experienced business executives. With venture capital in the bank, Bezos fixated on taking the company public with an IPO, and he went on a recruiting spree. With the D. E. Shaw noncompete clause finally expiring, he called Jeff Holden and told him to pack his bags. Holden convinced a few other DESCO employees to come with him, though one, Paul Kotas, put his stuff in Holden’s U-Haul and then changed his mind. (Kotas moved to Washington two years later and did become a longtime Amazon executive, though his hesitation would cost him tens of millions of dollars in stock.)

  Bezos began filling out the rest of his senior leadership ranks, building a group that would formally become known as the J Team. Amazon recruited executives from Barnes & Noble and Symantec and two from Microsoft—Joel Spiegel, a vice president of engineering, and David Risher, who would eventually take over as head of retail. Risher was swayed by the Amazon founder’s aggressive vision. “If we get this right, we might be a $1 billion company by 2000,” Bezos told him. Risher personally informed Microsoft cofounder Bill Gates of his defection to the bookseller across the lake. Gates, who underestimated the Internet’s impact for too long, was stunned. “I think he was honestly flabbergasted,” Risher says. “To some extent he was right. It didn’t make any sense.”

  One of Risher’s first tasks was taking over negotiations with crosstown coffee giant Starbucks, which had proposed putting a rack of merchandise from Amazon next to its cash registers in exchange for an ownership stake in the startup. Risher and Bezos visited Starbucks’ CEO Howard Schultz in his SoDo headquarters—across from the Pecos Pit—and Schultz told the pair that Amazon had a big problem and that Starbucks could solve it. “You have no physical presence,” the lanky Starbucks founder said as he brewed coffee for his guests. “That is going to hold you back.”

  Bezos disagreed. He looked right at Schultz and told him, “We are going to take this thing to the moon.” They decided to work on a deal, but it fell apart a few weeks later when Schultz’s executives asked for a 10 percent ownership stake in Amazon and a seat on its board of directors. Bezos had been thinking along the lines of less than 1 percent. Even today, Amazon continues to evaluate the possibility of some kind of retail presence. “We were always willing to consider that there may be an opportunity there,” says Risher.

  Another new arrival was Joy Covey as chief financial officer. Driven and often intimidating to underlings, Covey became an intellectual foil to Bezos and a key architect of Amazon’s early expansion. She had an unconventional background. A hyperintelligent but alienated child from San Mateo, California, she had run away from home when she was a sophomore in high school and worked as a grocery-store clerk in Fresno. She entered Cal State, Fresno, at age seventeen, graduated in two years, and then took the exam to become a certified public accountant at age nineteen, notching the second-highest score in the nati
on without studying. She later earned a joint business and law degree from Harvard. When Bezos found her, she was the thirty-three-year-old chief financial officer for a Silicon Valley digital-audio company called Digidesign.

  Over the next few years, Covey remained so intensely focused on executing Bezos’s “get big fast” imperative that everything else in her life became background noise. One morning she parked her car in the office garage and was so distracted that she inadvertently left it running—all day. That evening, she couldn’t find her car keys, concluded she had lost them, and went home without her car. The security guard in the garage called her a few hours later and told her that she might want to come back to the office to retrieve her still-idling vehicle.

  Covey began working on an IPO a month after joining the company. Amazon did not urgently require the capital of a public offering—it had yet to begin launching new product categories, and its ninety-three-thousand-square-foot warehouse in South Seattle was serving the company’s needs. But Bezos believed a public offering could be a global branding event that solidified Amazon in customers’ minds. In these days, Bezos took every opportunity to appear in public and tell the story of Amazon.com. (Always Amazon.com, never Amazon; he was as insistent on that as David Shaw had been on the space between the D. and the E. in his company’s name.) 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, a tough-as-nails Bronx-born businessman with a taste for expensive suits and for fine art, which he lavishly hung on the walls of his lower Manhattan office. Over two decades, Barnes & Noble had revolutionized bookselling. It introduced discount prices on new releases and, with archrival Borders, spread the concept of the book superstore, driving many mall shops and independents out of business. As a result, between 1991 and 1997, the market share of independent bookstores in the United States dropped from 33 to 17 percent, according to the American Booksellers Association, whose membership dropped from 4,500 to 3,300 stores in that time.

  Now Barnes & Noble was faced with what must have seemed like a pipsqueak upstart. Amazon had a measly $16 million in sales in 1996; Barnes & Noble notched $2 billion in sales that same year. Still, after the Wall Street Journal article in 1996, Riggio called Bezos and told him he wanted to come to Seattle with his brother Stephen to talk about a deal. Inexperienced at the time in these kinds of discussions, Bezos called investor and board member Tom Alberg and asked him to accompany him to dinner with the Riggios. Beforehand, they decided on a strategy of caution and flattery.

  The foursome had a steak dinner at Seattle’s famous Dahlia Lounge, on Fourth Avenue near the Columbia Building, an iconic Seattle restaurant with a memorable neon sign of a chef holding a strung-up fish. 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. “They didn’t come right out and offer to buy us. It was not particularly specific,” Alberg says. “It was a pretty friendly dinner. Other than the threats.”

  Afterward, Alberg and Bezos told the Riggios they would think about a partnership. Later Alberg and Bezos spoke on the phone and agreed that such a collaboration was unlikely to work. “Jeff was always a big believer that disruptive small companies could triumph,” Alberg says. “It wasn’t the end of the world. We knew we had a challenge.”

  Rebuffed, the Riggio brothers went home and started work on their own site. According to a person who worked at Barnes & Noble at the time, Len Riggio wanted to call the site the Book Predator but colleagues convinced him that was a bad idea. Barnes & Noble would take many months to back up its threat and spin up its own Web operation, and during that time, Bezos’s team accelerated the pace of innovation and expansion.

  Joy Covey considered both Morgan Stanley and Goldman Sachs for the role of lead underwriter on the Amazon IPO, but she settled on Deutsche Bank and the tall, mustached founder of its technology practice, Frank Quattrone. Quattrone’s lead analyst, a future venture capitalist named Bill Gurley, had covered Amazon for a year and presciently identified it as one of the “wave riders” that was exploiting the ascendance of the Internet.

  That spring, Bezos and Covey traveled the United States and Europe to pitch Amazon to potential investors. With three years of sales data, they now felt they had a unique story. Unlike traditional retailers, Amazon boasted what was called a negative operating cycle. Customers paid with their credit cards when their books shipped but Amazon settled its accounts with the book distributors only every few months. With every sale, Amazon put more cash in the bank, giving it a steady stream of capital to fund its operations and expansion.14 The company could also lay claim to a uniquely high return on invested capital. Unlike brick-and-mortar retailers, whose inventories were spread out across hundreds or thousands of stores around the country, Amazon had one website and, at that time, a single warehouse and inventory. Amazon’s ratio of fixed costs to revenue was considerably more favorable than that of its offline competitors. In other words, Bezos and Covey argued, a dollar that was plugged into Amazon’s infrastructure could lead to exponentially greater returns than a dollar that went into the infrastructure of any other retailer in the world.

  At seemingly every stop, investors asked the pair about possible expansion into other categories. Bezos demurred and said he was focused only on books. To burnish their case, they compared their fundamentals to Dell, the high-flying PC maker at the time. But Bezos, characteristically secretive, divulged only the legal minimum and withheld some data, like what it cost Amazon to attract a new user and how much loyal customers typically spent on the site. He wanted capital from an IPO but didn’t want to give his rivals a road map to use to follow in his footsteps. “There was a lot of skepticism on the road show,” says Covey. “A lot of people said, you are going to fail, Barnes and Noble is going to kill you, and who do you think you are not to share this stuff?”

  The IPO process was painful in another way: During the seven-week SEC-mandated “quiet period,” Bezos was not permitted to talk to the press. “I can’t believe we have to delay our business by seven years,” he complained, equating weeks to years because he believed that the Internet was evolving at such an accelerated rate.

  Staying out of the press soon became even more difficult. Three days before Amazon’s IPO, Barnes & Noble filed a lawsuit against Amazon in federal court alleging that Amazon was falsely advertising itself to be the Earth’s Largest Bookstore. Riggio was appropriately worried about Amazon, but with the lawsuit he ended up giving his smaller competitor more attention. Later that month, the Riggios unveiled their own website, and many seemed ready to see Amazon crushed. The CEO of Forrester Research, a widely followed technology research firm, issued a report in which he called the company “Amazon.Toast.”

  Straining against the regulatory shackles that required him to stay silent, Bezos wanted to send mimes wearing Amazon T-shirts to skulk around the Riggios’ launch event. Quattrone put the kibosh on the plan.

  Later Bezos recalled speaking at an all-hands meeting called to address the assault by Barnes & Noble. “Look, you should wake up worried, terrified every morning,” he told his employees. “But don’t be worried about our competitors because they’re never going to send us any money anyway. Let’s be worried about our customers and stay heads-down focused.”15

  For the next year, Amazon.com and BarnesandNoble.com competed, each asserting that it had a better selection and lower prices. Barnes & Noble laid claim to a deeper catalog; Amazon ramped up efforts to find rare and out-of-print books, assigning employees to track down books in independent bookshops and at antique-book dealers. In 1998, Barnes & Noble would spin off its dot-com subsidiary with a $200 million investment from German media giant Bertelsmann and later take the co
mpany public. Amazon would then outflank the bookseller by rapidly expanding into other product categories like music and DVDs.

  Bezos had predicted that the chain retailer would have trouble seriously competing online, and, in the end, he was right. The Riggios were reluctant to lose money on a relatively small part of their business and didn’t want to put their most resourceful employees behind an effort that would siphon sales away from the more profitable stores. On top of that, their company’s distribution operation was well entrenched and geared toward servicing physical stores by sending out large shipments of books to a set number of locations. The shift from that to mailing small orders to individual customers was long, painful, and full of customer-service errors. For Amazon, that was just daily business.

  Amazon’s IPO, on May 15, 1997, was a success, though a relatively mild one compared with the debauched dot-com affairs that would come later. Bezos battled his bankers to boost the price of the offering to eighteen dollars a share, and the stock traded underwater—below its IPO price—for more than a month. 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. And Amazon’s original backers and Kleiner Perkins all saw a healthy return on their investments. But even that was peanuts compared to the coming exponential growth in Amazon’s stock.

  From New York, Bezos called into the Amazon office on the day of the IPO and asked employees not to overcelebrate the moment or obsess over the stock price. Henry Weinhard’s beer, an inexpensive local brew, was passed around the Seattle offices and then everyone went back to work, although they all occasionally stole furtive glances at Amazon’s stock price.

 

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