by Brad Stone
Bezos used that word a lot: bold. In the company’s first letter to its public shareholders, written collaboratively by Bezos and Joy Covey and typed up by treasurer Russ Grandinetti in early 1998, the word bold was used repeatedly. “We will make bold rather than timid investment decisions where we see a sufficient probability of gaining market leadership advantages,” they wrote. “Some of these investments will pay off, others will not, and we will have learned another valuable lesson in either case.” The letter also stated that the company would make decisions based on long-term prospects of boosting free cash flow and growing market share rather than on short-term profitability, and one section in particular served as a guidepost for the unorthodox way the company planned to approach Wall Street.
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.
Our decisions have consistently reflected this focus. We first measure ourselves in terms of the metrics most indicative of our market leadership: customer and revenue growth, the degree to which our customers continue to purchase from us on a repeat basis, and the strength of our brand. We have invested and will continue to invest aggressively to expand and leverage our customer base, brand, and infrastructure as we move to establish an enduring franchise.
Inside Amazon, the shareholder letter became the equivalent of holy scripture. Bezos rereleases the letter each year with the company’s annual report, and the company has hewed remarkably close to the promises and philosophies laid out in it.
Amazon started its dot-com-era sprint with what it called its megadeals. It paid tens of millions of dollars in the late 1990s to be the exclusive bookseller on the popular sites of the day like AOL, Yahoo, MSN, and Excite. These sites were called portals, because they were the main entryways to the Web for the new and technically unsophisticated masses. The portals were accustomed to receiving equity stakes for these kinds of deals, but Bezos refused to give that—he was as stingy about handing out stock as he was about allowing employees to fly business-class. Instead, he paid cash and convinced each portal to throw in a freebie: links to Amazon books within search results. For example, if someone searched AOL.com for ski vacations, he would see a link to books about skiing on Amazon.
Bezos enforced strict frugality in Amazon’s daily operations; he made employees pay for parking and required all executives to fly coach. But he was surprisingly profligate in some ways. In early 1998, when he hired Randy Tinsley from Intel to become director of corporate development, one of the first things he said to him was “I am really looking forward to going shopping with you.” Their resulting splurge was epic. Amazon bought the movie database IMDB.com, the British Web bookstore BookPages, the German Web bookstore Telebuch, the online marketplace Exchange.com, the pioneering social-networking service PlanetAll, and a data-collection company called Alexa Internet—among many other purchases. The acquisitions brought in experienced executives, but Amazon was moving too quickly, and was too chaotic internally, to properly integrate the companies and their technology. Most of the executives left after a year or two, repulsed by the frenetic pace, the dreary Seattle weather, or both.
Amazon also veered disastrously into the venture-capital arena. In 1998 Bezos and venture capitalist John Doerr saw an opportunity for an online pharmacy and founded Drugstore.com, recruiting longtime Microsoft executive Peter Neupert to run it. Amazon owned a third of the company. The venture got off to a promising start, so for the next two years, Tinsley and Bezos invested tens of millions of Amazon’s cash in a variety of dot-com hopefuls, including Pets.com, Gear.com, Wineshopper.com, Greenlight.com, Homegrocer.com, and the urban delivery service Kozmo.com. In exchange for its cash, Amazon took a minority ownership position and a seat on the board for each, and the company believed it was well positioned for the future if those product categories succeeded on the Internet. The startups believed they had a powerful partner invested in their success. Almost all of them went down in flames, though, during the collapse of the dot-com bubble in 2000, and by then, Bezos had his own problems and possessed neither the temperament nor the time to try to save them. The company lost hundreds of millions on these investments. “Amazon had to be focused on its own business,” says Tinsley. “Our biggest mistake was thinking we had the bandwidth to work with all these companies.”
Inside Amazon, employees lived under Bezos’s frugal edicts while they watched in awe as he kept pushing more and more chips into the pot. Gene Pope was an early engineer at Apple who reunited at Amazon with his former colleague Joel Spiegel. After watching the wild expansion for a few months, Pope said to Spiegel, “What we are doing here is building a giant rocket ship, and we’re going to light the fuse. Then it’s either going to go to the moon or leave a giant smoking crater in the ground. Either way I want to be here when it happens.”
As the company grew, Bezos offered another sign that his ambitions were larger than anyone had suspected. He started hiring more Walmart executives. In early 1998, Amazon pursued one of Rick Dalzell’s former colleagues, a retired Walmart vice president of distribution named Jimmy Wright. At Walmart, the abrasive Wright had proven himself so exasperating that once during an argument in his office, Dalzell, the Army Ranger, had lifted Wright entirely off his feet, deposited him outside the office, and slammed the door shut. But Dalzell knew that if anyone could accomplish Bezos’s ambitious vision of a rapid build-out of distribution capacity, it was Jimmy Wright. “I’m not sure anyone else in America could have done it,” Dalzell says.
Bezos courted Wright for months and that summer got him to tour the Dawson Street warehouse. Bezos said he wanted a distribution system that was ten times larger than it currently was, and not just in the United States but in Amazon’s new markets in the United Kingdom and Germany. Wright asked Bezos what products they would be shipping. “He said, ‘I don’t know. Just design something that will handle anything,’ ” Wright recalls. “I’m going, You’re kidding me, right? And he said, ‘No, that is the mission.’ I had to have a solution to handle everything but an aircraft carrier.”
Wright had never experienced a challenge of that magnitude. At Walmart, distribution centers shipped containers of products predictably, once a day, to all the stores in the surrounding area. At Amazon, there were innumerable packages going to countless destinations. And there was no predictability, because Amazon sales were growing by 300 percent a year.
As Wright started planning, Amazon navigated a tumultuous 1998 holiday season. Around Thanksgiving, Joy Covey realized that the gap between the number of orders being placed on the website and the number of packages being shipped to customers was widening, and she raised an alarm. Amazon declared an all-hands-on-deck emergency, and, in a program dubbed Save Santa, every employee from the main office took a graveyard shift on Dawson Street or in a new facility in Delaware. They brought their friends and family, ate burritos and drank coffee from a food cart, and often slept in their cars before going to work the next day. Bezos held contests to see who could pick orders off the shelves fastest. After Christmas was over, he vowed that Amazon would never again have a shortage of physical capacity to meet customer demand.
Around that time, Wright showed Bezos the blueprints for a new warehouse in Fernley, Nevada, thirty miles east of Reno. The founder’s eyes lit up. “This is beautiful, Jimmy,” Bezos said.
Wright asked who he needed to show the plans to and what kind of return on investment he would have to demonstrate.
“Don’t worry about that,” Bezos said. “Just get it built.”
“Don’t I have to get approval to do this?” Wright asked.
“You just did,” Bezos said.
Wright kept his home and private consulting office in Bentonville, and during his fifteen months at Amazon he shuttled back and forth to Seattle. He did something else in that time as well. In backyard barbecues and at the Bentonville community fitness center, he canvassed his former colleagues and pitched them on joining the online retailer. “Walmart did not even have Internet in the building back then,” says Kerry Morris, a product buyer who moved from Walmart to Amazon. “We weren’t online. We weren’t e-mailing. None of us even knew what he meant by online retail.”
Amazon knew Walmart would react poorly to Amazon’s poaching from its ranks. Morris says that her interview process was conducted stealthily. She stayed at a friend’s in Seattle rather than at a hotel and interviewed for the job at a Starbucks, not at Amazon’s office. Amazon, she says, paid for her expenses with cash. That year, more than a dozen Walmart employees moved to Amazon.
The Walmart transplants created plenty of uncomfortable friction. The Amazon employees were in their twenties and early thirties and full of Bezos-programmed bravado about doing everything differently. The folks from Bentonville were considerably older, in their forties and fifties, and had little patience for the brash youngsters. One notoriously caustic émigré from Walmart, Tom Sharpe, took over as vice president of merchandising and lasted a little more than a year. Birtwistle, the Harvard MBA, remembers a preliminary conversation with Sharpe that went like this.
Sharpe: “What’s your name again?”
Birtwistle: “It’s Brian Birtwistle.”
Sharpe: “Well, listen, Buttwistle, the grown-ups are here now. We are here to make this thing run like a real business.”
The Walmart transplants created another problem. As part of the Drugstore.com build-out, Bezos and Doerr recruited a Walmart engineer named Kal Raman, and he also began cherry-picking his former colleagues from Bentonville. That was the last straw. Walmart sued Amazon, Kleiner, and Drugstore.com in the Arkansas state court, alleging that they were trying to steal trade secrets. John Doerr joked that he could no longer safely travel to the state.
The case was a symbolic shot across the bow and was ultimately settled with no damages. But it brought the bubbling tensions between the reigning retail champion and the brash online upstart into the open. Some people were unhappy about this. Rick Dalzell’s wife, Kathryn, was upset that her new community was now at war with her old one. Dalzell happened to mention that to Bezos, and soon after, Bezos and MacKenzie stopped by Dalzell’s home with flowers and a copy of Sam Walton’s autobiography, Sam Walton: Made in America.
Bezos had imbibed Walton’s book thoroughly and wove the Walmart founder’s credo about frugality and a “bias for action” into the cultural fabric of Amazon. In the copy he brought to Kathryn Dalzell, he had underlined one particular passage in which Walton described borrowing the best ideas of his competitors. Bezos’s point was that every company in retail stands on the shoulders of the giants that came before it. The book clearly resonated with Amazon’s founder. On the last page, a section completed a few weeks before his death, Walton wrote:
Could a Wal-Mart-type story still occur in this day and age? My answer is of course it could happen again. Somewhere out there right now there’s someone—probably hundreds of thousands of someones—with good enough ideas to go all the way. It will be done again, over and over, providing that someone wants it badly enough to do what it takes to get there. It’s all a matter of attitude and the capacity to constantly study and question the management of the business.
Jeff Bezos embodied the qualities Sam Walton wrote about. He was constitutionally unwilling to watch Amazon succumb to any kind of institutional torpor, and he generated a nonstop flood of ideas on how to improve the experience of the website, make it more compelling for customers, and keep it one step ahead of rivals.
In early 1998, Bezos was closely involved with a department called Personalization and Community, which was geared toward helping customers discover books, music, and movies they might find interesting. That May, he surveyed what was then Amazon’s Hot 100 bestseller list and had an epiphany—why not rank everything on the site, not just the top sellers? “I thought, ‘Hey, why do we stop at a hundred? This is the Internet! Not some newspaper bestseller list. We can have a list that goes on and on,’ ” he told the Washington Post.2
The notion was not only to create a new kind of taxonomy of popularity but also to give authors, artists, and publishers a better idea of how they were doing—and to cater to some of their more neurotic impulses. “Bezos knew sales rank would be like a drug to authors,” says Greg Linden, an early Amazon engineer. “He insisted that it change whenever a new order came in.”
That was not a trivial challenge. Amazon’s overloaded servers were already stretched to the limit, and its Oracle database software was not designed to handle the increasing loads generated by the swelling audience of the Web. Engineers ended up fudging it, taking snapshots of sales data and pushing new rankings to the website every few minutes. The service, called Amazon Sales Rank, was introduced in June to the consternation of not only authors, who began compulsively checking their rankings at all hours of the day and night, but also their spouses and more than a few wary editors and publishers. “I understand how addictive it can be, but maybe they could spend their time more productively, like, maybe, writing a new book,” veteran editor John Sterling said.3
Around that same time, Amazon filed for a patent on what it called its 1-Click ordering process. The system stemmed from a lunch Bezos had with Shel Kaphan and interface engineer Peri Hartman back in 1997, during which he declared that he wanted to make it as easy as possible for customers to buy things on the site. Hartman, a computer science graduate from the University of Washington, devised a system that preloaded a customer’s credit card information and preferred shipping address and then offered the opportunity to execute a purchase with a single press of a button when he or she ordered a product.
By reducing the friction of online buying even marginally, Amazon could reap additional millions in revenue while simultaneously digging a protective moat around its business and hobbling its rivals. The company’s nineteen-page patent application for the system, entitled “Method and System for Placing a Purchase Order Via a Communications Network,” was approved in the fall of 1999. Amazon trademarked the name 1-Click, and a multiyear debate over the wisdom of legally protecting basic business tools began.
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. Bezos didn’t altogether disagree—intellectually, he was an advocate for patent reform—but he was determined to exploit the status quo for any possible advantage. He sued Barnes & Noble for infringing on the patent in late 1999 and won a preliminary ruling that forced the bookseller to add an extra step to its checkout process. Amazon licensed the patent to Apple in 2000 for an undisclosed sum and tried to use it, ineffectively, to gain some leverage over a rising and worrisome rival that first showed up on Amazon’s radar in mid-1998: eBay.
Jeff Blackburn, the former Dartmouth football player who later would become Amazon’s chief of business development, saw eBay coming before almost anyone else at Amazon. The Silicon Valley startup, founded in 1995 as a site called AuctionWeb, mad
e $5.7 million in 1997, $47.4 million in 1998, and $224.7 million in 1999. Blackburn realized that it was growing rapidly, and, even more unsettling—and unlike Amazon—it was profitable. The company had the perfect business model: it took a commission on each sale but had none of the costs of storing inventory and mailing packages. Sellers posted their own products on the site, auctioned them off to the highest bidder, and handled shipping to the customers themselves. The site had started with collectibles like Beanie Babies and baseball cards but it was well on its way to intercepting Bezos’s dream of unlimited selection and stealing the mantle of the everything store.
In the summer of 1998, Bezos invited eBay’s Iranian American founder, Pierre Omidyar, and its CEO, Meg Whitman, a former Disney executive, to Seattle; eBay had just filed to go public when the two executive teams, whose fates would be intertwined for a decade, met for the first time. Bezos gave the eBay team a tour of the Dawson Street distribution center. Omidyar recalls being impressed by the automation in the facility and startled by the piercings and tattoos of the workers. “I thought it was all very cool,” Omidyar says. Later Whitman told him, “Pierre, get over it. This is horrible. The last thing we’d ever want to do is manage warehouses like this.”
During the meeting, the executives discussed different ways of working together. Omidyar and Whitman suggested putting eBay links on Amazon when a customer searched for products it didn’t carry, such as Beanie Babies, and they offered to do the same on eBay for the books of popular authors like Tom Wolfe. Bezos suggested the possibility of Amazon investing in eBay. The eBay executives came away with an impression that Bezos was offering to buy eBay for around $600 million—roughly the market capitalization it was pursuing in its IPO, though later Jeff Blackburn didn’t recall that any formal proposals were made. In the end, though, it didn’t matter; the eBay execs believed that they were pioneering a new type of virtual commerce where supply and demand met to identify the perfect price for any product. They were also put off by Bezos’s startling laugh. The venture capitalists backing eBay asked around and heard that one did not work with Jeff Bezos; one worked for him.