by Brad Stone
Bezos had not immediately viewed eBay as a direct threat. But as eBay’s sales and profits grew, he worried that customers might see eBay as the natural starting point for an online shopping trip. Though Bezos often claimed that Amazon considered itself “a customer-focused company, not a competitor-focused company,”4 eBay anxiety spread. Employees exposed to a steady barrage of new economy hokum in newspapers and magazines worried not only that eBay had a better business but that fixed-price retailing itself might become a relic of the past.
Late that year, Bezos initiated a secret auctions project in a sequestered space on the second floor of the Columbia Building, dubbing the effort EBS, for Earth’s Biggest Selection (or alternatively, employees joked, for eBay by spring). Bezos did not tell other employees or his directors, particularly since Scott Cook, the founder of Intuit, was on both the Amazon and eBay boards. Joel Spiegel, who led the effort with Jeff Blackburn, had a mandate to replicate eBay in three months.
Bezos was confident he could beat eBay, particularly since well-capitalized Amazon could afford to charge a lower listing fee to sellers and offer free fraud insurance. Foreseeing the need to marry auctions with a seamless way for buyers and sellers to exchange money, he paid $175 million to acquire the six-month-old payment firm Accept.com, which had not yet introduced an actual service but was already in the process of finalizing a deal with eBay when Bezos swooped in.
Bezos went skiing in Aspen that winter with Cook and Doerr and finally told them what was coming. “He said, ‘We’re going to win, so you probably want to consider whether to stay on the eBay board,’ ” says Cook. “He thought it would be the only natural outcome.” Cook said he wanted to wait and see how things played out.
Amazon Auctions launched in March 1999, and though it got off to a slow start, Bezos quickly doubled down. He acquired a company to broadcast auctions live on the Web and signed a deal with the storied auction house Sotheby’s to focus on high-end products. But the effort went nowhere. Customers could reach Amazon Auctions only by clicking on a separate tab on the Amazon home page, and it looked like a dingy leftovers bin to people who were accustomed to using Amazon to shop in the traditional way, with predictable prices for each item.
The high-tech community was getting a lesson in the dynamics of network effects—products or services become increasingly valuable as more people use them. In online marketplaces, the network effect was pervasive; sellers stuck around for access to a critical mass of buyers, and vice versa. In the auctions category, eBay already had an insurmountable advantage. Amazon’s executives remember this significant failure as painful but strangely uplifting. “Those days in the nineties were the most intense, fun time I ever had at the company,” Blackburn says. “We had an insanely talented group of people trying to figure out how to launch a superior auctions site. In the end the network effect mattered. You could say we were naïve, but we built a great product.”
Bezos didn’t take the defeat personally. He later cast the mistake as the first step in a series of important experiments to bring third-party sellers onto Amazon. Auctions would evolve into something called zShops, a platform for sellers that allowed them to operate their own fixed-price stores on Amazon.com (zShops, incidentally, was almost called Jeff’s Club, à la Walmart’s Sam’s Club). Regardless, it went nowhere as well. For now, at least, the Web’s small sellers were wedded to eBay.
Perhaps the most avid user of Amazon’s auction site was Bezos himself, who began to collect various scientific and historical curiosities. Most memorably, he purchased the skeleton of an Ice Age cave bear, complete with an accompanying penis bone, for $40,000. After the company’s headquarters moved yet again over the summer, out of the deteriorating Columbia Building and into the Pacific Medical Center building, a 1930s-era art-deco hospital that sat on a hill overlooking the I-5 freeway, Bezos displayed the skeleton in the lobby. Next to it was a sign that read PLEASE DON’T FEED THE BEAR.
Bears—the stock-market kind, pessimists who believe security prices are due to fall—would play no part in what happened next. On December 15, 1998, Oppenheimer analyst Henry Blodget made what became one of the most infamous predictions of the decade, projecting that Amazon’s stock price—already riding the wave of dot-com hysteria into the $200s—would hit $400 per share over the next twelve months. The forecast became a self-fulfilling prophecy and signaled the onset of mass delusion. It sent Amazon stock $46 dollars higher that first day alone, and the stock hit the $400 mark just three weeks later (after two subsequent stock splits, it peaked at $107). Nudged along by the breathless reports and rhetoric emanating from Wall Street and the press, investors were beginning to lose their minds.
Bezos claimed he was impervious to the hype, but as the dot-com frenzy intensified, he used the unique climate to hasten Amazon’s growth. If there was to be a great Internet landgrab, he reasoned, Amazon should rush to carve out the biggest parcel of territory. “We don’t view ourselves as a bookstore or a music store,” he said that year. “We want to be the place for someone to find and discover anything they want to buy.”5
There were two ways to accomplish this: either slowly, category by category, or all at once. Bezos tried both paths, and some of his ideas were so outlandish that employees called them “fever dreams.”
One internal initiative from that time was dubbed the Alexandria Project or, informally, Noah’s Ark. The idea was to obtain two copies of every book ever printed and store them in the new distribution center in Lexington, Kentucky. That was expensive and inefficient; most books would just sit gathering dust and taking up space, but Bezos wanted customers to be able to find any title on Amazon and get it quickly. Book-buying teams eventually pushed back against the directive, stocking only the most popular books but negotiating deals with select distributors and publishers so they would ship less popular titles directly to any customers who ordered them.
An even more absurd Bezos fever dream was named Project Fargo, after the Coen brothers’ film. Bezos wanted to obtain one of every product ever manufactured and store it in a distribution center. “The overarching goal was to make Amazon the first place people looked to buy anything,” says Kim Rachmeler, a longtime Amazon executive. “If you had a rodeo costume in stock, what wouldn’t you have?”
Rachmeler says that Project Fargo “didn’t have a lot of support among the rank and file, to put it mildly. It kept getting pushed down the stack and Jeff kept reviving it. I vividly remember a large meeting where Jeff was trying to convince people that Fargo needed to be done. ‘This is the most critical project in Amazon’s history’ is pretty close to a direct quote.” Ultimately, the project faded amid other, more pressing priorities.
It is more evident in the way Amazon operates now that Bezos became absorbed with the challenge of delivering products immediately after customers placed their orders. John Doerr says that “for many years we were on a journey to figure out if we could get to same-day delivery.” The quest sparked a $60 million investment in Kozmo.com, which delivered everything, from snacks to video games, to a New York City customer’s doorstep. (It went bust in 2001.) Bezos even wondered aloud whether Amazon could hire college students on every block in Manhattan and get them to store popular products in their apartments and deliver them on bicycles. Employees were dumbstruck. “We were like, Aren’t we already worried about theft from our distribution center in Atlanta?” says Bruce Jones, an engineer who worked on DC software.
The fever dreams were perhaps best embodied by the 1998 acquisition of a Silicon Valley company called Junglee, founded by three graduates from Stanford’s computer science PhD program. Junglee was the first comparison-shopping site on the Web; it collected data from a variety of online retailers and allowed customers to easily compare prices on specific products. A few months after the Amazon IPO, Bezos snatched the startup out of the hands of Yahoo, which was also negotiating to acquire it, for $170 million in Amazon stock. His idea was to incorporate Junglee’s listings into the Amazon site
and ensure that customers could search for and see information on any conceivable product, even if Amazon did not carry it.
Worried that it would have to start collecting sales tax if it had offices in California, Amazon management insisted that the Junglee employees move to Seattle, where for the next few months they turned their service into a feature on the Amazon site called Shop the Web. When a customer searched for a product on Amazon.com, the Junglee software generated a list of prices and blue links. But the customer would have to click on those links and go to another website to actually buy the items. Many Amazon executives hated the fact that customers were leaving their site to make purchases elsewhere. As a result, Shop the Web lasted on Amazon.com for just a few months and then died a quiet death. Ram Shriram, the chief operating officer of Junglee before he became a business-development executive at Amazon, calls it a “total tissue rejection. Part of the reason it didn’t succeed was that the team didn’t buy into it.”
By any measure, the acquisition of Junglee was a failure. All of Junglee’s founders and most of its employees left Amazon by the end of 1999 to return to the Bay Area. But the deal nevertheless produced an extraordinarily bounteous outcome—for Bezos. Unbeknownst to the founders of Junglee at the time, Ram Shriram was quietly advising two PhD students at Stanford—Larry Page and Sergey Brin—who were trying to reimagine search on the Internet. In February 1998, Shriram had become one of the first four investors who backed the hopeful little company, Google, with $250,000 each.
Six months after that investment, over the summer of 1998, Bezos and MacKenzie were in the Bay Area for a camping trip with friends, and Bezos told Shriram that he wanted to meet the Google guys. On a Saturday morning, Shriram picked up Bezos and his wife at a local hotel, the Inn at Saratoga, and drove them to his home. Page and Brin met them there for breakfast and demonstrated their modest search engine. Years later, Bezos told journalist Steven Levy that he was impressed by the Google guys’ “healthy stubbornness” as they explained why they would never put advertisements on their home page.6
Brin and Page left Shriram’s house after breakfast. Revealing once again his utter faith in passionate entrepreneurs’ power to harness the Internet, Bezos immediately told Shriram that he wanted to personally invest in Google. Shriram told him the financing round had closed months ago, but Bezos insisted and said he wanted the same deal terms as other early investors. Shriram said he would try to get it done. He later went back to the Google founders and argued that Bezos’s insight and budding celebrity could help the fledgling firm, and they agreed. Brin and Page flew to Seattle and spent an hour with Bezos at Amazon’s offices talking about technical issues like computer infrastructure. “Jeff was very helpful in some of those early meetings,” Larry Page says.
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. (Bezos adamantly refuses to discuss whether he kept some or all of his Google holdings after its IPO in 2004.) “He’s so prescient. It’s like he can peer into the future,” says Shriram, who left Amazon in 2000 and remains a Google board member and who still marvels at that transaction years later. “He’s also extremely shrewd and self-aware and knows just how far he can push something.”
As Bezos’s fever dreams receded in the face of practical concerns inside the company, Amazon pursued a more methodical path to expanding selection. The expansion into selling music and DVDs in 1998 had gone well, with Amazon quickly surpassing the early leaders in each market, including a startup called CDNow.com in music and Reel.com in movies. At first Amazon couldn’t get music labels and movie studios to supply it directly. But as in the book business, there were intermediary distributors, like Baker and Taylor, that gave Amazon an initial boost and then allowed it to credibly make its case directly to the big media companies.
At the beginning of 1999, an emboldened Bezos selected toys and electronics as two of the company’s primary new targets. To lead the toys rollout, David Risher, the senior VP of retail, chose Harrison Miller, a recent graduate of Stanford’s MBA program whose only apparent qualification for the toy job came from his once teaching fifth grade in a New York City school. In other words, 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.
Miller was given a single lieutenant, Brian Birtwistle, and just eight months to get a toy business up and running before the holiday crush. A few days after getting the assignment, he and Birtwistle flew to the annual toy fair in New York, passing analyst reports about the toy business back and forth across the airplane aisle. They walked the convention floor that week introducing themselves to wary toy companies that weren’t sure if Amazon and e-commerce in general represented an opportunity or a threat. The toy company execs demanded to know how much product the two wanted to buy. The young Amazon executives had no earthly idea.
Toys were fundamentally different than books, music, or movies. This time, there were no third-party distributors to provide any item and take back unsold inventory. The big toy makers carefully weighed how much product they would allocate to each retailer. And the retailers had to predict nearly a year in advance what the next holiday season’s most popular items would be, as a majority of their sales occurred within a six-week frenzy of parental indulgence. If the retailers’ forecasts were wrong, they were in deep trouble, because after the holidays, unsold toys were nonreturnable and about as desirable as rotten fruit. “Toys are so fad driven, it’s a little like betting on Oscar winners only by looking at movie trailers,” Miller says.
For the first time, Amazon had to prostrate itself to suppliers for the privilege of selling the suppliers’ products. In pursuit of Star Wars action figures and other toys from the classic trilogy, Miller, Bezos, and John Doerr went to dinner with Hasbro chief executive Alan Hassenfeld at the Fairmont Hotel in San Francisco and made a pilgrimage to Lucasfilm headquarters in Marin County, north of San Francisco. “It was our first serious encounter with having to beg and plead to stock an item,” says Miller. “The whole issue of being an approved supplier suddenly became a huge hill to climb.”
That summer, Harrison Miller and Bezos butted heads in front of the board of directors over the size of the bet on toys. Bezos wanted Miller to plow $120 million into stocking every possible toy, from Barbie dolls to rare German-made wooden trains to cheap plastic beach pails, so that kids and parents would never be disappointed when they searched for an item on Amazon. But a prescient Miller, sensing disaster ahead, pushed to lower his own buy.
“No! No! A hundred and twenty million!” Bezos yelled. “I want it all. If I have to, I will drive it to the landfill myself!”
“Jeff, you drive a Honda Accord,” Joy Covey pointed out. “That’s going to be a lot of trips.”
Bezos prevailed. And the company would make a sizable contribution to Toys for Tots after the holidays that year. “That first holiday season was the best of times and the worst of times,” Miller says. “The store was great for customers and we made our revenue goals, which were big, but other than that everything that could go wrong did. In the aftermath we were sitting on fifty million dollars of toy inventory. I had guys going down the back stairs with ‘Vinnie’ in New York, selling Digimons off to Mexico at twenty cents on the dollar. You just had to get rid of them, fast.”
The electronics effort faced even greater challenges. To launch that category, David Risher tapped a Dartmouth alum named Chris Payne who had previously worked on Amazon’s DVD store. Like Miller, Payne had to plead with suppliers—in this case, Asian consumer-electronics companies like Sony, Toshiba, and Samsung.
He quickly hit a wall. The Japanese electronics giants viewed Internet sellers like Amazon as sketchy discounters. They also had big-box stores like Best Buy and
Circuit City whispering in their ears and asking them to take a pass on Amazon. There were middlemen distributors, like Ingram Electronics, but they offered a limited selection. Bezos deployed Doerr to talk to Howard Stringer at Sony America, but he got nowhere.
So Payne had to turn to the secondary distributors—jobbers that exist in an unsanctioned, though not illegal, gray market. Randy Miller, a retail finance director who came to Amazon from Eddie Bauer, equates it to buying from the trunk of someone’s car in a dark alley. “It was not a sustainable inventory model, but if you are desperate to have particular products on your site or in your store, you do what you need to do,” he says.
Buying through these murky middlemen got Payne and his fledgling electronics team part of the way toward stocking Amazon’s virtual shelves. But Bezos was unimpressed with the selection and grumpily compared it to shopping in a Russian supermarket during the years of Communist rule. It would take Amazon years to generate enough sales to sway the big Asian brands. For now, the electronics store was sparely furnished. Bezos had asked to see $100 million in electronics sales for the 1999 holiday season; Payne and his crew got about two-thirds of the way there.
Amazon officially announced the new toy and electronics stores that summer, and in September, the company held a press event at the Sheraton in midtown Manhattan to promote the new categories. Someone had the idea that the tables in the conference room at the Sheraton should have piles of merchandise representing all the new categories, to reinforce the idea of broad selection. Bezos loved it, but when he walked into the room the night before the event, he threw a tantrum: he didn’t think the piles were large enough. “Do you want to hand this business to our competitors?” he barked into his cell phone at his underlings. “This is pathetic!”