by Brad Stone
In the transcript of that interview, Bezos seemed, even a decade later, to be full of confidence and conviction, and he was already a steady recycler of tidy Jeffisms. He reaffirmed his commitment to building a lasting company, learning from his mistakes, and developing a brand associated not with books or media but with the “abstract concept of starting with the customer and working backward.”
But when Bezos addressed Suria’s predictions, his comments seemed defensive. “First of all, for anybody who has followed Amazon.com for any length of time, we’ve all seen this movie before,” he said, interjecting cavalcades of laughter between his answers. “I know we live in a period where long term is ten minutes [laugh] but if you take any historical perspective whatsoever… I mean, let me ask you this question. How much do you think our stock is up over the last three years? The stock is up by a factor of twenty! So this is normal. I always say about Amazon.com we don’t seek controversy, but we certainly find it [laugh].”
In fact, times were not normal. The challenge from Suria and the dot-com collapse had changed the financial climate, and Bezos knew it. A few weeks later, Jenson and Bezos sat down to scrutinize Amazon’s balance sheet. They came to the conclusion that even if the company showed reasonable growth, its fixed costs—the distribution centers and salary rolls—were simply too big. They would have to cut even more. Bezos announced in an internal memo that Amazon was “putting a stake in the ground” and would be profitable by the fourth quarter of 2001.4 Jenson said that the company “tried to be realistic about what revenues were going to be and everyone was given a target on expenses.”
But the company couldn’t catch a break in the press. When Amazon announced this goal publicly later in the year, it was subject to a new round of criticism for specifying that it would measure profitability using the pro forma accounting standard—which ignored certain expenses, like the costs of issuing stock options—instead of more conventional accounting methods.
For the next eight months, Ravi Suria continued to pummel Amazon with negative reports. His research became a litmus test for people’s view of the dawning new Internet age. Those who believed in the promise of the Web and who had bet their livelihoods on it were likely to be skeptical of Suria’s negative perspective. But those who felt that the coming wave of changes threatened their businesses, their sense of the natural order, even their identities, were likely to embrace the sentiments of Suria and like-minded analysts and believe that Amazon.com was nothing more than a crazy dream precariously built on an irrationally exuberant stock market.
Perhaps that is why hyperrational Bezos grew so obsessed with the mild-mannered, bespectacled New York analyst. To Bezos, Suria represented a strain of illogical thinking that had infected the broader market: the notion that the Internet revolution and all of the brash reinvention that accompanied it would just go away. According to colleagues from the time, Bezos frequently invoked Suria’s analyses in meetings. An executive in the finance group used Suria’s name to coin a term for a significant mathematical error of a million dollars or more; Bezos loved it and started using it himself.
The word was milliravi.
It is the ambition of every technology company to be worth more than the sum of its parts. It inevitably seeks to offer a set of tools that other companies can use to reach their customers. It wants to become, in the parlance of the industry, a platform.
At the time, Microsoft was the archetype for such a strategy. Software makers tailored their products to run on the ubiquitous Windows operating system. Then Apple’s iOS operating system for phones and tablets became a foundation for mobile developers to reach users. Over the years, companies like Intel, Cisco, IBM, and even AT&T built platforms and then reaped the rewards of that advantageous position.
So it was only natural that as early as 1997, executives at Amazon were thinking about how to become a platform and augment the e-commerce efforts of other retailers. Amazon Auctions was the first such attempt, followed by zShops, the service that allowed small retailers to set up their own stores on Amazon.com. Both efforts failed in the face of eBay’s insurmountable popularity with mom-and-pop merchants. Nevertheless, by 2000, according to an internal company memo, Bezos was telling colleagues that by the time Amazon got to $200 billion in annual sales, he wanted revenues to be split evenly between sales from products it sold itself and commissions that it collected from other sellers who used Amazon.com.
Ironically, it was the industrywide overreach of 1999 that finally sent Amazon down the path of becoming a platform. Toys “R” Us, though it had taken a $60 million investment from SoftBank and the private equity firm Mobius Equity Partners to create the Internet subsidiary ToysRUs.com, stumbled badly during the 1999 holidays. The offline retailer suffered a raft of negative publicity from frequent outages of its website and late shipments of orders, which in some cases missed Christmas altogether. The company ended up paying a $350,000 fine to the Federal Trade Commission for failing to fulfill its promises to customers. Amazon, meanwhile, had to write off $39 million in the unsold toy inventory that Bezos had so fervently vowed he would personally drive to the local dump.
One night after the holidays, ToysRUs.com chief financial officer Jon Foster cold-called Bezos in his office, and the Amazon CEO picked up the phone. Foster suggested joining forces; the online retailer could provide the critical infrastructure, and the offline retailer would bring the product expertise and relationships with suppliers like Hasbro. Bezos suggested the Toys “R” Us execs meet with Harrison Miller, the category manager of the toy business. The companies held a preliminary meeting in Seattle, but at that point Amazon saw little reason to collaborate with a key competitor.
The next spring, Miller and Amazon’s operations team studied the problems of stocking and shipping toys and concluded that achieving profitability in the category would require sales of nearly $1 billion. The biggest challenge was selecting and acquiring just the right selection of toys—precisely the kind of thing Toys “R” Us did well.
A few weeks later, Miller and Mark Britto, who ran Amazon’s business-development group, met with ToysRUs.com executives in a tiny conference room at Chicago’s O’Hare International Airport and began formal negotiations to combine their toy-selling efforts. “It was dawning on us how brutal it was to pick Barbies and Digimons, and it was dawning on them how expensive it would be to build a world-class e-commerce infrastructure,” Miller says.
It seemed like a perfect fit. Toys “R” Us was adept at choosing the right toys for each season and had the necessary clout with manufacturers to get favorable prices and sufficient supplies of the most popular toys. Amazon of course had the expertise to run an online retailing business and get products to customers on time. The negotiations were, as was often the case when Jeff Bezos was involved, long and, according to Jon Foster, “excruciating.” When both teams met for the first time, Bezos made a big show of keeping one chair open at the conference-room table, “for the customer,” he explained. Bezos was primarily focused on building comprehensive selection and wanted Toys “R” Us to commit to putting every available toy on the site. Toys “R” Us argued that this was impractical and expensive. Meanwhile, it wanted to be the exclusive seller of toys on Amazon.com, which Bezos felt was too constricting.
The companies were at loggerheads for months. To get the deal done, they met somewhere in the murky middle. Toys “R” Us agreed to sell the few hundred most popular toys, and Amazon reserved the right to complement the Toys “R” Us selection with less popular items. Neither company got what it wanted, but for the moment, everyone was relieved. In August, the companies announced a ten-year partnership, with Amazon getting a major source of desperately needed cash and some help with its balance-sheet problems. The companies agreed that Toys “R” Us inventory would be kept in Amazon’s distribution centers—the first step toward making the most expensive and complicated part of Amazon’s business a platform that other companies could use.
The deal bec
ame a template for Amazon. Having outsourced his job running the toy category to Toys “R” Us, Harrison Miller assumed a newly created role as head of platform services. With Neil Roseman, a vice president of engineering, he started traveling the country pitching other big retailers on duplicating the Toys “R” Us deal.
They came close with electronics giant Best Buy, until the chain’s founder, Richard Schulze, insisted late in the negotiations during a dramatic Saturday-morning conference call that Amazon give him total exclusivity in the electronics category. Bezos refused. Bed, Bath, and Beyond and Barnes & Noble also balked.
Sony Electronics explored the possibility of using Amazon to bring its Sony Style chain online. As part of the discussions, Howard Stringer, chief of Sony Corporation of America, toured the Amazon fulfillment center in Fernley and, in a memorable moment, encountered on the warehouse floor a pile of Sony merchandise, which Amazon was technically not supposed to be selling. Stringer and his colleagues started examining the labels and writing down product numbers in an attempt to determine where the merchandise had come from. That deal didn’t happen either.
But in early 2001, the effort started to gain traction. Amazon signed a deal with the book chain Borders, which had blundered by building a massive distribution facility outside Nashville for online orders before realizing it needed smaller, geographically dispersed warehouses to get books to customers quickly and inexpensively. A few months later, Amazon agreed to run AOL’s shopping channel in return for a much-needed $100 million investment. Amazon also signed a deal to carry the inventory of retailer Circuit City, helping to add additional selection to the sparsely furnished shelves of Amazon’s electronics category.
All of these deals improved Amazon’s balance sheet in the short term, but in the long run, they were awkward for all parties. By relying on Amazon, the retailers delayed a necessary education on an important new frontier and ceded the loyalty of their customers to an aggressive upstart. That would be one of many problems for Borders and Circuit City, both of which went bankrupt in the depths of the financial crisis that began in 2008.
Bezos never got completely comfortable with these deals or with the idea of outsourcing his prized goal of limitless selection. The Toys “R” Us arrangement in particular was hugely lucrative, but Bezos grew frustrated as it became more difficult to ensure that Amazon could offer a comprehensive toy selection. That ultimately factored heavily into the outcome of the partnership several years later—dueling lawsuits in federal court.
In the summer of 2000, with Ravi Suria continuing to press his case in public, the slide in Amazon’s stock price started to accelerate. In the span of three weeks in June, it dropped from $57 to $33, shedding almost half its value. Employees started to get nervous. Bezos scrawled I am not my stock price on the whiteboard in his office and instructed everyone to ignore the mounting pessimism. “You don’t feel thirty percent smarter when the stock goes up by thirty percent, so when the stock goes down you shouldn’t feel thirty percent dumber,” he said at an all-hands meeting. He quoted Benjamin Graham, the British-born investor who inspired Warren Buffett: “In the short term, the stock market is a voting machine. In the long run, it’s a weighing machine” that measures a company’s true value. If Amazon stayed focused on the customer, Bezos declared, the company would be fine.
As if to prove his singular obsession with customer experience, Bezos placed an expensive bet, hitching Amazon’s Quidditch broom to the rising fantasy series Harry Potter. In July, author J. K. Rowling published the fourth book in the series, Harry Potter and the Goblet of Fire. Amazon offered a 40 percent discount on the book and express delivery so customers would get it on Saturday, July 8—the day the book was released—for the cost of regular delivery. Amazon lost a few dollars on each of about 255,000 orders, just the kind of money-losing gambit that frustrated Wall Street. But Bezos refused to see it as anything other than a move to build customer loyalty. “That either- or mentality, that if you are doing something good for customers it must be bad for shareholders, is very amateurish,” he said in our interview that summer.
The Harry Potter promotion unsettled even the executives working on it. “I was thinking, Holy shit, this is a lot of money,” says Lyn Blake, the Amazon executive in charge of books at the time. She was later inclined to admit that Bezos was right. “We were able to assess all the good press and heard all these stories from people who were meeting their deliverymen at their front doors. And we got these testimonials back from drivers. It was the best day of their lives.” Amazon was mentioned in some seven hundred stories about the new Harry Potter novel in June and July that year.
Bezos was obsessed with the customer experience, and anyone who didn’t have the same single-minded focus or who he felt wasn’t demonstrating a capacity for thinking big bore the brunt of his considerable temper. One person who became a frequent target during this time was the vice president in charge of customer service, Bill Price.
A veteran of long-distance provider MCI, Price came to Amazon in 1999. He blundered early by suggesting in a meeting that Amazon executives who traveled frequently should be permitted to fly business-class. Bezos often said he wanted his colleagues to speak their minds, but at times it seemed he did not appreciate being personally challenged. “You would have thought I was trying to stop the Earth from tilting on its axis,” Price says, recalling that moment with horror years later. “Jeff slammed his hand on the table and said, ‘That is not how an owner thinks! That’s the dumbest idea I’ve ever heard.’
“Of course everyone else was thinking [executives should be allowed to fly business-class], but I was the exposed nail in the room,” Price says.
The 2000 holidays would be Price’s Waterloo. His customer-service department tracked two important metrics: average talk time (the amount of time an employee spent on the phone with a customer) and contacts per order (the number of times a purchase necessitated a customer phone call or e-mail). Bezos demanded that Price reduce both, but that was fundamentally impractical. If a customer-service rep stayed on the phone long enough to fully solve each customer’s problem, the number of contacts per order might go down, but the average talk time would go up. If the customer-service rep tried to jump off each call quickly, average talk times would decline, but customers would be more likely to call back.
Bezos didn’t care about that simple calculus. He hated when customers called at all, seeing it as a defect in the system, and he believed that customers should be able to solve their problems themselves with the aid of self-help tools.5 When they did call, Bezos wanted their queries answered promptly and their issues settled conclusively. There were no excuses. Price’s only solution was to push his team harder, but since he had limited resources to add new people, employees were burning out.
The denouement came in a new S Team ritual called the war room, a meeting that was held daily during the holiday period to review critical company and customer issues. About thirty senior executives in the company packed into a conference room on the top floor of the Pac Med building that had expansive views of the Puget Sound. With Christmas sales ramping up and hold times on Amazon phone lines once again growing longer, Bezos began the meeting by asking Price what the customer wait times were. Price then violated a cardinal rule at Amazon: he assured Bezos that they were well under a minute but without offering much in the way of proof.
“Really?” Bezos said. “Let’s see.” On the speakerphone in the middle of the conference table, he called Amazon’s 800 number. Incongruously cheerful hold music filled the room. Bezos took his watch off and made a deliberate show of tracking the time. A brutal minute passed, then two. Other execs fidgeted uncomfortably while Price furtively picked up his cell phone and quietly tried to summon his subordinates. Bezos’s face grew red; the vein in his forehead, a hurricane warning system, popped out and introduced itself to the room. Around four and a half minutes passed, but according to multiple people at the meeting who related the story, the wait seemed i
nterminable.
Eventually a cheerful voice blurted out, “Hello, Amazon.com!” Bezos said, “I’m just calling to check,” and slammed down the phone. Then he tore into Price, accusing him of incompetence and lying.
Price was gone about ten months later.
While Amazon executives were courting large chain retailers, a rival was courting them. CEO of eBay Meg Whitman and one of her top deputies, Jeff Jordan, visited Amazon that fall with a tempting proposal: they wanted to take over Amazon’s failing Amazon Auctions business.
Whitman made a convincing case. She highlighted eBay’s focus on the unruly community of small sellers and argued that Amazon’s core retail business was at fundamental odds with its attempts to host third-party sellers, since both Amazon and these merchants were often competing to sell the same items. However, eBay had no such conflict, since it didn’t sell anything itself. Whitman argued that the deal could solve a problem for Amazon while also strengthening eBay’s position in its primary area of focus, auctions. It was the classic win-win scenario.
But Bezos declined the offer for the same reason he kept the ghost towns of Auctions and zShops alive on the Amazon website. He wasn’t ready to give up or relinquish Amazon’s hopes of becoming a platform for small and midsized retailers. The fact that third-party selling on Amazon wasn’t working meant, to Bezos, only that it wasn’t working at that particular moment.
The main problem was that Auctions and zShops were siloed on the Amazon website and got little attention from customers. Bezos referred to them as cul-de-sacs on the site. To the extent they enjoyed any traffic at all, it was through a feature called Crosslinks, in which links to third-party auctions appeared on related retail pages. For example, a seller hawking vintage fishing rods could choose to list his auctions via Crosslinks on the pages of books or movies about fly-fishing.6