by Brad Stone
Amazon experimented with using algorithms to analyze specific phrases on product pages and auctions and then automatically matching up similar products. The technology resulted in some memorable miscues. For example, the product page for a novel titled The Subtle Knife, the sequel to the young-adult novel The Golden Compass, carried links to a variety of survivalist-minded sellers in the auctions category who were hawking switchblades and SS weaponry kits. “There were some very unhappy results,” says Joel Spiegel. “The person whose mission in life was to sell children’s books would storm into my office yelling, Why the hell do I have Nazi memorabilia listed on my pages?”
One weekend in the fall of 2000, Bezos called various S Team members and executives to a daylong meeting in the basement of his lakefront mansion in Medina so they could examine why the third-party efforts were failing. Despite the problems, the group recognized that Crosslinks on the product pages were generating most of the traffic to Amazon’s third-party sellers.
That was an important observation. Traffic on Amazon was oriented around Amazon’s reliable product catalog. On eBay, a customer might search for the Hemingway novel The Sun Also Rises and get dozens of auctions of new and vintage copies. If a customer searched for the book on Amazon, there was one single page, with a definitive description of the novel, and that’s where customers flocked.
Amazon executives reasoned that day that they had the Internet’s most authoritative product catalog and that they should exploit it. That, it turned out, was the central insight that not only turned Amazon into a thriving platform for small online merchants but powers a good deal of its success today. If Amazon wanted to host other sellers on its site, it would have to list their wares right alongside its own products on the pages that customers actually visited. “It was a great meeting,” says Jeff Blackburn. “By the end of the day we all felt one hundred percent sure that this was the future.”
That fall, Amazon announced a new initiative called Marketplace. The effort started with used books. Other sellers of books were invited to advertise their wares directly within a box on Amazon’s own book pages. Customers got to choose whether to purchase the item from Amazon itself or from a third-party seller. If they chose the latter, either because the seller had a lower price or because the product was out of stock at Amazon, the company would lose the sale but collect a small commission. “Jeff was super clear from the beginning,” says Neil Roseman. “If somebody else can sell it cheaper than us, we should let them and figure out how they are able to do it.”
Marketplace launched in November 2000 in the books category and immediately drew protests. Two trade groups, the Association of American Publishers and the Authors Guild, each posted a public letter on its website complaining that Amazon was undermining the sale of new books in favor of used books and in the process taking royalties out of the pockets of authors.7 “If your aggressive promotion of used book sales becomes popular among Amazon’s customers, this service will cut significantly into sales of new titles, directly harming authors and publishers,” said the letter.
The protest was nothing compared to the consternation over Marketplace inside Amazon. Category managers realized they could now lose a sale to a competitor within the previously safe confines of their own store. Even worse, a customer might have a bad experience with that seller and end up leaving a negative review. And the company’s buyers now had to contend with irate publishers and other manufacturers who wanted to know why used products from small, often unauthorized sellers were being sold directly next to their new wares. This debate would play out gradually over the next few years as Amazon expanded the effort and added both new and used products from third-party sellers to each category. Marketplace, in effect, made it more difficult for the retailers inside Amazon to accomplish the lofty goals Bezos himself had set for them.
“Imagine you’re the guy on the hook for a zillion dollars’ worth of inventory,” says Chris Payne, recalling his initial reaction to Marketplace. “And this other lunatic comes over putting low-priced crap on your page. You can bet that leads to some squabbles.”
The new strategy would result in years of tension between various divisions, between Amazon and its suppliers, and between industry trade groups and the company. Bezos didn’t care about any of that, as long as it offered more choices to customers and, in the process, gave Amazon a greater selection of products. With a single brilliant and nonintuitive strategic move, he managed to upset almost everybody, even his own colleagues. “As usual,” says Mark Britto, “it was Jeff against the world.”
One Saturday in early December 2000, Britto and Doug Boake, business-development executives who joined Amazon in the Accept.com acquisition, were in Fernley gift-wrapping packages when Britto got a call on his cell phone. It was Bezos. He told them to meet him that night in Bentonville, Arkansas. They were going to visit Walmart.
Though it sounds unlikely, now that they are archrivals, Amazon was pitching Walmart on the idea of operating its website. Walmart was the undisputed gorilla of retailing, opening hundreds of new stores a year around the world and remaining relatively unharmed by the bear market. Lee Scott, just the third CEO in Walmart history, had personally invited Bezos to his home. Britto and Boake happily put down the gift wrap and headed to the Reno airport.
That evening, the Amazon executives met in Bentonville, where they got a taste of Walmart’s brand of frugality. Walmart booked them rooms at a local Days Inn. That night, Bezos, Britto, and Boake had dinner at a nearby Chili’s and walked around the historic town square.
The next morning, a procession of three black Chevy Suburbans rolled up to the hotel at the appointed time. The drivers wore earpieces, sunglasses, and steely expressions. The Amazon executives were ushered into the middle car and marveled at the abundance of security. Though he didn’t know it, Bezos was glimpsing his own future.
The cars drove to a large house in a gated community off a golf course, and the Amazon execs got out, walked up, and knocked on the front door. Linda Scott, the CEO’s wife, opened the door and immediately put them at ease. She told Bezos she was a big fan of his and had watched his appearance on CNBC’s Squawk Box a few weeks before.
The Amazon execs met Lee Scott and his chief financial officer, Tom Schoewe, in a dining room with big bay windows. For two hours, over pastries and coffee, the CEOs spoke frankly. They talked about the companies’ shared culture and the principles Bezos had taken from Sam Walton’s autobiography. Bezos spoke generally about Amazon’s attempts at personalization and the technology behind collaborative filtering—the algorithms that determined that people who bought one particular kind of product were inclined to purchase another specific set of products.
Scott noted that Walmart had similar techniques. It could measure whether a certain item, such as a globe for children, could lift the sale of another item, like a coloring book, if they were placed next to each other on a store display. Both companies had a deep interest in testing these combinations.
Scott also talked about how Walmart viewed advertising and pricing as two ends on the same spectrum. “We spend only forty basis points on marketing. Go look at our shareholder statement,” he said. “Most of that goes to newspapers to inform people about what is in our stores. The rest of our marketing dollars we pour into reducing prices. Our marketing strategy is our pricing strategy, which is everyday low pricing.”
Before the meeting, Rick Dalzell had warned Bezos to be wary of the crafty and astute Walmart chief. But Bezos was sponging up everything the older man said. Amazon had always considered itself an e-commerce company, not a retailer. Now Bezos needed to learn some of the fundamental rules in a professional sport that, up until that point, he had been playing only amateurishly.
After the first hour, the executives got down to business. Scott wanted to know what Amazon had in mind. The execs explained the Toys “R” Us deal and the nascent effort to operate the websites and handle distribution for other retailers. Scott said noncommittally
that it was worth talking about. To conclude the meeting, he leaned forward and said, “So, is there something deeper and more strategic that we should be considering?”
Bezos said he would think about how to make the proposal more interesting to Walmart. The men shook hands, and the Amazon executives returned to the Suburban waiting out front. As they were being driven to the airport, Britto and Boake agreed that Lee Scott’s parting words could be interpreted only as a veiled acquisition offer. “Really, is that what he meant by that?” Bezos asked.
Of course Bezos wasn’t interested in selling his company to Walmart, and Scott ultimately rejected the idea of outsourcing a crucial part of Walmart’s online operation to Amazon. The conversation between the two retailers never developed further and the meeting remained a quirk of history, a tantalizing suggestion of what might have been. The two companies would continue on separate paths, which, years later, would converge to produce a fierce rivalry.
* * *
In February 2001, Ravi Suria reared his head again. He published another report that questioned Amazon’s reserve of capital. With Amazon facing $130 million in annual interest expenses on its debt and given the prospect of its continued losses, Suria predicted that the company would face a cash shortage by the end of the year.
This time, Amazon made it personal. Spokesman Bill Curry retorted in an interview that Suria’s report was “silly.”8 Warren Jenson paid a personal visit to Lehman vice chairman Howard Clark, and John Doerr called Dick Fuld, chief executive of the investment bank, and implored him to have the firm review Suria’s research.
Years later, over cocktails at midtown Manhattan’s Trump Bar, with its dim lights and dark, polished wood, Suria complained that Amazon exerted unbearable pressure on him during that time. “They wanted to fire me. Everyone at Lehman hated my guts during those months,” he says. “Every time I picked up the phone someone was screaming at me.”
Suria now helps to run a hedge fund and has a bitter view of his history with the online retailer. “Amazon was like a high-school bully picking on an elementary-school kid. I was twenty-nine years old. It was a character-defining moment [for them], and as far as I’m concerned, they failed it miserably. It ruined my life for two years.” Suria believes Bezos is “deranged” and proudly notes that he hasn’t bought anything from Amazon since he tangled with the company.
But there’s no doubt that investors were keyed into Suria’s analysis. The February research report, his last at Lehman Brothers before departing for the hedge fund Duquesne Capital Management, sent Amazon stock roaring toward the ignominious land of the single digits. It had another repercussion as well. In regulatory papers filed by his lawyer that month, Bezos revealed intentions to sell a small parcel of stock, worth about $12 million. Since Lehman had allowed Amazon to see a version of Suria’s report before it was published, the timing of the stock sale suggested to the Securities and Exchange Commission that Bezos was deliberately dumping Amazon shares before bad news was made public.
In retrospect, one can see it was the farthest thing from the truth; Bezos remained completely convinced of the eventual success of his venture. But the SEC—which had been hammered by critics for whiffing on the dot-com bubble—announced an investigation into the possibility of insider trading. The investigation went nowhere, but the New York Times, among other publications, splashed the news prominently on the front of its business section.9 “I don’t care who you are or how much chutzpah you have,” says Warren Jenson. “It’s not fun picking up the Times and seeing your picture above the fold accused of insider trading. We are all products of what we’ve been through. This is one of the things that made Jeff the person he is. That scar does not heal easily.”
Now Amazon once again had to come to terms with the practical effects of its deteriorating stock price and its overzealous expansion. That month Amazon repriced the stock options of employees. They could trade three shares at their old stock price for one share at the new price—a move that boosted the morale of employees whose options, with the cratering stock prices, had become worthless. Amazon also announced plans to cut thirteen hundred employees, or about 15 percent of its workforce. The company was accustomed to adding people, not losing them, and the layoffs were brutal. People who had been hired just months before were summarily fired, their careers and personal lives left in tatters. Mitch Berman, a merchandising manager in the DVD group, had previously worked at Coca-Cola in Atlanta and had moved to Seattle for the job. He was employed by Amazon for all of four months and never understood why it didn’t work out. “I had literally picked up my entire life and moved across the country,” he says. “Obviously, I felt burned. I had to roll up my sleeves and start all over again.” He’s now a life coach living in Barcelona, Spain.
Diego Piacentini, a new executive from Apple, was thrust directly into the mess. Bezos hired the suave, Italian-born Piacentini in early 2000 to take the top spot running Amazon’s international operations. Piacentini’s old boss Steve Jobs had expressed incredulity at the move in his typically strident way. Over lunch in the Apple cafeteria in Cupertino, Jobs asked Piacentini why he would possibly want to go to a boring retailer when Apple was in the process of reinventing computing. Then in the same breath, Jobs suggested that maybe the career move revealed that Piacentini was so dumb that it was a good thing he was leaving Apple.
At first, Piacentini himself wondered why he’d made the move. He had joined Amazon right in the middle of Bezos’s conflict with Joe Galli. After his first few weeks, Piacentini called his wife back in Milan and told her not to pack their things for Seattle quite yet. But after Galli left, he grew more comfortable at Amazon. A year later, during the layoffs, he was tasked with closing Amazon’s new multilingual call center in The Hague. The facility had been poorly selected. The Hague was a financial and diplomatic hub, and the call center was incongruously located in a marble-floored building that had once been occupied by a bank. It never should have been opened in the first place, but “people at various levels were making decentralized decisions to move quickly and the process wasn’t strong,” Piacentini says.
The center had been open only a few months when Piacentini arrived to shut it down. With a few colleagues from Seattle, he collected the two hundred and fifty or so employees in the large marble lobby and made a brief speech in English telling everyone the bad news. Employees started howling and shouting, according to one Amazon employee who was there. One woman began sobbing and rolling on the floor.
Inside Amazon’s Seattle offices, it seemed like the walls were closing in—at times, literally. On the morning of Wednesday, February 28, Neil Roseman, Rick Dalzell, and an executive named Tom Killalea met with Bezos in his private conference room to brief him on a potentially serious security breach at Amazon’s used-book marketplace, Exchange.com. A few minutes into the conversation, the room started to shake.
It started slowly, a rumbling in the floor that passed into the walls and then intensified. The four men looked questioningly at one another and then dove under the side-by-side door-desks at the center of the room. Forty-six miles southwest, the Earth had suddenly shifted, and the Nisqually earthquake, 6.9 on the Richter scale, had begun.
Outside, chunks of brick and mortar were shaken loose from the sixty-eight-year-old Pacific Medical building and rained to the ground. Inside, the sprinklers went off and employees rolled under their mercifully thick door-desks. Bezos’s tiny conference room was full of tchotchkes like Star Trek figurines and water guns, many of which noisily rattled to the floor. Also in the room was a twenty-two-pound ball made of the dense metal tungsten, a memento from Stewart Brand and the organizers of the Clock of the Long Now. Halfway through the earthquake, the executives in the room heard the ominous sound of the ball rolling off its stand. “I was the low man on the totem pole, so my legs were halfway exposed,” says Neil Roseman, only partly in jest. Fortunately, the ball thudded harmlessly to the floor.
As the earthquake progressed, Killalea po
ked his head out, retrieved his laptop, and checked to see if the Amazon website was still running. (He would win a Just Do It award and get to keep an old ratty sneaker for that bit of bravado.)
The rumbling stopped after forty-five seconds, and employees evacuated the building. In a commanding performance, Bezos donned an item from his collection of oddities, a hard hat shaped like a ten-gallon cowboy hat, scrambled onto the roof of a car in the parking lot, and organized pairs of employees to reenter the building and collect their valuables. The building owner later shut down the tenth and twelfth floors for repairs, and for months plastic tarps covered patches of the façade where bricks had shaken loose.
When I visited Amazon for another Newsweek story that March, the stock was hovering around $10 and the city inspector had closed the main lobby. It was an unattractive sight and an unavoidable metaphor for the company’s rapid descent. Visitors were ushered into the basement through the back of the building, past a large placard warning of falling bricks.
In early 2001, Amazon’s position and future prospects remained dubious. The problem wasn’t only its diminishing market capitalization or its overlarded staffing and expansion efforts. Growth, particularly in the oldest category, books—still more than half its business at the time—appeared to be slowing after years of annual double-digit increases. Inside the company, executives were fearful that the slowdown augured an overall decrease in online shopping itself. “We were scared to death,” says Erich Ringewald, a vice president in charge of Marketplace. “Books were decelerating, and everyone thought that Walmart.com would start selling books at a loss to keep us from growing.”
Amazon then did something rare in its history. Warren Jenson, pushing to improve margins to meet the company’s self-imposed profitability deadline, convinced Bezos to quietly raise prices in the older media categories. Amazon reduced its discounts on bestselling books and started charging more to overseas customers who were buying from the domestic website. Bezos signed off on the increases, but another important meeting quickly made him change his mind.