The Everything Store: Jeff Bezos and the Age of Amazon

by Brad Stone

  At the time that Cambrian Ventures was starting up in Silicon Valley, the peer-to-peer file-sharing service Napster was dominating headlines and panicking the music business. The Cambrian engineers thought about Napster and the power of networks that linked people who were scattered around the world. Could you do something of value with those distributed networks, they wondered, something better than stealing music? That question became the seed of an initiative they called Project Agreya—the Sanskrit word for “first.”

  The idea was to build software and harness the Internet to coordinate groups of people around the world to work on problems that computers weren’t very good at solving. For example, a computer system might have difficulty examining a collection of photos of domestic pets and reliably selecting the ones that depicted cats or dogs. But humans could do that easily. The Cambrian Ventures executives hypothesized that they could build an online service to coordinate low-wage workers around the world and then sell access to this workforce to financial firms and other large companies. In 2001, they filed for a patent for the idea and called it a “Hybrid machine/human computing arrangement.”10

  The world would later come to know this idea, and embrace it, as crowd-sourcing. But Project Agreya was ahead of its time, and financial firms didn’t know quite what to make of it. The Agreya team was in New York trying to pitch the concept the week of 9/11. Venture capital dried up after the terrorist attacks, so they shut down Project Agreya and moved on.

  In 2003 Rajaraman and Harinarayan decided to close Cambrian Ventures to work on a new company called Kosmix, which would develop technology to organize information on the Web by specific topics. As part of winding down Cambrian, they had to deal with Bezos and his investment in the firm. Not surprisingly, Bezos proved to be a tenacious negotiator and a stubborn defender of his own financial interests, even when the stakes were a relatively inconsequential fraction of his net worth. Rajaraman and Harinarayan recall a brutal two-month-long negotiation during which Bezos leveraged the dissolution of Cambrian Ventures into a stake in Kosmix. In the midst of this, they happened to tell Bezos about the Agreya patent, and he was immediately interested and asked for it to be included in the overall deal. Seeing an opportunity to conclude the arrangement, they quickly agreed to sell it to him.

  To their surprise, Bezos then actually developed a version of Project Agreya inside Amazon. He renamed it Mechanical Turk, after an eighteenth-century chess-playing automaton that concealed a diminutive man—a chess master—who hid inside and guided the machine’s moves. About two dozen Amazon employees worked on the service from January 2004 to November 2005. It was considered a Jeff project, which meant that the product manager met with Bezos every few weeks and received a constant stream of e-mail from the CEO, usually containing extraordinarily detailed recommendations and frequently arriving late at night.

  Amazon started using Mechanical Turk internally in 2005 to have humans do things like review Search Inside the Book scans and check product images uploaded to Amazon by customers to ensure they were not pornographic. The company also used Mechanical Turk to match the images with the corresponding commercial establishments in A9’s fledgling Block View tool. Bezos himself became consumed with this task and used it as a way to demonstrate the service.

  As the company prepared to introduce Mechanical Turk to the public, Amazon’s PR team and a few employees complained they were uncomfortable with the system’s reference to the Turkish people. Bezos liked the name for its historical association but agreed to let the communications staff and Mechanical Turk team brainstorm alternatives. They seriously considered Cadabra, an allusion to magic and the original corporate name of Amazon. But in the end, Bezos shrugged off the concerns and said that he personally would bear the responsibility for any backlash.

  Mechanical Turk quietly launched in November 2005. Now any Internet user could perform what Amazon called human-intelligence tasks, typically earning a few cents per job. Other companies could list jobs on the Mechanical Turk website, with Amazon taking a 10 percent cut of the payments.11 One of the first applications, from a company called Casting Words, paid workers a few cents per minute to listen to and transcribe podcasts.

  Mechanical Turk gave Bezos another opportunity to demonstrate Amazon’s ability to innovate outside of its core retail business and show off his own curious attempts to crystallize abstract concepts. He called Mechanical Turk “artificial, artificial intelligence” and gave interviews about the service to the New York Times and the Economist. The ethnic reference in the name was never criticized, but labor activists targeted the service as a “virtual sweatshop” and “the dark side of globalization.”12

  By 2007 there were a hundred thousand workers on Mechanical Turk in more than one hundred countries.13 But it didn’t take off in the way Bezos clearly hoped it would, or at least it hasn’t yet. One obvious reason is that the exceedingly low wages on Mechanical Turk have the greatest appeal in less developed countries, yet most impoverished workers in the third world do not own Internet-connected PCs. When Amazon’s other Web services unexpectedly took off in the following years, Bezos devoted considerably more attention and resources to them. Just as in Amazon’s early days, when automated personalization replaced editorial, machines, not people hiding inside them, would drive Amazon’s long-awaited big breakthrough.

  In March 2006, Amazon introduced the Simple Storage Service, which allowed other websites and developers to store computer files like photos, documents, or video-game player profiles on Amazon’s servers. S3 remained alone and somewhat overlooked, like a section of a fence that had not yet been finished. A month after the launch, Alan Atlas recalled, it crashed for nine hours, and hardly anyone in the outside world noticed. Then a few months later, the Elastic Compute Cloud went to public beta, allowing developers to actually run their own programs on Amazon’s computers. According to Chris Brown, who returned from South Africa for the launch, Amazon opened the first servers to customers on the East Coast of the United States, and developers rushed in so quickly that the initial batch of computers was taken up before Amazon had a chance to let in folks on the West Coast.

  Part of AWS’s immediate attraction to startups was its business model. Bezos viewed Web services as similar to an electric utility that allowed customers to pay for only what they used and to increase or decrease their consumption at any time. “The best analogy that I know is the electric grid,” Bezos said. “You go back in time a hundred years, if you wanted to have electricity, you had to build your own little electric power plant, and a lot of factories did this. As soon as the electric power grid came online, they dumped their electric power generator, and they started buying power off the grid. It just makes more sense. And that’s what is starting to happen with infrastructure computing.”14

  Bezos wanted AWS to be a utility with discount rates, even if that meant losing money in the short term. Willem van Biljon, who worked with Chris Pinkham on EC2 and stayed for a few months after Pinkham quit in 2006, proposed pricing EC2 instances at fifteen cents an hour, a rate that he believed would allow the company to break even on the service. In an S Team meeting before EC2 launched, Bezos unilaterally revised that to ten cents. “You realize you could lose money on that for a long time,” van Biljon told him. “Great,” Bezos said.

  Bezos believed his company had a natural advantage in its cost structure and ability to survive in the thin atmosphere of low-margin businesses. Companies like IBM, Microsoft, and Google, he suspected, would hesitate to get into such markets because it would depress their overall profit margins. Bill Miller, the chief investment officer at Legg Mason Capital Management and a major Amazon shareholder, asked Bezos at the time about the profitability prospects for AWS. Bezos predicted they would be good over the long term but said that he didn’t want to repeat “Steve Jobs’s mistake” of pricing the iPhone in a way that was so fantastically profitable that the smartphone market became a magnet for competition.

  The comment reflected his
distinctive business philosophy. Bezos believed that high margins justified rivals’ investments in research and development and attracted more competition, while low margins attracted customers and were more defensible. (He was partly right about the iPhone; its sizable profits did indeed attract a deluge of competition, starting with smartphones running Google’s Android operating system. But the pioneering smartphone is also a fantastically lucrative product for Apple and its shareholders in a way that AWS has not been, at least so far.)

  Bezos’s belief was borne out, and AWS’s deliberately low rates had their intended effect; Google chairman Eric Schmidt said it was at least two years before he noticed that the founders of seemingly every startup he visited told him they were building their systems atop Amazon’s servers. “All of the sudden, it was all Amazon,” Schmidt says. “It’s a significant benefit when every interesting fast-growing company starts on your platform.” Microsoft announced a similar cloud initiative called Azure in 2010. In 2012, Google announced its own Compute Engine. “Let’s give them credit,” Schmidt says. “The book guys got computer science, they figured out the analytics, and they built something significant.”

  Just like Creation author Steve Grand had predicted, the creatures were evolving in ways that Bezos could not have imagined. It was the combination of EC2 and S3—storage and compute, two primitives linked together—that transformed both AWS and the technology world. Startups no longer needed to spend their venture capital on buying servers and hiring specialized engineers to run them. Infrastructure costs were variable instead of fixed, and they could grow in direct proportion to revenues. It freed companies to experiment, to change their business models with a minimum of pain, and to keep up with the rapidly growing audiences of erupting social networks like Facebook and Twitter.

  All of this took years and required significant effort, and its developers encountered many challenges and setbacks along the way. Andy Jassy, along with technical lieutenants Charlie Bell and Werner Vogels, outpaced rivals by layering additional services like Flexible Payment Services and Amazon CloudSearch alongside of EC2 and S3. Groups within Amazon were told to use AWS while the services were still immature, a demand that led to another round of consternation among its engineers. As startups and even some big companies began to rely heavily on AWS, outages had widespread repercussions, and chronically secretive Amazon found it had to get better at explaining itself and speaking to the public.

  But the emergence of Amazon Web Services was transformational in a number of ways. Amazon’s inexpensive and easily accessible Web services facilitated the creation of thousands of Internet startups, some of which would not have been possible without it, and it provided larger companies with the ability to rent a supercomputer in the cloud, ushering in a new era of innovation in areas like finance, oil and gas, health, and science. It is not hyperbole to say that AWS, particularly the original services like S3 and EC2, helped lift the entire technology industry out of a prolonged post-dot-com malaise. Amazon also completely outflanked the great hardware makers of the time, like Sun Microsystems and Hewlett-Packard, and defined the next wave of corporate computing.

  Perhaps the greatest makeover was of Amazon’s own image. AWS enlarged the scope of what it meant to be the everything store and stocked Amazon’s shelves with incongruous products like spot instances and storage terabytes. It made Amazon a confusing target for Walmart and other rival retailers and gave the company fresh appeal to the legions of engineers looking to solve the world’s most interesting problems. Finally, after years of setbacks and internal rancor, Amazon was unquestionably a technology company, what Bezos had always imagined it to be.

  CHAPTER 8

  Fiona

  Back in the Paleozoic era of the Internet, around the year 1997, an entrepreneur named Martin Eberhard was sitting in a Palo Alto coffee shop with his friend Marc Tarpenning, sipping a latte and pondering the inevitably bright future of mobile computing. The PalmPilot, the pioneering personal digital assistant, had just been introduced, and cell phones were evolving quickly into sleek devices that slid easily into a jacket pocket. Eberhard and Tarpenning worked for a disk-drive manufacturer and had just returned from a conference called DiskCon. In other words, they were bored out of their skulls and looking for something more interesting to do. They both happened to be voracious readers.

  Over coffee that day, the friends postulated that it might finally be possible to invent a computer for reading digital books. People had been talking about this for years, ever since Project Gutenberg, a nonprofit founded in the early 1970s in Champaign, Illinois, with a mission to digitize the world’s books and make them available on personal computers. Eberhard and Tarpenning had a different idea. They wanted something mobile, so people could take whole libraries of e-books with them in dedicated electronic-reading devices. That spring they started NuvoMedia and developed one of the world’s first portable e-readers, which they called the Rocket e-Book, or Rocketbook.

  Eberhard had founded a computer-networking company in the 1980s and had been around the Silicon Valley block a few times. (Later he would cofound the electric-car company Tesla.) So he knew that he needed deep-pocketed investors as well as powerful allies to pave his way in the complex and cosseted world of the book-publishing business. Eberhard believed that he needed Jeff Bezos and Amazon.com.

  In late 1997, the NuvoMedia founders and their lawyer took a Rocketbook prototype to Seattle and spent three weeks in negotiations with Bezos and his top executives. They stayed at a cheap hotel downtown and made regular trips to the old Columbia Building on Second Avenue to discuss the possibility of an Amazon investment in NuvoMedia. Bezos “was really intrigued by our device,” Eberhard says. “He understood that the display technology was finally good enough.”

  The prototype itself was crude, with a painted surface and rudimentary software. But it worked, displaying such books as Alice in Wonderland and A Tale of Two Cities on its glowing transflective LCD screen. The device weighed a little over a pound, heavy by today’s standards, but it could be held with one hand, like a paperback book, and its battery lasted twenty hours with the backlight on, which compares favorably to today’s mobile devices.

  Bezos seemed impressed but had some reservations. To download books, a customer needed to plug the e-reader into his computer. “We talked about wireless but it was crazily expensive at the time,” says Eberhard. “It would add an extra four hundred dollars to each unit and the data plans were insane.” The Rocketbook’s display wasn’t as easy on the eyes as modern e-readers, but Eberhard had checked out low-powered, low-glare alternatives, like E Ink, being developed in the MIT Media Lab, and e-paper, from Xerox, and found the technology was still unreliable and expensive.

  After three weeks of intense negotiations, the companies hit a major roadblock. Bezos told Eberhard he was concerned that by backing NuvoMedia and helping it succeed, he might be creating an opportunity for Barnes & Noble to swoop in and buy the startup later. So he demanded exclusivity provisions in any contract between the companies and wanted veto power over future investors. “If we made a bet on the future of reading, we’d want to help it succeed by introducing it to our customers in a big way,” says David Risher, Amazon’s former senior vice president of U.S. retail, who participated in the negotiations. “But the only way that’d have made sense is if it had been exclusive to us. Otherwise, we’d have been funneling our customers to a potential rival.”

  Eberhard couldn’t bring himself to agree to limit his future fund-raising opportunities, so Bezos’s concerns became a self-fulfilling prophecy. Once it was evident that the companies were at an impasse, Eberhard and Tarpenning got on a plane and flew to New York to meet with Len and Stephen Riggio of Barnes & Noble. They shook hands on a deal within the week. The bookseller and the publishing giant Bertelsmann agreed to invest two million dollars each, and together they owned nearly half of NuvoMedia.

  It later became fashionable to say that the Rocketbook and contemporaneous
competitors like the SoftBook were ahead of their time and that the world was not yet ready to read digitally. But that is not quite the entire story. NuvoMedia sold twenty thousand units in its first year and was on track to double that in its second. It negotiated pioneering e-book contracts with all the major book publishers (the Authors Guild condemned the contracts as being unfavorable to authors1), and in 1999, Cisco invested in NuvoMedia, giving the company more credibility and another strategic ally. The reviews of the device were generally favorable. Oprah Winfrey included the Rocketbook among her Ten Favorite Things in the inaugural issue of O magazine, and Wired wrote of the device, “It’s like an object that has tumbled out of the future.”2

  NuvoMedia had an aggressive road map for rapid development. Eberhard planned to exploit economies of scale and advances in technology to improve the Rocketbook’s screen quality and battery life while driving down its price. (Over the 1999 holiday season, the basic model cost $169.) “Within five years,” he told Newsweek’s Steven Levy that December, “We’ll have front-surface technology that doesn’t require you to read behind glass.”3 But NuvoMedia still needed fresh capital, and Eberhard was growing nervous about the unsustainable dot-com bubble and the deteriorating fund-raising climate. In February 2000, he sold NuvoMedia to a Burbank-based interactive TV-guide firm called Gemstar in a stock transaction worth about $187 million. Gemstar also snapped up SoftBook.

  It was a terrible move. Gemstar’s main corporate objective, it turned out, was exploiting its patent portfolio through litigation. A few months after the sale, Eberhard and Tarpenning exited the firm in disappointment. Gemstar released successors to both Rocketbook and SoftBook, but after slow sales and given its own internal lack of enthusiasm, it pulled them from the market in 2003. Gemstar CEO Henry Yuen, who orchestrated the company’s e-book acquisitions, later fled to China amid accusations of accounting fraud.4