Amazon Unbound

by Brad Stone

  As Amazon doubled down on its progress, its rival began to look shaky. Flipkart’s CEO, thirty-three-year-old Sachin Bansal, was grappling with the same problem of Google’s web dominance that had led Amazon to suspend search advertising in Mexico. Studying Google’s ad fees and India’s relatively low level of PC ownership, Bansal declaimed that Flipkart and the fashion site it had acquired, Myntra, would concentrate their energies and investments on their smartphone apps and scrap their desktop and mobile websites altogether. He then fired most of his management team, which had strenuously objected to the move.

  The strategy backfired. Customers were alienated by the inconvenience of having to download apps; meanwhile, Amazon took out full-page newspaper ads with a letter from Jeff Bezos, thanking Indians for making Amazon.in the most visited e-commerce site in the country. Flipkart sales slowed and the company laid off workers. Nevertheless, private investors were still besotted; the following year, Flipkart raised an additional $1.4 billion from a consortium that included the Chinese tech giant Tencent, eBay, and Microsoft. But it had to accept a reduced valuation of $11.6 billion from its previous round. “If someone gave us a model of how to fuck it up, we followed it,” said a Flipkart board member. Soon after, Sachin Bansal was replaced as CEO by his cofounder, Binny Bansal, though he remained executive chairman, a largely ceremonial role at Flipkart.

  The company’s stumble was one factor in a complex strategic landscape that Jeff Bezos was surveying by 2017. Investors had bid Flipkart’s valuation into the stratosphere, but both Amazon.in and Flipkart were losing well over a billion dollars a year. The retail giant Walmart, under CEO Doug McMillon, was looking afresh at global e-commerce and trying to stem Amazon’s advance around the world; it had previously explored the prospect of investing in Flipkart.

  Meanwhile, as Modi prepared to run for a second term, he was making it more, not less, difficult to conduct business in India, despite his previous promises. His ruling Bharatiya Janata Party proposed a new set of rules that would prevent a single seller on a foreign-owned online marketplace like Amazon.in from brokering more than 25 percent of the site’s total sales. This was a dart aimed directly at Amazon and Flipkart’s arm’s-length subsidiaries, Cloudtail and WS Retail—and a way for Modi to placate his powerful base of small retailers, which were increasingly unsettled by the e-commerce frenzy.

  Amid that piquant set of facts, Sachin Bansal met Jeff Bezos at The Weekend, an elite conference in Aspen, Colorado, organized by Ari Emanuel, CEO of the entertainment and media agency Endeavor, and Google chairman Eric Schmidt. He pitched an acquisition that would end the capital-intensive conflict between the two companies but keep both websites independent. Amazon.in would broker everyday items like groceries and books, while Flipkart would sell higher-value products, giving it additional leverage to reach better deals with vendors like smartphone makers. After being sidelined following the disastrous attempt to go mobile only, Bansal could use this as his route back into Flipkart’s leadership.

  Bezos, as always “weak-kneed” around a brash young entrepreneur, was intrigued by the proposal. He asked M&A chief Peter Krawiec to start negotiations.

  Krawiec started off with a lowball offer, backed up by numbers that showed Amazon India had grown larger than Flipkart. Flipkart disagreed with that market analysis. Both sides, which professed publicly not to care about the competition, adamantly insisted that they were winning. Since they couldn’t even agree on a common set of facts, negotiations proceeded slowly over the next few months.

  In October, some of Walmart’s management team heard about the talks from Goldman Sachs bankers. Intoxicated with India’s potential and with fear of losing out to Amazon in a critical growth market, they jumped back into the fray. That month Flipkart executives made a pilgrimage to Walmart headquarters in Bentonville, Arkansas. Amazon then heard about those talks and got more serious as well.

  Flipkart’s investors and board members split into camps favoring three different strategies: sell to Amazon, sell to Walmart, or stay independent. Sachin Bansal backed a deal with Amazon since it might allow him to resume running the company.

  But most Flipkart investors were skeptical that India’s antitrust authorities would sanction a merger with Amazon, which would consolidate around 80 percent of the e-commerce market. Bezos seemed to have faith in his budding relationship with Narendra Modi and expressed confidence that he could get the deal done. He pursued the acquisition earnestly, according to several colleagues—even over any concerns from Amit Agarwal, who would have the frightening responsibility of integrating two disparate brands and money-losing supply chains.

  In March 2018, Bezos hosted Sachin Bansal and Flipkart CEO Kalyan Krishnamurthy in the boathouse behind his home on Lake Washington. A few weeks later, he spoke over the phone with two of Flipkart’s most influential backers, Tiger Global partner Lee Fixel and SoftBank chairman Masayoshi Son, aka “Masa,” who particularly favored a deal with Amazon over Walmart and seemed determined to enlist Bezos as a long-term ally.

  The sticking point in the Amazon-Flipkart talks was a breakup fee. Flipkart’s investors feared the uncertainty of the regulatory review process and knew of Amazon’s infamous reputation for engaging in discussions only to not follow through, or to try to raise the price for a more determined rival. So Flipkart demanded a $4 billion breakup free, with the cash paid up front, so that if the merger review took eighteen months and resulted in rejection, Amazon wouldn’t benefit from having impeded a competitor. Amazon balked at that arrangement, which would amount to funding its rival. Though Masa clung to hope until the end, the Flipkart board turned down the Amazon deal.

  Meanwhile, Walmart had played its hand well. CEO Doug McMillon, Walmart International CEO Judith McKenna, and board member Greg Penner built a rapport with the Flipkart executive team, never forced exclusivity provisions into the talks (which would have required Masa to relinquish his dreams of a bromance with Bezos), and dangled the prospect of allowing Flipkart to continue to operate independently.

  After a process that stretched on for six months and had assaulted the calendars of everyone involved with never-ending conference calls, the fractious Flipkart board finally agreed to sell a stake to Walmart. At first the deal talks had called for the retailer to only take a minority position, but by then most of Flipkart’s weary investors wanted to sell their shares and cash out. Even at this late moment, drama dogged Flipkart; Sachin Bansal almost scuttled the deal by insisting Walmart guarantee him future control in the management of the company. Exasperated, the Flipkart board finally insisted that he leave the company for good.

  In May 2018, the companies announced that Walmart would pay $16 billion for a 77 percent stake in Flipkart. Walmart CEO Doug McMillon visited India after the deal was announced and told Flipkart employees, “It is our intention to just empower you and let you run. Speed matters. Decisiveness matters.”

  Despite the stormy previous months, Sachin and Binny Bansal were now billionaires and widely lauded as two of the most successful entrepreneurs in Indian history. But who can say what assails the judgment of exorbitantly wealthy and famous men as they enter middle age? Binny Bansal was promptly ousted from his role as chief executive of the Flipkart Group in late 2018 after Walmart investigated an allegation that he had conducted a consensual extramarital relationship with a former employee and tried to cover it up. And in 2020, ugly divorce proceedings between Sachin Bansal and his wife spilled into public view.

  Inside Amazon India, which had lost out on the hard-fought deal, executives were consumed with more pedestrian affairs. While they had a formidable new rival in India, they were confident that Walmart would find the road ahead as difficult to navigate as a rutted Indian highway. “If there was one thing we all knew, it was that Walmart had no idea what they were buying,” said a longtime Amazon India executive. “It really requires seven or eight years of living out here and working in an environment like this before you truly understand how complicated this mes
s is.”

  * * *

  At noon on a Saturday in the fall of 2018, SP Road, Bangalore’s wholesale electronics market, felt desolate. In the tiny, mostly empty stores that lined the street, shop attendants arranged and rearranged their goods. As sales of smartphones and computers skyrocketed on Amazon and Flipkart, they were cratering here.

  Caught in the downdraft was Jagdish Raj Purohit, the owner of a store that billed itself as Sunrise Telecom. In a shoebox of a space, Purohit was seated behind the cash register at the entrance. Along one side were hundreds of cases for every conceivable smartphone model. On the other was a combination of low-end and mid-price phones, as well as a Vivo V11, an upscale model from China that sold for 26,000 rupees.

  Purohit didn’t expect to sell many phones. “All mobile sales have gone online,” he groused, when asked the customary Hindi question “Dhanda kaisa hai?” (“How’s business?”). “Flipkart and Amazon are always advertising discounts on such phones, so who will come here?” He was trying to make up the shortfall by selling accessories.

  At Raj Shree Computech down the street, Mahendra Kumar and his two brothers had been selling computers and accessories for a dozen years. For the last few, business had been “thoda thanda”—a bit cold. It wasn’t a great mystery why. “Whoever comes here quotes laptop prices from Flipkart and Amazon straightaway, even before we say anything,” said Kumar. Or “they’ll come here and try many headphones for sound and then walk out saying they’ll be back later. We know they aren’t coming back.” Like his fellow shop owner down the street, Kumar was reluctant to become a seller on Amazon or Flipkart because margins were slim and returns created headaches.

  India’s competition regulations had been created to prevent this sort of bloodletting. Amazon and Walmart were trading blows, expanding into the delivery of apparel and fresh food and groceries, and each losing more than a billion U.S. dollars a year. It seemed like the noose of global capitalism was being fitted over the necks of millions of Indian small businesses.

  After Modi won reelection in 2019 amid the country’s most serious economic slowdown in years, the pendulum swung dramatically against the overseas retail giants. As Modi’s government had threatened, it tightened foreign investment laws. Amazon and Flipkart had to sell their ownership stakes in their affiliated subsidiaries and were barred from entering into exclusive arrangement with manufacturers or offering steep discounts.

  Small retailers and their trade organizations weren’t the only ones trying to enlist the state to protect them from the U.S. giants. India’s wealthiest person, Mukesh Ambani, was also lobbying the government to strengthen foreign investment rules for his own interest. In 2019, his company, Reliance Industries, which owned India’s largest chain of grocery stores, also entered the e-commerce fray. Its site, JioMart, would not be subject to the same restrictions as Amazon and Flipkart. Ambani, a political ally of Modi, tapped into growing strains of Hindu nationalism and called on his fellow citizens to “collectively launch a new movement against data colonization.”

  In response to the new hurdles, Bezos diversified his investments in India and expanded his ambitions, investing in a digital payments service, promoting the Kindle and Alexa, and adding a catalog of Bollywood films and various Indian-language TV shows to its local Prime Video service. Amit Agarwal would not concede that Amazon’s India adventures were veering off course. “Jeff would say, ‘it’s still day one,’ and I think it’s not even minute one of day one in India from where we are,” he told me.

  By many measures, Amazon had made remarkable progress in India. Customers in not just cosmopolitan cities but around the country were buying online, paying digitally instead of with cash, and leaning into the technological future that Jeff Bezos had envisioned for them. Small businesses were learning how to sell online and finding buyers well outside the outdoor markets whose essential character hadn’t changed in a century. But Amazon would remain grossly unprofitable in India for the foreseeable future, and its intense competition with Flipkart had created a disorienting set of social and economic discontinuities that helped to summon the dogs of nationalism and divisive populism. The entire saga was a preview of the political headaches that were waiting for Bezos back home.

  CHAPTER 4 A Year for Eating Crow

  In October 2014, a few weeks after Jeff Bezos returned from his first trip to India, former Microsoft CEO Steve Ballmer appeared on the talk show Charlie Rose and threw serious shade at his company’s crosstown rival. “I don’t know what to say about Amazon. I like Amazon. Nice company. [But] they make no money, Charlie! In my world, you’re not a real business until you make some money.”

  Amazon’s performance at the time seemed to merit Ballmer’s assessment. The company had lost $241 million that year, and over the holiday season it logged its slowest growth in sales since the disastrous days of the dot-com bust. By December 31, 2014, after declining 20 percent over the previous twelve months, Amazon’s market capitalization sat at a meager $143 billion.

  Which is why 2015 was such a critical year for the company and its CEO: it marked the true beginning of Amazon’s climb toward the lofty altitudes beyond a trillion dollars in market capitalization.

  Ballmer and other Amazon skeptics, like the hedge fund investor David Einhorn, who added Amazon to his “bubble basket of stocks” that fall, were looking at Amazon’s reported losses and significant investments in new initiatives. They were also underestimating the true performance of its older business units, which the company shrouded in secrecy. Amazon was profitable, particularly mature retail categories like books and electronics in the U.S. and UK. But rather than accumulating record amounts of cash and reporting it on its income statement, as companies like Microsoft and Apple were doing at the time, Bezos invested Amazon’s winnings like a crazed gambler at the craps table in Las Vegas.

  Years ago, he had learned that there were no annuities in retail. Customers were fickle and could change their loyalties at the moment they were presented with a better offer elsewhere. Amazon could only stay ahead of rivals if it kept inventing new technologies and improving levels of service. As we have seen, Bezos avidly pursued that goal by plunging billions into projects like Alexa, the Fire Phone, and the Go store, as well as future dominance in India and Mexico and other secret initiatives never known to the public.

  None of those bets had yet borne fruit. But in 2015, an earlier wager finally started to pay off. In its April earnings report, Amazon revealed for the first time the financial health of its ten-year-old cloud business, Amazon Web Services, and shocked Wall Street with its underlying sales growth and profitability. Then in June, Amazon copied a competitor in China and introduced the first Prime Day, capitalizing on a decade of growth from its two-day shipping program. Both Wall Street and the media began to show a newfound interest in Amazon, and shortly after the twentieth anniversary of its launch, the company came under a new kind of scrutiny commensurate with its growing size. That August, an explosive newspaper article in the New York Times turned Amazon’s combative corporate culture into the subject of national attention.

  Over the course of that eventful year, 2015, Amazon stock more than doubled. Because he owned about 18 percent of the company, Bezos was vaulted into the ranks of the top five wealthiest people in the world, according to Bloomberg’s Billionaire’s Index. It turned out that Steve Ballmer’s broadside against Amazon was a perfect contrarian indicator; it would mark almost precisely the start of one of the most dramatic increases in corporate value and personal wealth in the entire history of capitalism.

  * * *

  Of course, Ballmer had little grasp of how Amazon’s eventual engine of profitability, Amazon Web Services, was performing—and that was how Jeff Bezos wanted it. Over its first decade, AWS’s revenues and profits were a closely guarded secret. The division generated $4.6 billion in sales in 2014 and was growing at a 50 percent annual clip. But Amazon disguised those numbers, along with nascent advertising revenues, in a sundry “othe
r” category on its income statement, so that potential competitors like Microsoft and Google would not recognize how attractive a business cloud computing actually was. Observers and analysts could only guess at the financial dimensions of a unique enterprise computing business, anomalously tucked inside an online retailer.

  In the years after the introduction of its first products in 2006, AWS was used mostly by startups and university labs that needed extra processing power and signed up with a credit card to run their software over the internet on Amazon’s servers. When engineers inside corporations and governments wanted to run their computing experiments via AWS, they often quietly routed around their organizations’ stringent procurement processes. Like many other technology revolutions, cloud computing was first the provenance of geeks, and then spread outward.

  The first companies to embrace AWS became its beta testers and evangelists. Silicon Valley startups like Uber, Airbnb, Dropbox, and the photo-sharing site SmugMug ran their operations on AWS and could quickly order up more servers as their businesses grew at unprecedented rates. It was one of the greatest enablers of the post-recession technology boom—arguably more important than even the iPhone, though outsiders understood very little about it. NASA’s Jet Propulsion Lab in Pasadena, California, signed up in 2009 and used AWS to store and stream images from the Curiosity Rover on the surface of Mars. “I still have the presentation I gave to colleagues,” said Tom Soderstrom, JPL’s chief technology officer. “They thought I was talking about earth science, literal clouds.”

  Even some of AWS’s earliest executives had little sense for cloud computing’s enormous potential. “This business could be really big someday, maybe even $1 billion in revenue,” product manager Matt Garman once told an incredulous fellow Amazon newbie, Matt Peterson, his former business school classmate, over lunch in 2006. “Are you kidding, there is no way this will be a billion dollars. Do you know how big that would be?” Peterson responded. Garman is now an AWS vice president and member of the S-team; Peterson is an Amazon corporate development director; and AWS generated $45.4 billion in sales in 2020.