A Journey To The Amazon "Jeff Bezos " - Gyan ki Baatein Aur Sangrah

.A Journey To The Amazon. 

  🌹" Jeff Bezos "🌹

One Click Is Not Enough 

On September 22, 1994, two months after incorporating Amazon.com and ten

months before launching the company, Jeff Bezos decided to learn how to sell

books. So he took a course on how to start a bookstore, sponsored by the

American Booksellers Association. Some forty to fifty aspiring booksellers,

from young people starting out to retired couples thinking about a second career,

attended the four-day course at the Benson Hotel in Portland. They sat through

courses on topics such as bookstore financial operations, customer service, and

handling inventory. One of the instructors was Richard Howorth, owner of

Square Books in Oxford, Mississippi.

Howorth is a fanatic about customer service (which happens to be the only

way to compete with Amazon.com and the chain stores to this day). To

emphasize the importance of service, he related the story of his most extreme

example of taking care of a customer.

One of the store’s managers walked into Howorth’s upstairs office to tell him

a customer had a complaint. Howorth strolled downstairs to find out what the

problem was. The customer angrily told him that she had parked her car in front

of the store, and dirt from potted plants on the store’s balcony had somehow

fallen on her car. So Howorth offered to wash her car for her. They climbed into

her car and drove to a service station with a car wash. But the service station was

closed for repairs. She became more irate. Howorth then suggested they drive to

his house, where he collected a bucket, soap, and a hose and washed the carhimself.

As she drove him back to the store, her attitude changed. She became

downright pleasant. In fact, she came back to the store later that afternoon and

bought a bunch of books.

Bezos later told an executive at the American Booksellers Association that he

was impressed with the story and was determined to make customer service “the

cornerstone of Amazon.com.” Bezos considered it his most important weapon.

“We know that if we can keep our competitors focused on us, while we stay

focused on the customer, that ultimately we’ll turn out all right,” he has said.

Interestingly, Jeff’s idea of customer service is different than that held by

Howorth, who says personal, face-to-face service with the customer is what’s

most important. In the Internet game, customer service is mostly done by

unemotional computers. “I’ll bet he hasn’t washed a customer’s car,” Howorth

says of Bezos, perhaps with just a touch of bitterness.

In fact, for all his professed dedication to serving the customer, Bezos’s

obsession seems to be restricted to building an incredible Web site and to making

sure deliveries arrive when promised. It’s hard to even find a customer service

number on Amazon.com. Bezos wants everything to be done via email.

Amazon’s customer service started with Bezos himself answering the emails,

and by 1999 was manned by five hundred of these “customer care”

representatives packed into cubicles and tied to their telephones and email

accounts to answer questions from customers.

The people handling these emails are generally overqualified, underpaid

people with no experience in bookselling. From the beginning, disaffected

academics were popular because they were well-read and could supposedly help

find books on a huge variety of topics. They were paid about $10 to $13 an hour,

but with the potential of promotions and stock options dangled before their

glazed eyes.

Not everyone found Nirvana in this environment. Richard Howard, for

example, has a master’s degree in literature but decided to take the entry-level

customer care job at Amazon in 1998 with hopes of moving into Editorial, where

he could write reviews of books. What he found was a work mill with four

“Customer Service Tier 1 E-Mail Representatives” to a cubicle. Supervisors

listened in on calls to monitor performance, and rated the workers by how many

emails or phone calls they could answer per minute.

Howard chronicled his experience for a Seattle newspaper in an article titled

“How I ‘Escaped’ from Amazon.cult.”

Human interaction was treated almost as a necessary evil. Howard was given

a “Blurb Index,” a list of hundreds of short, canned answers to cover virtually

any question a customer might ask, which he felt were designed to create “a

blandly conventional zone of contact between [Amazon’s] agents and

customers.”

When Howard got a call from a customer one day asking how to find a copy

of James Michener’s Centennial because the customer was interested in Civil

War–era fiction, Howard suggested Gore Vidal’s Lincoln as a better alternative

—just the type of thing a knowledgeable employee in a good bookstore might

do. Howard spent three or four minutes on the call, he said, and was

reprimanded by his supervisor. After three and a half weeks on the job he was

fired for not being productive enough. He took a contract job at Microsoft

instead.

What the starry-eyed customer service representatives with visions of huge

stock options found when starting their jobs at Amazon was long hours and

options for just one hundred Amazon shares, as long as they performed well for

three years. The best could answer a dozen emails a minute. Those who dropped

below seven were often fired. The Washington Post did an exposé of this “dark”

side of Amazon and quoted one customer service rep as saying, “We’re supposed

to care deeply about customers, provided we can care deeply about them at an

incredible rate of speed.”

The customer service reps also had to learn the UNIX software system the

company used, and had to take a three-week training course at Amazon to learn

how everything worked, including how orders for books were submitted, how

they were delivered to the warehouse, how they were shelved, how to match

orders to the packed books, and how to choose the best shipping method. The

most frequent questions came from people who needed help ordering a book on

the site or wanted to know where the book they had ordered was.

But Bezos knew he would never be able to offer the kind of service one gets

from a physical store staffed by human helpers. “We’re never going to have

sofas; we’re never going to have lattes,” he told BusinessWeek magazine in June

1997. Where Bezos really managed to shine was in creating a great online

experience with very little human interaction with customers. The site had to be

simple, fast, and intuitive. It had to offer an unprecedented number of books at

the cheapest price possible and deliver them quickly. The whole thing just had to

work without problems so that people left the site happy. That seems to be

enough for most people. “When we do make a customer unhappy at some

point,” Bezos was later to explain, “these people come out of the woodwork and

say, ‘Well, actually that wasn’t my experience.’ Word-of-mouth is very

powerful.”

That’s especially true on the Internet, where word-of-mouth is viral. On the

Internet, says Bezos, “Everybody is a publisher.” They blog and they email, and

they can turn nasty very quickly. Email, he says, “has some magical ability to

turn off the politeness gene in the human being . . . you get these very candid

pieces of feedback that tell you exactly how you can improve your service. If I

walk into a restaurant and am served a bad meal, I just leave; I never go find the

chef and grab him by the collar and say, ‘You know, you really shouldn’t be

cooking.’ ”

But there have been a few occasions when emails and words spread virally

through the Internet were intended to grab Bezos by his virtual collar to yell at

him. Bezos has not always anticipated what it means to provide great customer

service. In the early days, Amazon had a policy of emptying out customers’

shopping carts if they remained idle for thirty days. It seemed reasonable at the

time to assume the customer wasn’t going to buy the items, an assumption that

turned out to be wrong. One customer sent an angry email saying that he had

spent hours filling the online cart with items he wanted, then suddenly found one

day that his basket had been emptied without any warning. In his email, he said

it was a stupid policy. The programmers went back to the files in the database

and recovered the items for him. They also eliminated the thirty-day deletion

practice. “It probably was a stupid policy,” Bezos was later to admit in a speech.

Sometimes the company was not able to live up to its promises. In the early

days, the overworked staff might miss the promised shipping dates. In order to

make up for it, the shipping costs would be refunded whenever a customer

complained.

As Amazon grew, Bezos’s dedication to doing what’s right for the customer

began to slip. He often caught hell for it from customers and had to recant. In

1998, reporters discovered that Amazon had started charging publishers $10,000

to feature books on its home page under headings such as “New and Notable”

and “Destined for Greatness” with heavy editorial support from Amazon,

including a profile of, or interview with, the author.

Bezos reportedly told his staff it was okay to put placement up for bids. “If

Publisher X gives us a better deal [on a new title] than Publisher Y,” said Bezos,

“and we predict that the customer is going to like both of these books equally but

there’s only a slot to show one, let’s show the one where we make more money.”

So what’s the big deal? After all, bookstores have long accepted payola to

give prime real estate in their stores to new titles. But this was Amazon, the

company about which Bezos has boasted, “We may be the most customer-

obsessed company to ever occupy planet Earth.” This was the company that was

supposed to always put customers first, offering the best titles to suit their tastes.

Who’s to say that the customer would “like both of these books equally” when it

comes to a choice between one that will make the company extra money and one

that won’t? That slope is as slippery as an eel in oil.

After the practice hit the press and customers started complaining to Amazon

in a barrage of emails, Bezos decided that full disclosure was the best policy.

Amazon started posting notices next to prominently placed books when

publishers paid for the placement. When that decision was announced, Bezos

was sure to point out that Amazon was the only bookseller that made this

disclosure. He also promised to refund any books customers had bought on the

basis of these recommendations.

Also in 1999, customers began realizing just how much information Amazon

was collecting about their book purchases, tastes, and foibles. It came to light

after Amazon bought a small online service called PlanetAll, which would cross-

reference book sales with people’s zip codes and email addresses. Amazon used

the information to recommend books to people who the service determined

would have similar tastes and interests. Bezos had to do a partial about-face on

this one as well, offering a way for buyers to opt out of the data-sharing

program. Today, nobody seems to mind—or think about—the fact that Amazon

recommends books based on data from others with “similar tastes.” The privacy

debate has shifted to Google and Facebook, although those companies are

probably no bigger offenders than Amazon.

From the beginning, it was very important to Bezos to make people think he

did belong on the Internet selling things, so he had to make sure he would

impress them. The company might send a hardcover book at the paperback price

when the softcover version the customer ordered was out of stock. Also, two

years after launching, Bezos created an out-of-print division to search for orphan

books. Customers were amazed that they could find such books at Amazon, but

nowhere else.

Bezos wants to use technology to provide great service to customers. That

philosophy resulted in what is perhaps Amazon’s most famous—and infamous—

patented software program, known as “1-Click ordering.”

The 1-Click software was written mostly by a programmer named Peri

Hartman, who joined Amazon in 1997. Hartman was given the task of working

on the software that would be the interface to the customers, including the

ordering system they would use to buy books.

Hartman recalls that, one day over lunch with Bezos and Shel Kaphan, the

head of software development, Bezos told them, “We need something to make

the ordering system frictionless. We need to make it so the customer can order

products with the least amount of effort. They should be able to click on one

thing, and it’s done.”A simple idea on simplicity, and Hartman took it literally. He set to work

creating a program that would require just one click to order a product. (His

name appeared first on the patent application, which became patent number

US5960411.) The patent filing was titled, innocuously enough, “Method and

system for placing a purchase order via a communications network.” More

telling was the label in an illustrated flow chart in the patent: “Enable Single-

Action Ordering.”

In fact, it is a simple idea. The nineteen-page patent filing is made up mostly

of flow chart diagrams that show the sequence of events that enable buyers to

place an order with a single click: Retrieve the buyers’ identification and

payment methods when they first place an order, enter it into the system, and the

next time they look up a book, they’ll see a 1-Click ordering button on the

buyers’ pages.

Sound like a no-brainer? That’s what Amazon’s competitors thought. Many

people in technology hate this type of broad patent, known as a “process patent”

since it mainly describes the process of doing something that is, well, patently

obvious—in this case, reducing to one the number of clicks needed to make a

purchase.

That is, however, the kind of attention to detail that has helped make

Amazon.com a success. Jeff Bezos will do anything he can think of to make the

process of using Amazon.com easier. The genius is that Bezos thought of it first.

He knew that doing anything online had to be simple in an age when people

were becoming overwhelmed by complicated computers, software, and Internet

technology. This, in fact, was a principle that Larry Page and Sergey Brin

adopted a couple years later when creating Google. But few competitors have

had the sense to follow this rule. Even today, most Web sites seem to be

confusing morasses of text, graphics, videos, flashing ads, and a tangled string of

links. Amazon.com doesn’t match the simplicity of Google’s famously spare

site, but it is well designed and easy to navigate.

“His general philosophy was to be friendly to customers,” recalls Hartman.

“The focus should be on the customer, not on the Web site. It’s pretty obvious

that a simple Web site is easier to use than one with of a bunch of fancy gadgets.

He was adamant about that.”

His goal was not just to make browsing for books easy, but an enjoyable

experience. “People don’t just buy books because they need books,” he has said.

“There are products like that. Pharmaceuticals are that way. Nobody enjoys

browsing the Preparation H counter. But people will gladly spend hours in a

bookstore, so you have to make the shopping experience fun and engaging.”

It didn’t require a free online latte to make customers appreciate Amazon.com.

In the late 1990s there was so much room for improvement in Web site design

that any incremental advancement was like getting an extra bottle of oxygen on a

trek to the top of Mount Everest. “To be nine times bigger than your nearest

competitor,” Jeff explained to The Washington Post in 1998, “you actually only

have to be 10 percent better.” Three years after the site was launched, he said

that the majority of his customers came to the site, not because of advertising,

but because of positive word-of-mouth.

From the beginning of his company to the present day, Bezos has been

fanatical about squeezing out every incremental percentage point of usefulness

in Amazon.com. They’re often simple things like the 1-Click feature and, later, a

one-click button to designate a gift and have it wrapped. He won’t wash a

customer’s car (there are too many customers for Amazon to provide individual

attention), but he’s happy to implement new policies if they will help all

customers. When one elderly woman sent an email to the company saying she

loved ordering books from the site but had to wait for her nephew to come over

and tear into the difficult-to-open packaging, Bezos had the packaging

redesigned to make it easier to open.

These customer services are often met with resistance. When the site

launched, he started allowing customers to review books on the site, positive or

negative. People thought he was crazy for allowing negative reviews. It’s not

exactly something to help sell books, at least not in the short run. But because

bad reviews were allowed as well as good, customers learned they could rely on

Amazon.com to point them to books that wouldn’t disappoint them—at least to a

certain extent. Friends and family of authors often help out with reviews on

Amazon to help kick-start sales. Negative reviews are usually genuine, unless

posted by an author with a competing title.

Very early on, Bezos started adding best-seller lists on Amazon. By 1998,

Amazon customers could see where books ranked on any of two thousand

different lists. One of Bezos’s favorite stories is that of a book called Endurance,

by Alfred Lansing. It’s a real-life adventure tale about polar explorer Ernest

Shackleton, whose ship was crushed by an ice floe. He and his twenty-eight men

all survived after a six-month trek hiking out of Antarctica. It was originally

published in 1956. In 1998, it ended up as one of the top one hundred best-

selling books on Amazon. Its popularity, he said, was “strictly fed by these

customer reviews.” (Today, a paperback version published in 1999 is still being

sold on the site, ranking within the top two thousand best sellers on the site, as

well as number one in history books about polar regions and number one among

travel books about Antarctica.)

And, of course, discounts are a big reason for the company’s success. By 1998he was discounting four hundred thousand best-selling titles and his customer

base had grown to 3.1 million people using the site. But he does not use

discounts alone to attract customers. By collecting data on which books

customers bought and comparing that to books bought by customers with similar

tastes, Amazon’s computers can recommend books that others may not have

found otherwise.

Bezos believes that he can keep improving that technology to outdo

recommendations in the best bookstores. In a speech in 1998, he described it as a

steadily improving technology:

So what we think we can do is use advanced technology, like

collaborative filtering and other things, to accelerate that discovery process.

So that, if today you have a 1-in-1,000 chance when you go in a bookstore

of stumbling on something that blows you away, we want to use technology

to get to know you as an individual and then make that a 1-in-300 chance.

Then a 1-in-100 chance. And then work a few more years on it and make it

a 1-in-50 chance and so on and so on. That will create huge value for

people. Great merchants have never had the opportunity to understand their

customers in a truly individualized way. E-commerce is going to make that

possible.

Another feature, added in October 2001, is “Look Inside the Book.” Not all

publishers or authors like the idea of letting people read some of the book before

buying it. Even worse, two years later he added “Search Inside the Book,”

allowing people to pick out only the topics they’re interested in without paying a

cent. It’s a great research tool for college students, but doesn’t bring in revenues

for either the publishers or Amazon.com. It does, however, create enormous

goodwill and brings people back to the site. Some of them end up buying that

book or others on the site.

The 1-Click patent, however, created the most controversy, one that lasted for

more than a decade. The reason is that anyone else trying to sell anything online

is prohibited from adding a one-click purchasing option—unless they want to

pay a royalty to Amazon. The patent was written broadly enough that

competitors were prevented not only from imitating the code, but from adding a

single-click feature at all, regardless of how they made it happen. There are

simply not very many ways to add the feature, and none of the approaches are

unique enough to avoid violating the patent.

This kind of patent might be compared to filing a patent for a plastic toy that

locks out any competitor who might want to make, say, “a disk with a curvededge, which can be thrown long distances by tossing and spinning it.” Even the

inventor of the Frisbee flying disk, Walter Frederick Morrison, improved on the

Frisbie pie pans that were first used for that purpose by describing a specific

shape to the curved rim. That shape, called the “Morrison Slope,” improved

distance and accuracy of the thrown disk. Morrison still managed to make about

a million dollars in royalties from his design despite many competitors.

The 1-Click patent was granted by the United States Patent and Trademark

Office in September 1999. After it was granted, it attracted enormous derision

from those creating retail sites on the Internet, as well as advocates of patent

reform. Patents are supposed to be granted only for “non-obvious” inventions.

How much thinking does it take to figure out how to cut the ordering process to

a single click? Legal experts began referring to it as the “notorious” patent. An

article in one law journal described it as “probably the most memorable example

of an unoriginal software-patent.” Technology book publisher and open-source

advocate Tim O’Reilly described that patent as “one more example of an

intellectual property milieu gone mad.” In an open letter to Bezos, published

online, he said that the patent “fails to meet even the most rudimentary tests for

novelty and non-obviousness to an expert in the field” and would stifle creativity

on the Internet. He asked people to sign a petition to get Bezos to give up the

patent.

The legal battle was slow and furious, and wasn’t resolved until 2009. In the

meantime, Barnes & Noble tried to get around the patent. Amazon owned 1-

Click? Well, B&N decided two clicks were almost as good as one. In May 1998

it introduced its own fast checkout system, called “Express Lane,” which simply

added a second click: After customers clicked on the express purchase button, a

second button popped up asking the buyer to click again to confirm the purchase.

Jeff Bezos was not amused—or taken in by the tactic. Three months after his

patent was granted, he sued B&N for patent infringement. “We spent thousands

of hours to develop our 1-Click process,” he said in a press release, “and the

reason we have a patent system in this country is to encourage people to take

these kinds of risks and make these kinds of investments for customers.”

Barnes & Noble fired back with its own press release, insisting that the suit

was a “desperate attempt to retaliate for our growing market share” in online

bookselling. It didn’t specify exactly how fast that share of market was growing.

(By 2010, Barnes & Noble was suffering, while Amazon.com is as strong as

ever.)

In response to Amazon.com’s lawsuit against Barnes & Noble, the Free

Software Foundation, an advocacy group that promotes open-source software

and is staunchly against software patents, called for a boycott againstAmazon.com. That didn’t work either.

In December 1999, a district court in Washington State upheld Amazon’s

patent, issuing a preliminary injunction preventing Barnes & Noble from using

Express Lane. The appeal took several years. Finally, in 2002, Barnes & Noble

settled the suit with Amazon.com. Although terms were not disclosed, Barnes &

Noble was finally able to put its fast purchase method on its site.

Apple Computer took the easy route. In 2000, it licensed the 1-Click patent

from Amazon.com, and put the capability on its iTunes store.

Ironically, even Bezos himself now argues against trivial patents. Influenced

by O’Reilly, he has traveled with the technology publisher to Washington, D.C.,

to argue that patent rules should be tightened. The two men even cofounded a

Boston company called BountyQuest, which offered rewards for evidence of

“prior art,” or documents that prove that someone else thought of the idea first

for a disputed patent. One of the patents for which it offered a reward was the 1-

Click patent. It’s part of the enigma that is Jeff Bezos: Preach restraint, but if you

can get away with something that improves customer service and the company’s

competitive edge, do it regardless of who complains. (To be sure, BountyQuest

also noted that its service could also be used to validate patents when no prior art

was discovered.) BountyQuest paid out money to three prior art submissions in

an attempt to invalidate the 1-Click patent, but none of them proved strong

enough to challenge the Amazon patent. BountyQuest later closed down without

any significant successes.

The strongest challenge, raised several years after BountyQuest folded, came

from a New Zealand actor named Peter Calveley (who was one of the actors

hired to act out motions that were filmed and used to create computer-animated

creatures for The Lord of the Rings movies). Calveley decided, just on a lark, to

look for prior art to challenge the 1-Click patent. He found it, from a defunct

online e-commerce company called Digicash. Armed with that information, the

patent office ordered a reexamination of the 1-Click patent in May 2006.

That attempt failed as well. Finally, in March 2010, the patent office upheld

the 1-Click patent for good—or, at least, until the patent expires—a stroke of

exceptional luck for Bezos. The patent office will often rescind a patent if it

seems that the patent is obvious or too broad. This time it didn’t. Perhaps it

depends on which individual in the patent office is doing the review. Some

people feel that getting the patent upheld was like winning a crap shoot.

Bezos is still trying to enhance his luck with newer and wilder ideas. One-

Click, it seems, is a step, not an end point. In June 2008, Amazon.com filed for a

new patent with a Microsoft Kinect–like feature for making purchases with body

movements. Anticipating computers and other devices that can track a user’smovements, the new Amazon patent is titled “Movement recognition as input

mechanism.” Forget keypads and mice, you may soon be able to make a

purchase simply by nodding your head at your computer, Kindle, or cell phone.

Industry wags have dubbed it the “1-Nod patent.”

It doesn’t stop there, of course. You may be able to indicate such requests as

how many copies of an item to order by holding up fingers, or create a password

from specific motions. The patent application gives an example: “The user could

set a password to three nods up and down, followed by a smile and two eyebrow

raises.”

This patent lists Bezos himself as the sole inventor. This illustrates two of the

most important principles of an entrepreneur. Always put the customer first,

even if it appears to require a decision that would decrease revenues. It’s a

winning strategy in the long run. And in order to get an advantage from those

decisions, think of the future, not the present. Even if that future still seems to be

years off. Just thinking of the idea may bring about that future more quickly.

Your competitors may hate you for it, but customers will be impressed—or at

least get a good laugh.

Innovations and new patents at Amazon will never cease. In December 2010,

word leaked out about a new patent, for a system that enables people who get

gifts through Amazon to return them even before they arrive in the mail. If Aunt

Mildred has a habit of sending unwanted gifts, the patent says, the site will

include an option to “convert all gifts from Aunt Mildred.” (Yes, the patent

includes the name of the presumably fictitious relative.) It allows the receiver to

track when the well-meaning relative buys a gift for him and change it to

something more desirable before it ships. Gift recipients can also apply other

rules selected from the “Gift Conversion Rules Wizard,” such as, “No clothes

with wool,” or “Convert any gift from Aunt Mildred to a gift certificate, but only

after checking with me.” The patent lists Bezos as the inventor.

Of course, those who dictate what constitutes proper etiquette believe such a

system is in appallingly bad taste. “This idea totally misses the spirit of gift

giving,” sniffs Anna Post, the great-great-granddaughter of etiquette maven

Emily Post and spokeswoman for the Emily Post Institute. Bezos thinks it will

improve gift-giving, whether or not the giver is offended. “In some cases,

concern that the gift recipient may not like a particular gift may cause the person

sending the gift to be more cautious in gift selection,” the patent notes.

But the idea is not only something that could please the fussy recipient, it can

save Amazon millions of dollars. When a gift is returned, Amazon warehouse

workers have to unpack and reshelve the old gifts and wrap, pack, and ship the

new ones. And it does fit in with Bezos’s desire to stay ahead with unusual innovation, a desire that has generally served the company very well.

Of course, a keen intellect, a drive to succeed, and an innate stubbornness to

the point of absurdity helps. These are all signs of a born entrepreneur.

  Jeff Discovers the Internet

David Shaw ended up being the one who set Bezos off on the path that led to

opportunity. In 1994, he asked Bezos to look at this new thing becoming all the

buzz, something called the Internet. It was a piece of technology that seemed to

be coming together with elements that just might create opportunities for a

company that used computer networks to conduct stock trades.

Until recently, the Internet had been mostly used as a network that allowed

universities, research labs, and government institutions to exchange information.

One key step toward change was taken in 1990, when Tim Berners-Lee created

the first Internet browser, called World Wide Web. Another came in 1991, when

the Internet was opened up to commercial use for the first time. It took several

more years before these changes caught on and spread to popular awareness. In

1993, a government-funded group at the University of Illinois at Urbana-

Champaign created a new generation of Web browser called Mosaic, a

wonderful, graphics-based browser. The following year, a very astute Silicon

Valley venture capitalist named John Doerr decided to recruit a bright young

man, Marc Andreessen, from the Mosaic team in Illinois to move to Silicon

Valley and start a Web browser company. That same year the company, called

Netscape, launched its browser, Navigator.

Shaw decided the Internet had a future, and gave Bezos the task of finding the

opportunities there. In the spring of 1994, he began researching the Internet, and

was impressed with what he found. Primarily, he says, he came across an

important statistic: The Internet was growing at 2,300 percent a year! “You

know, things just don’t grow that fast. It’s highly unusual, and that started me

thinking, ‘What kind of business plan might make sense in the context of that

growth?’ ”

Those numbers sound incredibly impressive, although that growth was

starting from a very small base. An annual growth rate of 2,300 percent annually

simply means the population grows by a factor of 23 every year. How impressive

that is depends on the starting point. A club of 100 people that grows by 2,300

percent annually, for example, ends up with 2,400 members after a year. But

those numbers quickly get crazy—assuming that growth rate continues. After the

third year of growth the club would boast 1.4 million members.

Similarly, from a very small base, a bacterial infection can quickly turn into

billions of infectious organisms, an arithmetic phenomenon of which Bezos was

fully aware. “I had never seen anything grow so fast, and I don’t think many

people had, except for perhaps in a petri dish,” he said in a speech to the

Commonwealth Club in Silicon Valley.

That’s great for bacteria. Such growth rates, however, are not sustainable

outside of a petri dish. International Data Corporation has numbers going back to

December 1995, when it estimates that sixteen million people were using the

Internet. IDC puts the Internet population at thirty-six million at the end of 1996,

for a growth rate of just 125 percent. Growth was just under 100 percent for the

next two years.

Still, that doesn’t take away from Jeff’s ability to recognize a good thing

growing when he saw it. The short version of the story is simply that Jeff knew

there would be a huge Internet population in short order. (IDC says there are

more than 1.7 billion people online these days, which is approaching one-quarter

of the world’s population.) Fast growth means opportunity, in most people’s

dreams. Twitter accounts, for example, grew by 1,500 percent in 2009, although

it has not figured out how to make a profit off that growth. Jeff’s job, and his

genius, was to find a way to make a fortune off this phenomenon.

Shaw recognized it as well. By 1996, D. E. Shaw was spinning off Internet

companies, including the free, ad-supported email service called Juno, and

Farsight, an online service with aspirations of managing everybody’s finances

through Shaw’s Web site, including banking, brokerage, and insurance services.

But the most outstanding spinoff from D. E. Shaw was the one Jeff kept for

himself.

Most successful entrepreneurs start a company because they’re passionate

about the business they want to enter—Bill Gates creating software with the goal

of putting a computer on everyone’s desk, Steve Jobs pioneering a new personal

computer with a design that would set gold standards, or Larry Page and Sergey

Brin creating a search engine that could bring all the world’s information to

everyone. But Bezos was simply interested in the fact that growth of the Internet

meant somebody was going to make a fortune or two from the phenomenon, and

he wanted one for himself.

He didn’t set out to build the world’s biggest bookstore simply because he

loved books, although he does love them, as shown by his voracious appetite for

books in his youth. He wanted to simply create a hit company by leveraging his

business and technology skills. It didn’t matter what the business was, as long as

it had huge potential. He realized the Internet would become an enormous

gathering place, and where people gathered, there was an opportunity to sell

them something, if one understood the unique characteristics of that new

environment and figured out how to exploit it properly. He began to dream of

becoming the world’s largest Internet retailer—perhaps the world’s largest

retailer, period.

But he also realized that the best approach was to start by focusing on one

market, to figure out the needs of that market and match them to the needs and

capabilities of the Internet. Once he was established in one market, he would be

able to figure out other markets as well. His big challenge was to figure out what

product to sell. To answer that question, he created a deal flow chart to analyze

several opportunities. He made a list of twenty possible products. Which one

offered the best set of features for quickly building an Internet presence? “I was

looking for something that you could only do online, something that couldn’t be

replicated in the physical world,” he said. The answer turned out to be books.

Imagine the criteria an ambitious young executive with a penchant for

computers would put on a deal flow list.

Familiar product: Everyone knows what a book is. When ordering a

particular title online, nobody has to worry about whether it is a cheap knockoff

or an imitation, as they might with, say, consumer electronics.

Large market size: Computer software and music might be reasonable bets.

In 1994, according to U.S. Census Bureau data, nearly $7 billion worth of PC

software applications were sold in North American retail stores in 1994. That

same year, however, $19 billion worth of books were sold in the United States.

Further, almost $2 billion of the software applications sold that year were

produced by just one publisher: Microsoft. Entering the software business would

make Jeff heavily dependent on just one producer, making it difficult to

negotiate price reductions.

As for music, there were 300,000 CD titles for sale, compared to 3 million

different books available around the world. “Books are incredibly unusual in one

respect, and that is that there are more items in the book category than there are

in any other category by far,” he was later to recall. In 1994, 513 million copies

of books were sold, and 17 best sellers sold over one million copies. And on

average, American consumers spent $79 per person on books in 1994, compared

to $56 per person on recorded music.

Competition: There were two large bookstore chains, Barnes & Noble and

Borders Group, with a combined market share of 25 percent. An uncountable

number of independent bookstores accounted for another 21 percent of sales.

The remainder were not sold through bookstores at all, but through other outlets.

such as supermarkets, general-purpose retailers, book clubs, and mail-order

catalogs.

Most bookstores also carried a very limited inventory. Although they could

easily order a book if a customer wanted it, that’s just not as satisfying in an

instant-gratification world. Barnes & Noble and Borders were converting large

structures, such as bowling alleys and movie theaters, into 60,000-square-foot

superstores, but even these carried no more than 175,000 titles.

The growing popularity of mail-order books also provided a basis on which to

build a virtual bookstore. As for direct competition, there were a couple of

online offerings already, but they were primitive approaches. In 1991, a handful

of specialty book publishers and retailers, such as Computer Literacy Bookstore

(clbooks .com), O’Reilly & Associates (ora.com), and the Stanford University

Bookstore, allowed the few people with online accounts (using online Bulletin

Boards, or pre-Web Internet communications systems) to order books through

email. In 1992, a start-up called, naturally, Books.com, launched a similar

service, and the following year posted an online database of 40,000 titles. There

was clearly room for a more sophisticated system of online book selling.

Acquiring inventory: Most importantly, there was a ready source of

wholesale books. Two distributors, Ingram Book Group and Baker & Taylor,

dominated the market. Their warehouses contained about 400,000 titles. Small,

independent bookstores relied on these distributors, rather than the publishers, to

supply them with titles, and Jeff could tap into this ready source. The distributors

both had warehouses located strategically around the U.S. and could deliver

books within a couple of days. When customers requested books that a store did

not stock, most bookstores ordered the books from one of those two distributors.

Creating a database of books for sale: Finally, the wholesalers had already

set the stage for the digital age. Bezos attended a meeting of the American

Booksellers Association (ABA) and discovered that all books for sale were

given an ISBN number. The ISBN (International Standard Book Number) was

created in the 1960s, then standardized by the International Organization for

Standardization (ISO) in 1970. That made it easier to create a database of books

and search for them by their ISBN numbers. In the late 1980s, Ingram and Baker

& Taylor had upgraded their inventory list from microfiche, which an individual

had to scan through manually, to a digital format that clerks could search through

on a computer. It seemed to Bezos as if all the information about books “had

been meticulously organized so it could be put online.”

Discount opportunities: In the early 1990s, Crown Books had opened up

hundreds of discount stores, forcing the major booksellers to follow suit for the

first time. But the cost of real estate for the stores and the cost of maintaining

inventories meant their ability to discount books and still make a profit was

limited. An online store that could order books directly from the distributors

instead of keeping its own inventory would have a huge price advantage.

Shipping costs: Like software and music CDs, books are easy to ship through

the mail at book rates or with overnight delivery services. At eight ounces to a

couple pounds, a book is heavier than a CD or software (depending on the size

of the manual) but lighter than computers or many other consumer electronics

products.

Online potential: Finally, software programs could sort, search, and organize

book titles and categories, making them easier to find and buy online. The

largest bookstores carried just 175,000 titles, but Bezos knew that software could

sort through a million titles in a database, as long as he had a couple of

reasonably powerful computers.

Jeff was amazed by what he found when he analyzed the potential of selling

different products online. Books appeared to be by far the most eligible partner

for a dance with e-commerce. To most people, the idea would seem too simple to

start a revolution. In reality, what Jeff created was simply a mail-order book

service that used the Internet to place orders. But he knew it could be a very big

system for placing orders. “I didn’t think of it,” John Ingram, chairman of

Ingram Book Company, was later to confess. “Before 1995, I’m not sure I knew

what the Internet was.”

Jeff told David Shaw that he had found the right opportunity. But selling

books was a big leap for a financial services firm, and Shaw apparently rejected

the idea.

Jeff thought about it, and decided this was an opportunity he couldn’t pass by.

He told Shaw he was going to start a company on his own, and Shaw took him

on a long walk to try to talk him out of it. Why leave a stable, high-paying job

with substantial bonuses for the vagaries and uncertainty of a start-up? Of

course, Shaw had done the same thing when he started his company, but Jeff

considered this argument deeply.

Once again, the nerdy, list-making aspect of his personality helped him

decide. In a speech at Lake Forest College in 1998 (where he was given an

honorary degree), Jeff recalled that he created a “regret minimization

framework.” Once he was old and looking back on his life, what would he regret

the most if he made either decision? “A lot of people live their lives this way,” he

confessed. But, he added, “Very few are nerdy and dorky enough to call it a

‘regret minimization framework,’ but that was what I came up with.”

His conclusion: “I knew that when I was eighty there was no chance that I

would regret having walked away from my 1994 Wall Street bonus in the middle

of the year. I wouldn’t even have remembered that. But I did think there was a

chance that I might regret significantly not participating in this thing called the

Internet, that I believed passionately in. I also knew that if I had tried and failed,

I wouldn’t regret that.”

Once he made that decision, he knew it was time to go, and go quickly.

“When something is growing 2,300 percent a year, you have to move fast,” he

said in his speech. “A sense of urgency becomes your most valuable asset.” He

knew that the company that got the earliest start would have the easiest time

capturing the early customers and making a name for the business.

So he told Shaw he decided to start a company to sell books online, and gave

notice. It was the summer of 1994.

Now that he had his idea for a new company and a way to make it work with

the new technology the Internet was likely to provide, he had to start building a

company. That meant finding some people to help him. Fortunately, his years in

business had provided the connections he needed to find some good people.

More importantly, he had the self-confidence of Muhammad Ali, the enthusiasm

of John Kennedy, and the brains of Thomas Edison. He had what was needed to

persuade others to join him in his bold new quest.

    Jeff Created a Book Store

It took Jeff Bezos and his tiny team just one year to go from settling into Seattle

to launching a company. First, he had to get some computers to run his site and

store all the data he had collected about books. He bought two or three Sun

Microsystem workstations, small but powerful computers often used by

engineers to design products or run computer networks.

Amazon’s biggest expense was obviously going to be buying or building

software. Start-up executives often make the mistake of assuming no outsiders

can build software as well as their own programmers. They end up wasting time

and money building what they could have easily bought from a vendor that had

already worked out the bugs and refined its programs.

Bezos, however, knew what he was doing. He probably knew as much about

programming as the people he had hired to do it for him. He carefully chose

what to buy and what to build. In order to run the basic operations of the

company and manage all the data, he and his programmers chose Oracle

Corporation’s Oracle database management system. It’s an expensive system,

but well tested, reliable, and widely used by giant corporations to store and

manage their data. In fact, it was more powerful than the tiny company needed at

the time. But Bezos had confidence in his future, and Oracle’s software would

allow the company to grow without having to switch systems. Davis and Kaphan

were careful to keep that issue in mind when writing their own software as wel

They didn’t want to be replacing systems as the company grew, another common

problem with start-up companies. “Jeff was very concerned about scaling the

company,” says Peri Hartman.

Still, Oracle was a general-purpose system. Amazon’s software designers had

to build upon it to do exactly what the company wanted. In that process, the

programmers made a lot of mistakes. Kaphan was primarily responsible for the

Web site software that would be seen and used by customers, while Davis

focused mostly on the back-end systems that conducted transactions and ran the

company. Neither Davis nor Kaphan were experts in relational database systems.

“We made some good guesses and a lot of poor ones,” Davis would later say.

But the team still had to build a lot of software themselves. Executive hubris?

Probably not. This team was building an unusual company of a type that had

never really existed before. Since they had to spend time creating their own

programs, they did it on the cheap.

In order to keep costs down, they relied heavily on open source software, free

programs such as the UNIX operating system and the C and Perl programming

languages, all of which were able to run on the Sun workstations Bezos had

bought. Open source software is built by hobbyists and university professors and

students, is widely distributed, and can be enhanced or added to by anyone. The

open source strategy, in fact, became popular for many other dot-com

companies, including Google. Although Amazon’s programmers had no

experience in retail, back-office, or customer-centric software, Jeff got his stock

options’ worth from them. They were familiar with open source programs,

allowing them to create the workhorse software they needed. Davis and Kaphan

built their software on top of the free UNIX operating system using the free

programming languages.

In addition to the Oracle system that would manage the database program,

they had to build their own database that would hold all the information to run

the company. So they made it from an open source system called DBM (database

manager), which had been created at AT&T and later improved upon by the

University of California at Berkeley and others. That required modifying it to

make it run on UNIX. When the company launched in 1995, its overall database

of books contained more than a million titles, requiring more than two gigabytes

of memory. They put the thousand most popular books into a twenty-five-

megabyte computer memory system that could respond very quickly to requests

through the DBM program.

With a database containing more than a million books, Jeff began to claim that

Amazon was “the biggest bookstore on earth.” That was a nice marketing

gimmick of questionable veracity. For one, Bezos didn’t want his company to

have any inventory—or, at least, he wanted the inventory to pass through his

hands very quickly, in and out the same day. What he actually had was a huge

database of book titles and information about them. His plan was to order the

books from publishers or distributors only after his customers had ordered them

from him (a goal he later had to abandon as Amazon grew). His belief was that

Amazon would then be able to operate with much lower overhead than physical

bookstores and mail-order companies. Another reason the claim of a million

books was an exaggeration is that even the distributors had only about 300,000

books in stock at any one time. In another sleight of hand, although Bezos

claimed Amazon to be a bookstore with 1.1 million titles, his database actually

had a list of 1.5 million titles. One source later told book author Robert Spector

that the reason for the lowball figure was so that Amazon could later claim 1.5

million books, making it seem as though the inventory had grown.

In terms of the number of books actually on hand at any one time, Amazon’s

competitors could have just as easily described it as one of the smallest

bookstores on earth. In fact, any physical bookstore could claim access to just as

many titles as Amazon, because that bookstore could order any books from

distributors or publishers just as Amazon did. The difference was that Amazon

could find the titles quickly in its custom-built database and place the orders

faster than a physical bookstore could using people staffing a help desk.

Amazon’s programmers still had to create a highly customized inventory

tracking system, because the company still had to keep track of books moving

from the publisher or distributor to Amazon’s warehouse and then to the

customer. Since mail-order companies did keep books in stock, they typically

had only two categories for inventory: in stock or on back order. Bezos wanted

more precision, so Davis had to write an inventory tracking system specifically

for Amazon. If Amazon already had a copy in its warehouse, the book was listed

as able to ship in one day. If a distributor had a book in stock, it was promised in

two or three days. (If nearby Ingram had it, the book could often make it out in

one day.) If a book had to be ordered from a publisher, delivery to the customer

might take a week or two. If the book was out of stock at both the publisher and

distributors, it was listed as “shipped in four to six weeks or maybe never.”

Books that were out of print fell into the “maybe never” category. (Bezos would

still try to find the out-of-print books, and sometimes managed to do so from

publishers or other bookstores, a feature that gave Amazon a reputation early on

as an amazing place to find books.) The general strategy was to be conservative

when estimating when a book would be shipped, so that surprises would be

positive—shipped sooner than the customer expected—rather than negative.

Still, some of the tasks had to be done by hand and were extraordinarily

tedious. That meant a lot of work for Bezos’s tiny team of programmers. In order

to find books, for example, Amazon used a database of titles called Books in

Print, published by R. R. Bowker, which lists all in-print books by their

International Standard Book Number (ISBN). It provided this list—a million and

a half titles altogether—to publishers, bookstores, and libraries on CD-ROM

disks. Getting the lists into Amazon’s computers was like moving a giant pile of

sand with a teaspoon, because Amazon did not have the huge, expensive

computers used by large corporations to suck up the data quickly. The

programmers could only transfer six hundred books at a time, which meant

someone had to copy and paste blocks of titles twenty-five hundred times to

copy an entire disk. R. R. Bowker sent out an updated disk every week, and just

transferring the updates took almost an entire day.

Different databases of books were not always reliable, however. They often

had different data about which books were available. So the Amazon team

determined which were more reliable with a simple test: They would order

books and see which databases were accurate. They found that when distributors

or publishers claimed that books were out of stock, they were often actually out

of print. But when they acknowledged that a book was out of print, that was

usually the truth.

The next problem was how to take orders from customers and collect the

money from them. That was a new issue for the Internet, which had just recently

opened up for commerce. The Amazon brains didn’t know if people would be

comfortable placing orders and giving credit card numbers over the Internet, or

if they would prefer to use email, or to call the company directly, or to simply

mail in a check. There were already well-publicized cases of hackers breaking

into the files of Internet companies and stealing credit card information. The

most obvious solution was to provide for every scenario.

At first, the team thought email was the most likely scenario to work, since

email users outnumbered Internet users by ten to one. So they created an email

ordering system: A customer could search for a book on the site, but the rest

could be handled by email, on the assumption that people would be more

comfortable with it: placing the order by email, getting an email back letting

them know how soon it could be shipped, then sending a credit card number

back via email.

By the time Amazon opened for business, the petri dish of the Internet had

become so popular that the email system wasn’t needed, and Amazon was able

to rely mostly on orders coming directly through the Web site. About half the

customers phoned in their credit card numbers, and some paid by check, but the

team was surprised that a significant number of customers were willing to do the

transactions directly through the Web site.

Of course, that meant that keeping the credit card numbers safe was of

paramount importance. Davis created that system, something he dubbed the “CC

Motel,” a play on Black Flag’s Roach Motel, where “roaches check in, but they

don’t check out.” Credit card numbers could be entered into the system, but

hackers would not be able to get them out. The approach was simple: Never put

the credit card information into any computer that was connected to the Internet.

The card number was transferred to a floppy disk and walked over to the

transaction processing computer. (In those early days of unreliable computer

networks, companies called this a “sneaker-net” network, a backup for when

they couldn’t get the network to function properly.) The CC Motel computer was

connected by a telephone-based modem only to the credit card companies and to

the book distributors, and was used both for charging the credit cards and for

ordering the books from the distributors. The books were ordered first, in order

to make sure they were available. Only then were the credit cards charged.

This early system worked, although it was almost laughably simplistic, and

was one that would obviously have to be replaced once orders reached

substantial levels. Davis later recalled that he would have nightmares about the

system. The data was supposed to be backed up onto another computer every

night, but the team would sometimes forget to do it. Sometimes they lost or

accidentally wrote over files that might contain a couple hundred transactions.

That required going back to the CC Motel and printing out a list of the credit

card numbers, then calling the credit card company to go through the numbers

one at a time to make sure the transactions had been processed. At other times,

they lost files of credit card numbers and would have to get the credit card

company to fax back a list of the transactions, which contained only the last four

digits of the credit cards, and someone at Amazon would have to sit down with

the list and match them to their list of transactions. “We didn’t take seriously the

responsibility of keeping that data in a good state,” said Davis.

But there were also features of the shopping site that few other companies

thought to build in, features that gave customers confidence in using the system.

For example, people did not have to even register with the site in order to start

looking for books or putting them into a shopping basket. “We let people get

well into the ordering process before we made them create an account, which

was a real stumbling block on some other early e-commerce sites,” says Kaphan.

In order to assuage customers’ fears about leaving their credit card

information online, Jeff’s mandate was to make the ordering process “gentle,” as

Kaphan puts it. So they were given the option of leaving just the last few digits

of their credit card number, and calling in the full number by phone when they

were ready to be charged. And Amazon made sure that the customers knew they

would not be charged until the very last step, eliminating the fear that they would

buy a book accidentally. “Users were always reassured at each step that they

were not making irreversible steps until they were ready to commit their orders,”

says Kaphan. “I remember that next to the button to put something in the

shopping basket, I put something like ‘you can always take it out later.’ ”

This was all part of Bezos’s mandate to make sure the site was the best

around, a philosophy that the programmers took very seriously. The Web was

new, confusing, and more than a bit intimidating to most people, and generating

trust was (and still is) highly valued online. The Amazon.com system helped

meet Bezos’s goal of creating a good experience for customers. Mainly, he knew

that this approach was key to the company’s success.

In fact, Davis and Kaphan were not only able to make the site trustworthy and

easy to use, they made it more useful than shopping off-line. Any good Web site

should exploit the technology of computers and the Internet to do things that

can’t be done off-line. Very few of the early dot-com companies figured out how

to do that. But Bezos reasoned that if customers can get the same service off-

line, why change to a new medium that seems confusing or even scary? “The

Web is an infant technology,” Bezos said at the time. “If you want to be

successful in the short-to-medium term, you can only do things that offer

incredibly strong value propositions to customers relative to the value of doing

things in more traditional ways. This basically means that, right now, you should

only do on-line what you cannot do any other way.”

Amazon’s programmers found a way to offer something that can’t be done

off-line by making it easy to tap the company’s database in order to find

information about books and authors. Kaphan tapped his expertise in creating

hypertext, or links from one piece of data to another. He and Davis took all the

biographical information about authors in the Amazon database and intertwined

it through links. Customers were able to search through all subjects and authors

they found of interest. If they found one book they liked, they could click on the

author’s name and find all the other books he or she had written. They could

click on a subject category to find other books on that subject. Who needs a

Dewey Decimal System? “I always thought that the hypertextualization of the

bibliographic information was key [to Amazon’s early success],” says Kaphan.

“You could navigate through the large space of available books.”

Aside from weeding out the bugs in the internal workings of the site,

Amazon’s programmers had to make sure the site would work properly with

several different Web browsers, each with different features. The graphical

browser was what made the Internet popular, by turning it into a simple point.

nd-click navigation system. In the early days of the Internet, nobody could be

sure which Web browser would be most popular.

University students from around the world were cranking out graphical

browsers to take advantage of the World Wide Web communications standards

developed by Tim Berners-Lee at the European Organization for Nuclear

Research in the suburbs of Geneva. Some of the earliest graphical browsers from

the early 1990s were now largely forgotten or overlooked names like Erwise,

developed at the Helsinki University of Technology; ViolaWWW, from the

University of California, Berkeley; and Lynx, created at the University of

Kansas.

But the one that really got people moving to the Internet was Mosaic,

developed at the Urbana-Champaign campus of the University of Illinois, in the

school’s famed National Center for Supercomputing Applications (NCSA). It

was the foundation for the Netscape Navigator, the first successful commercial

browser (although offered for free), created at Netscape Communications by

former Illinois students who had worked on the Mosaic browser. By 1995,

Netscape also had competition from Microsoft’s Internet Explorer, which ended

up capturing most of the market.

By the spring of 1995, Amazon had a Web site. The site wasn’t finished yet,

but it was working well enough to let a few hundred friends try it out—after they

were sworn to secrecy, of course. With the promise not to tell anyone about the

project, the beta testers began browsing through books and making pretend

purchases.

One problem Amazon’s programmers discovered during testing was that there

was no way to track an individual customer’s activity. If someone bought a book,

then started browsing for other items, Amazon’s computers had no way of

knowing that both actions were done by the same person. It’s one of those things

you don’t realize you need until you discover you don’t have it. They had to

build in a system that would store all activity from a particular user into one file,

and pull out that data when a customer returned.

Some of the site’s important features just reflected a lack of resources. The

programmers used few graphics in the early days, mainly because they didn’t

have many to work with. They were not graphic designers, and many book

publishers were either unable or unwilling to supply them with images. But that

turned out be a feature customers liked. Internet connections were very slow in

those days, and graphics took a long time to download. Also, some of the early

Web browsers were text-only, unable to display graphics, so Kaphan and Davis

made sure all the necessary information was provided without the need for

images. Just try turning off the graphics in a Web browser today and you’ll see.

how many critical pieces of information and links disappear from most sites.

Again, many early dot-com companies missed the point. They put as many

graphic images as possible on their sites (and many still do) under the mistaken

belief that it makes their sites look more professional or their ads more

noticeable. In reality, the sites just become more annoying and confusing. In fact,

Google was later to stumble on this same approach, demonstrating that a spare

Web site is still vastly superior to one flashing images and shouting out sound

effects like a late-night TV pitchman selling $19.95 items not available in stores.

Bezos had to improvise to deal with unexpected problems, and he did so with

élan, if not a devious glee. For instance, he wanted to test his ordering systems to

make sure they worked properly and to work out bugs. That meant ordering one

book at a time. But the distributors wanted a minimum order of ten books. He

was later to say in his speeches that he had offered to pay the distributors extra to

get just one book, but they refused to break procedure. Bezos discovered,

however, that if some books in a particular order weren’t in stock, the

distributors would still ship the others and charge for only the books shipped. He

then found an obscure book on lichens that both distributors supposedly carried,

but did not actually have in stock. So in order to run his tests, he started placing

orders for the one book he wanted, plus nine of the lichen books. “They would

deliver the one that we wanted, along with a very sincere apology about not

having been able to fulfill the nine copies of the lichen book order,” he said.

“That worked very well for exercising our systems. I’ve since talked and joked

at length with the people at these companies about this. They actually think it’s

very funny.”

In many ways, Amazon’s early design was a combination of trial and error,

good guessing, chance, and some clever improvisation. But the small team kept

an eye on what was important: giving priority to the customers’ needs rather than

trying to extract every dollar possible from their virtual wallets. They paid

attention to what customers liked and what they didn’t. That approach gave

Amazon a good start—and continued to be a guiding beacon in the company’s

future.

The Crash

In June 1999, Black & Decker executive Joseph Galli accepted an offer to

become president and CEO of PepsiCo’s Frito-Lay North America

Division.Then Bezos got to him. In a long meeting, Bezos convinced him to kiss

off Frito-Lay and join him atop Amazon’s summit as president and chief

operating officer. After the purchase of mail-order tool-seller Tool Crib of the

North, Galli helped Amazon get into the business of selling tools online, a much

higher-margin business than the others Amazon had entered recently.

Contractors could order tools on Amazon and have them shipped directly to their

job sites.

That was the fun part of the job. The following January, Bezos, at least, said

he was still having a great time. “I’m just plain having fun at Amazon.com,” he

said. “I’m a change junkie, and I can’t imagine an environment more changing

than the Internet in general and Amazon.com in particular.”

Well, the Internet was changing, all right. After the Y2K scare turned out to be

less threatening than a two-year-old’s Halloween costume, everybody stopped

upgrading the computers they had previously feared would crash, sending

airplanes plummeting from the sky. Instead, sales of computers and other tech

products did the plummeting, starting January 1, 2000. Within a few months, as

the terrible sales started showing up in quarterly financial reports, tech stocks

followed suit, and the dot-com bubble imploded like stars into a black hole.

Amazon’s crash coincided with the dot-com crash, which became apparent

after Amazon reported its first quarter results in April 2000 (the first quarter

after Y2K-induced buying stopped). The crash certainly contributed to the

collapse of Amazon’s stock price. But it does not account for the sudden slowing

in Amazon’s revenues. After all, most of Amazon’s revenues came from non-

tech products, so the end of the tech-buying binge should not have hurt Amazon

as much as other tech companies.

But signs of trouble at Amazon began even before Y2K hit and ran. Even as

late as December 1999, analysts were projecting a net loss for Amazon of as

much as $350 million. But the loss came in at a whopping $720 million, even

though revenues had more than doubled, to $1.6 billion.

The year 2000 merely exacerbated the problems that had started at Amazon in

the year Y1.999K. After years of annual reports to shareholders that began with

a letter full of hyperactive hyperbole about the previous spectacular year, Bezos

began his letter for the year 2000 annual report with: “Ouch. It’s been a brutal

year for many in the capital markets and certainly for Amazon.com

shareholders.” After years of triple-digit growth, revenues in 2000 grew just 68

percent, to $2.8 billion. Further, Amazon reported a $1.4 billion loss, compared

to a $654 million loss the year before.

For almost any other multibillion-dollar company in the world, 68 percent

growth would have been spectacular. But Amazon had grown too big in too short

a time. Bezos’s strategy of growing as fast as possible worked, putting the

company into a position that made it almost impossible for anyone to catch

(even today), at least in retailing. But the company had also started to spin out of

control, plagued by inefficiency and overcapacity. With everything in high gear

and the gas pedal to the floor, it was not able to stop quickly enough to avoid

slamming into the wall that suddenly appeared around the Y2K bend.

At the end of 1999, for example, Amazon’s most recent warehouse, an

850,000-square-foot behemoth in Coffeyville, Kansas, was only 10 percent

utilized. Bezos was anticipating that the company’s continued torrid growth into

new markets would fill the warehouse with new products soon enough. He was

still pursuing the strategy that it was better to have too much capacity now than

not enough when needed, which would delay the delivery of products and anger

customers. As Bezos had once quipped, like the joke about obstetricians, “One

baby dropped on its head is too many.”

His ambition truly had no bounds, his head full of new ideas on what to add

next. By mid-1999, he was talking about Amazon getting into travel services,

banking, insurance, and other businesses far afield from retailing. And what if

other Web sites came along to offer even lower prices than Amazon?

“Membership clubs!” he said in December. “If you want to see all the

information we collect on Amazon—the customer reviews, the professional

reviews and use our agenting technology—you have to pay $30 a year.”

But at the same time, increased competition was also taking its toll, despite

Amazon’s rapid growth and domination of new markets. In fact, Bezos

apparently knew that trouble lay ahead as early as the summer of 1999.

Revenues were more than doubling, but losses were also growing in step with

his ambitions.

That started worrying more Wall Street stock analysts, who had been blown

away with Amazon’s growth and stock trajectory until then. When Amazon held

its quarterly conference call with analysts in June 1999, the Street was less

impressed than usual. “Everyone thinks [the problems] all happened in April of

this year [2000],” recalled Kelyn Brannon, Amazon’s former CFO, in a

December 2000 story in Fortune magazine. “We saw the turn—how the market

was going—after the June [1999] conference call. The tone of the calls, the

questions, the whisper conversations that went on afterward—it was a different

tone. Rather than saying great quarter, great revenue growth—we stopped

getting so many ‘greats.’ You get right into hard questions: Can you talk to me

about direct margin? Can you talk to me about the operational efficiencies in

your distribution center?” Brannon left Amazon six months after that conference

call.

Galli was the one who had to straighten things out. In January 2000, he had to

play the heavy and lay off 150 people in order to start putting Amazon on a path

toward profitability. He hired new managers who knew how to run a company

more efficiently, implemented tighter budgets, requiring all major purchases to

be approved by top management. He became the symbol of Amazon’s

transformation from a very cool new-age Internet company to a more buttoned-

down corporation that was actually prone to recession like every other company

in the world. He even took away the employees’ free aspirin and Tylenol—a

move that created such an outcry that he had to restore it a week later.

Employees were getting a lot of headaches.

As the recession deepened in 2000 and Amazon’s stock plummeted like spit

off a bridge, Galli himself began to need some of that Tylenol. In July 2000, a

little more than a year after he had joined Amazon, the company announced that

he was leaving. He took over as president and CEO of VerticalNet, an Internet

company that ran dozens of industry-specific Web sites. Galli and Bezos insisted

that things were fine between them, and that Galli decided to change jobs to get

closer to his children, who lived with his former wife in Baltimore. VerticalNet

was in Horsham, Pennsylvania. But VerticalNet was (and is) no Amazon. It

never recovered from the Y2K fiasco, and in 2007 was sold to an Italian cement

company.

Wall Street wondered if there was more to Galli’s departure than family needs.

For one thing, the previous CEO of VerticalNet said that he hadn’t even been

looking for a new CEO, that Galli had approached him about the job. And the

timing of Galli’s departure was odd: He quit the day before Amazon announced

its second-quarter earnings. “Well, it’s never a good sign when your president

resigns a day before earnings,” said Mark Rowen, a market analyst at Prudential

Securities, the day Galli resigned. He suspected trouble. “The truth is, nothing

goes from a small business to an extremely large business without any hiccups,”

Rowen said. “And I think we’re seeing a hiccup at Amazon.”

What Amazon suffered was more of a seizure than a hiccup. It’s just that most

Wall Street analysts were hoping Bezos would still pull Amazon out of its

revenue spasm. But when he announced that Amazon had taken in just $578

million in sales for the quarter, $22 million less than some Wall Street analysts

had hoped for, six analysts immediately downgraded the stock. Because of cost-

cutting measures, Amazon’s net loss was less than Wall Street had expected, but

stockholders were hoping that increasing revenues would help it generate a

profit that year. The stock dropped 13 percent that day. In total, thirteen analysts

downgraded Amazon’s rating in the year 2000. Between mid-December 1999

and the end of 2000, Amazon’s stock lost 90 percent of its value, bottoming out

at about $15 per share.

Was Amazon now toast? People had finally given up on unprofitable Internet

companies, and Amazon was the biggest money-loser on the Internet. In the

previous five years, Bezos had borrowed $2 billion—and had lost $1.74 billion

of it. Wall Street started calling on Bezos to grow up and start running the

company like a business, not a gambling casino. “It’s time for these guys to start

performing like real retailers,” said Gene Alvarez, a retail analyst at research

firm Meta Group. “The Internet panache has worn off and now it’s time to start

performing.”

Bezos took the criticism to heart. He complained that he had gone from

“Internet poster child to Internet whipping boy.” At the same time, he finally

changed the tune he had been singing—or perhaps whistling in the dark—for

years. “Get Big Fast” was dead. He was now going to work on turning a profit.

To be fair, this shift was, in a sense, all part of his plan. During a Q&A session

with employees at a spanking-new distribution center in December 1999, he said

he would switch to a strategy of working toward a profit when the “cone of

opportunity” on the Internet had sufficiently narrowed to make it difficult for

newcomers to squeeze through ahead of him, to gain a foothold in all the new

markets he was contemplating. Bezos just didn’t realize that the cone would

suddenly close altogether.

Once that happened, though, Bezos adopted his new religion with all the

fervor he had previously used to worship the god of growth. A December 2000

article in Fortune magazine noted that he mentioned the word profit twenty-five

times in an interview with the magazine. One of the mentions: “We have, for the

first time, set an internal goal with the date for when the company as a whole is

going to be profitable,” he declared.

Bezos even showed the Fortune reporter an email he had circulated to the

company’s seven thousand employees to prove it. It read: “We’re putting a stake

in the ground: We’re going to become profitable. That’s right: We’re aiming to

have sales of $5 billion, produce over $1 billion in gross profits, and achieve

solid operating profitability by . . .” (Bezos had blotted out the date, since he had

a policy against making forward-looking statements. But the reporter got the

date from another Amazon employee: Christmas 2001.)

Bezos did what any stockholder-fearing CEO would do: He slashed costs by

laying people off and cutting spending. His inspirational posters preaching about

growth were replaced with something more down-to-earth: “Get the CRAP

[Can’t Realize Any Profit] Out.” He also started running Amazon more like a

retailer than like a dot-com company, with both eyes on the bottom line. He

closed unprofitable lines of business, wrote off bad investments, increased cost-

cutting, and started demanding more realistic budgets. Every division head had

to meet with him weekly to go over the division’s budget. Each executive had to

submit budgets with specific revenue goals, and timelines by which they would

be met. Amazon managers started taking Finance 101 courses at the company’s

Seattle headquarters.

Bezos also tried to reassure Wall Street that he was cracking the cost-cutting

whip at managers. At the third-quarter conference call with stock analysts, he

said he had been telling managers that “we want you to find half a million

dollars, we want you to find $750,000, we want you to find $1.5 million.” Those

reassurances failed to inspire confidence. After the meeting, Amazon’s stock

price dropped 17 percent. People hadn’t heard this kind of backtracking from the

always gung-ho Bezos before.

That didn’t mean, however, that he put the brakes on Amazon’s expansion into

new retail products. In 2000, he added sales of lawn and patio furniture, health

and beauty aids, and kitchen products to the mix. He also made investments in

living.com, Audible.com, and online car-sales company Greenlight.com. These

companies, however, also paid Amazon hefty fees to be featured on Amazon’s

Web site, still prime virtual property on the Internet. Bezos’s ambitions had not

abated one bit. “The question now becomes, how much of the $5 trillion

worldwide [retail] market is addressable?” Bezos said during the Wall Street

conference call.

In October 2000, Amazon started showing improvement, this time giving Wall

Street a pleasant surprise. Its quarterly loss came in at 25 cents a share. Most

analysts had been expecting a loss of about 33 cents a share. There were other

good signs: Operating losses were 11 percent of revenues, half what they had

been a year earlier, while gross profit margins were up to 26 percent, compared

to 20 percent a year earlier. Bezos had finally learned the trick most public

companies had lived by for years: Never surprise Wall Street unless it’s with

good news. The stock regained about 30 percent of its value over the next three

days.

It wasn’t the end of Amazon’s troubles, though. The company still struggled

with a tough market throughout 2001, and its stock again receded. In early 2001,

he laid off another thirteen hundred employees, about 15 percent of the

workforce, including customer service workers, closing down a service center in

Seattle. He also shuttered a warehouse in Georgia.

During this time he started another business that brought in immediate

revenues: building and running Web sites for other companies, including Toys

“R” Us, Target, Circuit City, and even book retailer Borders.

But those deals were done, in part, to make up for declines in Amazon’s core

business. In the third quarter of 2000, for example, Amazon sold $400 million

worth of books, music, and videos. A year later that had dropped to $351

million. One analyst estimated that quarterly revenue per customer had dropped

from $31 per employee to just $18 per customer in late 2001.

The Toys “R” Us deal, announced in August 2000, was a particularly big shift

in strategy for Amazon. The deal was set to last ten years, during which Amazon

would help the toy retailer rebuild and run its site, Toysrus.com. The toy

company hadn’t done a particularly good job on its own, suffering through many

site crashes and late deliveries. Amazon would handle the purchases, shipping,

and customer service, but Toys “R” Us would own the inventory, which meant

Bezos didn’t have to spend money buying products up front. Toys “R” Us took

the risk of paying for the inventory—including buying Amazon’s toy inventory

—while Amazon would stock all the toys sold online in its underused

warehouses. That made things much easier for Amazon, since toys usually had

to be ordered from Asian manufacturers six months in advance. Bezos didn’t

want to be in the position of having to write off more unsold inventory. This deal

was the start of Amazon’s business of selling products from other retailers

through its site.

The deal, however, didn’t last ten years. While it was hailed as a good deal for

both companies at the time, getting them both out of the problems they were

facing in online toy sales, both companies wanted out once their problems were

behind them. In 2003, Amazon started allowing other toy retailers to sell through

its site. In 2004, Toys “R” Us sued for $200 million in damages and the right to

get out of the deal, saying that Amazon had agreed to sell only its toys through

Amazon.com. Bezos countersued, asserting that the toy retailer had failed to

provide Amazon with enough inventory to meet demand. In 2007, a court ruled

that Toys “R” Us could terminate the agreement, but awarded no damages. The

previous year, electronics retailer Circuit City ended a similar relationship with

Amazon after four years.

But in 2001, Bezos had his eye on a much closer horizon. At the fall earnings

conference call, he said he expected to start making a profit by the end of the

year. He was, however, very specific, promising only a pro forma net profit (a

profit before most expenses are taken into account). He kept cutting back in the

fourth quarter, reducing operating costs by half. That allowed him to further

lower prices on books, music, and videos, with the hope that people would buy

more.

It worked. On January 22, 2002, he made the conference call with analysts to

reveal the results of the fourth quarter of 2001. Not only had he made the pro

forma net, he reported the company’s first net profit after all expenses were

taken out. It wasn’t much: just $5 million, or a penny a share. But it was much

nicer than the $545 million net loss he’d reported a year earlier. This was to

become a key contributor to Amazon’s future profitability. By running the

company more efficiently, he could keep prices as low as possible, cementing

Amazon’s reputation as the go-to place for online retail.

Try as he might, he could barely contain his enthusiasm. “As pleased as we

are with this quarter, we have a ton of work to do,” Bezos said during the

conference call. Still, listeners could hear Amazon executives applauding and

slapping high fives with each other at the end of the call.

They had reason to be happy. In four days, the stock rose 42 percent. That was

still only a price of $14.44, but a huge gain for anyone who bought Amazon near

the bottom.

And now that he had proved, at last, that he could run a profitable business, he

continued Amazon’s expansion, albeit at a less frenetic pace. In June 2002, he

opened for business in Canada. In September he started selling office products.

In November he started selling apparel. But his most important new business

would not arrive until 2007. It was a new piece of hardware developed just for

Amazon, called the Kindle.

Source :-

ONE CLICK [  Jeff Bezos The Rise of Amazon.com ] - Richard L. Brandt

[ THIS book is available On pdf Drive app]