Author: Brad stone
The Everything Store: Jeff Bezos and the Age of Amazon Brad Stone 2013
About the book The Everything Store
In The Everything Store, Stone tells the story of the rise of Amazon.com. At first it was a bookstore that delivered goods by mail. But its visionary founder, Jeff Bezos, had no intention of remaining a bookseller. He wanted to create a “store of everything”, to offer customers a limitless choice of things at low prices. For this, he created a company with a corporate culture that no one has been able to surpass so far. Unlike Gates and Zuckerberg, the Amazon founder is a non-public figure. Brad Stone interviewed former and current Amazon employees and lifted the veil of secrecy that Jeff Bezos has surrounded himself with. The owner of the “everything store” bet on the Internet and opened a new era in the history of the world market, forever changing the way you find and buy the things you need.
about the author Brad stone
Brad Stone is an American journalist, executive editor of Bloomberg News, and an analyst for The New York Times. Focused on the latest technology companies, from Silicon Valley startups to corporations like Uber, Amazon and Airbnb. He is interested in ideas that fundamentally change people’s lives. Thanks to Stone’s investigative journalism, a humble Arizona bike dealer has learned that he is the biological father of Jeff Bezos, the owner of Amazon.com.
Amazon.com is one of the few Internet companies with a twenty-year history. At the time of this writing, Amazon has a market capitalization of over $140 billion, with revenue in excess of $74 billion in its most recent fiscal year. The company has a market share of over 28% of the US online retail market.
Many observers still cannot agree on the assessment of these results. In 2003, 8 years after its founding, the company made its first profit, and current profitability levels are quite modest even for a low-margin business like retail. Amazon pays no dividends, invests huge amounts of money in the construction of new logistics centers, launches new products over and over again, many of which fail.
Most recently, Amazon wrote off about $170 million related to its investment in the Fire Phone. Wall Street analysts grabbed their heads, the company’s stock plummeted. How did the company react to this? Much calmer than you might imagine. “We are willing to be misunderstood, even for long periods of time,” Jeff Bezos, founder and CEO, has repeatedly remarked.
Amazon’s mission is to be the most customer-focused company in the world and to continuously improve service standards. By putting the user at the forefront, a company can be merciless to competitors and often even partners. Offering low prices and fast shipping, Amazon has squeezed out of retail both many large chains and thousands of small family businesses that are unable to compete in the new circumstances. For some, Amazon is an opportunity to quickly buy the necessary goods at the best price, for some it is a monster corporation that leaves ordinary people without work.
This book will help the reader to try to understand a company that does not seek to be understood. We will follow the history of its development, pay attention to the personality of its founder and try to immerse ourselves in the unique culture of Amazon.com.
10. Wall Street to Bookstore
The idea of the “everything store” was born in 1994 in the depths of DE Shaw & Co, one of the most unusual investment firms on Walltreet. Founded by a former Columbia University computer science professor, the company relied on mathematical market research methods and complex multivariate models. Instead of financiers, mathematicians and computer technology specialists worked in the company.
The latter included Jeff Bezos, a 29-year-old vice president of the company and a graduate of Princeton University. Even then, he demonstrated the qualities that his colleagues at Amazon would later repeatedly observe. Bezos worked tirelessly, was disciplined and punctual. He carried a notebook with him in order to write down thoughts that came to his head. He was easily carried away by new interesting ideas, without regret forgetting about the old ones. Bezos thought about everything around him in an analytical way and was extremely methodical in everything.
The youngest vice president in the company, by 1993 Bezos was head of the options trading group and then led a project to create a trading platform that could act as an alternative to the New York Stock Exchange, which charged high commissions from traders.
Many considered DE Shaw to be an extremely private hedge fund, while the company’s employees saw themselves as engineers and mathematicians capable of applying their skills to a variety of situations, including the stock markets. The “everything store” was one of the most promising ideas in the Internet business – the world was just beginning to see the promise lurking on the World Wide Web.
Thinking about this possibility, Bezos initially thought that selling literally everything would be too impractical, at least at first. The books caught Jeff’s attention for a number of reasons. Firstly, the books were published in large editions and were absolutely identical, always and everywhere. Secondly, they were distributed by the two largest distributors. There was no need to deal with many separate publishers. Thirdly, over three million titles of books have been printed in the world. No ordinary store could hold that much stock.
Bezos knew that had he developed the idea within the walls of DE Shaw, the new company would never have truly become his. Therefore, after weighing all the options and assessing the risks, he decided to end a successful career in the world of finance and, to the surprise of many, including his parents, plunged headlong into selling books via the Internet.
11. First steps
At first, the company did not have money for its own office, and had to work from the home of the Bezos family. For a cup of coffee, a few employees went to future competitors, the Barnes & Noble bookstore. Once the development of the technical platform was completed, the company rented a small basement, formerly a music studio. After the launch of the site, the number of orders began to grow at such a terrifying rate that the local electrical wiring could not withstand the load from powerful servers and it was necessary to use several extension cords leading to different sockets.
When receiving orders from customers, the company purchased the required books from the distributor and then sent them to the address. The system did not allow orders of less than ten titles, and to get around this limitation, Amazon employees ordered the right book along with nine unpopular and out of stock. As a result, after some time, a parcel arrived at the company with one book and a letter of apology for the absence of the other nine.
Jeff Bezos assembled his first desktop from a simple wooden door he bought from a store near his office. Subsequently, such doors acquired a symbolic meaning – until now, all the tables in the company are wide wooden boards, mounted on simple metal legs. No expensive furniture, not even in senior management offices and meeting rooms. Lean is one of Amazon’s founding principles. Every dollar spent should benefit customers, otherwise it is better not to spend it.
Bezos himself receives just over $80,000 a year in compensation – a good salary for the American middle class, but certainly not for the manager of a huge corporation. His stake in the company is just over 18% and, accordingly, according to the most rough estimates, he is worth more than $20 billion.
The growing business required new employees, and Bezos had to establish a set of fundamental principles for hiring. In his opinion, each hired employee had to raise the bar for his future colleagues. Bezos says it’s better to make the mistake of rejecting the right candidate than hiring the wrong one.
As many employees say, a sure sign that everything is working correctly is the feeling that comes after a few years that today and now they would hardly have been able to pass all the stages of interviews and get a job offer.
Every job seeker at Amazon goes through a series of interviews. Among the interviewers, there is always a person whose function is called “bar raiser” (bar raiser). He has the right to veto any decision. Even if three, five, seven colleagues agree that the candidate should make a job offer, this employee has the right to reject the candidacy. Those who have had the best hiring decisions in the past are eligible to fill this honorary role. The applicant does not know which of the interlocutors is “raising the bar”.
12. Growth problems and experiments
In early 1997, Amazon’s founder spoke to students at Harvard Business School about the company’s business model and future. After an hour of discussion, the audience agreed: as soon as large traditional retailers become interested in the online segment, the days of a new player will be numbered. “You may be right, but you may not underestimate how difficult it will be for established businesses to focus on a new sales channel,” Jeff Bezos replied.
The modesty and prudence expressed in this answer did not at all correspond to the actions of the company in subsequent years, the era of the heyday and collapse of the dot-coms. Amazon raised more than $3.5 billion in investments over three years and used the money to develop its logistics network, enter new markets, and numerous M&A deals. It was a time of trial and error – out of the company’s five state-of-the-art warehouses, two soon had to be closed, and only a few of the many acquisitions brought real value. By that time, Bezos was building truly Napoleonic plans, and plus or minus a billion dollars did not play a role. Less than five years after the first book sold, the company was already hard at work on entering the markets of music, films, electronics and children’s toys.
With the last two categories, the company had to make a lot of mistakes. And there, and there we had to work not with intermediaries, but directly with manufacturers. Electronics was sold mainly through large chains like Best Buy, and the latter went to great lengths to convince their suppliers to ignore the online competitor. As for toys, the problem here was the absolute unpredictability of demand. Retailers had to place their orders almost a year before the six-week Christmas sales period.
However, Bezos was not embarrassed by the problems. He actively poached staff from Walmart, the largest retailer in no hurry to enter the World Wide Web. He proposed new projects, spending huge sums of money on them. The very first investment in the purchase of children’s toys, at his insistence, amounted to $ 120 million – a significant part had to be written off irrevocably. At some point, Bezos was on fire with the idea of collecting two physical copies of every book printed in the world, and then at least one copy of every product sold in the world. Customers should have known that Amazon.com could find absolutely everything.
Some innovations have proved useful and have taken root. The company has patented a one-click purchase mechanism – registered users can now purchase any product by pressing a button once, without having to re-enter credit card information, address and confirm the order. Later, this technology was licensed by Apple for its online application store.
The company’s main competitor was the newly emerging online auction site eBay, which acted as an intermediary between buyers and a variety of individual sellers. The success of this model led to the fact that the auction section appeared on Amazon. The project failed due to the “network effect”. The essence of the latter is that many Internet businesses only make sense if you have a large customer base. So, social networks are used either by everyone or no one. Likewise, Amazon didn’t find enough auction-interested users to take any significant market share away from eBay.
In the past few years, the Chinese service Alibaba.com has become a threat to the company, which held an initial public offering in 2014, based on a market valuation of $170 billion. The site is a platform for small companies that can sell their goods directly to buyers. In favor of Alibaba – low prices of Chinese sellers. A significant drawback is the lack of its effective logistics.
All these years the company has remained true to its basic principles. While actively trying new things, attracting huge investments and continuing to incur serious losses, she still saved on office furniture and forced employees to pay for parking near the office on their own.
13. Fall and rebirth
After five years of explosive growth, the company had to go through an ordeal – an era that has become known as the “dot-com crash”. Investors throwing money left and right began to doubt the ability of most newly emerging companies to provide even a minimal return. There were also questions about Amazon’s business model. Stock market analysts predicted a collapse of the business within the next twelve months. And the prophecies of skeptics almost came true. In September 2001, the company’s stock was trading in the $5 region, a serious drop from a peak of $106 two years earlier. The pessimists were dissuaded by the fourth quarter, the first profitable quarter in the history of Amazon.
In the general panic, only Jeff Bezos remained relatively calm – without sacrificing long-term principles for the moment, he began a series of major changes that subsequently determined the face of Amazon until today.
From a financial point of view, the company had two important advantages in those years. First, a financial cushion of $1 billion. Second, the negative working capital cycle. Amazon received money from buyers immediately upon making a purchase, and paid suppliers only after a month or two. The faster the company grew, the more cash it had at its disposal. The Achilles’ heel was the exorbitantly high level of fixed costs. A complex logistics system made it possible to deliver any product anywhere in the country in a minimum time and at a reasonable price, but it was very expensive for the current size of the business. Amazon needed to do even more.
The failed auction idea set the company in the right direction. To keep growing, Amazon needs to be more than just a store, it needs to be a platform for other retailers. Early contracts with Toys”R”Us and Circuit City gave the companies a certain online presence and gave Amazon the necessary expertise in the electronics and children’s toy business. Subsequently, this allowed the online retailer to successfully develop both types of business already without outside help, and played a cruel joke with networks. By entrusting their online segments to Amazon, they missed the opportunity to acquire the necessary competencies to operate independently on the World Wide Web.
The company took a truly revolutionary step in 2000, giving everyone the opportunity to sell products on amazon.com on a par with their own. Now, for low prices, they had to compete not only with Walmart, but also with thousands of entrepreneurs anywhere in the United States. If an obscure company wanted to sell a new Harry Potter book for 10 cents less than Bezos did, any buyer could see it and buy a cheaper product without any barriers. Bezos himself stated that in the long run his goal is an equal ratio in total revenue between Amazon goods and goods from third-party sellers. The goal is the flywheel effect that occurs when low prices and a wealth of choice attract many buyers to the site, buyers attract sellers. Vendors provide a wide range of products and compete by lowering prices even lower. This, in turn, again has a positive effect on the number of orders. Thus, the company grows, amplifying the effect of each of the stages of this cycle.
14. Time to clean up
After the crisis ended, Amazon’s most important task was to streamline internal processes. For six years (from 1998 to 2004), the number of employees has grown from two to nine thousand. Too much time began to be spent on coordinating work between different departments and internal bureaucracy. According to Bezos, too much communication is a sign of inefficiency. Teams that work seamlessly with each other and have all the necessary resources should not waste time on coordination and diplomatic games.
The result was the introduction of the “two pizzas” concept. The number of teams working on projects should not exceed ten employees – that is the number of people that could be fed with two pizzas ordered to the office. The teams were self-sufficient and competed with each other, often even duplicating the functions of other teams. Bezos believed that competition promotes Darwinian evolution: only the strongest will survive and achieve their goals. Decisions were decentralized as much as possible, and the responsibility lay with those who were able to take it upon themselves. Bezos believed in the entrepreneurial ability and responsibility of his colleagues.
Significant changes awaited the company’s logistics chain. It was originally copied from the model of traditional retailers and may have been good if you needed to send a truckload of toilet paper to a specific store. However, to collect completely unrelated items into one small order, more efficient solutions were needed.
There were no similar solutions on the market, and the company had to develop them on its own. To work in logistics centers, not retail professionals were hired, but mathematicians and programmers. The most sophisticated software calculated all orders in real time, the location of goods inside warehouses, available delivery options, terms, number of employees and other parameters. Millions of decisions were made automatically every hour.
Since then, the company’s logistics system has changed so rapidly that centers that were opened 2-3 years ago sometimes seem hopelessly outdated even to employees. Case in point: Order picking used to be handled by employees who received streamlined real-time instructions. “Go to shelf number X and take item Y from shelf Z.” Each of them could walk more than ten kilometers during a work shift. In the most modern centers, employees stand still, and robots bring racks to their workplace. The latter outwardly resemble robotic vacuum cleaners, but instead of collecting dirt, they climb under the right shelves, lift them up and take them to the employee’s workplace. After the ordered items are removed, the robot will move the rack to a new location, taking into account the set of items remaining on it and their relative popularity.
With a large array of all sorts of information, the company could promise its customers exact delivery dates. “Order within an hour and a half and this item will be in your home by Monday” – notifications of this kind allowed buyers to plan better and led to increased sales. Based on how many people were willing to overpay for express delivery and how much they spent on average, the company soon offered a kind of “club program”, Amazon Prime.
By paying $79 (now $99), a customer could enjoy free two-day shipping on any orders for a year. The success of the novelty led to the imminent launch of a service for sellers – Fullfillment by Amazon (FBA). Now third-party sellers could not only list their products on the site, but also use a common logistics system for a fee, including warehousing, order picking, packaging and shipping. In this way, third-party merchandise was also made available to club members. Remember the flywheel effect?
15. Technology company
Ever since the late 90s, Jeff Bezos has insisted that Amazon should not be a retailer, but a technology company. In the mid-2000s, he discovered that the main competitor was no longer Walmart, but Google.
First, Amazon and Google competed for buyers. As the popularity of the search engine grew, more people went there to search for the products they wanted. Google sold ads by keyword, and Amazon, in order to stay in front of buyers and maintain its leadership in online retail, was forced to buy it.
Second, companies competed for talented programmers and engineers. Google improved the search algorithm, Amazon improved methods of optimization and data processing. Google offered programmers comfortable working conditions and chic offices with free meals, while Amazon was in rainy Seattle and still forced employees to pay for parking themselves.
By allowing numerous sellers to list their products on the Amazon platform and use their logistics system, the company has gained access to a huge amount of data. However, the same data was needed by the clients themselves. Third-party sellers wanted to know who they were competing with, how high or low their prices were, and how often buyers chose their products. In response to numerous requests, the Amazon API saw the light of day. Third-party developers were able to write applications that automatically extract and process the necessary data from Amazon databases. With more information, sellers could adjust their strategies, sell more, and offer buyers lower prices.
The ability to analyze data is a key skill for most Amazon employees. Many of them, not programmers or engineers, routinely work with databases using SQL queries, extracting huge amounts of information and making decisions backed by numbers. A rare initiative at Amazon will get going without a concrete rationale.
Subsequently, Amazon Web Services was launched – services for renting IT infrastructure and computing power, as well as data storage. With a lot of third party developers, the company was interested in keeping them as close as possible and offering them additional features. Subsequently, Amazon offered a single scalable solution – cloud services Elastic Cloud.
Cloud services had to be as cheap as possible for the company’s customers. It was important to become a leader in a new market, and in the long run, the flywheel effect would take care of both growth and return on investment. A low-margin business wouldn’t appeal to Google, or IBM, or Microsoft, who cared about the numbers in their annual financial statements.
From the launch of Amazon Web Services in 2008 until May 2014, the company reduced the cost of using the services 42 times.
16. Kindle and e-books
In the early 2000s, Apple released the iPod music player and online music store, killing the traditional CD business. Watching what was happening, Jeff Bezos realized that sales of music, books and films account for almost three-quarters of Amazon’s revenue. At any moment, someone could appear who would similarly destroy the book business. There was only one way out – to do it yourself.
Steve Kessel, who was previously responsible for all sales of printed literature, was assigned responsibility for the new project. “Steve, I want you to destroy the business you created,” Bezos was direct and concise. In response to a question about the timing, he continued, “Basically, you’re already late.”
Bezos wanted the reader to be easy to use for people who are not tech-savvy. Even the need to set up a Wi-Fi connection seemed superfluous to the head of the company, as well as the need to connect the device to a personal computer. The e-book was supposed to use a mobile connection to download content, while the user did not have to pay for the connection and generally even think about how it works.
A key success factor was to be a library of accessible books. It was planned to start with 100 thousand items. This task involved a lot of negotiation work with the largest publishers, who did not see much benefit in additional costs. Printed books sold well, and digital copies held a very small share of the market.
The first generation of the Amazon Kindle (the name the device eventually received) was released in 2007. The cost of the gadget was $399, and users could purchase books for $9.99 apiece. This meant that on many books, Amazon was actually making a loss, because the wholesale prices of the publishers remained unchanged. The markup traditional for the industry was 100%. That is, if a publisher sold a book to a retailer for $15, the estimated selling price for the final buyer was $30. Subtract a discount of, say, 30%—Amazon could sell a printed copy of the book for $21 a copy and make $6 in profit. Now, each digital copy sold brought the company a loss of $5. Once again, Bezos was thinking long-term, assuming
Publishers were furious, at first thinking that the $9.99 price would remain a one-time share; they had absolutely no desire to make it the new standard. An unexpected rescue came in the form of Apple, which presented the iPad and an online e-book store in early 2010. Before the release of the novelty, the Kindle market share was about 90%, but now readers have an alternative. Publishers, through the Apple Store, could offer their books at any price, paying 30% as a commission and guaranteeing that the same books would not be sold cheaper elsewhere.
Against the backdrop of numerous lawsuits (the last such dispute with the publisher Hachette was resolved by the world in the fall of 2014) and accusations, Bezos’ company was forced to come to terms with the new state of affairs and adjust its business model. Slightly more expensive books allowed subsidizing the cost of devices, and as a result, the price of the latter fell significantly. If the first version cost $399, now the cheapest version can be purchased for $79.
17. New Acquisitions
After the euphoria of the late 90s, Amazon preferred to develop new competencies on its own – mergers and acquisitions were rare. Those that did happen left an unpleasant aftertaste.
The acquisition in 2009 of the company Zappos, which was engaged in the sale of shoes via the Internet, stands apart. The deal was attractive to Amazon for a number of reasons. First, the big shoe makers saw Bezos as a discounter and feared retail price cuts similar to those faced by book publishers. Secondly, the amazon.com site itself was not yet suitable for this category of goods. Four colors, three widths and ten sizes of the same model were displayed as 120 separate items. The Zappos business has grown and competed successfully. From its founding in 1999 to 2005, revenue reached $370 million, and in 2008 it was over $1 billion.
The first negotiations between the companies took place in 2005 and ended in vain. As their participants later recalled, the deal could probably have taken place if they offered Amazon an amount of about $ 500 million. Then Bezos decided to go into the shoe business on his own and launched the endless.com website, which guaranteed shipment within a day after the order and free returns. Amazon could afford to lose money on a relatively small project. Zappos responded with a similar offer, and this significantly affected the profitability of the entire business.
The subsequent financial crisis also dealt a huge blow to business. Losing access to low-cost funding, Zappos was forced to lay off 8% of its employees and start charging for some shipping options.
To successfully compete with Amazon, the company lacked the scale and a comparable logistics network in terms of efficiency. As a result, Bezos’ second proposal was accepted. However, it is not known who won and who lost. The acquisition had to pay about $ 900 million in Amazon shares, which rose significantly in price immediately after the transaction. Own same shoe project quickly sunk into oblivion.
A similar story happened a few years later with Quidsi, an online children’s goods retailer. The company located its logistics centers as close as possible to major cities, and also used more than twenty sizes of cardboard boxes, each time choosing the best one to save on postage. Thanks to this, Quidsi, unlike Amazon and other competitors, could not lose money on shipping relatively inexpensive and bulky diapers – the most popular product in the category.
The companies again disagreed on the price of the deal, and again Amazon declared war on competitors, launching a special discount program for young parents and offering prices much lower than Quidsi. Numerous lawsuits and accusations of unfair competition followed, but the result was the same. In 2010, battle-weary opponents were forced to accept a $550 million offer.
Zappos and Quidsi still operate under their own brands, but the companies’ internal processes are somewhat integrated, allowing Amazon to capture additional savings.
18. Good or evil?
There is an ongoing debate about whether Amazon is a “good” or “evil” company. Low prices, a wide range of goods and a high level of service incline the observer to the first option. However, the aggressive (often on the verge of a foul) behavior of the company in relation to competitors and partners casts doubt on this point of view. Many Americans cannot forgive a company for its aggressive evasion of collecting sales tax from customers.
One of the factors that allowed the company to keep prices low for many years was the tax laws of the United States. Online retailers took advantage of the fact that they had to collect sales tax only from those buyers who were in the states where the seller was physically present. Physical presence could mean the presence of an additional office or, for example, a warehouse.
The tax added about 5–10% to the purchase amount, and its absence allowed online stores to gain a serious advantage over traditional stores. While the industry was in its infancy, the situation was of little concern, but at a certain point, large chains merged and began to put serious pressure on both the federal and state governments and simply on the general public.
The original structure of Amazon’s logistics network was largely driven not by distance to customers and maximum transport efficiency, but by opportunities to receive tax breaks. Even as individual states began tightening local laws, the company continued to seek benefits in exchange for job creation. All sorts of tricks were also used – employees were forced to coordinate their business trip schedules with tax specialists, since the number of days spent in certain states also affected the tax situation. Now Amazon collects tax in 23 states with 69% of the entire American population, but years of PR battles and legal battles have somewhat damaged the image of the company.
Another big controversy came in late 2010 when Amazon released a smartphone app that lets you scan the barcode on almost any product and instantly check the price on amazon.com. Users were offered up to $15 off their first purchase using the app. In fact, now the whole world was an Amazon store. Customers could come to any local store, see the product in person, touch and try it on, and then order cheaper online.
Some time later, the idea was developed in Fire Phone, a mobile phone released under the Amazon brand. The built-in Firefly app allows you to recognize products by barcode or image, music and movies by sound, and then directs users to the appropriate amazon.com page.
After reading the book, you can draw a number of conclusions about the reasons for the success of the company and the fundamental principles on which it has relied all these years.
At the center of the entire ecosystem of Amazon products and services are the company’s customers. For a long time, Jeff Bezos had a habit of leaving an empty chair in any meeting room and in his office for a conditional buyer who had the right to come at any moment. All decisions start with what users want, and this can only be understood based on rigorous data analysis. As the first fact that surprised them, employees often cite the amount of information that the company collects and analyzes every second. Views, clicks, conversions, price levels, preference trends—think of any metric, any metric you would like to know, and chances are Amazon has a database with years of history to match.
Amazon’s history of innovation is not a history of ingenious accidental inventions. This is a chain of links firmly connected to each other. Innovations followed each other in a logical sequence, increasing the flywheel effect, attracting new customers, increasing choice and lowering prices. Go to Amazon.com and take a look at recently launched products, newly announced promotions and customer programs. Nothing is accidental. Each step of the company is a new link.
Unlike many other companies that declare their mission and values, Amazon’s fourteen “principles of leadership” are not empty words. Ask any employee, for example, about customer obsession, frugality, propensity to take decisive action – and you will hear many real stories from everyday workdays.
The culture of the company encourages the entrepreneurial abilities of employees, the ability to take responsibility and bring results. Disputes and conflicts are not uncommon here. Everyone should be able to defend and argue their point of view. The internal environment will seem overly aggressive to many, but the company has a good reason for that. More precisely, 244 million reasons – exactly how many, according to the latest data, she has clients. For each of them, the Bezos team will do everything in their power and a little more.