Exhaustive research, some gutsy calls and an intuitive understanding of customer service enabled Jeff Bezos to change the way Americans buy books when he left a thriving New York finance career and started the online bookseller that became the most successful Internet retailing site ever. He didn’t stop there, however.
He’s taken his lofty and zealous Amazon.com Inc. vision to “accelerate access to things that inspire, educate and entertain” into e-books, e-publishing and technology services. Before he’s done, he just may reinvent the wheel a couple more times.
“Genuine pioneers don’t stop after just one discovery or innovation,” Microsoft founder Bill Gates wrote in a short essay on Amazon’s founder and CEO for the Time 100 list in 2009. “They are driven to build on their accomplishments and to follow them into new frontiers.” He called his Seattle-area neighbor “a great example of one of those insatiable pioneers of business and technology.”
That insatiable pioneer often talks about how “grumpy” he gets when he has to read a paper book these days. With Bezos’ forays into the Kindle reader, introduced in November 2007, and e-publishing, he’s trying to ensure that everyone has the chance to enjoy his reading style preference. And the technological proficiency Amazon has gained has allowed the company to launch another high-growth potential unit—offering cost-efficient tech services and Cloud storage for startups and other corporations.
Although Amazon is not an industry sales leader for publishing, it is a high-profile influence leader. The tens of millions of people who buy books from Amazon every day are part of Bezos’ grand plan for his company over time to “sell every book ever printed, in any language, in and out of print, in less than 60 seconds.” E-book sales remain a small share of the publishing market, but its trend line is showing a dramatic climb, and for Amazon itself, e-books are going great guns.
“We love inventing on behalf of customers and have never been more excited about the long-term opportunities,” Bezos said when the company released its first-quarter earnings in April. (The company did not respond to interview requests for this story.)
The short-term opportunities are impressive in their own right as last year’s fourth-quarter earnings hit $10 billion, a record for a three-month period, and Kindle books topped Amazon.com’s combined sales of paper books and hard covers.
Meanwhile, Kindle books’ pricing is wreaking havoc—both practically and emotionally—in the publishing industry, which has been glacial in reacting to the technological changes that have reshaped the music and entertainment businesses. In the first quarter of 2011, Amazon announced the U.S. Kindle Store now has more than 900,000 books, more than 740,000 of which are $9.99 or less.
As with Amazon’s other business sectors, the customer experience is the critical guiding hand: “We humans do more of what’s easy,” Bezos said during a conversation with writer Steven Levy at the 2009 Wired Business Conference. “When you lower friction, you always get more of what you just made easier. We’ve co-evolved with our tools over time.”
Defying Skeptics
One of Amazon’s strengths is its ability to evolve along with those tools. Despite market skeptics who have questioned the company’s strategies at every stop, e-books and the Kindle are but part of the expanding pieces of the Amazon empire, including a broadening range of retailing products and partnerships, Web services and Cloud content storage.
During that expansion, Amazon has managed to grow its revenue base by an average of nearly 32 percent per year in the last decade, compared to the 3 percent average performance among S&P 500 companies over the same time.
In the process, 47-year-old Bezos’ guiding hand has touched virtually every aspect of daily life. The tracks of that influence lead from extension cords laid into a Seattle garage for a brash online book beta test among friends in 1994 to the shiny nearly 1.7-million-square-foot LEED Gold certified headquarters in the revitalized South Lake Union area of Seattle. Amazon has overcome challenge after challenge by steadfastly adhering to Bezos’ unyielding straight-arrow mission: “Our vision is to be earth’s most customer-centric company; to build a place where people can come to find and discover anything they might want to buy online.”
People keep coming. Far and away the world’s largest online retailer by sales, Amazon was growing at roughly three times the rate of online retail sales as a whole in the United States and Canada at the end of 2010. In its first-quarter earnings statement, the company counted about 137 million active customers and reported that about 2 million merchants sell on the Amazon marketplace. And the future looks robust: Two hundred million U.S. consumers will be shopping online by 2015, up from 163.1 million in 2009, according to projections by the New York-based research firm eMarketer.
Invention in Its DNA
When Amazon announced it was folding the meteoric-growing retailer Zappos Inc. into its organization in 2009, Bezos delivered an “everything I know address” to Zappos employees. He stressed how critical it is to think long term and not just give it lip service. “I find that most of the initiatives we undertake may take five to seven years before they pay any dividends for the company,” he says. “They may start paying dividends for customers right away…. We can tolerate being misunderstood. We’ve been called ‘amazon.toast,’ ‘amazon.con,’ many different things. If we think we’re right, then we continue. If we think we’re wrong, if we’re criticized about something and we think we’re wrong, we change it. We fix it.”
The deal was vintage Bezos. Amazon, which let the fellow customer-friendly shoe and apparel retailer maintain its iconoclastic independence, significantly broadened its hip quotient and product reach through the acquisition.
Amazon, which today employs about 34,000 full-time and part-time employees worldwide, continues to defy the retailing model that says growth slows as a company matures. “Jeff’s strategy about selection and availability and low pricing is all kind of a miracle,” Bing Gordon, a partner with the noted Silicon Valley venture-capital firm Kleiner Perkins Caufield & Byers and a seat-holder on Amazon’s board of directors since 2003, told MarketWatch in December. “Amazon is one of these companies that reinvents Manifest Destiny [under which operations keep] getting better and better.”
In his most recent letter to shareholders, Bezos talked up Amazon’s investments in new technology, which have raised concern that the company is squeezing its margins too tightly. Such investments, Bezos wrote, “lead directly to free cash flow.”
“Invention is in our DNA, and technology is the fundamental tool we wield to evolve and improve every aspect of the experience we provide our customers,” he wrote.
The Back Story
Bezos, born in 1964 in Albuquerque, N.M., showed inventiveness at an early age. His company biography notes that as a toddler “he asserted himself by dismantling his crib with a screwdriver.” He was especially close to his stepfather, Mike Bezos, a Cuban immigrant who moved the family to Houston when he got an engineering position at Exxon. He was also close to his maternal grandparents, spending the summers of his youth at their 25,000-acre ranch in Cotulla, Texas.
His grandfather, who was a regional director of the Atomic Energy Commission in Albuquerque, retired early to the ranch. Bezos had a wide variety of chores there.
“I helped fix windmills, vaccinate cattle and do other chores,” he says. “We also watched soap operas every afternoon, especially Days of Our Lives.”
At home, the garage became a lab for his science projects. In a 2010 baccalaureate address to Princeton University graduates he recalled how he “invented an automatic gate closer out of cement-filled tires, a solar cooker that didn’t work very well out of an umbrella and tinfoil, baking-pan alarms to entrap my siblings.” The family moved to Miami, Fla., during his high school years, where Bezos discovered a love for computers and graduated as the class valedictorian.
After graduating from Princeton University with a degree in computer science and electrical engineering, Bezos worked at Fitel, a startup company building an international trade network; at Bankers Trust, where he rose to vice president level; and at D. E. Shaw, a firm specializing in developing computer science applications for the stock market. After he discovered that usage on the neophyte World Wide Web was increasing 2,300 percent a year, he methodically studied the top 20 mail-order businesses with an eye toward what made sense for transition to the Web.
‘Betting on Jeff’
Bezos understood the disruptive nature of the Internet and that change was going to be rapid. He settled on books for a number of reasons, not the least being that major book wholesalers had already compiled electronic lists of their inventory.
“I told my wife, MacKenzie, that I wanted to quit my job and go do this crazy thing that probably wouldn’t work, since most startups don’t, and I wasn’t sure what would happen after that,” Bezos told the Princeton graduates. “MacKenzie [a novelist and also a Princeton grad] told me I should go for it…. I’d always wanted to be an inventor, and she wanted me to follow my passion.”
Bezos typed a business plan while his wife drove to Seattle. He candidly told his original investors there was a 70 percent chance they would lose their entire investment, but his parents signed on for $300,000, a substantial portion of their life savings. “We weren’t betting on the Internet,” his mother has said. “We were betting on Jeff.”
The origins of the company are now part of Internet lore. In 1995, Bezos opened Amazon.com and told his several-hundred beta testers to spread the word. No advertising, no press. Within 30 days, the company had sold books in all 50 states and 45 foreign countries.
Revolutionizing Retail
“He understood from the beginning that he wasn’t just inventing a new and more efficient way for people to find books they wanted to buy, but that he was also helping to define a fundamentally new way to conduct a consumer retail business,” Microsoft’s Gates wrote of Bezos in his Time 100 essay. “Indeed, Jeff’s idea was just as revolutionary as when Sears, Roebuck started its mail-order catalog business a century earlier.”
The company quickly expanded into dozens of product categories, internally and through sales partnerships with large U.S. retailers such as Toys R Us, forcing the world’s biggest retailers to rethink their business models and ultimately changing the way people shop. Amazon became a master of the up-sell strategy, showing customers interested in one product others that they might also prefer. Amazon addressed its customers by their first names in all correspondence, offering services that traditional retailers could not: lower prices, authoritative selection and a wealth of product information.
By 1999, Time magazine was naming Bezos its “Person of the Year,” in recognition of Amazon’s success in popularizing online shopping. The company’s initial business plan, however, projected that it would not show a profit for four to five years, and bottom-line anxiety created the first cadre of outside doomsayers Amazon would encounter. Stockholders and analysts complained that the company needed to rethink its strategies to show more immediate profits.
“If you are going to do large-scale invention, you have to be willing to do three things: You must be willing to fail; you have to be willing to think long term; and you have to be willing to be misunderstood for long periods of time,” Bezos said at the 2009 Wired convention. “If you can’t do those three things, you should limit yourself to sustaining innovation, which is critical. No company I know could survive over time without doing sustained innovation.”
During the rise of the dot-com bubble (roughly from 1995 through 2000), Bezos says he warned his people at all-hands meetings not to feel “30 percent smarter this month because the stock price is up 30 percent because you’ll feel 30 percent dumber when it declines.” The stock price deflated dramatically during the dot-com bust—it was referred to often as Amazon-dot-bomb—but Bezos saw that the business metrics continued to improve—the number of customers continued to grow and the profit per unit sold increased.
The Ultimate Survivor
While many of the early players failed during the dot-com bubble burst, Amazon persevered and finally turned its first profit in the fourth quarter of 2001. BBCNews.com triumphantly declared that “if the Internet was the new rock and roll, Jeff Bezos… was its Elvis…. [Today he’s] the ultimate dotcom survivor.” Amazon succeeded by establishing high standards for reliability and customer service and earned deep loyalty through its innovations, such as the user reviews, one-click shopping and shopping cart icons that have become so familiar to online retailing.
“One of the differences in founder/entrepreneurs and professional managers is that the founder/entrepreneurs are more stubborn about the vision and keep working on the details,” Bezos told the Wired conference audience. “One of the dangers of bringing in professional managers is that the first thing they want to do is alter the vision, and usually that’s not the right thing to do. The trick as an entrepreneur is to know when to be flexible and when to be stubborn.
“The rule of thumb is to be stubborn on the big things and flexible on the details. We center our strategy on the things that we know will be stable in time.” No matter what part of the retail business is involved, Bezos says he knows that in 10 years customers are going to want low prices, fast delivery and vast selection.
“We had some very harsh critics during that period of time, but we always observed that some of the harshest critics were our best customers,” Bezos said. “So we figured it couldn’t be that disastrous if that was the case. Having a culture that is heads-down focused on the customer instead of the external world makes a company that is more resilient to external influences.”
That customer focus is why the company’s product base evolved from books, CDs and movies to almost any consumer interest, from flat-screen TVs to groceries, and why they ship many items for free, allow competitors to use the company’s product pages to undercut its own listings, and often price high-profile offerings at a loss to draw in customers.
By the end of the decade, the faith his parents showed in Bezos paid off famously— as 6 percent owners of Amazon.com, they were billionaires.
Making A Bigger Umbrella
In 2006, Amazon spread its wings again, into the technical and logistical areas of other businesses.
“Bezos aims to transform Amazon into a kind of 21st century digital utility,” Bloomberg Businessweek reported in a cover story at the time. “It’s as if Wal-Mart Stores Inc. had decided to turn itself inside out, offering its industry-leading supply chain and logistics systems to any and all outsiders, even rival retailers. Except Amazon is starting to rent out just about everything it uses to run its own business, from rack space in its 10 million square feet of warehouses worldwide to spare computing capacity on its thousands of servers, data storage on its disk drives, and even some of the millions of lines of software code it has written to coordinate all that.… Even after all these years spent battling back claims that his company would be ‘Amazon.toast,’ he’s still bounding up and down stairs two at a time to exhort his band of nerds on to the Next Big Thing.”
Amazon has evolved into the early leader in the fast-growing Cloud computing sector through its network of sophisticated data centers. Companies are choosing to bypass establishing internal data centers and outsourcing their computing needs using the Cloud model: They use the Web to access computer processing and storage without the associated costs of owning the machines or operating the software. Thousands of corporate clients—including such names as Netflix, Foursquare and Pfizer—have moved their business computing to Amazon Web Services.
Bezos told Fortune in mid-2010 that he expects legacy companies to gravitate to Amazon Web Services during the next five years. “The right analogy here is the electricity grid,” he said. “A hundred years ago if you wanted to run your factory and you needed electricity, you had to become an expert in power generation. You had to buy your own electric power generator. You had to maintain it. You had to make your own electricity. And today, because of Amazon Web Services, you don’t have to be in the power generation business.
“It’s not a differentiator for companies. So if you’re going to build your own data center and buy your own server hardware and manage all your own networking gear and all of the things that you have to do, it has to be done at an A-plus quality level. But it’s just the price of admission. It’s not your secret sauce. It doesn’t help you differentiate from your competitors.”
Amazon’s Next Wave
Technology support poses a significant challenge for the doggedly customer-centric Amazon: In April, it faced its first high-profile service glitch when technical problems knocked some of its clients offline for various windows during a 48-hour period.
The Seattle company is investing to build data centers to bolster its e-commerce platform, as well as its Amazon Web Services business. Amazon spent $855 million on fulfillment in the first quarter, up from $546 million a year earlier. Spending on technology and content rose to $579 million from $366 million. In the past few months, it has announced the opening of distributions in several states and plans to hire in each of them.
During the first quarter this year, the company also rolled out Amazon Cloud Drive, Amazon Cloud Player for Web and Amazon Cloud Player for Android. Together, these services enable customers to securely store music in the cloud and play it on any Android phone, Android tablet, Mac or PC, wherever they are. In addition to music, Cloud Drive allows customers to upload and store all kinds of digital files, including photos, videos and documents—all available via Web browser on any computer.
“We work backward from our customers’ needs and forward from our skills,” Bezos says, explaining that the Kindle is an example of Amazon working backward from its customer needs and Amazon Web Services is an example of working forward from its skills. “When we started working on the Kindle (in the mid-2000s), we didn’t have the hardware skills needed. We had to go out and hire and develop those skills.”
Developing. Expanding. Evolving. Hiring. Jeff Bezos’ Amazon, like the river, never sleeps.
Check out Jeff Bezos' surprising advice to the 2010 graduating class at Princeton University.