World Changers

Perhaps no entrepreneur has been written off more often than Amazon.com’s Jeff Bezos. Eager to be the first to write an obituary for his e-commerce business, one analyst and journalist after another has predicted the company’s demise.

Back in 1997,when Barnes & Noble finally launched its rival Web site, Forrester Research chief George Colony famously claimed that Bezos’s little venture would soon be “Amazon.toast.” At the time, Amazon had 150 employees to Barnes & Noble’s 30,000.

When the dot-com bust forced thousands of e-commerce Internet players out of business, Amazon’s stock crashed, wiping out billions of dollars of market cap. And the critics emerged yet again. Some Wall Street analysts were even calling Bezos something of a fraud and urging shareholders to dump the stock. The entrepreneur just shrugged it all off.

In 2001, he showed up at PC Forum, a conference packed with leading figures in the tech business, and put up a pair of stunning slides. First, he pulled out a stock chart that showed Amazon shares falling from their $100 peak to just $6. If you look at things this way, he said, you’re a pessimist. His next slide showed another stock chart. This time it charted the company’s cumulative wealth creation from the day it went public for $1.50 a share until the day of the presentation when it was nearly $12. I prefer to look at it this way, Bezos told the crowd, and that’s why I’m an optimist.

“If you go back in time,” Bezos says, laughing, “we have been called ‘Amazon. toast,’ ‘Amazon.con,’ and ‘Amazon.bomb.’ And this was all in the first three years of our existence. When we were Amazon.toast, somebody wrote that we had a great two-year run, but now the big boys have shown up and they are going to steamroll us. We had an all-hands meeting with our 150 employees. Every employee had read the Amazon.toast article. In fact, every mother of every employee had read it and called to ask, ‘Are you okay?’

“I said, ‘Look, you should wake up worried and terrified every morning. But don’t be worried about our competitors because they are never going to send us any money. Let’s be worried about our customers and stay heads-down focused.’”

And that’s exactly what Bezos did. In his self-professed desire to build “an important and lasting company,” he put his head down and worked like mad to fulfill Amazon’s mission to be “the earth’s most customer-centric company.” It took Amazon more than six years to report its first quarterly profit at the end of 2001. But it now is the world’s largest e-commerce company, with revenues of more than $34.2 billion in 2010 and more than a billion in net profit. All this, for a company whose business plan was drafted by Bezos during a cross-country drive from New York to Seattle.

The Bezos story would be a familiar one to many entrepreneurs. His cleverness was apparent from the start when as a toddler he tried to dismantle his crib with a screwdriver. He was born in Texas, where he spent much time on his maternal grandparents’ ranch doing odd jobs and helping them take care of the cattle. At home with his parents, Bezos demonstrated an intense and broad interest in a number of scientific areas, so much so that he converted the family’s garage into a science laboratory, like many budding inventors. He built a cooking contraption out of an umbrella—and important for a teenager with young siblings—an alarm system from a Radio Shack electronics kit to maintain his privacy.

He went on to Princeton University with the plan to study physics, but changed his major to electrical engineering and computer sciences, graduating summa cum laude. Bezos then moved to New York to work for a high-tech start-up, where he built a computer network for financial trading. Bezos quickly moved to Bankers Trust where he became the youngest vice president, before taking off for D. E. Shaw & Co., an investment management firm, where he met the woman who would become his wife, MacKenzie. At Shaw, Bezos described his role as “sort of an entrepreneurial odd-jobs kind of a person,” looking for business opportunities in the insurance, software, and Internet sectors. He excelled in the role, becoming senior vice president in 1992. It was here that the idea for Amazon came to him.

He was drawn to Seattle due to the city’s large population of software engineers. It helped that Washington didn’t have a state tax and that Seattle also was less than four hundred miles away from Roseburg, Oregon, home to the largest book distribution warehouse in the country, Ingram. In the garage of his rented home, Bezos and his first three employees set up computers and began writing software for the new business. He originally planned to call the company Cadabra. Fortunately, his friends convinced him that, while the name might have magic connotations, it sounded very similar to “cadaver.” So Bezos opted for Amazon, after the world’s largest river. The company launched in July of 1995 with a mission to use the Internet to transform book buying.

His company has done much more than that. As the world’s largest retailer on the Internet, Amazon has revolutionized e-commerce and changed the very nature of the book business. Bezos helped to create the Kindle, the best selling e-book reader of all time. The incredible success of that product allowed Amazon to begin selling more digital books than those in either hardcover or paperback in 2011.

I came across the fact that Web usage was growing at 2,300 percent per year. I’d never seen or heard of anything that grew that fast, and the idea of building an online bookstore with millions of titles—something that simply couldn’t exist in the physical world—was very exciting to me. I had just turned thirty years old, and I’d been married for a year. 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 start-ups don’t, and I wasn’t sure what would happen after that. MacKenzie told me I should go for it.

As a young boy, I’d been a garage inventor. I’d 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. I’d always wanted to be an inventor, and she wanted me to follow my passion.

I was working at a financial firm in New York City with a bunch of very smart people, and I had a brilliant boss that I much admired. I went to my boss and told him I wanted to start a company selling books on the Internet. He took me on a long walk in Central Park, listened carefully to me, and finally said, “That sounds like a really good idea, but it would be an even better idea for someone who didn’t already have a good job.” That logic made some sense to me, and he convinced me to think about it for forty-eight hours before making a final decision.

Seen in that light, it really was a difficult choice, but ultimately, I decided I had to give it a shot. I didn’t think I’d regret trying and failing. And I suspected I would always be haunted by a decision to not try at all. After much consideration, I took the less safe path to follow my passion, and I’m proud of that choice.

Our mission is to be earth’s most customer-centric company. Right after World War II, Masaru Ibuka, the guy who founded Sony, set as the mission for Sony that they were going to make Japan known for quality. You have to remember that this was a time when Japan was known for cheap copycat products. And Masaru didn’t say he was going to make Sony known for quality. He said he was going to make Japan known for quality. He chose a mission for Sony that was bigger than Sony. And when we talk about being the earth’s most customer-centric company, we have a similar idea in mind. We want other companies to look at Amazon and see us as a standard bearer for an obsessive focus on the customer as opposed to an obsessive focus on the competitor.

In a typical company, if you have a meeting, no matter how important it is there is always one important party who is not represented: the customer. So it’s very easy inside a company to forget about the customer. Hopefully, if you were to walk around Amazon.com and ask people why do you do something this way, a lot of times I would hope you would hear because it’s better for the customer.

We can customize and personalize the store for individual customers. This is something you can’t do in the physical world. In the physical world, the store has to be laid out for the mythic average customer. That needn’t be the case for an online store, and it shouldn’t be the case. A great online merchant is going to get to know their customer the same way a small-town merchant did fifty years ago. When you come in, they are going to greet you by name and help you find the things they know you want quickly and efficiently.

Again, we have always had the mentality that we are going to be obsessed over our customers and not obsessed with our competitors. There are many advantages to being a competitor-focused company. You can pursue a close-following strategy. You don’t have to go down a bunch of blind alleys when you are inventing. You can just follow the leader. Let them spend all the investment resources to go down the blind alleys and when they do something that works you can follow them quickly. That can be an effective business strategy but that is not what we do.

The balance of power online moves away from the merchant and toward the consumer. This is because customers have better information online. Comparison shopping is just a click away. In the physical world, nobody is going to drive to two different stores to save a dollar. There may be a few such people but they need some help. But in the online world, that’s easy. You just click and go to a store.

So customers have great information and they have a powerful megaphone—the Internet itself—to express their displeasure if someone lets them down. If we make a customer unhappy they don’t tell a few friends as they would in the old world. They tell five thousand friends. The good news is if you understand this you can also work very hard on customer experience and turn customers into evangelists. Then they can use that megaphone to actually promote your service. Word of mouth is such a good amplifier.

On the Internet, word of mouth is more powerful than it has ever been before. On the Internet, everybody buys ink by the barrel. Everybody has opinions and they share them—on blogs, on social networking sites, by e-mail, text messages, and so on. This is a very powerful and positive phenomenon for society.

In the old world you wanted to take 30 percent of your energy, time, and dollars and focus that on customer experience and put 70 percent on marketing. In the new online world you flip that around. You want to spend 70 percent of your time on customer experience and 30 percent shouting about it. You still have to do both but the emphasis changes.

It is not enough to only listen to your customers, but you also need to invent on your customer’s behalf It’s not the customer’s job to invent on his or her own behalf There are two ways to extend. One is to take an inventory of your skills and what you’re good at and then extend from your skills. The second is to look at customers and determine what they need, even if it requires you to get new skills. Kindle is a great example of working backward from the customer need, because what we really saw was that there were a few different technologies that were converging and becoming mature enough so that we could meld them together and create a whole end-to-end service that became the Kindle and the underlying store that all works together.

I had been selling e-books for a long time. No one was buying them. And then, after three years of work, we came out with the Kindle. What we realized at the time is that there were a few technologies that were converging. If we could combine them together in the right recipe, it would be transformative in the world of electronic reading. For me, one of the most interesting questions was why hadn’t books been digitized earlier. The physical book is highly evolved and so elegantly suited to its purpose that it is hard to improve on. It isn’t like some other artifact or object. It is something that is very, very emotional and personal for people.

But the book has a feature, which I think is hard to notice but it is the book’s most important feature: it disappears. When you’re reading, you don’t notice the paper, the ink, the glue and the stitching. They enter a mental flow-state. All of that dissolves and what remains is the author’s world. The ability for a book to disappear became our top design objective for Kindle. We knew that if we couldn’t replicate that aspect of a book, nobody would use this device.

We also knew we had to go beyond the book (with features that include looking up definitions of words, searching the text, and bookmarking pages) but one thing you couldn’t do is out-book the book. By that I mean we have to look for things that we can do that you could never do with a paper book. We would always get asked in the early days, How are you going to do virtual book signings? Well, we never figured that out. Instead, we’ve done things that physical bookstores could never do like customer reviews. You have to play to your strengths, like customers who bought this also bought that. That is another thing that a physical bookstore can’t do.

Any physical retailer who isn’t focused on creating an extremely compelling experience using the physical medium will be in trouble. Physical retailers will not be able to compete with online retailers with respect to price. If you look at the economics, it just doesn’t work. That doesn’t mean that physical retailing isn’t going to continue and flourish. In fact, what is going to happen is that online retailers are going to make physical retailers become better. The stores are going to be cleaner; the sales associates will be friendlier. The decor will be more entertaining. You’ll see a big transformation here over the next twenty years.

The physical world is the best medium ever created. This is why Disney World is so successful. Real space is the best and people evolved in that medium. That’s where we grew up as a species. Technology has to get way better before that changes. The people who predicted that the movie theaters were going to go out of business when the television came along were dead wrong. Then they said that when the VCR came out, well this time for sure. I hear it again now for DVDs and home theater systems. The people who predict that don’t understand human nature. We are a gregarious species. We like to get together.

After the end of every quarter, I usually go away for a few days. I try to isolate myself from everything. It’s just because with a little bit of isolation I find I start to get more creative. I do spend a lot of time Web surfing during those two or three days and just looking at what hobbyists and hackers are doing. What are the sorts of things that are on the cutting edge, and then I will usually write two- or three-page documents, just memos. Sometimes they are just memos to myself. For me, that’s a very valuable time. Doing it once a quarter is the right kind of metronome. I just lock myself away. There are no distractions from the office. No phones ringing.

I have certainly come up with principles, themes, big directions, even certain tactical inventions during these days. The important thing is I bring them back to the office and socialize those things with the broader executive team. What I find is by the time that process is done, I’m never really sure if I invented anything or not because it starts here and ends up there. That’s what you want if you have a bunch of smart people. Somebody says, “Well, that will never work because you forgot x, y, and z.” And then you step back and recognize that’s true and then it morphs and builds.

One of the things we’re doing right now came out of one of these retreats. It’s called Fulfillment by Amazon. We let our third-party sellers take their inventory and send it to us. We stow it in our fulfillment centers and we do the fulfillment for them. They still own the inventory but stow it in our fulfillment center. The great thing about it is that it provides better customer service. If you order two things, they will come in one box. It saves on transportation costs. This is a service that is great for the sellers because if you are a small seller, they can’t take a vacation because if they do it’s unpaid. There is no one there to ship the products.

We have had many failures. If you want to be inventive, you have to be willing to fail because you have to be willing to do experiments. And it’s not an experiment if you know in advance it’s going to work. For example, we licensed Web search from Google and launched a different user interface called A9.com and tried that for three years and nobody came and a couple of years ago we shut it down. I couldn’t even get my mom to use it. You try these things. They don’t always work.

Go back in time further than that and we launched Amazon auctions. We could never get auctions to work. Now the good news was that auctions led ultimately to our third-party sales business with fixed prices. We have done it in our own way and one of the things I’ve noticed on the Internet is that me-too companies tend not to do very well. If somebody has a different way of doing something that can be successful. But if you just try to do it as a me-too offering and customers are already doing something with someone else, why would they do it with you?

With respect to investors, there’s a great Warren Buffettism. You can hold a rock concert and that can be successful, and you can hold a ballet and that can be successful, but don’t hold a rock concert and advertise it as a ballet. If you’re very clear to the outside world that you’re taking a long-term approach, then people can self-select in. You get shareholders who want you to relentlessly lower prices. As Buffett says, you get the shareholders you deserve.

They all want vast selection, and they all want accurate, fast, convenient delivery. There are always small things that are different. Our starting point is, “Let’s just assume that people are very similar all over the world.” When we entered Japan, we were told customer reviews would never work. People in Japan just won’t write customer reviews. I said, “Well, let’s just try it.” And of course they wrote customer reviews, just like people everywhere in the world. You have to be very careful.

Companies have tendencies to over-exaggerate the differences in different geographies. There are things that are different. For example, in China, a lot of our payment is done by cash on delivery instead of with credit cards because credit card penetration is not very high in China. We have to have a network of regional fulfillment centers. We employ our own bicycle couriers in China. We have to adapt to local business conditions. But what customers want is the same.

I’ve not seen an effective manager or leader who can’t spend some fraction of time down in the trenches. If they don’t do that, they get out of touch with reality, and their whole thought and management process becomes abstract and disconnected.

As a kid, I spent my summers with my grandparents on their ranch in Texas. I helped fix windmills, vaccinate cattle, and do other chores. We also watched soap operas every afternoon, especially Days of Our Lives. My grandparents belonged to a Caravan Club, a group of Airstream trailer owners who travel together around the United States and Canada. And every few summers, we’d join the caravan. We’d hitch up the Airstream trailer to my grandfather’s car, and off we’d go, in a line with three hundred other Airstream adventurers. I loved and worshipped my grandparents and I really looked forward to these trips. On one particular trip, I was about ten years old. I was rolling around in the big bench seat in the back of the car. My grandfather was driving. And my grandmother had the passenger seat. She smoked throughout these trips, and I hated the smell.

At that age, I’d take any excuse to make estimates and do minor arithmetic. I’d calculate our gas mileage—figure out useless statistics on things like grocery spending. I’d been hearing an ad campaign about smoking. I can’t remember the details, but basically the ad said, every puff of a cigarette takes some number of minutes off of your life: I think it might have been two minutes per puff. At any rate, I decided to do the math for my grandmother. I estimated the number of cigarettes per day, estimated the number of puffs per cigarette, and so on. When I was satisfied that I’d come up with a reasonable number, I poked my head into the front of the car, tapped my grandmother on the shoulder, and proudly proclaimed, “At two minutes per puff, you’ve taken nine years off your life!”

I have a vivid memory of what happened, and it was not what I expected. I expected to be applauded for my cleverness and arithmetic skills. “Jeff, you’re so smart. You had to have made some tricky estimates, figure out the number of minutes in a year, and do some division.” That’s not what happened. Instead, my grandmother burst into tears. I sat in the backseat and did not know what to do. While my grandmother sat crying, my grandfather, who had been driving in silence, pulled over onto the shoulder of the highway. He got out of the car and came around and opened my door and waited for me to follow. Was I in trouble? My grandfather was a highly intelligent, quiet man. He had never said a harsh word to me, and maybe this was to be the first time? Or maybe he would ask that I get back in the car and apologize to my grandmother. I had no experience in this realm with my grandparents and no way to gauge what the consequences might be. We stopped beside the trailer. My grandfather looked at me, and after a bit of silence, he gently and calmly said, “Jeff, one day you’ll understand that it’s harder to be kind than clever.”

Cleverness is a gift. Kindness is a choice. Gifts are easy—they’re given after all. Choices can be hard. You can seduce yourself with your gifts if you’re not careful, and if you do, it’ll probably be to the detriment of your choices.