I
By the spring of 1997, e-commerce companies were proliferating like bacteria. With a little money, practically anybody could set up a Web site and try to sell things. Jason and Matthew Olim, two teenagers in Amber, Pennsylvania, founded CDNOW in the basement of their parents’ home and did $6 million worth of business in 1996. Before long, the Olims faced competition from many other music sites, such as CD Universe. Despite all of this entrepreneurial activity, it was far from clear how much money was being spent online. Estimates ranged from $300 million a year to more than $1 billion, but most of the figures being bandied about were produced by commercial research organizations with a vested interest in the growth of e-commerce. The lower estimates were probably more accurate. Despite the hoopla surrounding online shopping, most people still preferred to make their purchases in bricks-and-mortar stores. “In the three years since the Internet has taken off, the slow growth of electronic commerce has been one of its big disappointments,” The Economist commented in a May 1997 survey article. “The software bugs, baffling interfaces and limited selections in the average online shop make even the corner grocery shop look like a miracle of organization and choice. And most online stores are losing a fortune.”1
If e-commerce had been subject to the regular discipline of the market, the early setbacks would have proved fatal. But consumers were not driving online commerce; Wall Street was driving it. A few days after The Economist’s piece appeared, the IPO market, which had been in the doldrums for months, perked up. On May 14, Rambus, a microchip maker, went public. Its stock was issued at $12 and closed at 30 1/4, a rise of more than 150 percent. The following day, Amazon.com, the online bookseller, issued 3 million shares at $18. The stock opened at $27 and closed at 23 1/2. By the standards of Netscape and Yahoo!, it wasn’t much of a debut, but one of the most controversial capitalist ventures of the twentieth century was now a public company.
Jeff Bezos, Amazon.com’s founder, was born in Albuquerque, New Mexico, on January 12, 1964. His parents separated before his birth, and he never knew his biological father. Bezos’s mother remarried a Cuban immigrant, Miguel Bezos, a petroleum engineer for Exxon. From an early age, Bezos was an overachiever. At Palmetto High School in Pensacola, Florida, where he was the valedictorian of the class of 1982, he wrote a term paper entitled “The Effect of Zero Gravity on the Aging Rate of the Common Housefly,” which won him a trip to NASA. His valedictorian speech was a call for man to colonize space. He also got a place at Princeton, where he entered the honors physics program but switched to electrical engineering and computer science after he discovered that other students were even smarter than he was.2
Bezos graduated summa cum laude in 1986 with a grade-point average of 3.9 and took a job at Fitel, a small New York firm that was building a computer program for carrying out international financial transactions. In 1988, he moved to Banker’s Trust, a big Wall Street bank, where he quickly became a vice president. He helped set up BTWorld, a software program that allowed clients of the bank to track their corporate retirement plans. Two years later, at the age of twenty-six, Bezos switched jobs again, this time to a hedge fund founded by David Shaw, a Stanford-trained computer scientist who helped pioneer the application of computers to finance. Shaw’s fund, D. E. Shaw, used high-powered PC workstations to seek out and make profitable trades.
After a couple of years, Shaw put Bezos in charge of drumming up new business. In early 1994, he asked him to investigate the possibilities for making money on the Internet. Bezos was immediately struck by the growth of traffic on the World Wide Web, which was running at an annual rate of about 2,300 percent. “You have to keep in mind that human beings aren’t good at understanding exponential growth,” Bezos told Robert Spector, the author of Amazon.com, a history of the company. “It’s just not something that we see in our everyday life.” A phenomenon growing as fast as the Web is “invisible today and ubiquitous tomorrow.”3 At the time, few businesses were operating on the Web, but Bezos thought it was only a matter of time before capitalism conquered the new medium. He put together a list of twenty items that could be sold online, including computer software, office supplies, books, magazines, and music. After narrowing the choices to books and music, he settled on the former for a couple of reasons. There were more books to sell than music titles, and, unlike the music industry, which is dominated by a handful of big companies, there were “no eight-hundred-pound gorillas in book publishing and distribution.”4
Despite evolving into a major business with an annual turnover of more than $25 billion, the book industry had remained fragmented, with more than 50,000 different publishers, ranging from famous names like Random House and Simon & Schuster to tiny imprints that published one or two titles. On the retail side of the business, the biggest players were Barnes & Noble and Borders, two national chains that had grown rapidly during the 1980s and now controlled about a quarter of the market. The rest of the market was split between mail-order clubs, department stores, and independent bookstores, which still numbered in the hundreds of thousands. Bezos saw the chance to build an online retail business that could dwarf its rivals in selection, convenience, and geographic reach. The biggest Barnes & Noble stores stocked about 175,000 books, which was only a fraction of the 1.5 million English-language books in print. Such stores were expensive to build and operate. By eliminating the cost of real estate and sales staff, Bezos believed it should be possible to offer customers cheaper prices than they could get in traditional bookstores while offering a broader selection and making higher profit margins.
Bezos recommended that D. E. Shaw set up an online bookstore. When Shaw rejected the idea, he decided to quit and start his own. Bezos didn’t make this decision lightly. In the spring of 1994, top Ivy League graduates didn’t give up good jobs on Wall Street to take a gamble on the Internet. Bezos justified taking the risk using what he called a “regret minimization framework.” He told Spector: “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 tried and failed, I wouldn’t regret that. So, once I thought about it in that way, it became incredibly easy to make that decision.”5
Bezos and his wife, Mackenzie, whom he had met while she was working as a research associate at D. E. Shaw, packed up their Manhattan apartment, flew to Texas, then drove to Seattle. Bezos chose Seattle, the home of Microsoft and Boeing, as his new company’s location for several reasons. He had friends there. It had a large community of computer scientists. It was in a state that didn’t have a sales tax. And it was close to Roseburg, Oregon, where the country’s biggest book distributor, Ingram Book Group, had a major distribution center. On July 5, 1995, Bezos incorporated his new company under the name Cadabra Inc. (as in “abracadabra”). One of his first tasks as an Internet entrepreneur was to come up with a better name. Since Web sites were often listed alphabetically, he wanted one beginning with the letter “A.” After perusing the dictionary, he settled on Amazon, the world’s largest river. The name was instantly recognizable but also vague enough to stand for anything, which was useful from a branding standpoint. Bezos insisted on calling the company Amazon.com, the first such use of the “.com” suffix. Some of his friends considered this a mistake, but it turned out well, helping to differentiate the new firm and also creating a new collective noun for Internet companies: “dotcoms.”
II
Bezos rented a house in Bellevue, a suburban city on the other side of Lake Washington from Seattle. Amazon.com started out in the garage, which had been converted into a recreation room. The firm’s first two employees were both computer scientists: Sheldon Kapham, an expert in databases who had worked for Kaleida Labs, a failed multimedia joint venture between Apple and IBM; and Paul Barton-Davis, an Englishman who had helped to set up a Web site at the University of Washington. For months, Kapham and Barton-Davis concentrated on building a reliable and easy-to-use retail Web site. Bezos insisted that they keep it as simple as possible. Some early e-commerce sites took minutes to load and froze whenever a customer tried to buy anything. Bezos ruled out any data-intensive graphics. He paid Kapham and Barton-Davis out of his own pocket. When he ran out of money, his parents invested about $250,000. At this early stage, raising money from outside investors wasn’t really an option. Amazon.com was just a clever name for a business idea that wasn’t even original.
Books had been sold online for years. As far back as 1991, Computer Literacy Bookshops, a Silicon Valley company that specialized in technical books, set up clbooks.com and accepted orders over the Internet. Three years later, BookStacks Unlimited, a Cleveland company, started Books.com, which offered more than 400,000 titles at discounted prices. The Books.com Web site included a number of features designed to make users feel like part of a community of readers: reviews, excerpts, discussion groups, and a daily radio show covering literary news. Amazon.com would adopt many of these features and add a few of its own.
Amazon.com’s Web site launched on July 16, 1995. Its home page featured the firm’s logo, the letter “A” with a river running through it, and the slogan “Earth’s Biggest Bookstore.” A search box allowed users to browse through a million books by author, title, subject, and publication date. Amazon.com encouraged its users to submit reviews, which it posted online. Just as Bezos had wanted, the site was simple, quick, and functional. The prices were cheap, but not astonishingly so. Non-best-sellers were discounted by 10 percent, best-sellers by 30 percent; and a group of featured books by 40 percent. Amazon.com promised to ship books in anything from twenty-four hours to six weeks, depending on how obscure they were. In the first week, customers submitted about $12,000 worth of orders.
Six months later, at the start of 1996, sales were big enough that Bezos and his colleagues, who had already moved to a grungy office building in downtown Seattle, needed more space. Amazon.com was acquiring a following, albeit at a cost. During 1995 it had lost more than $300,000, on revenues of $511,000. Bezos tried to raise some more money from people he knew in the Seattle business community but found it tough going. The ambitions for Amazon.com that he laid out to potential investors were pretty modest. He was aiming to break even in 1997 on annual sales of somewhere between $10 million and $20 million. After much arm-twisting, he managed to secure outside investments totaling nearly $1 million.
It was the media that transformed Amazon.com from an interesting small business story into a multibillion-dollar corporate thriller. On May 15, 1996, The Wall Street Journal published a front-page story under the headline “How Wall Street Whiz Found a Niche Selling Books on the Internet.” The article, written by G. Bruce Knecht, was overwhelmingly positive. It related how Bezos had quit his job on Wall Street and tapped out a business plan for Amazon.com on a laptop computer as his wife drove him across country. “Though it hasn’t yet posted a profit, the company is on its way to ringing up more than $5 million in sales this year—better than most Barnes & Noble Inc. superstores,” Knecht wrote. “Its site on the World Wide Web has become an underground sensation for thousands of book lovers around the world, who spend hours perusing its vast electronic library, reading other customers’ amusing online reviews—and ordering piles of books.”6 The Wall Street Journal sells nearly 2 million copies a day and is required reading in the corporate world. Being featured on its front page is, quite literally, the sort of publicity that money can’t buy. The day the piece came out, Amazon.com’s business doubled. Then it doubled again, and again.
From Bezos’s perspective, the timing couldn’t have been better. He had just started talking to venture capital firms about financing his expansion plans. One firm, General Atlantic Partners, had offered to invest $1 million in a deal valuing Amazon.com at about $10 million. After the article appeared in The Wall Street Journal, and other VCs inundated Bezos with calls, he raised the valuation he was demanding to $100 million. General Atlantic agreed to a valuation of $50 million, but Bezos, who could now have his pick of suitors, refused its offer. Instead, he invited John Doerr, of Kleiner Perkins, up to Seattle. Having Doerr behind Amazon.com would impress Wall Street. Doerr accepted the invitation. After looking around Amazon.com’s headquarters, he thought Bezos’s valuation excessive, but he nonetheless offered $8 million for a 13 percent stake, valuing the company at about $60 million. Bezos had by now been offered better terms elsewhere, but he agreed to the deal. “If we’d thought all this was purely about money, we’d have gone with another firm,” Bezos told The New Yorker. “But Kleiner and John are the gravitational center of a huge piece of the Internet world. Being with them is like being on prime real estate.”7
The cash infusion from Kleiner Perkins was more than enough to pay for a nationwide advertising campaign. Bezos was now getting a lot more ambitious. He had been studying the history of the Walt Disney Company, and he wanted to turn Amazon.com into an equally powerful brand. Great brands are what distinguish successful companies, such as Disney, Nike, and Coca-Cola, and allow them to charge premium prices. On the Internet, there were no strong brands, with the possible exception of America Online. If Amazon.com could exploit the publicity it was receiving to create a distinctive brand identity, it would have some protection when, as many people expected to happen, Borders and Barnes & Noble launched their own Web sites. The first Amazon.com ads appeared in USA Today, The Wall Street Journal, and The New York Times Book Review. Bezos also did advertising deals with The New Yorker, Atlantic Monthly, and Wired.
Bezos also realized the importance of promoting himself, and the media was happy to cooperate. Newspaper and magazine editors were desperate to put a human face on the Internet story, and writing about Bezos was an obvious way to do it. With his baby features and his infectious cackle, he could all too easily be portrayed as the goofy boy next door. Bezos stories multiplied. Most of them focused on his discovery of the World Wide Web, his fateful drive across country, and the origins of Amazon.com in a Bellevue garage. Few mentioned that he was ordered to research Internet commerce, that he flew from New York to Texas, and that he rented a house with a garage precisely so he could say that Amazon.com had started out in one. The media presented Amazon.com as a radically new type of business—one that wasn’t hemmed in by the physical constraints facing other companies. “Amazon.com is truly virtual,” Fortune informed its readers in December 1996. “Though it has become a multi-million-dollar business that employs 110, there’s still no storefront and little inventory.”8 Even the normally skeptical Economist fell for this line, describing how “three floors above an art gallery on a slightly seedy street in Seattle, the world’s biggest bookstore, Amazon.com, hums inside a refrigerator-sized box in the corner of a humble storeroom.”9 In reality, the computer in the corner was only a small part of Amazon.com’s business. The rest of the company was a lot more old-fashioned than Bezos liked to admit.
Whenever a customer placed an order for a book, Amazon.com ordered it from a distributor, usually Ingram, which trucked it to Seattle. Once there, the book was packed, addressed, and shipped to the customer. Apart from the actual ordering of the book, each step of this process involved manual labor. Far from being “truly virtual,” Amazon.com was a labor-intensive business. In the beginning, it didn’t stock many books of its own, but it soon realized that ordering the same books repeatedly made no sense. In November 1996, Amazon.com rented a 93,000-square-foot warehouse in South Seattle, where it stocked copies of frequently ordered titles, such as the Dilbert series. Bezos hired a senior executive from Federal Express, the overnight delivery service, to run the warehouse and distribution operations, which employed hundreds, and later thousands, of people. Many of these workers were hired on temporary contracts, so they didn’t appear on Amazon.com’s payroll, but they were an essential part of the firm’s operations.
III
The slogan “Earth’s Biggest Bookstore” was also questionable. Although Amazon.com’s Web site listed more than a million titles, only a few hundred of these books were in stock and ready for immediate delivery. The rest had to be ordered from the distributors, or from the publishers direct, which is just what happens when a customer walks into a regular bookstore and asks for a book that isn’t in stock. In a rare piece of journalistic enterprise, two journalists at Slate, an online magazine started by Michael Kinsley, a former editor of The New Republic, tested Amazon.com’s claim to be the fastest and most convenient bookstore. The Slate journalists simultaneously ordered a best-seller and an obscure textbook from Amazon.com and two regular bookstores. The regular stores both beat Amazon.com by a week in delivering the bestseller, although the online firm was the quicker to deliver the textbook.10
Reality was less important than perception. Amazon.com had established itself in the public mind as a quick and convenient place to buy books. In the final quarter of 1996, its sales came to more than $8 million. Time magazine named Amazon.com as one of its ten “Best Web sites of 1996.” Buying books online had now turned into a fashionable activity, and it introduced countless people to the Internet. In many American households, opening the brown corrugated packages from Amazon.com was a regular ritual. The books ordered from Amazon.com were often obscure. When people wanted the latest John Grisham or Stephen King novel they tended to go to the nearest bookstore; but when they were searching for a biography of Napoleon or a computer textbook they often went online. This thrilled many publishers. Michael Lynton, the head of Penguin Putnam, told The New York Times that selling books over the Internet would bring “enormous benefit to the [publishing] business because it’s not about selling big, best-selling authors. It’s about selling our back list, and it’s very rare that opportunity comes along.”11
Amazon.com’s growing popularity didn’t please everybody in the book business. Toward the end of 1996, Leonard and Stephen Riggio, the New York brothers who owned Barnes & Noble, visited Bezos in Seattle. Accounts of the meeting differ. The Wall Street Journal reported that the Riggios offered to purchase Amazon.com outright, a claim they denied. Another version of events had the Riggios expressing interest in a joint Web site that would sell books from both Amazon.com and Barnes & Noble. Stephen Riggio confirmed to the Journal that he and his brother were also thinking about setting up their own Web site. “We have to be a player,” Riggio said. “Online bookselling is going to be a very big thing.”12 In January 1997, Barnes & Noble agreed to become the exclusive bookseller on America Online.
IV
The Riggios’ interest in the Internet reinforced Bezos’s belief that Amazon.com had to establish its dominance of the market quickly. He had the slogan “Get Big Fast” emblazoned on T-shirts and gave them to employees at the company picnic. In March 1997, Amazon. com announced plans to introduce software that would make book recommendations to customers based on past purchases and the buying patterns of others that had bought the same titles. Such “collaborative filtering” software, which was first used by the online music store Firefly, was being widely hailed as the next big thing in e-commerce, because it exploited the interactivity of the Internet to offer customers something that offline stores couldn’t match. Bezos liked to claim that Amazon.com was not just a retailer, but a “technology company,” or an “artificial intelligence company.” This wasn’t strictly true—firms like Wal-Mart were heavy users of information technology, but they were still classed as retailers—but there were sound business reasons for the hyperbole. Retailing is a highly competitive industry, with low profit margins. On the stock market, even successful retailers trade at modest prices, while most technology companies trade at a premium. Bezos was already thinking about taking Amazon.com public. A few months earlier he had taken an important step in that direction by hiring Joy Covey, a former chartered accountant at Ernst and Young, as his chief financial officer. Covey had exactly the sort of experience that Wall Street insisted upon for IPO candidates. In 1993, she had been the chief financial officer at DigiDesign, a Boston software company, when it did a successful IPO.
In February 1997, shortly after joining Amazon.com, Covey invited a number of investment banks to a “bake-off” for the prize of managing the anticipated IPO. Goldman Sachs, Deutsche Morgan Grenfell, Hambrecht & Quist, Alex Brown, and Robertson, Stephens were among the firms that made presentations. Morgan Stanley was a conspicuous absentee. Mary Meeker and the rest of Morgan’s technology department were keen to pitch for the Amazon.com business, but they were overruled by the bank’s top executives out of loyalty to Barnes & Noble, which was a longtime client. Meeker was so angry that she considered resigning, but she decided against it. Covey chose Deutsche Morgan Grenfell, Frank Quattrone’s firm, to be the lead underwriter, with Hambrecht & Quist and Alex Brown as the comanagers. The decision was a coup for Quattrone, whose investment banking team was still seeking to establish itself in its new location. Quattrone and his colleagues started work on a prospectus, which Amazon.com filed with the SEC at the end of March, revealing that it planned to issue 2.5 million shares at $12 to $14 each.
The prospectus was a schizophrenic document. Its opening passage stressed the purported advantages of online commerce, including “virtually unlimited online shelf space” and “lack of investment in expensive retail real estate and reduced personnel requirements.”13 This section was followed by a list of “risk factors” facing the company. All prospectuses contain such a section, but Amazon.com’s lawyers had clearly insisted on full disclosure, lest investors subsequently claim they had been misled. After revealing that it had lost $6 million since its inception, the company said it “believes that it will incur substantial operating losses for the foreseeable future, and that the rate at which such losses will be incurred will increase significantly from current levels.” The reasons for this dire prediction were spelled out in detail. “The online commerce market, particularly over the Internet, is new, rapidly evolving and intensely competitive, which competition the Company expects to intensify in the future. Barriers to entry are minimal, and current and new competitors can launch new sites at a relatively low cost.”14
Any objective person reading the prospectus would have been forced to conclude that Amazon.com’s prospects were poor. In any business, from a hot dog stand to the auto industry, the keys to generating profits are selling a popular product and avoiding ruinous competition. The first step is a lot easier than the second one, as a glance at the hot dog industry makes clear. Fast-food stands are cheap to set up, so they often attract competitors, which limits their profitability. If competitors are barred, as is often the case at sporting stadiums, for example, where one firm gets the entire concession, the hot dog business can be immensely profitable. The principle is a universal one: if the barriers to entering an industry are high, profits tend to be high. When barriers to entry are low, so are profits.
Amazon.com was openly admitting that in e-commerce the barriers to entry were low. If they stayed this way, the chances of any online retailer making sustainable profits were slim, and e-commerce would represent a return to the “perfect competition” envisioned by Adam Smith. In perfect competition, all goods sell at cost, and profits are zero. Bill Gates was among those who believed that the Internet would turn out this way. In the second edition of his book, The Road Ahead, Gates said the Internet would lead to a “new world of low-friction, low-overhead capitalism, in which market information will be plentiful and transaction costs low. It will be a shopper’s heaven.” If investors had accepted Gates’s argument, the Internet stock boom would have come to a rapid end. But Wall Street analysts came up with a competing economic vision that was much more favorable to Internet companies. In this “winner-takes-all” model, the Internet economy would end up looking more like a television quiz show in which the victorious contestant takes home all the prizes.
Economists developed the winner-takes-all theory to explain the success of technology companies like Microsoft and Intel. In technology markets, consumers tend to settle on one or two dominant products, such as Microsoft Windows, which generate big profits. One reason why this happens is that technology goods are complicated. After people have learned how to use them they are reluctant to incur the financial and psychological costs of adopting a rival technology. When the music industry switched from vinyl to CDs, listeners had to spend heavily to convert their record collections, and they refused to switch again to mini-discs. “Switching costs” of this nature represent one major barrier to entry. “Positive feedback loops,” which reinforce the dominant product’s position, represent another. In the early 1990s, Microsoft Windows was already by far the most widely used PC operating system. Seeing this situation, independent software developers, such as video game companies, neglected Macintosh and other Microsoft rivals, preferring to write their applications for Windows. Before long, computer buyers had many more Windows applications to choose from, which further increased Microsoft’s market share.
The Internet stock promoters, such as Mary Meeker, applied the winner-takes-all model to e-commerce. Barriers to entry on the Internet were low to begin with, they conceded, but this situation wouldn’t last. Once companies like Amazon.com established themselves as market leaders, online shoppers would get used to using them, and it would be extremely difficult for other firms to challenge. In the language of game theory, firms that took an early lead would enjoy a big “first mover advantage,” and many of them would end up dominating their markets. From Wall Street’s perspective this argument had a welcome corollary. Since investors were being offered the chance to pick the big winners of the future, they couldn’t expect to get them cheap. High stock prices made sense.
Like many Internet companies, Amazon.com’s business plan was predicated on the winner-takes-all model. Bezos’s strategy was to raise a lot of money from investors and use it to build market share. Once market dominance had been achieved, hefty profits would follow automatically. That was the theory anyway. In practice, it wasn’t clear if switching costs and positive feedback loops really applied to e-commerce. A visitor to Yahoo!’s home page could switch to Lycos’s home page with one click. Similarly, an Amazon.com customer could check the prices on offer at a rival online bookstore in a few seconds. As for positive feedback loops, they were also hard to find. If anything, firms like Amazon.com seemed to suffer from negative feedback. The more money they spent, the more money they lost.
Amazon.com was already facing competition, and more was on the horizon from Barnes & Noble. As its prospectus admitted, “many of the Company’s competitors have longer operating histories, larger customer bases, greater brand recognition and significantly greater financial, marketing and other resources than the Company.”15 The only way that Amazon.com could steal an edge was to slash its prices, but this was a costly strategy. The financial accounts published in the prospectus showed that Amazon.com was paying about $16 to buy and ship each book that it sold at $20. On top of this, it was spending about $8 in advertising and $1 in overhead, bringing its total cost per book to $25. If a regular firm followed this business model, it would go bankrupt in a few months. The only justification Bezos could offer was that if Amazon.com kept growing, profits would appear at some (unspecified) point in the future. The early losses were presented as a deliberate strategy. “If we’re profitable in the next two years, it will be an accident,” he told Fortune.16
V
A few weeks after Amazon.com published its prospectus, Barnes & Noble unveiled plans for its own Web site, Barnesandnoble.com, and sued in federal court to prevent Amazon.com from calling itself “Earth’s Biggest Bookstore.” Amazon.com’s warehouse “stocks only a few hundred titles,” the suit claimed. “Barnes & Noble stocks more books than Amazon and there is no book which Amazon can obtain that Barnes & Noble cannot.”17 The Barnes & Noble counteroffensive came as Bezos and Covey were completing an exhausting three-week road show that took in twenty-four cities. Thanks to all the publicity that Amazon.com had received, the road shows were packed with eager investors, but Bezos and Covey refused to tell them how quickly Amazon.com would turn a profit. Instead, they stressed its rapid growth. Sales in the first quarter of 1997 were $16 million, more than revenues in all of 1996. Losses had also jumped dramatically, to almost $3 million, but Bezos had already explained that heavy losses were part of his strategy, and investors seemed willing to take him at his word. The investment bankers, as they moved from city to city, carried a book in which they recorded how much stock each investor was interested in buying. At the end of the three weeks, the entries in the book showed that there would be more than enough buyers for Amazon.com’s stock.
A couple of days before the IPO, Deutsche Morgan Grenfell increased the size of the issue to 3 million shares and raised the price to $18. At that price, Amazon.com would be valued at about $420 million. Bezos, who owned almost 10 million shares, would be worth about $180 million. Kleiner Perkins’s $8 million investment would be valued at $60 million. On May 15, 1997, the stock started trading on the Nasdaq under the symbol “AMZN.” From the beginning, it was volatile, often rising or falling several points a day. These gyrations were partly a reflection of the fact that only 3 million of Amazon.com’s 23 million shares were trading. With so few shares available for investors to buy and sell, even small orders could move the stock price significantly. It was the same artificial shortage of stock that had distorted the valuations of Netscape and every other Internet company. A firm’s market capitalization is equal to the total number of shares outstanding multiplied by its stock price. In order to arrive at the $420 million valuation figure for Amazon.com that appeared in the newspapers, journalists multiplied the $18 issue price by 23 million. This calculation was based on the tacit assumption that the 20 million Amazon.com shares that weren’t yet trading would have received the same price on the open market, which was questionable. If another 20 million shares had been issued in the IPO, the stock price would almost certainly have been a good deal lower.
The investment bankers knew about this discrepancy, but they didn’t publicize it, and they were delighted to see more headlines about Internet stocks. The publicity would help them to unload the backlog of IPOs that had been building up for months. The Rambus and Amazon.com stock offerings “caused every investment banker and every venture capitalist in Silicon Valley to just go absolutely nuts,” Roger McNamee, the well-known Silicon Valley investor, told CNNfn in late May. “They were just hoping for a big IPO to get things going again.”18