📚️ Book Notes: The Everything Store
Jeff is an embodiment of long-term thinking. He emphasizes doing what's best for the customer, even if it translates to huge losses in the short term. However, I feel that this is not the definitive story of Amazon. It has cherry-picked bits and pieces, unlike Walter Isaacson's Steve Jobs.
Here are my notes from The Everything Store:
- Bezos has proved quite indifferent to the opinions of others. He is an avid problem solver, a man who has a chess grand master’s view of the competitive landscape, and he applies the focus of an obsessive-compulsive to pleasing customers and providing services like free shipping. He has vast ambitions—not only for Amazon, but to push the boundaries of science and remake the media. In addition to funding his own rocket company, Blue Origin, Bezos acquired the ailing Washington Post newspaper company in August 2013 for $250 million in a deal that stunned the media industry. As many of his employees will attest, Bezos is extremely difficult to work for. Despite his famously hearty laugh and cheerful public persona, he is capable of the same kind of acerbic outbursts as Apple’s late founder, Steve Jobs, who could terrify any employee who stepped into an elevator with him. Bezos is a micromanager with a limitless spring of new ideas, and he reacts harshly to efforts that don’t meet his rigorous standards. Like Jobs, Bezos casts a reality-distortion field—an aura thick with persuasive but ultimately unsatisfying propaganda about his company. He often says that Amazon’s corporate mission “is to raise the bar across industries, and around the world, for what it means to be customer focused.” Bezos and his employees are indeed absorbed with catering to customers, but they can also be ruthlessly competitive with rivals and even partners. Bezos likes to say that the markets Amazon competes in are vast, with room for many winners. That’s perhaps true, but it’s also clear that Amazon has helped damage or destroy competitors small and large, many of whose brands were once world renowned: Circuit City. Borders. Best Buy. Barnes & Noble.
- In 1991, D. E. Shaw was growing rapidly, and the company moved to the top floors of a midtown Manhattan skyscraper a block from Times Square. The firm’s striking but sparely decorated offices, designed by the architect Steven Holl, included a two-story lobby with luminescent colors that were projected into slots cut into the expansive white walls. That fall, Shaw hosted a thousand-dollar-a-ticket fund-raiser for presidential candidate Bill Clinton that was attended by the likes of Jacqueline Onassis, among others. Employees were asked to clear out of the office that evening before the event. Jeff Bezos, one of the youngest vice presidents at the firm, left to play volleyball with colleagues, but first he stopped and got his photo taken with the future president. Bezos was twenty-nine at the time, five foot eight inches tall, already balding and with the pasty, rumpled appearance of a committed workaholic. He had spent seven years on Wall Street and impressed seemingly everyone he encountered with his keen intellect and boundless determination. Upon graduating from Princeton in 1986, Bezos worked for a pair of Columbia professors at a company called Fitel that was developing a private transatlantic computer network for stock traders. Graciela Chichilnisky, one of the cofounders and Bezos’s boss, remembers him as a capable and upbeat employee who worked tirelessly and at different times managed the firm’s operations in London and Tokyo. “He was not concerned about what other people were thinking,” Chichilnisky says. “When you gave him a good solid intellectual issue, he would just chew on it and get it done.” Bezos moved to the financial firm Bankers Trust in 1988, but by then, frustrated by what he viewed as institutional reluctance at companies to challenge the status quo, he was already looking for an opportunity to start his own business. Between 1989 and 1990 he spent several months working in his spare time on a startup with a young Merrill Lynch employee named Halsey Minor, who would later go on to start the online news network CNET. Their fledgling venture, aimed at sending a customized newsletter to people over their fax machines, collapsed when Merrill Lynch withdrew the promised funding. But Bezos nevertheless made an impression. Minor remembers that Bezos had closely studied several wealthy businessmen and that he particularly admired a man named Frank Meeks, a Virginia entrepreneur who had made a fortune owning Domino’s Pizza franchises. Bezos also revered pioneering computer scientist Alan Kay and often quoted his observation that “point of view is worth 80 IQ points”—a reminder that looking at things in new ways can enhance one’s understanding. “He went to school on everybody,” Minor says. “I don’t think there was anybody Jeff knew that he didn’t walk away from with whatever lessons he could.” Bezos was ready to leave Wall Street altogether when a headhunter convinced him to meet executives at just one more financial firm, a company with an unusual pedigree. Bezos would later say he found a kind of workplace soul mate in David Shaw—“one of the few people I know who has a fully developed left brain and a fully developed right brain.” At DESCO, Bezos displayed many of the idiosyncratic qualities his employees would later observe at Amazon. He was disciplined and precise, constantly recording ideas in a notebook he carried with him, as if they might float out of his mind if he didn’t jot them down. He quickly abandoned old notions and embraced new ones when better options presented themselves. He already exhibited the same boyish excitement and conversation-stopping laugh that the world would later come to know. Bezos thought analytically about everything, including social situations. Single at the time, he started taking ballroom-dance classes, calculating that it would increase his exposure to what he called n+ women. He later famously admitted to thinking about how to increase his “women flow,” a Wall Street corollary to deal flow, the number of new opportunities a banker can access. Jeff Holden, who worked for Bezos first at D. E. Shaw & Co. and later at Amazon, says he was “the most introspective guy I ever met. He was very methodical about everything in his life.”
- Shaw and Bezos discussed another idea as well. They called it “the everything store.” Several executives who worked at DESCO at that time say the idea of the everything store was simple: an Internet company that served as the intermediary between customers and manufacturers and sold nearly every type of product, all over the world. One important element in the early vision was that customers could leave written evaluations of any product, a more egalitarian and credible version of the old Montgomery Ward catalog reviews of its own suppliers. Shaw himself confirmed the Internet-store concept when he told the New York Times Magazine in 1999, “The idea was always that someone would be allowed to make a profit as an intermediary. The key question is: Who will get to be that middleman?”
- Bezos concluded that a true everything store would be impractical—at least at the beginning. He made a list of twenty possible product categories, including computer software, office supplies, apparel, and music. The category that eventually jumped out at him as the best option was books. They were pure commodities; a copy of a book in one store was identical to the same book carried in another, so buyers always knew what they were getting. There were two primary distributors of books at that time, Ingram and Baker and Taylor, so a new retailer wouldn’t have to approach each of the thousands of book publishers individually. And, most important, there were three million books in print worldwide, far more than a Barnes & Noble or a Borders superstore could ever stock. If he couldn’t build a true everything store right away, he could capture its essence—unlimited selection—in at least one important product category. “With that huge diversity of products you could build a store online that simply could not exist in any other way,” Bezos said. “You could build a true superstore with exhaustive selection, and customers value selection.” In his offices on the fortieth floor of 120 West Forty-Fifth Street, Bezos could hardly contain his enthusiasm. With DESCO’s recruiting chief, Charles Ardai, he investigated some of the earliest online bookstore websites, such as Book Stacks Unlimited, located in Cleveland, Ohio, and WordsWorth, in Cambridge, Massachusetts. Ardai still has the record from one purchase they made while testing these early sites. He bought a copy of Isaac Asimov’s Cyberdreams from the website of the Future Fantasy bookstore in Palo Alto, California. The price was $6.04. When the book appeared, two weeks later, Ardai ripped open the cardboard package and showed it to Bezos. It had become badly tattered in transit. No one had yet figured out how to do a good job selling books over the Internet. As Bezos saw it, this was a huge, untapped opportunity.
- Each order during those early months brought a thrill to Amazon’s employees. When someone made a purchase, a bell would ring on Amazon’s computers, and everyone in the office would gather around to see if anyone knew the customer. (It was only a few weeks before it started ringing so often that they had to turn it off.) Amazon would then order the book from one of the two major book distributors, paying the standard wholesale rate of 50 percent off the list price (the advertised price printed on the book jacket). There was little science to Amazon’s earliest distribution methods. The company held no inventory itself at first. When a customer bought a book, Amazon ordered it, the book would arrive within a few days, and Amazon would store it in the basement and then ship it off to the customer. It took Amazon a week to deliver most items to customers, and it could take several weeks or more than a month for scarcer titles. Even back then, Amazon was making only a slender profit on most sales. It offered up to 40 percent off the list price on bestsellers and books that were included in Spotlight, an early feature on the website that highlighted new titles each day. The company offered 10 percent off the list price on other books; it also charged shipping fees starting at $3.95 for single-book orders. One early challenge was that the book distributors required retailers to order ten books at a time. Amazon didn’t yet have that kind of sales volume, and Bezos later enjoyed telling the story of how he got around it. “We found a loophole,” he said. “Their systems were programmed in such a way that you didn’t have to receive ten books, you only had to order ten books. So we found an obscure book about lichens that they had in their system but was out of stock. We began ordering the one book we wanted and nine copies of the lichen book. They would ship out the book we needed and a note that said, ‘Sorry, but we’re out of the lichen book.’ ” In early June, Kaphan added a reviews feature that he’d coded over a single weekend. Bezos believed that if Amazon.com had more user-generated book reviews than any other site, it would give the company a huge advantage; customers would be less inclined to go to other online bookstores. They had discussed whether such unfiltered user-generated content could get the company in trouble. Bezos decided to watch reviews closely for offensive material rather than read everything before it was published. The early employees and their friends wrote many of the initial reviews themselves. Kaphan himself took a book off the shelf that was meant for a customer, a Chinese memoir called Bitter Winds: A Memoir of My Years in China’s Gulag. He read it cover to cover and wrote one of the first reviews. Naturally, some of the reviews were negative. In speeches, Bezos later recalled getting an angry letter from an executive at a book publisher implying that Bezos didn’t understand that his business was to sell books, not trash them. “We saw it very differently,” Bezos said. “When I read that letter, I thought, we don’t make money when we sell things. We make money when we help customers make purchase decisions.”
- As if to prove his singular obsession with customer experience, Bezos placed an expensive bet, hitching Amazon’s Quidditch broom to the rising fantasy series Harry Potter. In July, author J. K. Rowling published the fourth book in the series, Harry Potter and the Goblet of Fire. Amazon offered a 40 percent discount on the book and express delivery so customers would get it on Saturday, July 8—the day the book was released—for the cost of regular delivery. Amazon lost a few dollars on each of about 255,000 orders, just the kind of money-losing gambit that frustrated Wall Street. But Bezos refused to see it as anything other than a move to build customer loyalty. “That either- or mentality, that if you are doing something good for customers it must be bad for shareholders, is very amateurish,” he said in our interview that summer. The Harry Potter promotion unsettled even the executives working on it. “I was thinking, Holy shit, this is a lot of money,” says Lyn Blake, the Amazon executive in charge of books at the time. She was later inclined to admit that Bezos was right. “We were able to assess all the good press and heard all these stories from people who were meeting their deliverymen at their front doors. And we got these testimonials back from drivers. It was the best day of their lives.” Amazon was mentioned in some seven hundred stories about the new Harry Potter novel in June and July that year. Bezos was obsessed with the customer experience, and anyone who didn’t have the same single-minded focus or who he felt wasn’t demonstrating a capacity for thinking big bore the brunt of his considerable temper. One person who became a frequent target during this time was the vice president in charge of customer service, Bill Price. A veteran of long-distance provider MCI, Price came to Amazon in 1999. He blundered early by suggesting in a meeting that Amazon executives who traveled frequently should be permitted to fly business-class. Bezos often said he wanted his colleagues to speak their minds, but at times it seemed he did not appreciate being personally challenged. “You would have thought I was trying to stop the Earth from tilting on its axis,” Price says, recalling that moment with horror years later. “Jeff slammed his hand on the table and said, ‘That is not how an owner thinks! That’s the dumbest idea I’ve ever heard.’ “Of course everyone else was thinking [executives should be allowed to fly business-class], but I was the exposed nail in the room,” Price says.
- One weekend in the fall of 2000, Bezos called various S Team members and executives to a daylong meeting in the basement of his lakefront mansion in Medina so they could examine why the third-party efforts were failing. Despite the problems, the group recognized that Crosslinks on the product pages were generating most of the traffic to Amazon’s third-party sellers. That was an important observation. Traffic on Amazon was oriented around Amazon’s reliable product catalog. On eBay, a customer might search for the Hemingway novel The Sun Also Rises and get dozens of auctions of new and vintage copies. If a customer searched for the book on Amazon, there was one single page, with a definitive description of the novel, and that’s where customers flocked. Amazon executives reasoned that day that they had the Internet’s most authoritative product catalog and that they should exploit it. That, it turned out, was the central insight that not only turned Amazon into a thriving platform for small online merchants but powers a good deal of its success today. If Amazon wanted to host other sellers on its site, it would have to list their wares right alongside its own products on the pages that customers actually visited. “It was a great meeting,” says Jeff Blackburn. “By the end of the day we all felt one hundred percent sure that this was the future.” That fall, Amazon announced a new initiative called Marketplace. The effort started with used books. Other sellers of books were invited to advertise their wares directly within a box on Amazon’s own book pages. Customers got to choose whether to purchase the item from Amazon itself or from a third-party seller. If they chose the latter, either because the seller had a lower price or because the product was out of stock at Amazon, the company would lose the sale but collect a small commission. “Jeff was super clear from the beginning,” says Neil Roseman. “If somebody else can sell it cheaper than us, we should let them and figure out how they are able to do it.”
- In early 2001, Amazon’s position and future prospects remained dubious. The problem wasn’t only its diminishing market capitalization or its overlarded staffing and expansion efforts. Growth, particularly in the oldest category, books—still more than half its business at the time—appeared to be slowing after years of annual double-digit increases. Inside the company, executives were fearful that the slowdown augured an overall decrease in online shopping itself. “We were scared to death,” says Erich Ringewald, a vice president in charge of Marketplace. “Books were decelerating, and everyone thought that Walmart.com would start selling books at a loss to keep us from growing.” Amazon then did something rare in its history. Warren Jenson, pushing to improve margins to meet the company’s self-imposed profitability deadline, convinced Bezos to quietly raise prices in the older media categories. Amazon reduced its discounts on bestselling books and started charging more to overseas customers who were buying from the domestic website. Bezos signed off on the increases, but another important meeting quickly made him change his mind. On a Saturday morning that spring, at the Starbucks inside the Bellevue Barnes & Noble where he had conducted Amazon’s very first meetings, Bezos met Jim Sinegal, the founder of Costco. Sinegal was a casual, plain-speaking native of Pittsburgh, a Wilford Brimley look-alike with a bushy white mustache and an amiable countenance that concealed the steely determination of an entrepreneur. Well into retirement age, he showed no interest in slowing down. The two had plenty in common. For years Sinegal, like Bezos, had battled Wall Street analysts who wanted him to raise Costco’s prices on clothing, appliances, and packaged foods. Like Bezos, Sinegal had rejected multiple acquisition offers over the years, including one from Sam Walton, and he liked to say he didn’t have an exit strategy—he was building a company for the long term. Bezos had set up the meeting to ask Sinegal about using Costco as a wholesale supplier for products that manufacturers still wouldn’t sell to Amazon. That idea never went anywhere, but over the next hour, Bezos listened carefully and once again drew key lessons from a more experienced retail veteran. Sinegal explained the Costco model to Bezos: it was all about customer loyalty. There are some four thousand products in the average Costco warehouse, including limited-quantity seasonal or trendy products called treasure-hunt items that are spread out around the building. Though the selection of products in individual categories is limited, there are copious quantities of everything there—and it is all dirt cheap. Costco buys in bulk and marks up everything at a standard, across-the-board 14 percent, even when it could charge more. It doesn’t advertise at all, and earns most of its gross profit from the annual membership fees. “The membership fee is a onetime pain, but it’s reinforced every time customers walk in and see forty-seven-inch televisions that are two hundred dollars less than anyplace else,” Sinegal said. “It reinforces the value of the concept. Customers know they will find really cheap stuff at Costco.” Costco’s low prices generated heavy sales volume, and the company then used its significant size to demand the best possible deals from suppliers and raise its per-unit gross profit dollars. Its vendors hadn’t been happy about being squeezed but they eventually came around. “You can fill Safeco Field with the people that don’t want to sell to us,” Sinegal said. “But over a period of time, we generate enough business and prove we are a good customer and pay our bills and keep our promises. Then they say, ‘Why the hell am I not doing business with these guys. I gotta be stupid. They are a great form of distribution.’ “My approach has always been that value trumps everything,” Sinegal continued. “The reason people are prepared to come to our strange places to shop is that we have value. We deliver on that value constantly. There are no annuities in this business.” A decade later and finally preparing to retire, Sinegal remembers that conversation well. “I think Jeff looked at it and thought that was something that would apply to his business as well,” he says. Sinegal doesn’t regret educating an entrepreneur who would evolve into a ferocious competitor. “I’ve always had the opinion that we have shamelessly stolen any good ideas,” he says. In 2008, Sinegal bought a Kindle e-reader that turned out to be defective and wrote Bezos a laudatory e-mail after Amazon’s customer service replaced his device for free. Bezos wrote back, “I want you to consider me your personal customer service agent on the Kindle.” Perhaps Amazon’s founder realized he owed Sinegal a debt of gratitude, because he took the lessons he learned during that coffee in 2001 and applied them with a vengeance. The Monday after the meeting with Sinegal, Bezos opened an S Team meeting by saying he was determined to make a change. The company’s pricing strategy, he said, according to several executives who were there, was incoherent. Amazon preached low prices but in some cases its prices were higher than competitors’. Like Walmart and Costco, Bezos said, Amazon should have “everyday low prices.” The company should look at other large retailers and match their lowest prices, all the time. If Amazon could stay competitive on price, it could win the day on unlimited selection and on the convenience afforded to customers who didn’t have to get in the car to go to a store and wait in line. That July, as a result of the Sinegal meeting, Amazon announced it was cutting prices of books, music, and videos by 20 to 30 percent. “There are two kinds of retailers: there are those folks who work to figure how to charge more, and there are companies that work to figure how to charge less, and we are going to be the second, full-stop,” he said in that month’s quarterly conference call with analysts, coining a new Jeffism to be repeated over and over ad nauseam for years.
- Gise, who had been a lieutenant commander in the U.S. Navy during World War II, was in many ways Bezos’s mentor. He instilled in Bezos the values of self-reliance and resourcefulness, as well as a visceral distaste for inefficiency. “There was very little he couldn’t do himself,” Jackie Bezos says of her father. “He thought everything was something you could tackle in a garage.” Bezos and Pop Gise repaired windmills and castrated bulls; they attempted to grade dirt roads and built contraptions like an automatic gate opener and a crane to move the heavy parts of a broken-down D6 Caterpillar bulldozer.
- Bezos’s grandparents taught him a lesson in compassion that he related decades later, in a 2010 commencement speech at Princeton. Every few years Pop and Mattie Gise hooked an Airstream trailer to their car and caravanned around the country with other Airstream owners, and they sometimes took Jeff with them. On one of these road trips, when Bezos was ten and passing time in the back seat of the car, he took some mortality statistics he had heard on an antismoking public service announcement and calculated that his grandmother’s smoking habit would take nine years off her life. When he poked his head into the front seat to matter-of-factly inform her of this, she burst into tears, and Pop Gise pulled over and stopped the car. In fact, Mattie Gise fought cancer for years and would eventually succumb to it. Bezos described what happened next in his speech at Princeton. 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.”
- An interviewer once asked Bezos why he was motivated to accomplish so much, considering that he had already amassed an exceedingly large fortune. “I have realized about myself that I’m very motivated by people counting on me,” he answered. “I like to be counted on.”
- Some Amazon employees currently advance the theory that Bezos, like Steve Jobs, Bill Gates, and Larry Ellison, lacks a certain degree of empathy and that as a result he treats workers like expendable resources without taking into account their contributions to the company. That in turn allows him to coldly allocate capital and manpower and make hyperrational business decisions while another executive might let emotion and personal relationships intrude. But they also acknowledge that Bezos is primarily consumed with improving the company’s performance and customer service, and that personnel issues are secondary. “This is not somebody who takes pleasure at tearing someone a new asshole. He is not that kind of person,” says Kim Rachmeler. “Jeff doesn’t tolerate stupidity, even accidental stupidity.” Right or wrong, Bezos’s behavior was often easier to accept because he was so frequently on target with his criticisms, to the amazement and often irritation of employees. Bruce Jones, the former Amazon vice president, describes leading a five-engineer team working to create algorithms to optimize pickers’ movements in the fulfillment centers while the company was trying to solve the problem of batches. The group spent nine months on the task, then presented their work to Bezos and the S Team. “We had beautiful documents and everyone was really prepared,” Jones says. Bezos read the paper, said, “You’re all wrong,” stood up, and started writing on the whiteboard. “He had no background in control theory, no background in operating systems,” Jones says. “He only had minimum experience in the distribution centers and never spent weeks and months out on the line.” But Bezos laid out his argument on the whiteboard and “every stinking thing he put down was correct and true,” Jones says. “It would be easier to stomach if we could prove he was wrong but we couldn’t. That was a typical interaction with Jeff. He had this unbelievable ability to be incredibly intelligent about things he had nothing to do with, and he was totally ruthless about communicating it.”
- In many ways, the introduction of Amazon Prime was an act of faith. The company had little concrete idea how the program would affect orders or customers’ likelihood to shop in other categories beyond media. If each expedited shipment cost the company $8, and if a shipping-club member placed twenty orders a year, it would cost the company $160 in shipping, far above the $79 fee. The service was expensive to run, and there was no clear way to break even. “We made this decision even though every single financial analysis said we were completely crazy to give two-day shipping for free,” says Diego Piacentini. But Bezos was going on gut and experience. He knew that Super Saver Shipping had changed customers’ behavior, motivating them to place bigger orders and shop in new categories. He also knew from 1-Click ordering that when friction was removed from online shopping, customers spent more. That accelerated the company’s fabled flywheel—the virtuous cycle. When customers spent more, Amazon’s volumes increased, so it could lower shipping costs and negotiate new deals with vendors. That saved the company money, which would help pay for Prime and lead back to lower prices.
- But on this particular visit to Bezos in 2002, O’Reilly had a cogent case to make, and Bezos listened. The publisher showed Bezos Amarank, a sophisticated tool his company had created that visited the Amazon website every few hours and copied the rankings of O’Reilly Media books and the books of its competitors. It was a clunky process that relied on a primitive technique called screen scraping, and O’Reilly suggested that Amazon should develop a series of online tools called application programming interfaces, or APIs, that allowed third parties to easily harvest data about its prices, products, and sales rankings. O’Reilly spoke ambitiously about parceling out entire sectors of the Amazon store and allowing other websites to build on top of them. “Companies need to think not just what they can get for themselves from new technologies but how they can enable others,” he said.
- At the same time, Bezos became enamored with a book called Creation, by Steve Grand, the developer of a 1990s video game called Creatures that allowed players to guide and nurture a seemingly intelligent organism on their computer screens. Grand wrote that his approach to creating intelligent life was to focus on designing simple computational building blocks, called primitives, and then sit back and watch surprising behaviors emerge. Just as electronics are built from basic components like resistors and capacitors, and as living beings spring from genetic building blocks, Grand wrote that sophisticated AI can emerge from cybernetic primitives, and then it’s up to the “ratchet of evolution to change the design.” The book, though dense and challenging, was widely discussed in the book clubs of Amazon executives at the time and it helped to crystallize the debate over the problems with the company’s own infrastructure. If Amazon wanted to stimulate creativity among its developers, it shouldn’t try to guess what kind of services they might want; such guesses would be based on patterns of the past. Instead, it should be creating primitives—the building blocks of computing—and then getting out of the way. In other words, it needed to break its infrastructure down into the smallest, simplest atomic components and allow developers to freely access them with as much flexibility as possible. As Bezos proclaimed at the time, according to numerous employees: “Developers are alchemists and our job is to do everything we can to get them to do their alchemy.” Bezos directed groups of engineers in brainstorming possible primitives. Storage, bandwidth, messaging, payments, and processing all made the list. In an informal way—as if the company didn’t quite know the insight around primitives was an extraordinary one—Amazon then started building teams to develop the services described on that list. In late 2004, Chris Pinkham, head of the company’s IT infrastructure, told Dalzell that he had decided to return with his family to their native South Africa. At this point, A9 had taken root in Palo Alto, and Dalzell was busy establishing remote developer centers in Scotland and India, among other places. Dalzell suggested to Pinkham that instead of leaving Amazon, he open an office in Cape Town. They brainstormed possible projects and finally settled on trying to build a service that would allow a developer to run any application, regardless of its type, on Amazon’s servers. Pinkham and a few colleagues studied the problem and came up with a plan to use a new open-source tool called Xen, a layer of software that made it easier to run numerous applications on a single physical server in a data center. Pinkham took colleague Chris Brown along with him to South Africa and they set up shop in a nondescript office complex in Constantia, a winemaking region northeast of Cape Town, near a school and a small homeless encampment. Their efforts would become the Elastic Compute Cloud, or EC2—the service that is at the heart of AWS and that became the engine of the Web 2.0 boom.
- By 2007 there were a hundred thousand workers on Mechanical Turk in more than one hundred countries. But it didn’t take off in the way Bezos clearly hoped it would, or at least it hasn’t yet. One obvious reason is that the exceedingly low wages on Mechanical Turk have the greatest appeal in less developed countries, yet most impoverished workers in the third world do not own Internet-connected PCs. When Amazon’s other Web services unexpectedly took off in the following years, Bezos devoted considerably more attention and resources to them. Just as in Amazon’s early days, when automated personalization replaced editorial, machines, not people hiding inside them, would drive Amazon’s long-awaited big breakthrough. In March 2006, Amazon introduced the Simple Storage Service, which allowed other websites and developers to store computer files like photos, documents, or video-game player profiles on Amazon’s servers. S3 remained alone and somewhat overlooked, like a section of a fence that had not yet been finished. A month after the launch, Alan Atlas recalled, it crashed for nine hours, and hardly anyone in the outside world noticed. Then a few months later, the Elastic Compute Cloud went to public beta, allowing developers to actually run their own programs on Amazon’s computers. According to Chris Brown, who returned from South Africa for the launch, Amazon opened the first servers to customers on the East Coast of the United States, and developers rushed in so quickly that the initial batch of computers was taken up before Amazon had a chance to let in folks on the West Coast. Part of AWS’s immediate attraction to startups was its business model. Bezos viewed Web services as similar to an electric utility that allowed customers to pay for only what they used and to increase or decrease their consumption at any time. “The best analogy that I know is the electric grid,” Bezos said. “You go back in time a hundred years, if you wanted to have electricity, you had to build your own little electric power plant, and a lot of factories did this. As soon as the electric power grid came online, they dumped their electric power generator, and they started buying power off the grid. It just makes more sense. And that’s what is starting to happen with infrastructure computing.” Bezos wanted AWS to be a utility with discount rates, even if that meant losing money in the short term. Willem van Biljon, who worked with Chris Pinkham on EC2 and stayed for a few months after Pinkham quit in 2006, proposed pricing EC2 instances at fifteen cents an hour, a rate that he believed would allow the company to break even on the service. In an S Team meeting before EC2 launched, Bezos unilaterally revised that to ten cents. “You realize you could lose money on that for a long time,” van Biljon told him. “Great,” Bezos said. Bezos believed his company had a natural advantage in its cost structure and ability to survive in the thin atmosphere of low-margin businesses. Companies like IBM, Microsoft, and Google, he suspected, would hesitate to get into such markets because it would depress their overall profit margins. Bill Miller, the chief investment officer at Legg Mason Capital Management and a major Amazon shareholder, asked Bezos at the time about the profitability prospects for AWS. Bezos predicted they would be good over the long term but said that he didn’t want to repeat “Steve Jobs’s mistake” of pricing the iPhone in a way that was so fantastically profitable that the smartphone market became a magnet for competition. The comment reflected his distinctive business philosophy. Bezos believed that high margins justified rivals’ investments in research and development and attracted more competition, while low margins attracted customers and were more defensible. (He was partly right about the iPhone; its sizable profits did indeed attract a deluge of competition, starting with smartphones running Google’s Android operating system. But the pioneering smartphone is also a fantastically lucrative product for Apple and its shareholders in a way that AWS has not been, at least so far.) Bezos’s belief was borne out, and AWS’s deliberately low rates had their intended effect; Google chairman Eric Schmidt said it was at least two years before he noticed that the founders of seemingly every startup he visited told him they were building their systems atop Amazon’s servers. “All of the sudden, it was all Amazon,” Schmidt says. “It’s a significant benefit when every interesting fast-growing company starts on your platform.” Microsoft announced a similar cloud initiative called Azure in 2010. In 2012, Google announced its own Compute Engine. “Let’s give them credit,” Schmidt says. “The book guys got computer science, they figured out the analytics, and they built something significant.” Just like Creation author Steve Grand had predicted, the creatures were evolving in ways that Bezos could not have imagined. It was the combination of EC2 and S3—storage and compute, two primitives linked together—that transformed both AWS and the technology world. Startups no longer needed to spend their venture capital on buying servers and hiring specialized engineers to run them. Infrastructure costs were variable instead of fixed, and they could grow in direct proportion to revenues. It freed companies to experiment, to change their business models with a minimum of pain, and to keep up with the rapidly growing audiences of erupting social networks like Facebook and Twitter.
- Bezos’s colleagues and friends often attribute Amazon’s tardiness in digital music to Bezos’s lack of interest in music of any kind. In high school, Bezos forced himself to memorize the call letters of local Miami radio stations in an effort to fake musical fluency in conversations with his peers.8 Colleagues remember that on the solemn road trip from Target’s offices in Minneapolis after 9/11, Bezos indiscriminately grabbed stacks of CDs from the bargain rack of a convenience store, as if they were all interchangeable. Steve Jobs, on the other hand, lived and breathed music. He was a notoriously devoted fan of Bob Dylan and the Beatles and had once dated singer Joan Baez. Jobs’s personal interests guided Apple’s strategy. Bezos’s particular passions would have the same defining impact at Amazon. Bezos didn’t just love books—he fully imbibed them, methodically processing each detail. Stewart Brand, the author of How Buildings Learn, among other works, recalls being startled when Bezos showed him his personal copy of the 1995 book. Each page was filled with Bezos’s carefully scribbled notes.
- One day in 2004, Bezos called Kessel into his office and abruptly took away his impressive job, with all of its responsibilities and subordinates. He said he wanted Kessel to take over Amazon’s fledgling digital efforts. Kessel was skeptical. “My first reaction was that I already had the best job in the world,” he says. “Ultimately Jeff talked about building brand-new things, and I got excited by the challenge.” Bezos was adamant that Kessel could not run both the physical and digital-media businesses at the same time. “If you are running both businesses you will never go after the digital opportunity with tenacity,” he said. By that time, Bezos and his executives had devoured and raptly discussed another book that would significantly affect the company’s strategy: The Innovator’s Dilemma, by Harvard professor Clayton Christensen. Christensen wrote that great companies fail not because they want to avoid disruptive change but because they are reluctant to embrace promising new markets that might undermine their traditional businesses and that do not appear to satisfy their short-term growth requirements. Sears, for example, failed to move from department stores to discount retailing; IBM couldn’t shift from mainframe to minicomputers. The companies that solved the innovator’s dilemma, Christensen wrote, succeeded when they “set up autonomous organizations charged with building new and independent businesses around the disruptive technology.” Drawing lessons directly from the book, Bezos unshackled Kessel from Amazon’s traditional media organization. “Your job is to kill your own business,” he told him. “I want you to proceed as if your goal is to put everyone selling physical books out of a job.” Bezos underscored the urgency of the effort. He believed that if Amazon didn’t lead the world into the age of digital reading, then Apple or Google would. When Kessel asked Bezos what his deadline was on developing the company’s first piece of hardware, an electronic reading device, Bezos told him, “You are basically already late.” With no personal knowledge of the hardware business and no internal resources at the company to draw on, Kessel went on a fact-finding mission to Silicon Valley, meeting with hardware experts from Apple and Palm and with executives from the famed industrial design firm Ideo. He learned that Amazon would need not just designers but electrical engineers, mechanical engineers, wireless engineers—the list was endless. Following Christensen’s dictates as if they were instructions in a recipe, Kessel set up another subsidiary in Palo Alto in addition to A9. To take the helm of the new division, he hired Gregg Zehr, an easygoing former vice president of engineering at Palm Computing who kept a jazz guitar in his office. Jateen Parekh, a former engineer at set-top-box maker ReplayTV (an early TiVo rival), became the first employee, and a few others were hired as well. There was no office to report to, so they set up shop in an empty room in the headquarters of A9. Zehr and his colleagues set about furnishing the new division with a name alluring enough to attract the best and brightest engineers from Silicon Valley. They eventually settled on Lab126. The 1 stands for a, the 26 for z; it’s a subtle indication of Bezos’s dream to allow customers to buy any book ever published, from a to z.
- Lab126 was soon given extensive resources but it also had to contend with the unfettered imagination of Bezos. Amazon’s founder wanted his new e-reading device to be so easy to use that a grandmother could operate it, and he argued that configuring devices to work with WiFi networks was too complicated for non-tech-savvy users. He didn’t want to force customers to connect the device to a PC, so the only alternative was to build cellular access right into the hardware, the equivalent of embedding a wireless phone in each unit. Nothing like that had been tried before. Bezos insisted that customers should never have to know the wireless connection was there or even pay for access. “I thought it was insane, I really did,” Parekh says. In those early months, much of the early direction for the Kindle was set. Zehr and Parekh made the decision to explore the low-powered black-and-white display technology called E Ink that, years before, Martin Eberhard had found too primitive and expensive. It used millions of tiny microcapsules, each about the diameter of a human hair and containing positively charged white particles and negatively charged black particles suspended in a clear fluid. When a positive electric field is applied, positively charged particles move to the top of the microcapsule, making that spot appear white; when a negative electric field is applied, negative particles migrate up, and the spot appears black. Unlike LCD systems, the technology worked well under direct sunlight, used very little battery power, and was exceedingly easy on the eyes. In a sense, Amazon got lucky. A technology perfectly suited for long-form reading on a device (and terrible for everything else) just happened to be maturing after a decade of development.
- The Pentagram designers, both British born, began by studying the actual physics of reading—the physical aspects of the pastime, such as how readers turn pages and hold books in their hands. They forced themselves to read on existing e-readers, like the Sony Libre and the old Rocketbook, and on PDAs like the iPaq from Compaq and Palm’s Treo. They brought in focus groups, conducted phone interviews, and even went up to Seattle to talk to Bezos himself, trying to deconstruct a process that for many hundreds of years people had taken for granted. “We were pushing for the subconscious qualities that made it feel like you are reading a book,” says Hobbs. One of the primary conclusions from their research was that a good book disappears in the reader’s hands. Bezos later called this the top design objective. “Kindle also had to get out of the way and disappear so that you could enter the author’s world,” he said.
- The meetings could get tense. Hobbs, Whitehorn, and Brunner wanted to strip out complexity and make the device as streamlined and inconspicuous as possible. Bezos also wanted a simple, iconic design but insisted on adding a keyboard so users could easily search for book titles and make annotations. (He envisioned sitting in a taxi with Wall Street Journal columnist Walt Mossberg and keying in and downloading an e-book right there in the cab.) Bezos toted around a BlackBerry messaging device at the time and told the designers, “I want you to join my BlackBerry and my book.” In one trip to Seattle, the designers stubbornly brought models that left out the keyboard. Bezos gave them a withering look. “Look, we already talked about this,” he said. “I might be wrong but at the same time I’ve got a bit more to stand on than you have.” “I remember being very silent for the rest of that meeting,” Hobbs says. They complied and designed oblong buttons, based on the style of the BlackBerry, while trying to accommodate the angles that reader’s fingers might take moving across the device. There were similar disputes about wireless connectivity. The Pentagram designers couldn’t understand how the economics of the wireless connection could work and assumed Amazon would be asking the user to pay a wireless charge every time he or she bought a book. At one point, they pitched Bezos on a process similar to the iTunes model, which required making the bookstore accessible on a PC. Bezos pushed back. “Here’s my scenario, I’m going to the airport. I need a book to read. I want to enter it into the device and download it right there from my car.” “But you can’t do that,” Hobbs replied. “I’ll decide what I can do,” Bezos said. “I’ll figure this out and it is not going to be a business model you understand. You are the designers, I want you to design this and I’ll think about the business model.”
- During these unproductive months, Amazon developers conceived of a potential shortcut to their goal, which they dubbed Topaz. Topaz was a program to take the scanned digital files from Search Inside the Book and repurpose them in a format suitable for the Kindle. Amazon offered this as an option to publishers, arguing that it would help them decrease the costs of digitizing their catalogs, although the digital file would remain exclusive to the Kindle. Large publishers like Simon and Schuster did not want to create a new dependency on Amazon, but some smaller publishers jumped at the option. By early 2007, Amazon could demonstrate the Kindle’s wireless access, and, finally, some publishers understood its potential. John Sargent, the CEO of Macmillan, and some other executives became converts when they recognized for the first time that giving customers instant gratification—the immediate download of any e-book at any time—might allow Amazon to succeed where Sony and others had failed. Of course, as Bezos had feared, it leaked. Engadget, the technology blog, had the first details about Amazon’s new e-reading device, and soon after, Victoria Barnsley, the CEO of HarperCollins UK, confirmed at an industry event that she had seen the device and was “rather impressed.”
- The next few months were tense. Amazon’s inducements to publishers were followed by threats. Publishers that didn’t digitize enough of their catalogs, or didn’t do it fast enough, were told they faced losing their prominence in Amazon’s search results and in its recommendations to customers. Years earlier, the music labels had scampered into the arms of Apple despite their reservations, since they were facing the even more ominous threat of rampant music piracy. But books were not as easily pirated and shared online, and book publishers feared no similar bogeyman. So Bezos finally had to turn Amazon into one. What had started out as Amazon’s soliciting publishers for help had evolved into the equivalent of a parent threatening a child. After realizing they did not yet have the Oprah Winfrey book club pick, One Hundred Years of Solitude by Gabriel García Márquez, Porco sent an e-mail to Random House’s head of sales demanding to know why there was no e-book version available. The note, which came during the middle of the night New York time, was so contemptuous and incendiary that it made the rounds within the publishing company. (Knopf, the Random House imprint that published the book, wouldn’t have the digital rights for another year.)
- And there was one other ingredient in this piquant stew. Bezos decided that the digital versions of the most popular books and new releases would have a flat price of $9.99. There was no research behind that number—it was Bezos’s gut call, fashioned after Apple’s successful ninety-nine-cent price tag for a digital single in iTunes and based on the assumption that consumers would expect to pay less for an e-book than they did for a traditional book, as an e-book had none of the costs associated with printing and storage. Since Amazon bought e-books from publishers at the same wholesale price as it bought physical books, typically paying around fifteen dollars for a book that would retail at thirty, that meant it would lose money on many of its sales. Bezos was fine with that—he believed publishers would eventually be forced to lower their wholesale prices on e-books to reflect the lower costs of publication. In the meantime, it was just the kind of investment in Amazon’s future that he loved. “Customers are smart, and we felt like they would expect and deserve digital books to be lower priced than physical books,” says Steve Kessel. Amazon knew quite well that publishers would absolutely hate the $9.99 price. The $9.99 e-books were considerably more appealing to some customers than the more expensive hardcovers, the industry’s most profitable format, and the pricing pulled the rug out from under traditional retailers, particularly independent booksellers, who would suddenly find their shelves stocked with what some book buyers might soon view as overly expensive relics. Everyone had watched this precise dynamic play out in music, with disastrous consequences for physical retailers. So Amazon decided not to let publishers know about the planned $9.99 price, lest they object. This was easily rationalized; retailers have no obligation to tell their suppliers how they plan to price products, and doing so could theoretically raise the specter of vertical price fixing and attract the attention of antitrust authorities. Still, Amazon had approached publishers as a partner, and now it was deliberately withholding a key piece of information. “We were instructed not to talk about pricing strategy,” Jeff Steele says. “We knew that if we priced e-books too low, they would fear it would devalue their product. So we just said pricing had not yet been decided.”
- The new low price for top-selling e-books changed everything. It tilted the playing field in the direction of digital, putting additional pressure on physical retailers, threatening independent bookstores, and giving Amazon even more market power. The publishers had seen over many years what Amazon did with this kind of additional leverage. It exacted more concessions and passed the savings on to customers in the form of lower prices and shipping discounts, which helped it amass even greater market share—and more negotiating leverage. All this would take a few years to sink in, but it became widely understood when the Kindle started gaining real momentum with the introduction of the Kindle 2 in early 2009. The gazelles were wounded, the cheetah was on the loose, and the subsequent high-profile business and legal dramas would shake the book industry to its foundation.
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