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Kindle Notes & Highlights
by
Jeff Bezos
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October 7 - October 24, 2021
“Curiosity is more important than knowledge.”
People who love all fields of knowledge are the ones who can best spot the patterns that exist across nature.
Another characteristic of truly innovative and creative people is that they have a reality-distortion field, a phrase that was used about Steve Jobs and comes from a Star Trek episode in which aliens create an entire new world through sheer mental force. When his colleagues protested that one of Jobs’s ideas or proposals would be impossible to implement, he would use a trick he learned from a guru in India: he would stare at them without blinking and say, “Don’t be afraid. You can do
Disney more because of the audacity of his vision. “It seemed to me that he had this incredible capability to create a vision that he could get a large number of people to share,”
Walt Disney really was able to get a big team of people working in a concerted direction.”
“You know the business plan won’t survive its first encounters with reality,” he says. “But the discipline of writing the plan forces you to think through some of the issues and to get sort of mentally comfortable in the space. Then you start to understand, if you push on this knob, this will move over here and so on. So, that’s the first step.”
1. Focus on the long term. “It’s All About the Long Term,” he said in the italicized initial headline in his first shareholder letter in 1997. “We will continue to make investment decisions in light of long-term market leadership considerations rather than short-term profitability considerations
Focus relentlessly and passionately on the customer. As
constantly remind our employees to be afraid, to wake up every morning terrified. Not of our competition, but of our customers.”
“The advantage of being customer focused is that customers are always dissatisfied. They always want more, and so they pull you along. Whereas if you’re competitor obsessed, if you’re a leader, you can look around and you see everybody running behind you, maybe you slow down a little.”
An investor complained that Bezos was forgetting that Amazon only makes money when it sells things, so negative reviews hurt the business. “When I read that letter, I thought, we don’t make money when we sell things,” Bezos says. “We make money when we help customers make purchase decisions.”
Focus on the big decisions. “As a senior executive, what do you really get paid to do?” he asks. “You get paid to make a small number of high-quality decisions. Your job is not to make thousands of decisions every day.”
He divides the decisions that have to be made into those that can be walked back and those that are irrevocable. The latter require a lot more caution. In the case of the former, he tries to decentralize the process. At Amazon he created what he calls “multiple paths to yes.” In other organizations, he points out, a proposal can be killed by supervisors at many levels, and it needs to pass through all those gates in order to be approved. At Amazon, employees can shop their ideas around to any of the hundreds of executives who are empowered to get to yes.
There are three criteria he instructs managers to consider when they are hiring: Will you admire this person? Will this person raise the average level of effectiveness of the group he or she is entering? Along what dimension might this person be a superstar?
Market leadership can translate directly to higher revenue, higher profitability, greater capital velocity, and correspondingly stronger returns on invested capital.
We will make bold rather than timid investment decisions where we see a sufficient probability of gaining market leadership advantages. Some of these investments will pay off, others will not, and we will have learned another valuable lesson in either case.
When forced to choose between optimizing the appearance of our GAAP accounting and maximizing the present value of future cash flows, we’ll take the cash flows.
We will balance our focus on growth with emphasis on long-term profitability and capital management. At this stage, we choose to prioritize growth because we believe that scale is central to achieving the potential of our business model.
We aren’t so bold as to claim that the above is the “right” investment philosophy, but it’s ours, and we would be remiss if we weren’t clear in the approach we have taken and will continue to take.
To be certain, a big part of the challenge for us will lie not in finding new ways to expand our business, but in prioritizing our investments.
but we think the opportunities and risks ahead of us are even greater than those behind us.
Twenty-five percent of our fourth-quarter 1998 sales was derived from Amazon.co.uk, Amazon.de, and music, video, and gift sales on Amazon.com, all very new businesses.
Only two years ago, Amazon.com’s US book business represented 100 percent of our sales. Today, despite strong growth in US books, other areas account for more than half our sales.
Goals for 2000 In the year 2000, Amazon.com has six major goals: growth in both the number of our customers and the strength of the relationship we have with each of them; continued rapid expansion of the products and services we offer; driving operational excellence in all areas of the company; international expansion; expanding our partnership programs; and last, importantly, driving toward profitability in each and every business we are in. I’ll spend a moment on each goal.
The more frequently customers visit our store, the less time, energy, and marketing investment is required to get them to come back again. In sight, in mind.
Finally, each new product or service further leverages our investments in distribution, customer service, technology, and brand, and can yield increased leverage on our bottom line. Operational excellence: To us, operational excellence implies two things: delivering continuous improvement in customer experience and driving productivity, margin, efficiency, and asset velocity across all our businesses.
Often, the best way to drive one of these is to deliver the other. For instance, more efficient distribution yields faster delivery times, which in turn lowers contacts per order and customer service costs. These, in turn, improve customer experience and build brand, which in turn decreases customer acquisition and retention costs.
we simply won’t build a partnership with any company that does not share our passion for serving customers.
Obsess over Customers: Our Commitment Continues Until July, Amazon.com had been primarily built on two pillars of customer experience: selection and convenience. In July, as I already discussed, we added a third customer experience pillar: relentlessly lowering prices. You should know that our commitment to the first two pillars remains as strong as ever.
Why focus on cash flows? Because a share of stock is a share of a company’s future cash flows, and, as a result, cash flows more than any other single variable seem to do the best job of explaining a company’s stock price over the long term.
Limiting share count means more cash flow per share and more long-term value for owners. Our current objective is to target net dilution from employee stock options (grants net of cancellations) to an average of 3 percent per year over the next five years, although in any given year it might be higher or lower.
What’s Good for Customers Is Good for Shareholders 2002
We priced all one hundred titles by visiting their superstores in both Seattle and New York City. It took us six hours in four of their different superstores to find all one hundred books on their list. When we added up everything we spent, we discovered that: At their stores, these one hundred bestselling books cost $1,561. At Amazon.com, the same books cost $1,195 for a total savings of $366, or 23 percent. For seventy-two of the one hundred books, our price was cheaper. On twenty-five of the books, our price was the same. On three of the one hundred, their prices were better (we
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Similarly, many investors are effectively short-term tenants, turning their portfolios so quickly they are really just renting the stocks that they temporarily “own.”
Though negative reviews cost us some sales in the short term, helping customers make better purchase decisions ultimately pays off for the company.
Why not focus first and foremost, as many do, on earnings, earnings per share or earnings growth? The simple answer is that earnings don’t directly translate into cash flows, and shares are worth only the present value of their future cash flows, not the present value of their future earnings. Future earnings are a component—but not the only important component—of future cash flow per share. Working capital and capital expenditures are also important, as is future share dilution.
To illustrate with a hypothetical and very simplified example, imagine that an entrepreneur invents a machine that can quickly transport people from one location to another. The machine is expensive—$160 million with an annual capacity of one hundred thousand passenger trips and a four-year useful life. Each trip sells for $1,000 and requires $450 in cost of goods for energy and materials and $50 in labor and other costs. Continue to imagine that business is booming, with one hundred thousand trips in Year 1, completely and perfectly utilizing the capacity of one machine. This leads to
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Earnings $10,000 $20,000 $40,000 $80,000 Depreciation 40,000 80,000 160,000 320,000 Working Capital — — — — Operational Cash Flow 50,000 100,000 200,000 400,000 Capital Expenditures 160,000 160,000 320,000 640,000 Free Cash Flow $(110,000) $ (60,000) $(120,000) $(240,000) There are of course other business models where earnings more closely approximate cash flows. But as our transportation example illustrates, one cannot assess the creation or destruction of shareholder value with certainty by looking at the income statement alone. Notice, too, that a focus on EBITDA (earnings before interest,
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Our Most Important Financial Measure: Free Cash Flow per Share
Our pricing objective is to earn customer trust, not to optimize short-term profit dollars.
Senior leaders that are new to Amazon are often surprised by how little time we spend discussing actual financial results or debating projected financial outputs. To be clear, we take these financial outputs seriously, but we believe that focusing our energy on the controllable inputs to our business is the most effective way to maximize financial outputs over time.
We’ve been using this same annual process for many years. For 2010, we have 452 detailed goals with owners, deliverables, and targeted completion dates. These
360 of the 452 goals will have a direct impact on customer experience.
Taken as a whole, the set of goals is indicative of our fundamental approach. Start with customers and work backward. Listen to customers, but don’t just listen to customers—also invent on their behalf. We can’t assure you that we’ll meet all of this year’s goals. We haven’t in past years. However, we can assure you that we’ll continue to obsess over customers. We have strong conviction that that approach—in the long term—is every bit as good for owners as it is for customers. It’s still Day 1.
Our business approach is to sell premium hardware at roughly breakeven prices. We want to make money when people use our devices—not when people buy our devices.
In the short run, the market is a voting machine but in the long run, it is a weighing machine.” We don’t celebrate a 10 percent increase in the stock price like we celebrate excellent customer experience. We aren’t 10 percent smarter when that happens and conversely aren’t 10 percent dumber when the stock goes the other way. We want to be weighed, and we’re always working to build a heavier company.
Prime Instant Video is experiencing tremendous growth across all metrics—including new customers, repeat usage, and total number of streams. These are output metrics and they suggest we are on a good path, focusing on the right inputs. Two of the key inputs are the growth of selection and the desirability of that selection.
Employee Empowerment We challenge ourselves to not only invent outward facing features, but also to find better ways to do things internally—things that will both make us more effective and benefit our thousands of employees around the world.
Career Choice is a program where we prepay 95 percent of tuition for our employees to take courses for in-demand fields, such as airplane mechanic or nursing, regardless of whether the skills are relevant to a career at Amazon. The goal is to enable choice. We know that for some of our fulfillment center employees, Amazon will be a career. For others, Amazon might be a stepping-stone on the way to a job somewhere else—a job that may require new skills. If the right training can make the difference, we want to help.
What we’re doing is challenging and fun—we get to work in the future. Failure comes part and parcel with invention. It’s not optional. We understand that and believe in failing early and iterating until we get it right. When
