The Everything Store: Jeff Bezos and the Age of Amazon

by Brad Stone

“We are genuinely customer-centric, we are genuinely long-term oriented and we genuinely like to invent. Most companies are not those things. They are focused on the competitor, rather than the customer. They want to work on things that will pay dividends in two or three years, and if they don’t work in two or three years they will move on to something else. And they prefer to be close-followers rather than inventors, because it’s safer.

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.

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.

Bezos chose to start his company in Seattle because of the city’s reputation as a technology hub and because the state of Washington had a relatively small population (compared to California, New York, and Texas), which meant that Amazon would have to collect state sales tax from only a minor percentage of customers.

Seattle was also close to one of the two big book distributors: Ingram had a warehouse a six-hour drive away, in Roseburg, Oregon.

During that time, the name Cadabra lived on, serving as a temporary placeholder. But in late October of 1994, Bezos pored through the A section of the dictionary and had an epiphany when he reached the word Amazon. Earth’s largest river; Earth’s largest bookstore.3 He walked into the garage one morning and informed his colleagues of the company’s new name. He gave the impression that he didn’t care to hear anyone’s opinion on it, and he registered the new URL on November 1, 1994. “This is not only the largest river in the world, it’s many times larger than the next biggest river. It blows all other rivers away,” Bezos said.

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).

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.

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

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.

That summer, the company launched what could be considered its first big innovation: allowing other websites to collect a fee when they sent customers directly to Amazon to buy a book. Amazon gave these approved sites an 8 percent commission for the referral.

affiliate marketing. It also allowed Amazon, very early on, to extend its reach across the Web to other sites, entrenching it in advance of the looming competition.

Employees soon learned of a new motto: Get Big Fast. The bigger the company got, Bezos explained, the lower the prices it could exact from Ingram and Baker and Taylor, the book wholesalers, and the more distribution capacity it could afford. And the quicker the company grew, the more territory it could capture in what was becoming the race to establish new brands on the digital frontier. Bezos preached urgency: the company that got the lead now would likely keep it, and it could then use that lead to build a superior service for customers.

So Bezos suggested that the personalization team develop a much simpler system, one that made recommendations based on books that customers had already bought.

That feature, called Similarities, immediately yielded a noticeable uptick in sales and allowed Amazon to point customers toward books that they might not otherwise have found.

“Great merchants have never had the opportunity to understand their customers in a truly individualized way,” he said. “E-commerce is going to make that possible.”

This was a key part of Amazon’s early strategy: maximizing the Internet’s ability to provide a superior selection of products as compared to those available at traditional retail stores.

Joel Spiegel, who led the effort with Jeff Blackburn, had a mandate to replicate eBay in three months. Bezos was confident he could beat eBay, particularly since well-capitalized Amazon could afford to charge a lower listing fee to sellers and offer free fraud insurance.

Amazon Auctions launched in March 1999, and though it got off to a slow start, Bezos quickly doubled down. He acquired a company to broadcast auctions live on the Web and signed a deal with the storied auction house Sotheby’s to focus on high-end products. But the effort went nowhere. Customers could reach Amazon Auctions only by clicking on a separate tab on the Amazon home page, and it looked like a dingy leftovers bin to people who were accustomed to using Amazon to shop in the traditional way,

Bezos didn’t take the defeat personally. He later cast the mistake as the first step in a series of important experiments to bring third-party sellers onto Amazon. Auctions would evolve into something called zShops, a platform for sellers that allowed them to operate their own fixed-price stores on Amazon.com

“We want to be the place for someone to find and discover anything they want to buy.”5 There were two ways to accomplish this: either slowly, category by category, or all at once. Bezos tried both paths,

It is more evident in the way Amazon operates now that Bezos became absorbed with the challenge of delivering products immediately after customers placed their orders. John Doerr says that “for many years we were on a journey to figure out if we could get to same-day delivery.”

Amazon pursued a more methodical path to expanding selection. The expansion into selling music and DVDs in 1998 had gone well, with Amazon quickly surpassing the early leaders in each market, including a startup called CDNow.com in music and Reel.com in movies. At first Amazon couldn’t get music labels and movie studios to supply it directly. But as in the book business, there were intermediary distributors, like Baker and Taylor, that gave Amazon an initial boost

Toys were fundamentally different than books, music, or movies. This time, there were no third-party distributors to provide any item and take back unsold inventory. The big toy makers carefully weighed how much product they would allocate to each retailer. And the retailers had to predict nearly a year in advance what the next holiday season’s most popular items would be, as a majority of their sales occurred within a six-week frenzy of parental indulgence.

The electronics effort faced even greater challenges. To launch that category, David Risher tapped a Dartmouth alum named Chris Payne who had previously worked on Amazon’s DVD store. Like Miller, Payne had to plead with suppliers—in this case, Asian consumer-electronics companies like Sony, Toshiba, and Samsung. He quickly hit a wall. The Japanese electronics giants viewed Internet sellers like Amazon as sketchy discounters. They also had big-box stores like Best Buy and Circuit City whispering in their ears and asking them to take a pass on Amazon.

They agreed on five core values and wrote them down on a whiteboard in a conference room: customer obsession, frugality, bias for action, ownership, and high bar for talent. Later Amazon would add a sixth value, innovation.

While employees embraced Amazon’s newly articulated values, many resisted the breakneck pace of the work. As Amazon’s growth accelerated, Bezos drove employees even harder, calling meetings over the weekends, starting an executive book club that gathered on Saturday mornings, and often repeating his quote about working smart, hard, and long. As a result, the company was not friendly toward families, and some executives left when they wanted to have children. “Jeff didn’t believe in work-life balance,” says Kim Rachmeler. “He believed in work-life harmony. I guess the idea is you might be able to do everything all at once.”

The calculations showed that at its current rate, Amazon wouldn’t become profitable for decades. “It was an aha moment,” Brannon says. Bezos agreed to lift his foot from the accelerator and begin to move the company toward profitability.

And after hearing persistent grumbling from the ranks that Bezos didn’t listen to his subordinates, the Amazon board initiated one of the biggest misadventures of the company’s first decade. The board members asked Bezos to search for a chief operating officer.

While other dot-coms merged or perished, Amazon survived through a combination of conviction, improvisation, and luck. Early in 2000, Warren Jenson, the fiscally conservative new chief financial officer from Delta and, before that, the NBC division of General Electric, decided that the company needed a stronger cash position as a hedge against the possibility that nervous suppliers might ask to be paid more quickly for the products Amazon sold. Ruth Porat, co-head of Morgan Stanley’s global-technology group, advised him to tap into the European market, and so in February, Amazon sold $672 million in convertible bonds to overseas investors. This time, with the stock market fluctuating and the global economy tipping into recession, the process wasn’t as easy as the previous fund-raising had been. Amazon was forced to offer a far more generous 6.9 percent interest rate and flexible conversion terms—another sign that times were changing. The deal was completed just a month before the crash of the stock market, after which it became exceedingly difficult for any company to raise money. Without that cushion, Amazon would almost certainly have faced the prospect of insolvency over the next year.

nervous senior executives finally convinced Bezos to shift gears. Instead of Get Big Fast, the company adopted a new operating mantra: Get Our House in Order. The watchwords were discipline, efficiency, and eliminating waste. The company had exploded from 1,500 employees in 1998 to 7,600 at the beginning of 2000, and now, even Bezos agreed, it needed to take a breath. The rollout of new product categories slowed, and Amazon shifted its infrastructure to technology based on the free operating system Linux.

Bezos redefined Amazon for the rapidly changing times. During this period, he met with two retailing legends who would focus his attention on the power of everyday low prices. He would start to think differently about conventional advertising and look for a way to mitigate the costs and inconveniences of shipping products through the mail.

Suria’s analysis was, in the narrowest sense and with the benefit of hindsight, incorrect. With the additional capital from the bond raise in Europe, Amazon had nearly a billion dollars in cash and securities, enough to cover all of its outstanding accounts with suppliers. Moreover, the company’s negative-working-capital model would continue to generate cash from sales to fund its operations. Amazon was also well along in the process of cutting costs. The real danger for Amazon was that the Lehman report might turn into a self-fulfilling prophecy. If Suria’s predictions spooked suppliers into going on the equivalent of a bank run and demanding immediate payment from Amazon for their products, Amazon’s expenses might rise. If Suria frightened customers and they turned away from Amazon because they believed, from the ubiquitous news coverage, that the Internet was only a fad, Amazon’s revenue growth could go down. Then it really could be in trouble.

So it was only natural that as early as 1997, executives at Amazon were thinking about how to become a platform and augment the e-commerce efforts of other retailers.

few weeks later, Miller and Mark Britto, who ran Amazon’s business-development group, met with ToysRUs.com executives in a tiny conference room at Chicago’s O’Hare International Airport and began formal negotiations to combine their toy-selling efforts. “It was dawning on us how brutal it was to pick Barbies and Digimons, and it was dawning on them how expensive it would be to build a world-class e-commerce infrastructure,” Miller says.

The deal became a template for Amazon. Having outsourced his job running the toy category to Toys “R” Us, Harrison Miller assumed a newly created role as head of platform services. With Neil Roseman, a vice president of engineering, he started traveling the country pitching other big retailers on duplicating the Toys “R” Us deal.

All of these deals improved Amazon’s balance sheet in the short term, but in the long run, they were awkward for all parties. By relying on Amazon, the retailers delayed a necessary education on an important new frontier and ceded the loyalty of their customers to an aggressive upstart. That would be one of many problems for Borders and Circuit City, both of which went bankrupt in the depths of the financial crisis that began in 2008. Bezos never got completely comfortable with these deals or with the idea of outsourcing his prized goal of limitless selection. The Toys “R” Us arrangement in particular was hugely lucrative, but Bezos grew frustrated as it became more difficult to ensure that Amazon could offer a comprehensive toy selection.

“In the short term, the stock market is a voting machine. In the long run, it’s a weighing machine” that measures a company’s true value. If Amazon stayed focused on the customer, Bezos declared, the company would be fine.

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 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.

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.

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.”

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.

Drawing on Collins’s concept of a flywheel, or self-reinforcing loop, Bezos and his lieutenants sketched their own virtuous cycle, which they believed powered their business. It went something like this: Lower prices led to more customer visits. More customers increased the volume of sales and attracted more commission-paying third-party sellers to the site. That allowed Amazon to get more out of fixed costs like the fulfillment centers and the servers needed to run the website. This greater efficiency then enabled it to lower prices further.

Bezos felt that word of mouth could deliver customers to Amazon. He wanted to funnel the saved marketing dollars into improving the customer experience and accelerating the flywheel. And as it happened, at the time, Amazon was conducting an experiment that was actually working this way—free shipping. During the 2000 and 2001 holidays, Amazon offered free shipping to customers who placed orders of a hundred dollars or more. The promotion was expensive but clearly boosted sales. Customer surveys showed that shipping costs were one of the biggest hurdles to ordering online. Amazon hadn’t yet found a good way to convince customers to shop in multiple categories—to buy books, kitchen appliances, and software, for example, all at the same time.

They would make the free-shipping offer permanent, but only for customers who were willing to wait a few extra days for their order. Just like the airlines, Amazon would, in effect, divide its customers into two groups: those whose needs were time sensitive, and everyone else. The company could then reduce the expense of free shipping, because workers in the fulfillment centers could pack those free-shipping orders in the trucks that Amazon sent off to express shippers and the post office whenever the trucks had excess room. Bezos loved it. “That is exactly what we are going to do,” he said.

Though they didn’t share it openly, many just couldn’t take working for Bezos any longer. He demanded more than they could possibly deliver and was extremely stingy with praise.

In January 2002, Amazon reported its first profitable quarter, posting net income of $5 million, a meager but symbolic penny per share. Marketing costs were down, international revenues from the United Kingdom and Germany were up, and sales from third-party sellers on the vaunted Amazon platform made up 15 percent of the company’s orders.

Two other technology icons, Steve Jobs and Larry Ellison, were adopted, and the experience is thought by some to have given each a powerful motivation to succeed.

Allgor and his supply-chain algorithms team would become Amazon’s secret weapon, devising mathematical answers to questions such as where and when to stock particular products within Amazon’s distribution network and how to most efficiently combine various items in a customer’s order in a single box.1 Wilke recognized that Amazon had a unique problem in its distribution arm: it was extremely difficult for the company to plan ahead from one shipment to the next. The company didn’t store and ship a predictable number or type of orders. A customer might order one book, a DVD, some tools—perhaps gift-wrapped, perhaps not—and that exact combination might never again be repeated.