Jeff Bezos and Amazon (AMZN) have fully ascended, and I’m not talking about the stock price, though $1000 is a nice round number. Amazon has become an everyday presence in our lives as customers, as a looming threat to just about any business you can think of, and a company increasingly seen as one of the most (if not the most) innovative in the world. And then it bought Whole Foods Market (WFM) last week.
Jeff Bezos, meanwhile, has stepped into Steve Jobs's lineage, the tech genius of the moment who has survived controversy and turmoil to become triumphant. (Perhaps Elon Musk will survive to be the next one in the lineage; perhaps Mark Zuckerberg is already on his way). Throw in the Washington Post's re-emergence on the current media scene, and Bezos becomes nearly inescapable.
I’ve been thinking about Bezos a lot recently. I read his 2016 shareholder letter and was impressed by a number of ideas – the concept of ‘disagree and commit’ to avoid bogging down in contentious decision-making processes, the avoidance of proxies that take one away from the true focus of the business, and of course Amazon’s understanding of its customer obsession. A colleague shared this video interview with Bezos, which had interesting nuggets about AMZN - 3rd party sales = 50% of the business - and about Amazon's long-term approach. This article gets at the nature of Amazon’s strength as a company well. As both an investor and a worker in a tech company, I've been interested in seeing what else I can learn from Bezos and Amazon.
For a road trip a couple weekends ago, I downloaded an audio book version of The Everything Store, Brad Stone’s 2013 book. (Downloaded as part of a free trial on Audible, an Amazon company, that I subsequently canceled. The benefits of customer obsession). I listened to the book over the course of the two-day trip and thought to share some impressions.
About the book
There are broader takeaways that I’ll get into, but it is worth addressing the book itself for context.
Stone researched his material exhaustively, and the end product was an enjoyable listen. There were areas I would have liked to hear more about – how Amazon has used operating float to its advantage, more financial details on how the company has managed cash flows over time, the mechanics of Amazon’s Marketplace – and there were minor errors that stood out (mentioning revenues instead of profits a couple times, talking about the balance sheet a lot when he meant either income statement or cash flow statement). But those are nits. And while I don't plan to listen to more audio books, given the time I had on my hands it may have allowed the book to sink in more.
Stone introduces the book by quoting a discussion he had with Bezos before starting his research. Bezos asks how Stone will avoid the narrative fallacy, Nassim Nicholas Taleb’s concept for how we fit things too easily into a story when chance often is the real explanation. Stone fights against it in the book but doesn’t wholly manage to avoid it, most notably in his treatment of Bezos and Amazon’s culture, where the book skews negative. That is to say, I think there are probably real criticisms to be made about both Bezos and Amazon and will comment on them, but I suspect Stone didn’t adjust for the fact that critical sources would speak louder than uncritical ones.
I’m mostly taking the book’s reporting at face value. I reviewed a few of Amazon's executives’ dispelling reviews on the Amazon page (of course), but also remember the New York Times article on Amazon, and what I have heard second or third-hand about Amazon/Bezos is in line with the book's portrayal. My comments will aim to avoid judgment of people, especially Bezos, and to study the portrayed actions in the book.
4 ways to analyze The Everything Store; picking 2 of them
There are four axes that I think are useful to consider The Everything Store for lessons.
I don’t have sufficient knowledge or aptitude to offer much value on the first axis. I don’t have great interest in Amazon as an investment – Amazon is a great entry in the ‘value vs. quality’ debate of investing, and I’m nominally on the ‘value’ side, much to my loss in this case. But that’s a different article. I’ll just say that 47x TTM free cash flow that is growing at a 30% year-over-year pace seems to me not as crazy a price as it should, but I’ve only looked at the surface.
So I’ll focus more on the latter two axes; what can we learn from the way Bezos and Amazon have run their business over the past 20 years as investors and workers, and what does Bezos’s example say about our society?
So much of Amazon’s success seems to come from two things – the vision Bezos had at inception and has maintained throughout, and the culture he has implemented in the company to ensure Amazon fulfills that vision.
But Bezos’s vision was calculated. The first chapter talks about his time at D. E. Shaw and the fertile laboratory he and his colleagues had to bounce ideas off one another about the budding internet market. His understanding that the internet could greatly improve commerce was fundamental. But so too was the understanding that books were one of the easiest areas to start with – ‘books are like a commodity,’ he is credited as realizing, which means you can sell them just as well online as in person, and offer a much wider selection. It offered Bezos a beachhead into the world of e-commerce.
The Everything Store often comes back to ‘tease’ Bezos’s more grandiose ideas like the Alexandria Project – hosting two copies of every book ever printed in a warehouse - and maybe Amazon will never quite achieve that or develop a profitable way to do it, but the vision was important for constantly reminding others in the company where Bezos intended to take Amazon.
The culture of Amazon is a more ambiguous item to study than Bezos’s vision. A few things that stand out to me as unique and/or important to Amazon’s success:
Frugality as mode of operations. It is portrayed as being taken to either comical lengths – main office employees having to pay for parking – or sinister ones, such as the failure to install air conditioners in fulfillment centers for a painfully long time. Not treating your employees as partners and stakeholders in success strikes me as a mistake, and being stingy with them on these sorts of things is a penny-wise pound-foolish move.
But frugality in operations makes sense. Forcing teams to see what they can achieve on a tight budget will frustrate teams but will also lead to innovation. My notes are short of specific examples, but I came away thinking it is a helpful ethos for a company.
Amazon also wasted a ton of cash in the run-up to the dot-com bust. Perhaps web companies view that like the 60s; if you remember your spending, you probably weren’t there. But it is an interesting tension in the company’s history.
Outsiders seem to have driven a lot of the company’s success. Bezos is exacting about what he was looking for in employees – high achievers from top schools, so that each new employee raises the bar – but the company seems to have less success when it tried to acquire specific domain expertise.
Jeff Wilke’s role in reinventing Amazon’s fulfillment process, one of the company’s biggest competitive advantages now, is the easiest example for me to recall. But Bezos moved people with no expertise in toys or jewelry to run those businesses, and he himself had no retail experience. The reason this has worked for Amazon is perhaps obvious – the outsider is smart enough to learn about the department or the problem, but fresh enough to come up with a new way of approaching it and fixing it.
On the flip side, there are countless examples either within or outside of Amazon where ‘legacy’ types failed to adapt. The anecdote early on about Howard Schultz telling Bezos he would need a physical presence somewhere, and so he should partner with Starbucks (SBUX) is an example of a legacy business not understanding Amazon (though it didn’t cost Starbucks in the end). Barnes & Noble (BKS) was unable to commit to a new business model that might cannibalize its old one, the same way Microsoft (MSFT) wasn’t able to commit to mobile on time in the mid-2000s. Toys R Us tried to go it alone online but didn’t have the DNA for it, and had to partner with Amazon for a contentious few years.
Amazon was then able to commit to the Kindle and the world of e-books despite the threat it posed to the company’s original book business. Just like Amazon was able, on the third try, to figure out the Marketplace model and integrate that into the site better, even as a threat to Amazon’s own business. Credit for that again goes back to Bezos’s vision, but his oft-quoted focus on it always being day 1 at Amazon could also be restated as a focus on always being the hungry outsider.
Hard work as the foundation for everything at Amazon. Everyone likes to think s/he works hard. But Amazon did an appropriate job of integrating the focus on hard work into its hiring process, so that potential employees would know what they were signing up for. I lived in Luxembourg for 3 years, and many of the English speakers were Amazon employees. There’s no doubting their work ethic and how much they were tied to their phones, but while I could see tempers rise on occasion, they didn’t seem to regret being with the company, and most of the people I knew there are still at the company.
For all that, there are definite risks or downsides to Amazon’s culture. To start with that last point, Bezos is quoted as talking about how at Amazon, one works long, hard, and smart, and you can’t choose two. Which is fine if someone is as dedicated as Chris Smith in the book’s anecdote, working so hard at the factory that he forgot about his car being parked on the street to the point that he didn’t realize it until he got a $1800 bill for it being impounded a few weeks later. But if one is looking to build a sustainable business with institutional knowledge, rather than a business where you have to replace people every 3-5 years, it seems self-defeating.
Amazon also appears to have a pattern of handling employees poorly. To be clear, it is a huge company, and it also has a pattern of handling employees well. Perhaps the example of Bezos calling customer service during an executive team meeting to shame the head of the department at the slow response was an exception; and perhaps the mishandling of the Udi Manber/Jeff Holden duel was an exception. And it is quite possible the author gave too much importance to Shel Kaphan’s departure. But employee treatment came up in my notes almost every chapter.
The main problem is not that Amazon expects too much of employees. A few years ago, a colleague of mine passed around Netflix’s (NFLX) famous HR presentation. I haven’t read it in a while, but my major takeaway at the time was the dual concept that the company could outgrow an employee’s given skillset, and that companies should focus on hiring full adults and treating them like adults.
I cite this because, as depicted, Amazon outgrew Kaphan’s skillset. Which is where a dignified conversation about the reality is appropriate, rather than letting Kaphan dangle on the line until he quit, as was apparently the case.
This is one example from 17 years ago or so, so I don’t want to oversell it, but it was the most memorable example of Amazon not always treating employees like empowered adults. The other examples I cited and many of the horror stories about Amazon fit into this pile as well.
The last major point about culture is that I could have used Bezos and Amazon interchangeably for the last few paragraphs. As depicted in the book, Amazon relies heavily on Bezos’s vision and his view on what the company’s culture could be. Which leads me to think Amazon has serious Key Man risk. When is day 2 at Amazon? The day Bezos steps down, I'd bet. And that may be a product of a hard-driving culture that doesn’t easily afford opportunities to develop a heterodox approach to growing the company.
I’ll caveat one last time that this is my impression from the book as well as newspaper articles about Amazon and the rare second or third-hand anecdote about Bezos. It is certainly inaccurate, and I don’t intend to pass judgment on the company or Bezos. But my point in raising this is not 'Amazon should be a nicer place to work because they're mean.' My point is that as a business decision, employees are really important and according them respect matters.
One of the constant struggles in Amazon’s history is to fend off the ‘tendrils of chaos,’ as Stone puts it. A huge organization that has its tendrils in hundreds of markets would suffer from chaos, so this is no surprise.
Amazon has seemed to welcome chaos and willing to work itself through it. For example, the company accepted placement on the Yahoo.com homepage in the mid-90s (when it mattered) well before it was ready to handle the increase in orders.
I was impressed by Bezos’s approach to decentralize teams, at least towards the end of the book. He has the classic Bezosian insight that the company doesn’t need to solve poor communication between teams, they need to operate well enough that they don’t need to communicate. Which, in practice, would seem to lead to more chaos unless you have really strong department heads or executives coordinating the teams’ efforts.
And yet, Bezos is depicted as having the tendencies of a micro-manager. He receives direct email from customers and, when something bothers him, forwards it to the appropriate department with just a question mark added to the text, overturning that department's week. There is an inconsistency between 'let teams take responsibility and run on their own' and 'solve this problem right now and explain to me what went wrong', and it, I suspect, is both demotivating and inefficient.
I don't mean to defend process over fundamental goals. I just think about the challenge even small companies like Seeking Alpha have with coordination and managing chaos, and I wonder what examples there are to take from Amazon’s approach. I don’t have a great answer.
I can write more unequivocally about Amazon’s customer obsession. It is the north star for Bezos and for the company, and it is admirable. His insights into the way a company can be focused are well-practiced but also on point (watch the first video above again). While he acknowledges other types of obsessions – competitor, product – can work, it is clear from actions and words that he views customer obsession as the most appropriate.
I agree with him for most businesses. But I find more interesting and valuable the clear self-awareness he has about Amazon’s obsession (which is, again, his own). This understanding makes it easier for Amazon to resolve conflicts, and easier for Amazon to make decisions. Each obsession comes with its shortcomings, and it is possible Amazon needs to think more about employees, or partners, or products, or other aspects of its business. But it is obviously pivotal to its success and perhaps to many companies’ success, to understand why they are here and what they most care about.
(I would love to hear what you think Seeking Alpha's obsession is).
So many of Amazon’s big successes are built on past stretch goals. The push in the logistics department and the development of free shipping for people who could wait opened up the opportunity to deliver on the promise of Prime. The traffic generated on the site made Marketplace work. The data the company has gleaned from Prime enhances the rest of its sales efforts. Amazon Web Services was built on the need to improve the company's own infrastructure and data support.
Whatever Bezos’s vision, it is unlikely he knew where it was going and how it would get there. But the attitude of striving for more, and the overarching aim of being an everything store and the best friend of customers everywhere enabled the company to experiment and aim to do better, and the lessons learned or the levels achieved allowed the company to build on top of that.
Stretch goals are a staple of the modern corporate climate. They can be positive in the way they urge teams to stretch for the moon, and negative in the way they distort the near term and encourage running before walking. What Amazon seems to do well is put it all in context of the ultimate ambition of the company so that failures or victories both add up to logical next developments, even if those developments couldn’t have been foreseen.
The context in which both Bezos and Amazon emerged as the powerhouses they are needs to be considered. Neither of these things takes away from the respective achievements of man and firm, but it would be silly to ignore them.
For Bezos, the book begins explaining his precocious upbringing, including his natural curiosity for engineering and science, his participation in a gifted students’ program, and the laser-like focus he had through his schooling. While many of his advantages were natural ones, he also had two parents who afforded him his creativity, who set an example for him – his adopted father was a Cuban immigrant teenager who rose to be an Exxon (XOM) engineer, who were able to support him financially, and who could even invest in Amazon when the time came. He also worked at D. E. Shaw, as I mentioned, where he was surrounded by cutting-edge technology and smart, forward-looking thinkers with whom he could swap ideas about the future prospects of industry.
None of that takes away from the incredible and unique achievements that Bezos has amassed over his life to date. But it is worth keeping in mind, especially when the author presents the decision Bezos had to make as to whether to give up his job at D. E. Shaw or start Amazon as some sort of dilemma. It is always easy to project ease on someone else’s situation, but it seems fair to say that had Amazon been a flop, Bezos would have landed on his feet.
The other aspect of Amazon’s environment is the calculated way in which it worked to maximize its advantages. The most obvious is that the company is based in Washington state because they wouldn’t have to pay sales tax there. This approach was also mirrored by the company's EU headquarters in Luxembourg - Luxembourg offers a skilled multilingual workforce, but it also offers a tax haven. As that continued to be an issue for the company leading up to the publication of the book in 2013, Amazon’s argument seemed increasingly untenable, as if it is realistic to expect customers to send in their own sales tax on goods purchased online without even calculating the sales tax for them.
That sort of regulatory arbitrage is a regular feature of online vs. physical businesses, whether Uber (UBER) vs. the taxi industry or Airbnb (AIRB) vs. the hotel industry. It is a feature of international commerce, whether it is China still not really opening up or the nascent U.S.A. being much more restrictive on imports and even piratical in some of its trade dealings.
And for Amazon, it worked. It appears to be a good corporate citizen now, a leading consumer of green energy and someone who can afford to play by the rules. Which is how it goes – get whatever edge you can until ‘they’ take it away from you, and hope you’ve grown big enough to take the hit.
There are no scales of justice waiting at the end of a corporate lifespan, though, to say Amazon should have suffered more for that ingenious and ingenuous approach, as with any other company. That doesn’t mean we shouldn’t consider the external factors when assessing the success of a business or what that means for society as an example.
It is rare to find the person in the US or Western Europe to whom Amazon doesn't matter. Without making a directional bet on the company, I can say that it seems like that type of person will become rarer over time, and Amazon's geographical impact will continue to expand.
Jeff Bezos's impact on the 21st century, through Amazon and his other efforts, may outstrip that of all the other great businessmen of this era. And as we move into what the Gilded Age 2.0, with tech taking over the world, he is a man worthy of study, with both strengths and weaknesses that others can learn from.
I haven't reached a definitive view on Bezos and Amazon. But he has that definitive view, which makes it easier for Amazon to achieve everything else. The curiosity, drive, and passion with which Amazon and Bezos pursue their aims are perhaps like the sun's flames, vital and inspiring but also prone to burn people who are not adequately prepared for it. The question is how other business people, as mini Prometheans, can learn to best take that flame and build our own fires that will shed light on the world. And it will be tough to catch up with Bezos's head start.
This article was written by
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: A friend working at Amazon asked me whether she should sell shares to make a mortgage payment; “It’s never a bad time to sell Amazon shares”, I said. This was somewhere between 2012-2014, between $200-$400/share. I hope she didn’t listen to me.
That friend also got me an interview at Amazon for a data intern role in 2011. I interviewed well but then failed a pivot table test and didn’t get the job. I bear a grudge only to pivot tables, and am happy to have ended up at Seeking Alpha instead, though it was not a self-esteem building 9-12 months in between, working primarily at an afterschool day care for 4-8 year olds.