Motley Fool Hidden Gems Investing - Amazon Can’t Be Contained

Episode Date: September 14, 2024

40% of everything sold online in the United States is through Amazon. Its web services division owns almost a third of the worldwide cloud infrastructure. Amazon is a goliath. Dana Mattioli is an investigative journalist at the Wall Street Journal and the author of “The Everything War: Amazon’s Ruthless Quest to Own the World and Remake Corporate Power.” Mary Long caught up with Mattioli for a conversation about: - Amazon’s early days and how it withstood years of sustained losses.  - How Amazon makes Wall Street look genteel. - The lengths that the company went to get information from competitors. Companies discussed: AMZN, TGT, EBAY Host: Mary Long Guest: Dana Mattioli Producer: Ricky Mulvey Engineers: Dez Jones, Austin Morgan Learn more about your ad choices. Visit megaphone.fm/adchoices

In a few of these NDAs that these entrepreneurs signed, I found something very strange called a residuals clause. And it said, basically, any company meeting with Amazon for deal talks or an investment, there's a line that you sign that says, anything retained in the memory of an Amazon executive in those talks could be used without any legal consequence to Amazon. So as long as they remember your idea or your technology or something you told them, they could use it and you can't sue them. I'm Ricky Malvi, and that's Dana Mattioli, an investigative journalist at The Wall Street

Journal and the author of The Everything War, Amazon's ruthless quest to own the world and remake corporate power. On today's show, we're going inside the belly of the beast. My colleague, Mary Long, caught up with Mattioli to discuss how Amazon leverages data, its battle in Washington, and the culture that built a multi-trillion dollar company. Dana, the full title of your book is The Everything War, Amazon's Ruthless Quest to Own the World and Remake Corporate Power. Amazon started as a bookshop. Was the plan always to own the world and remake corporate power? Yeah, it's hard to remember that in 2024 that this was a fledgling, against all odds, online bookstore when it launched in 1995.

And, you know, most people at that time had never even been on the World Wide Web. I think 3% of Americans had ever gone on the Internet. And Jeff Bezos created this company predicated on them not only going on the Internet in droves, but putting their credit card into it and shopping, which sounded crazy. And, you know, the early employees at the time weren't sure that it would survive, but Jeff always had a plan for this to be the company that we see today. There is a scene in the book that I think really speaks to that. 2006, Amazon's a $19 billion company, and Jeff walks into this big retail gala that happens every year in Manhattan. And it's all of the top CEOs from like Nordstrom and Saks Fifth Avenue and Diane von Furstenberg's there, like all these known entities. And everyone sort of looks at him like, what's this guy doing here?

he sells books and widgets and no one's ever going to buy her clothes on Amazon. And one of my sources bumped into Jeff at the bar and he said, you know, what are you doing here? And Jeff replied, well, your margin is my opportunity, which caught a lot of people by surprise. And that's exactly what happened. A lot of those companies in that room at that time are now bankrupt. And not only them, this has happened across industries that they've penetrated and really everyone's margin was Amazon's opportunity. And that's an especially crazy story to hear now because earlier this summer, Saks Fifth Avenue bought Meme & Marcus and Amazon kind of helped them do it. I know. I was flabbergasted. That was like such a full circle moment because

if you could think back to 2006, people would have bet their life that Amazon could never get near a prestige brand like that, right? So here's a question. Why does that deal make sense for Amazon? Or is that like, after having read your book, perhaps I'm thinking a bit, I'm like too Machiavellian here, but is that kind of a full circle? Like, ha ha, see, yes, remember in 2006 when I showed up to that gala. Is that the point of the move or is there something deeper here that Amazon sees? You know, it's kind of wild if you just take a step back and look at Amazon's full scope. They can't be contained to just one area of commerce or just even one area of industry. 40% of everything sold online in the US is on

Amazon.com. It's the world's largest cloud computing company. It delivers more packages than UPS and FedEx. UPS is a hundred-year-old company. Amazon displaced it in the matter of 10 years. It's a healthcare giant. It's a logistics giant. I mean, it's like this sprawling octopus with all these different tentacles that are the number one, two, or three player in all those industries. There's nothing like it. There's no analog. And them getting into the luxury space make sense. They've got the world's best fulfillment centers. This is higher margin than they normally would play in. And it just seems like any area that they have set their mind on where people have said there's high barriers of entry or it's complicated, they've tried to

figure out. And sometimes not so honestly. The book gets into how they've lied, cheated, stolen their way to the top in some cases, right? So there's the question of that as well. So let's go back to those early days before Amazon was what we know it to be today. Again, in those early days, Bezos convinces Wall Street to pay more attention to growth rather than profits. That can sound like a simple, small shift in thinking, but your book kind of highlights that that shift in focus was really essential to the company's story. How did that happen?

So that is now common today. If you think of like the Ubers of the world and all these companies that file for IPOs without profits. That was so not the case in 1997 when Amazon filed its IPO. When you filed for an IPO, you had profits. That's how you were valued by Wall Street. And Jeff brilliantly convinces Wall Street that we're different, that you are going to let us suffer losses so that we can grow and you're going to reward us for it. So they had this crazy runway, years and years where they just posted loss after loss. And it created this have and have not scenario across retail first. And one of the really fun parts of this book was speaking to the early retail CEOs who had to go

head to head with Jeff Bezos, the people that underestimated him, quite frankly. And I spoke to some of them. And I remember speaking to the CEO of Linens and Things from the 1990s and 2000s. And they said, did you just not believe in online commerce? And I said, no. Once Amazon came on the we did, but they had a different playing field than us. He said, my shareholders would skewer me if I had one quarter of losses. If I had years of sustained losses, I'd be out of a job. The company would probably be bankrupt. And that CEO actually went to his board early on and said, I need $100 million to build out our logistics center to do this dot-com thing. And they laughed him out of the room. They said, our shareholders will kill us over that. You have $25 million.

in. And that played out in boardroom after boardroom in corporate America. The retailers could not get the buy-in from their boards because their shareholders would have killed them for dedicating that much money to logistics. So some of them even relied on Amazon and said, okay, you do it for us. Yeah. Borders being one example of that. And Target and these other companies, some of them are not around anymore. And Amazon got all of their customer data. They got a cut of commissions. So these companies are basically they forced into the arms of what became their biggest competitor who profited all along. When AWS launches in 2006, it's Amazon's first major expansion outside of this retail space.

And you write that, okay, this is Bezos building Amazon into a conglomerate, but that there's an irony in this because kind of similar to this shift in thinking about profit versus growth, you write the very idea of a conglomerate as a good business model had grown increasingly out of favor with Wall Street. Why had Wall Street soured on conglomerates and how did Amazon start to change that thinking? Yeah. For many years, conglomerates were sort of the name of the game. CEOs at places like General Electric and Honeywell would do all these roll-ups of disparate businesses that had nothing to do with each other. So like GE, which makes appliances, but also make airplane turbines and curling irons and had a TV studio.

And for a while, for the 80s and 90s, that worked. They were rewarded for that because their empires were growing and they could offset losses in one area that wasn't doing well with the gains somewhere else. It was like a way to hedge their bets. And as their empires grew, they got rewarded by the stock market. But then that really fell out of favor. These companies became bloated. Activist investors came on the scene, people like Carl Icahn, who said, what are you doing being in all these disparate businesses? There's too much expense. You're not doing any of them well. It's a distraction. So all of the esteemed corporate conglomerates that we grew up with got dismantled. the activist investor said, sell off everything but one or two business lines or spin them off

and focus on the one thing you do well. And at that very same time, that's when Jeff started spinning up this conglomerate. And interestingly, they haven't really had pressure from activists to dismantle it. And I make the case in the book that that structure is really its secret sauce because they're able to extort partners across business lines and get favorable terms and really crush their rivals using those different tentacles of the octopus that they're wrapped around some of their biggest rivals, but also small businesses that rely on them. The story of the birth of AWS at Amazon is an interesting one to me because I feel like in a lot of business circles, it's often lifted up as an example of what innovation ought to look like. This is a product that skyrockets

profitability for the company and it kind of came about as like a side of desk project almost. And And so it can be used to lift up, in some ways, the corporate culture at Amazon. Like, look, this is a place where innovation thrives. This is what happens when you do that. But your book kind of turns that picture on its head for me and says, OK, rather than the culture being this rosy thing, it's actually quite toxic. What would you say the culture is at Amazon? And how did it get to be that way?

OK, so I've covered companies for 18 years at The Wall Street Journal, including Wall Street. I covered banking for a long time as an M&A reporter. Amazon makes Wall Street look genteel. This is the most cutthroat culture of any of them I've ever covered. I mean, the amount of really brilliant Amazon workers I've spoken to over the years who were just pushed to the brink to the point where they had to take leaves of absence for mental health. Some of them have tried to commit suicide because of the work environment there. And these are white collar workers. There's more to be said on the factory side of

the business too. And what I've learned in reporting out this book is that's largely by design, not that they want people to commit suicide, but they want this sort of culture that drives people to the edge to have output. And, you know, Jeff early on told his earliest employees that were more like hippie, dippy, Seattle, 1990s grunge people that were missionary based, that they didn't have a killer mentality. He wanted them to be like cutthroat. He, you know, Jeff himself came from the world of hedge funds in New York. That kind of gets lost in his origin story sometimes. And he starts, once the company goes public and he gets the buy-in from Wall Street not to have profits, the company's stock price skyrockets and in come all these

NBAs that are sort of cut from the same cloth as Jeff. And he does a few things that create this culture. He adopts this HR mechanism called yank and rank or stack ranking. It was popularized by Jack Welch at GE. And to this day, even though many other companies have abandoned this because it had pretty severe consequences on culture, Amazon cuts the bottom 6% of its workforce every year. It structures as compensation that white-collar employees don't really get the bulk of their pay until years three and four at Amazon. Problem with that is most white-collar employees last a year and a half because it's a toxic culture and they leave or they get fired. And so when I spoke to people at Amazon, even some of the S team members,

the highest levels of people that reported to Jeff, some of them sort of described this like Hunger Games-like scenario where employees are competing with each other internally to keep their jobs. And that has a really pressure cooker of environment that could affect people's mental health. But it also caused some of these people that maybe wouldn't have done this elsewhere to do unethical, anti-competitive, or even illegal things to stay ahead. Yeah. And you have so many examples of that exact thing happening and unfolding within the book. Bezos talks a lot about Amazon being customer obsessed rather than competitor obsessed. And this ties to the culture. Your book is rife with examples of Amazon being,

I would say, pretty competitor obsessed. So just to pull out one example, what lengths did the company go to try and get information about bestselling products from Trader Joe's? Yeah, that example, it floored me when I found it out. So Amazon, like many other retailers, has a private label arm where they make their own goods to compete with other retailers. That's standard. But the way they go about it is not. Amazon has a history of spying on its third-party sellers on its website to reverse engineer

these hits. But also there's a scene in the book where Jeff Bezos is kind of obsessed with Trader Joe's from what people around him have told me. and he thinks it's a cool quirky store. And the private label food team goes about making a new brand for Amazon called Wickedly Prime. And in their pitch for this brand, they say that they want it to be like Trader Joe's and they want to sort of copy the top 200 bestselling items at Trader Joe's. But Trader Joe's is a very secretive company. They don't have online shopping. You can't really see what their bestsellers are. So they had to sort of figure out what that was.

So they go about recruiting an executive from Trader Joe's to join their team. And the executive is not really told much about what she'd be working on in her job interview, just that she'd be working on a food brand. And she moves across the country. She starts at work her first week in Seattle. And she stumbles across this mysterious conference room that has brown paper covering the windows and the door so no one could see inside of it. She walks in, and it's teeming with boxes of Trader Joe's items, almost like a Trader

Joe's grocery store. And she's like, oh, crap. And she starts piecing together. She's there to try to copy her old employer. But it gets worse. Her new boss at Amazon starts pressuring her, saying, give us all of the documents you retained from Trader Joe's, which is actually illegal. So the employee resists and says, I don't feel ethically comfortable doing that.

But the pressure ratchets up and she finally, to appease him, sends over a document with the top items sold at Trader Joe's over a week to Amazon's team so that they could start picking which ones to copy. But then he doesn't stop there. He says, well, send us the data about the margins. And this just causes the employee to crack. She starts crying in the middle of their office. And then someone reports this to HR. And, you know, the people involved in pressuring the employee were let go. So Amazon did the right thing there.

But this story is just emblematic of the pressure that these employees are under and how that results in real anti-competitive behavior, how that helps them crush rivals or anyone that comes near them in terms of being a competitive threat. Lots of companies have private labels and they use data from their competitor. They use data on those sales to boost their own private labels. But Amazon's, as this Trader Joe's story kind of proves, Amazon really leverages that data differently. And that's become the piece of lots of investigations that you've put through.

Nate Sutton, a top lawyer at Amazon, testified in July 2019 that Amazon did not use individual data from third-party sellers when making decisions about launching private brands. You broke a story that proved Sutton lied under oath when he made that claim. How do you prove that? So it's really interesting. When I took over the beat on covering Amazon in 2019, I was curious as to how Amazon used this data. You know, Amazon collects more data than so many companies, maybe more than any company

in the world. And it just seemed like given the culture and the pressure on these employees, it would be strange if they didn't help themselves to data they're not supposed to help themselves to. And I found out they did. And it was really important for me in proving this out to get the receipts. So when I started the bead, I started speaking to lots of private label employees at Amazon, current and former people.

And I learned that not only does Amazon regularly do this, that some of them could provide me with a paper trail of how they do this, even though Amazon has on the record denied doing this for years, even in front of Congress as part of their testimony. So I was able to get this treasure trove of documents from people that were on or had worked on the private label team showing that, you know, basically Amazon's this giant online mall, right? And it has these third-party sellers from all over the world. 60% of what's sold on Amazon is these third-party sellers. And they rely on Amazon to get access to market. But when this mall was closed, pretty much, the landlord, Amazon, was like kind of going into their shops and snooping in their books and getting behind the till and getting all their secrets, how many items they sold, what their margins were, cost of goods, and getting all the best selling item data and reverse engineering those products intentionally and undercutting them on price.

And there's a scene in the book where I get that data, those documents, and they sort of slide them across the table to a company that was ripped off. It's a company called Fordham, this small four-person company in Brooklyn that was making car trunk organizers. And I passed it across to the two founders and they said, how did you get this? And I told them what was going on and they were like, oh my God, because Amazon had just reverse engineered their best-selling item. But that was just one of a sea of examples of where this was happening. When Amazon first launched its third-party marketplace, it took about a 19% cut from

sellers. Today, that cut's closer to 50%. You have so many examples of talking. you've talked to a lot of these third-party sellers and a lot of them view Amazon as this necessary evil. How do those same sellers talk about other sites like eBay, Etsy, Shopify, Walmart? Because business is competitive. Lots of companies are, again, trying to gather information as best they can. But what is the feeling of sellers towards sites that aren't Amazon? Yeah. Largely, sellers on Amazon sort of describe it as a devil's bargain. They need to be

there because 40% of everything sold online in the US is there, but it comes at a very steep cost. A lot of them have also tried other marketplaces. And in any marketplace, you're going to pay a fee or a commission. They talk about the other marketplaces more friendly in terms of the economics. The problem is those other marketplaces don't have the eyeballs. If 40% of everything sold online is coming from Amazon, if you're selling on those other marketplaces, there's not any single one that could match that, right? So a lot of them have tried to get off of Amazon. They sort of described themselves as stuck on this like, what's it called? A hamster wheel that they can't get off of. As their margins compress, Amazon takes more, more, more.

And another problem is that for years, Amazon required that the lowest price a seller had was on amazon.com. So if I was selling, there's an example in the book actually where a man takes So for his dad's family business, they sell industrial-sized buckets. He puts it on Amazon, and the costs are so steep that this bucket that he gets for $3.90, he has to sell for $30 each to offset all of Amazon's fees. So if he does that on Amazon, if his price is $30 to offset all of the fees, if he sells that on Walmart.com or Target.com, Shopify, he has to also sell it for $30. Otherwise, Amazon is going to kick him off the site, even if the cost of business is less on those sites.

So the claim that the Federal Trade Commission makes in its lawsuit against Amazon, where they call it a monopoly, is that Amazon is raising prices on consumers, not just on Amazon.com, but across the entire internet because of that dynamic. And we focused a lot on the seller relationship with Amazon thus far, but it's not just sellers that report this copycatting of products. You talked to a lot of entrepreneurs, many of whom were connected with Amazon through the Alexa Fund, who also felt that they were, this might be an understatement, but burned by the company. So what is the Alexa Fund? What can you tell us about that? Yeah. So the Alexa Fund is Amazon's internal venture capital fund. And it's really complicated because Amazon's the number one, two or three player in so many industries. If you are selling your company or looking for an investment, you sort of have to talk to them because they

might be the biggest player in your industry. And it's much more precarious for a founder than going to Sand Hill Road where the true VCs are, the pure play venture capitalists. Because if you pitch them, they're not going to copy your product. They don't have businesses that go and copy it. But what I found in this book is that these entrepreneurs, these founders, these CEOs alleged that Amazon's venture capital arm and its M&A arm acted more like corporate espionage, that they would go in, share all of their secrets under the guise of Amazon either buying their companies or making an investment, and then Amazon would ghost them. And then months later, a year later, Amazon would launch the very same product with some of their technology and put

them out of business. And something interesting I found in the course of this book was I was able to get hundreds of pages of internal documents from Amazon, not from them, at Amazon, and a few of these NDAs that these entrepreneurs signed, I found something very strange called a residuals clause. And it said, basically, any company meeting with Amazon for deal talks or an investment, there's a line that you sign that says, anything retained in the memory of an Amazon executive in those talks could be used without any legal consequence to Amazon. So as long as they remember your idea or your technology or something you told them, they could use it and you can't do them. Wow. I want to pivot a bit and talk about voice technology. You've done some reporting that

found out that between 2017 and 2021, Amazon's devices team, which to be fair, includes more than just Alexa devices, but that that segment lost $25 billion. With that in mind, why is this such a continued point of interest for the company? Think about that number. For those few years, it lost the entire market cap of like a Tyson Foods. Like most companies cannot sustain a loss like that. And there's like a few things going on. Amazon is very deliberately secretive about its internal financials. They don't break different device, the device business or other businesses out to Wall Street. So it's kind of this black box as it relates to what goes on inside the company. And for years, they just sort of saw voice technology and these devices as a

land grab, that they wanted them in everyone's home. And they thought that this would be sort of like the Gillette model, where you sell the razors for either a loss or for break-even, and then you sell the blades for a profit. But Amazon never found its blade with a lot of these devices. They sell them either at or below cost, and it's hemorrhaging money. On the flip side, though, these devices, there's 500 million Alexa-enabled devices in people's homes. Just think about that. I mean, that's a wild number, are sopping up so much data. So when I speak to people about the dollar losses, some of them are skeptical. They're like, well, how much would you value that data at? A lot of your book talks about the relationship that Amazon is trying to build

and ultimately does. Well, I guess they don't really build it because it's not a great relationship, but their relationship with Washington and kind of how this plays out over the past several years. not terribly long ago. Bezos made it pretty clear that he wanted to win over Washington. He bought a big house in this exclusive neighborhood. He buys the Washington Post. And yet Amazon's relationship with politicians is not very friendly. What went wrong? It's the sort of this strange dichotomy where Amazon was very late to getting into the lobbying game. It wasn't until 2013 where Jeff's board of directors tells him you need to start taking this seriously. he viewed Amazon as the David in the David versus Goliath scenario because for so long he was.

2013, he was not. They're a $200 billion company. Companies around the world, CEOs were alleging wrongdoings and that this was eating their lunch. The board finally convinces him to start taking this seriously. From then on, they start building up this massive lobbying team. They start spending serious money in the capital. They've spent almost more money than any other company in lobbying these days. But even though they're spending the money and they've built out the team, the DC team is often inhibited by Jeff himself or his lieutenants back in Seattle that don't understand Washington. Based on the culture of this company, they're not diplomatic. This is very much a scorched earth. Jeff tells his team to punch back when it comes to reporter criticism

or DC criticism. And there was these weird, funny scenarios where the DC team, which is built of like really smart people that understand that, you know, get things done in D.C. by scratching backs, people from the FTC, the DOJ, people who worked in Congress. That team would go about what they called watering the flowers or, you know, making relationships on the Hill, you know, really speaking Amazon's points. And then with a single tweet or a nasty remark, the Seattle team, including Jeff, would tear down those relationships and anger people like Joe Biden. So it has not been a successful venture as it relates to government relations. Okay.

It's no secret that there's a lot of political division in the country right now. But there seems to be bipartisan agreement between Democrats and Republicans in Congress over the question of Amazon and its bigness. You've kind of had a front row seat to that. What has it been like to witness a moment of bipartisanship play out over this company? It's so strange. I mean, it's the one thing it seems like both sides could agree on. You have people like Donald Trump and Joe Biden in agreement that Amazon is too big.

You have people like Matt Gaetz and Elizabeth Warren who have similar views on antitrust reform and who are both backers of, you know, Lena Kahn, the chair of the FTC. And it's one place where Amazon has seemed to be polarizing to both parties. And, you know, that has culminated in this historic lawsuit from the Federal Trade Commission, which is calling it a monopoly. Yeah. So let's talk a little bit about Lina Khan and that the antitrust suit that's out now. Lina Khan in and of herself is an interesting character and an interesting storyline. How did she go from being a student at Yale Law School to chairing the FTC? It's the most meteoric rise. But in 2017, as a 27-year-old law student at Yale, she wrote a law review article.

And law review articles don't really go viral. If you're lucky, a few thousand people read them, right? This one just hit a nerve with society. And millions of people read it. It might be the most read law review article of all time. And she says that Amazon is a monopoly and that the antitrust laws, the way that they're being interpreted, cannot contain companies like Amazon. And something needs to give.

And this just, like I said, it hit a nerve and it starts going viral. Reporters read it, politicians read it, CEOs read it, and she starts becoming someone people are talking about. And that gets her placed on Congress's investigation into big tech. She gets some academic roles after that. And it sort of culminates with her being named the youngest chairperson in the FTC's 100 year history when Joe Biden named her as chair of the FTC. And it was kind of a gut kick to Amazon. You know, Joe Biden was someone that they thought would be, you know, not a backer,

but receptive to them. The head of public relations and government relations at the time was Jay Carney. And Jay worked very closely with President Biden. He was his spokesperson when he was VP. He was also President Obama's spokesperson. So then, President Biden picks, kind of handpicks, Amazon's biggest nemesis to be the head of the agency regulating it. And then that agency, of course, goes on to sue Amazon. What is the basis of the FTC's argument against Amazon right now? Yeah. So the FTC sued Amazon in 2023. And the basis is that Amazon has monopoly power in online retailing and over its sellers on its website. That because sellers need to be on Amazon to reach all of us, 200 million Prime members, and 40% of online

retail, it's been able to ratchet up fees for those third-party sellers from 19% a decade ago to 45 cents on the dollar for everything they sell today. And because of that, it's become pay to play, and these sellers have had to raise their prices on shoppers. So I want to be cognizant of your time. We cater to an audience of investors here on Motley Fool Money. And so for all the bad that's happened inside Amazon, there's a lot of investors who think, yikes, but they've still done a really good job of rewarding shareholders. What do you think investors should pay more attention to at Amazon? Well, I think investors will love the book because I was able to get the unvarnished financials for this book, the stuff that they don't report to Wall Street.

And there's some like high popping figures in there. Like for instance, they don't really break out their advertising profits, I was able to find that their operating profits and advertising are 90%. So there's some gems like that that would really give you the full picture of what their financials look like. What I would say is that we also get into some of the losses that they don't disclose. That if Amazon were to jettison their devices business, for instance, it'd be probably a much more profitable company. That being said, there's a scene in the book that I really think speaks to how Amazon sort of thinks about its roadway. And, you know, in the midst of this antitrust investigation, which could break Amazon up if the FTC is successful, Andy Jassy,

the company's current CEO, has told his team that Amazon could be a $10 trillion company. So clearly they think there's a lot of runway left. Dana, thank you so much for the time. Really appreciate all the insight that you've given us today and all the insight that's in your book. It's an incredibly well-sourced book and a really compelling, fascinating, frightening read. Thanks for having me. As always, people on the program may have interests in the stocks they talk about. The Motley Fool may have formal recommendations for or against, so don't buy or sell anything based solely on what you hear. I'm Ricky Mulvey. Thanks for listening.

We'll be back tomorrow.