Tech Brew Ride Home - (IHP) Amazon's Founding Part 2

Episode Date: July 4, 2023

Originally published April 2015 It’s part two of our Amazon founding story. How did Amazon come to completely dominate e-commerce? How did Jeff Bezos’ “Get Big Fast” strategy evolve? How and why did Amazon become the quintessential “dot com” and dot-com-era stock? The answers are within.  Bibliography:  The Everything Store: Jeff Bezos and the Age of Amazon  The Playboy Interview: Moguls  Amazon.com: Get Big Fast  One Click: Jeff Bezos and the Rise of Amazon.com  http://jimromenesko.com/2013/08/11/i-interviewed-jeff-bezos-when-amazon-was-an-insignificant-speck-in-the-book-selling-universe/#more-49306  http://archive.wired.com/wired/archive/7.03/bezos_pr.html  http://www.fastcompany.com/50541/inside-mind-jeff-bezos  http://www.wsj.com/articles/SB832204437381952500  http://www.wsj.com/articles/SB10001424052702303339904576405922077032468  http://phx.corporate-ir.net/phoenix.zhtml?p=irol-corporateTimeline_pf&c=176060  http://content.time.com/time/subscriber/article/0,33009,992927-2,00.html  http://www.vox.com/2015/1/4/7490013/ecommerce-shopping-mall  http://mashable.com/2014/05/08/amazon-sales-chart/  http://www.statista.com/statistics/185283/total-and-e-commerce-us-retail-trade-sales-since-2000/  http://www.bloomberg.com/news/articles/2013-01-07/amazon-surges-to-record-high-on-global-e-commerce-growth  http://www.thewire.com/business/2014/05/amazon-has-basically-no-competition-among-online-booksellers/371917/ Learn more about your ad choices. Visit megaphone.fm/adchoices

On April 4th, 2023, around 2 in the morning, a man was found stabbed multiple times on a sidewalk in downtown San Francisco. Hey, who did this to you? What happened next turned the story into a political firestorm. Reports have identified the victim as Bob Lee, the founder of Cash App. From Bloomberg Podcasts, this is Foundering, the Killing of Bob Lee, beginning April 16. Welcome to the Internet History Podcast. I'm your host, Brian McCullough. This is Chapter 7, Part 2, where we take a look at Amazon's rise to dominance of the entire e-commerce industry.

When we last left our Amazon story, the website, Amazon.com, had officially launched on July 16, 1995. As we mentioned last time, Amazon's launch came after a slow, deliberative beta test. Unlike the strategy of, say, Netscape, which liked to launch products quick and dirty, Amazon was meticulous about getting all of its processes right. Bezos and company believed that they were proving a concept, so any hiccups or bugs that might arise once they were live would only undermine their credibility as a new type of commerce. The site at launch was bare bones, at least in terms of decoration.

The only graphics were the Amazon logo, which was a field with a river running through it, to give the impression of a giant A, as well as a handful of covers of spotlighted or featured books that Amazon was promoting on its homepage. All the books on the site at launch were discounted by a blanket 10%, but the spotlight books were discounted by further 20 to 30%. For many weeks, and actually months, in fact, sales at Amazon were slow.

Early on, a dozen sales would constitute a good day. But three days after launch, Yahoo! who suddenly included Amazon in its What's Cool section of their directory. And suddenly, the traffic numbers jumped considerably. By the end of its first month, Amazon was proud to have shipped orders to 45 of the 50 states. But again, these were the very early days. Everything was still being done by hand. When an order came in, Amazon turned around and ordered the book from the distributors,

who shipped the book to Amazon's meager offices, then the handful of Amazon employees, Bezos and Kaffin included, rebox the books and ship them to the customers. There was very little in the way of art or science to the logistics of their operation, so much so, in fact, that Bezos has liked to retell the following anecdote

from the early months of the website being public. When it came time to reship the books to customers, Bezos and Company would simply kneel down on the floor and assemble the packages by hand. According to Bezos, he remarked to another early employee, Nicholas Lovejoy, quote, We've got to do something about this. We've got to get knee pads. That was the solution I came up with. Then Lovejoy said, what about packing tables? I thought that was the most brilliant idea I had ever heard in my life. It truly dramatically improved things, end quote.

The company had one publicly facing email address, and all of the employees would take a turn responding to customer inquiries. Their office didn't have a photocopier, so another early employee, Laura Lee Smith, would walk several blocks away to a coffee shop. To generate the images for those book covers that they featured on the homepage, Nicholas Lovejoy, who we just mentioned, and who, by the way, was a former D.E. Shaw colleague who had come west to help advise the startup, Lovejoy would scan images by hand using a newly purchased HP scanner. If all this sounds a bit ad hoc, that's because that's exactly what it was. Over its first week in business, Amazon reportedly rang up $12,000 worth of book sales.

However, it was only able to ship $846 worth of books out to customers. By October, Amazon could report its first 100-order day. And though these numbers sound good for a business that was brand new and blazing an entirely new trail, the fact of the matter was it wasn't going to be enough to sustain the business for very long. For one thing, around the time of the site launch, Amazon had moved into its first actual office-slash-warehouse space at 2714 First Avenue South in the Soto neighborhood of Seattle, across the street from the headquarters of Starbucks. They were a real business now, and they were trying their best to learn to act like one. The thing is, acting like a real business did not come cheap.

In later SEC filings, we can see that despite steadily growing sales, Amazon was firmly operating in the red. After its first full year of operations, 1995, Amazon was able to sell a half million dollars worth of books. And yet, it was losing money to the tune of about $300,000. And that brings us to the question of financing, which you'll notice we haven't really mentioned up until this point. That's because for as long as he possibly could, Jeff Bezos was determined to self-fund the business, drawing from the money he had socked away over his years on Wall Street, as well as with a mixture of credit card loans and personal guarantees, Bezos was able to fund Amazon through its public launch.

Bezos's parents had kicked in about $100,000 when the company first started, and then in the summer of 1995, in the name of her family trust, Jeff's mother, Jackie, invested another $145,000 in Amazon, a literal friends and family round. But all this money wouldn't be enough to keep the lights on very much longer, now that losses were coming in at the tune of several hundred thousand dollars a year. So in the summer of 1995, Jeff Bezos started to try to raise money for Amazon for the very first time. He didn't want to approach big-name venture capital firms, however, at least not at that stage. Instead, he intended to raise a small $1 million round among local Seattle connections. And so it turns out this was yet another major reason why Bezos had decided to locate in Seattle. Bezos was friends with Nick Hanauer, a native Seattleite, who was very well connected in the town. Hanauer was instrumental in making introductions on Bezos' behalf to private angel investors in the Seattle area.

The business plan that Bezos shopped around to these local investors was projecting $74 to $114 million in sales by the year 2000. Think about it. That's basically Bezos's most optimistic scenario by the year 2000 to reach about $100 million in sales. On the strength of these projections, Bezos was able to raise $981,000 by the end of 1995, giving away only around about 20% of the company. Of course, those investors would do quite well by this investment because that best case scenario that had brought them into the deal, would not actually come remotely close to matching what Amazon would eventually achieve. Instead of $100 million in sales, by the year 2000, Amazon would record almost $1.6 billion in net sales, more than 10 times Bezos's best-case guesstimate. With this infusion of cash, things continued to grow at Amazon into 1996. By the beginning of the year,

the site was averaging about 2,000 visitors a day, which was significant for the web at that time. But almost everyone agrees that the true turning point for the company came later on in the year when Amazon was featured on the front page of the Wall Street Journal on May 16, 1996. Under the headline that read, Wall Street Wiz finds niche selling books on the internet, the journal described Bezos as a, quote, whiz kid programmer on Wall Street, unquote, who, quote, suddenly fell under the spell of one of the iffiest business propositions of modern times, retailing on the internet, end quote. The impact of this article was instantaneous.

According to Nicholas Lovejoy, Jeff's former colleague from D.E. Shaw, quote, the size of the business basically doubled that day. It was a permanent shift. The business kept growing the next day and the next day and the day after that, end quote. There was some concern at the time that the servers would not be able to handle this sudden influx of traffic, but they held, and Amazon was able to benefit from the stamp of authenticity that no less than the Wall Street Journal could provide. As Jane Slade would later remember it, quote,

if we hadn't been on the cover of the Wall Street Journal, and most people hadn't seen us as a solvent company, they wouldn't be handing us their credit cards, end quote. Almost overnight, Amazon went from being a tiny curio on the corner of the internet to becoming the standard bearer for what was to be a whole new industry, e-commerce. New partners, such as the search engines and AOL,

suddenly came calling, interested now in partnerships. Just as importantly, the big-name venture capital firms that Jeff Bezos had been delicately avoiding all through 1995 now came calling as well. The sudden flood of attention Amazon suddenly received was so night and day, Bezos later remembered, quote, we joked that we were going to have to change our voicemail system to say,

if you're a customer press one, If you're a VC, press two, end quote. But it turns out that a year on from raising his local Seattle Angel round of investment, Jeff Bezos was now ready to talk to the big money boys. And in fact, Amazon was successful in holding out for the Crem de la Crem, and successfully landed an $8 million investment from none other than Kleiner Perkins, giving away only about 13% of the company, and getting no less than John Doer himself to agree to sit on Amazon's board of directors.

I think that it was this Wall Street Journal article and the resulting surge in traffic and sales and the resulting attention from venture capitalists, that was probably the moment that Amazon and Jeff Bezos pivoted into becoming basically what they are today. It helped, as we have pointed out, that Bezos had. had grown his operation comparatively slowly and cautiously and sort of outside of the glare of public scrutiny that now surrounded hot internet startups. For context, note that it's almost two full years between the time that Amazon first sets up shop in Jeff Bezos' unfinished garage in 1994 and 1996 when the Wall Street Journal article hits. and there's almost a full year of operations between the time of the beta launch

and the point where Jeff Bezos is willing to take on the likes of Kleiner Perkins as a partner. For all the talk of Get Big Fast, and we'll get to that in a second, it's interesting to note that Amazon was nothing if not meticulous and calculated in its earliest development. And I do think this was entirely calculated. As you heard in the modest sales projections that Bezos had used to pitch the company to those Seattle Angel investors, I think there was a time before 1996 when Jeff Bezos was at least publicly describing Amazon as a strong and dynamic little company that might be able to carve out a profitable niche for itself within a somewhat niche market.

He wasn't selling people on the Everything store quite yet. He was keeping that in his back pocket. But after 1996 and after sales really began to take off, and after the article in the journal and the Kleiner-Perkins investment, Bezos seems to have dusted off that everything-store idea and began executing on that vision of the limitless possibilities he had once seen in the web as a business medium. As John Dore himself said, quote, Jeff was always an expansive thinker, but access to capital was an enabler, end quote. Another early Amazon employee, James Marcus, remembered that, quote,

the cash from Kleiner Perkins hit the place like a dose of entrepreneurial steroids, making Jeff more determined than ever, end quote. And so it's about this time, suddenly a new motto was making the rounds at Amazon, a motto that would basically become the standard business strategy for every dot-com-era business. Get Big Fast. Netscape had actually coined the term originally,

but Jeff Bezos and Amazon really put the idea into practice in the largest extent. In essence, the initial thinking behind Get Big Fast at Amazon was practical. The publicity surrounding the Wall Street Journal article, no doubt, would alert bigger competitors to Amazon's existence. Borders and Barnes & Noble now had Amazon on their radar, if they hadn't already been aware of the company. Bezos had consciously been flying under the radar, in a sense, until he could hone his model, and also prove that this model could gain real traction. Perhaps he was even waiting to prove this to himself. but by 1996, he felt that he and Amazon were ready.

And so there was nothing left to do but put the pedal to the metal. In the journal article itself, it was noted that Amazon at that point was on track to do about $5 million in sales that year, 1996, which only represented the sales of a single Barnes & Noble Superstore. Bezos knew that Amazon could, and frankly would, have to do better than that. after all, as many investors had pointed out to him, there was nothing stopping from a Barnes and Noble, say, from launching a website of its own, thereby copying Amazon and with the added benefit of Barnes & Noble's famous brand name and possibly customer loyalty.

If the Earth's biggest bookstore, as Amazon claimed it was, really could go toe to tow with the entire book retailing industry, the time for cautious testing was definitely over. And so with this infusion of Kleiner Perkins' money, Bezos now believed he could take on the incumbents like Barnes & Noble and Borders and beat them, not at their own game of selling books in physical stores, but beat them at the new game of e-commerce, selling books online. And maybe, just maybe, he could disrupt or supplant that old game of physical retail. in a way that has always been the bright, shining promise of e-commerce, that it could do business in a new, better way,

better than traditional physical commerce. From time immemorial, the way it's worked is a merchant brings his wares to a central location and presents them to a buying public. The consumer, therefore, has to come to this central location and take possessions of the goods and take them home to consume them. E-commerce promised to upend all this by taking out the legwork of all that physical location stuff. Goods would now be presented online digitally, and then delivered directly to the consumer's home

with all of the obvious efficiency gains that this would entail. Amazon was already proving that limitless inventory was one key, revolutionary differentiator of online commerce. It could offer greater selection than any single physical bookstore could ever hope to. But also there was the promise of ever greater efficiencies beyond this. Not having a physical storefront meant not having overhead costs like real estate, rent, utilities, and a sales force. If those factors were eliminated in an e-commerce world, then didn't e-commerce offer either lower prices to consumers or fatter margins for the merchant or some combination of the two?

It certainly seems so. And it seems that at some point between researching the web at D.E. Shaw and the Kleiner-Perkins investment, Jeff Bezos came to believe that e-commerce was markedly superior as a way of doing business. And so if he could now hustle and grow his company as quickly as possible, he could definitely take on the entrenched real-world incumbents and defeat them by taking advantage of the inherent advantages that e-commerce offered. Later in the dot-com era, Get Big Fast was a buyword for entering a commerce niche first, and gaining brand ubiquity before any competitors could even arrive.

And to some extent, this is what Bezos was after at this point. Amazon would successfully brand itself as the first best-known name in e-commerce, It would get big and mature enough, fast enough, to solidify its e-commerce beachhead before the Barnes and Nobles and Borders and Borders of the world could copy its new methods. Bezos knew that the incumbents were definitely coming. In short, the first step to conquering the world meant conquering the existing book-selling world. Book-selling would be the first beachhead, the first battlefield. To this end, Bezos and Amazon began spending their recent,

raised capital on people. Tons of people were hired to flush out the warehouse staff so Bezos and the other small team could stop doing double duty as shippers. People were hired to complement Shell Caffin and Paul Davis and to build out the technical side of the website and database. People were hired to write editorial for the books they were selling. This meant book reviews. This meant book and catalog curation by people such as Glenn Fleischman. And people were hired to to build out real customer service teams. So many people were hired, in fact, that Jane Slade made her famous pronouncement

to local recruiting firms to, quote, send us your freaks. The oddballs and misfits that might not suit a typical office or a typical company, but could somehow, counterintuitively, thrive in the chaos of the Amazon offices where the parameters of your job could change seemingly by the hour.

Shellcaffen has referred to this period of time as the MBAization of Amazon. And indeed, it seems that there was a conscious decision that the old ad hoc ways of doing things would no longer cut it. In November of 1996, Amazon moved into its first true distribution facility, a 93-square-foot facility on Dawson Street in South Seattle. This coincided with the hiring of Oswaldo Fernando Duenas, a 20-year veteran of FedEx, who was the first person at Amazon with legit logistics and warehousing experience. Also around this time, the fall of 1996 through the spring of 1997, Amazon hired, among others, Rick Iyer, from PC Magazine, to head Amazon's editorial efforts, Mark Breyer of Kraft Foods, and Mary Engstrom of Symantec to handle marketing and public relations. John David Richter from Microsoft to handle product development. And most interestingly, Scott Lipsky from Barnes & Noble to head business expansion.

Because, as we've said, Barnes & Noble, for one, had certainly taken notice of what Amazon was up to. In late 1996, the Riggio brothers, Leonard and Stephen, who had built Barnes & Noble into the 466 store juggernaut that made it the Walmart of the book retailing industry, flew out to Seattle to have dinner with Jeff Bezos. According to Tom Alberg, an advisor to Bezos, the meeting echoed those other meetings we've discussed in earlier chapters between, say, Microsoft and Netscape or Air, and Yahoo, in essence, the Rigios said that they admired what Amazon was doing, but that when and if they got around to selling books online, they would most certainly bury Amazon. According to Alberg, Barnes & Noble originally wanted some vague partnership with Len Riggio saying, quote, I want to invest, I want to own 20% of you, I don't care what the price is, end quote. But like Netscape and Yahoo before them, Bezos didn't take the bait.

He had a larger vision. And that was what Get Big Fast was all about. It was an all-consuming company motto. It adorned T-shirts that were handed out at Amazon Company picnics. Bezos felt that the unlimited playing field of the Internet meant that Amazon could very quickly ramp up to generate sales that could challenge the incumbency of Barnes & Noble and Borders, and what was more, he got a sense that while he had meticulously and deliberately attempted to beat them at their own game, selling books,

he had the notion that the incumbents would not actually be able to easily beat him at his own game, selling on the internet. And so quickly ramping up on the web was not only key, in a way, it was more like David tweaking Goliath and picking a fight that the giant incumbents would want to contest, almost out of pride, out of a desire to teach a lesson to this new upstart. And in public comments to the press, Jeff began doing exactly that, telling reporters at the time, quote, I think it's rational for those guys at this point. He's referring to Barnes & Noble and Boehlers now. They're big enough to break into the market, now that it's been validated, end quote. What a lovely little jab that is. Bezos is suggesting, sure, Barnes and Noble can make a website, now that we've shown them how to.

To borrow another metaphor, I think this is a bit like the Russians drawing Napoleon into their vast territory in the winter. Bezos wanted the big incumbents to come after him because he wanted to fight on his own turf. Notice Amazon never once announced a shift

to open physical locations. That was never even in question. The question was when would Barnes & Noble create its website, when would borders? And when they did so, would they be able to do it any better than Amazon? Bezos certainly seems to have calculated that they could not, that it would be ruinously expensive for them to even try to do so, and that if they didn't do it better in some meaningful way providing a superior experience to what Amazon itself was providing,

then the whole effort would eventually exhaust them. The ensuing battle, especially with Barnes & Noble, would be long and protracted. And just as Bezos had envisioned, that battle only proved to burnish Amazon's bona fides as well as exhausting Barnes & Noble and Borders. There's no telling the hundreds of millions of dollars that Barnes & Noble in particular has spent over the last 20 years competing with Amazon, first with online sales, and then eventually, in recent years, in the field of e-books. And certainly in the case of borders, this sort of competition was, in fact, financially ruinous.

But that is not to say that the fight was completely a rout. We cannot say, for instance, that Amazon crushed Barnes & Noble and that Amazon won or Barnes & Noble lost, because Barnes & Noble, of course, still does very well. It's still a large, profitable concern. and it should be noted for the record that, in fact, it would not be until as late as 2007 that Amazon's media sales would actually surpass Barnes & Noble's retail store sales for the first time. Indeed, for many years, Barnes & Noble was certainly a formidable opponent for Amazon, even in the online space. In January 1997, Barnes & Noble struck first by locking up a... exclusive agreement with America Online to become that services exclusive bookseller.

This was back in the days when accessing AOL's 8 million early online subscribers was basically everything. And Barnes & Noble launched its own website reasonably quickly as well, going live on May 12, 1997. And like prognosticators have so often done in the web era, at the the time that Barnes & Noble launched its online site, a lot of very smart people looked at the competitive situation that Amazon was facing and declared that Amazon was likely not able to survive this fight. In September of 1997, Fortune Magazine had a front page story with the title Why Barnes & Noble May Crush Amazon. In the article, the author posited, quote, anything Amazon dot com can do on the internet, so too can Barnes and Noble, end quote.

Famously, Forster Research released a report in early 1997 entitled Amazon.toast. The price wars and promotional battles that ensued would indeed be fierce and would certainly cut into Amazon's early margins and sales. But remember, for Amazon, the point was never to actually Barry Barnes & Noble. Amazon was playing a longer game. Just as Bezos had envisioned, Amazon proved that it was definitely better on its own turf of e-commerce.

It might not be able to match Barnes & Noble's physical locations and cafes and the ability to browse physical bookshelves, of course, but then it didn't want to, because Amazon could innovate in all sorts of interesting ways, like the recommendation engine and user reviews and things like one-click ordering, things that delighted book buyers in ways that made Amazon seem fresh and innovative. Looking back all these years later, it's hard to shake the notion that Barnes & Noble thought of e-commerce as just another sales channel, and that once it had that sales channel covered, its traditional strengths would certainly squash.

Amazon, this upstart competitor. But in the end, it's also hard, in retrospect, not to think that Bezos's gut instinct was right, that e-commerce was an inherently different and perhaps superior business model. Not a supplement to traditional sales channels, not a sideshow. This was the whole new ballgame. And so as Amazon executed, on this whole new ballgame, it seemingly went from strength to strength. Within three short years, Amazon became the third largest book retailer in the world.

Think of that, out of nowhere, becoming the number three player in its industry. Its sales suddenly representing the equivalent of a 50-store super-store chain. Barnes & Noble could only copy the new features and innovations that Amazon continually rolled out. A term began to be banding about in the business world. Beware because your industry could suddenly be, quote, Amazoned. The idea was that no matter what you sold or what service you provided, you had to be on the lookout for these new web startups that, like had happened to Barnes & Noble, might come out of nowhere and challenge you

and suddenly take up a significant portion of your market. Another key factor to the churning waters that around this time would lead to the formation of the coming dot-com bubble would be the untold billions of dollars that incumbent companies in all industries spent in a defensive attempt to be proactive and come up with their own digital strategy to avoid being Amazon. Bezos himself would later say of his competitor's web efforts, quote, Barnes & Noble isn't doing this because they wanted to. They're doing this because of us. That's just a fact. End quote. Again, Bezos was a true believer in the idea of e-commerce.

In his book about Amazon, the Everything Store, the writer Bradstone recounts a time when Jeff Bezos met with Howard Schultz. the CEO of Starbucks. Being local downtown neighbors, Schultz wanted to propose some sort of partnership that would allow Amazon to place merchandise in Starbucks cafes, perhaps in a bid to emulate Barnes & Noble's cafes, I suppose. Schultz told Bezos, quote, you have no physical presence, that's going to hold you back, end quote.

Bezos shot back that the physical presence wasn't necessary. We're going to take this thing to the moon, he told Schultz. Remember, books were just the test case for that grand plan to create an everything store, to bring all of commerce onto the web. And I'll admit that I was a bit of a skeptic of this fact before beginning my research, but everything I've read and every interview I've conducted so far leads me to the conclusion that on some level, books were always just the beginning. even if he told investors at the time and told the press that the focus of Amazon was only on books,

Jeff Bezos was probably always dreaming of selling everything. He was just waiting for this first test case to prove his instincts right. From that perspective, challenging Barnes & Noble was just a stepping stone. Getting big fast was more than just a clever internal rallying cry. It was, in fact, a mission statement for seizing a dominant position in a position in a, a limitless market, and seizing an opportunity that would never come around again, at least in Bezos's lifetime. In prescient words, describing the field of e-commerce as he saw it, Jeff Bezos said, quote,

there will be a proliferation of companies in this space, and most of them will die. There will only be a few enduring brands, and we will be one of them, end quote. Amazon had its by now de rigour IPO on May 15, 1997. It raised $54 million in capital for the company, largely thanks to the explosive sales numbers that it could show to investors. In 1996, Amazon's sales had reached $15.7 million. But for 1997, the sales projections would top $147 million. By the time of the IPO, Amazon was recording a staggering 900% growth rate in annual revenue.

By later 1997 and early 1998, Amazon was researching new markets, just as Bezos had always planned, looking for new things to sell on the web. The logical category extensions that Amazon settled on were music retail, which at that time meant CDs, and movie retail, which at the time meant VHS cassettes, but was actually at that exact moment transitioning to DVD disks. Clearly, both of these products were just like books, completely identical commodity items that could be easily shipped by mail. As Amazon executive Joy Covey remembered, Bezos, quote, always had a large appetite.

It was just a question of staging the opportunities at the right. time." The right time came in June of 1997 when Amazon launched its music store, and then again, in November of 1997 when it started to sell movies. A mere 120 days after launching the music store, Amazon could factually claim to be the largest online seller of music. The CD-Nows of the world didn't stand a chance. The motto on the top of Amazon's website suddenly changed from reading Earth's largest bookstore to now read books, music, and more, and eventually would simply say Earth's biggest selection. Movies and music, then, were the first forays into the everything store that we now know and love. But again, it seems

that Bezos always had his mind on literally everything. Nicholas Lovejoy has recounted this story from when he first joined Amazon, saying, quote, books were always a prelude to other things. At that time, I was doing quite a bit of kayaking. Jeff would say, in the future, when you come to Amazon.com, I don't want you just to be able to search for kayak and find all the books on kayaking. You should also be able to read articles on kayaking and buy subscriptions to kayaking magazines. You should be able to buy a kayaking trip to anywhere in the world you want to go kayaking. And you should be able to have a kayak delivered to your home. You should be able to discuss kayaking with other kayakers.

There should be everything to do with kayaking. And the same is true for anything. That amazing vision was there then. Very clear, unambiguous. No doubt about it. Books were just a starting point, end quote. And so now, at the scale that Jeff Bezos was now daring Amazon to operate in, you could no longer get away with tiny warehouses and everyone pitching in to ship out orders. From the time of the IPO through the year 2000,

Amazon would go on to raise a staggering $2.2 billion in debt and capital to fuel its growing operations, and most importantly, to pay for an expansion into warehouses and inventory. After all, if you were going to be able to sell and ship literally everything, even items as big as kayaks, then you needed to upgrade and evolve into a true distributor of your own. You needed to become the supply chain and warehousing and distribution and logistics juggernaut that we also know Amazon as today. And that costs money, a ton of it. Again, for context, I think we can look at the years 1994 to 1996 as when Jeff Bezos used Amazon and books as an experiment to prove to himself and to the world that e-commerce was a viable new way of doing business. And in the years 1996 to 1998 were when this way of doing business got traction, and the proof of concept was validated.

Then the years 1998 to 2000 would be when Bezos finally felt that his vision for e-commerce and his motto of Get Big Fast could be put into action. To this day, there are two buildings on the Amazon campus that are called Day One North and Day One South. The plaques inside have a quote from Bezos, which reads, There's so much stuff that is yet to be invented. There's so much new that is going to happen. People don't have any idea yet how impactful the Internet is going to be, and that all of this is still day one in such a big way, end quote. So the warehouses, these giant warehouses,

the size of multiple football fields with armies of autonomous, robots filing and sorting that those warehouses that we think of today as being synonymous with Amazon, the predecessors of those began to show up around the time of the IPO, and more so into 1997 and 1998. The first big-time warehouse, in fact, came, as we said, in November 1996, when Amazon purchased that 93,000 square foot facility in Seattle. But soon there was one in Delaware, and then in Nevada and Georgia and Kansas, and two in Kentucky. Some of the logistical whiz kids that helped put all of this together included Jimmy Wright and especially Rick Dalzell.

Both of these men were Walmart veterans who were hired away by Amazon to attempt to mimic the best practices of the world's biggest genius retailer. One of the keys to Walmart's success all these years has always been its distribution and supply chain. An intricately woven and calculated network of nationwide warehousing and delivery systems that ensures that supercenter store shelves are always stacked in the most efficient and, more importantly, cost-effective way possible. Amazon thus logically turned to Walmart veterans, as one of the early Amazon employees called them the guys with the cowboy hats, to emulate Sam Walton's miracle with Walmart, but to emulate it in this new age of virtual retail. The Everything store had to have its virtual shelves stacked all the time, too. And what we should stop and marvel at is that Bezos and Amazon were largely able to make this happen.

Today, Amazon's operations are the wonder of the retail world. But we should also stop and notice what this transformation meant. That one big casualty here is actually one of the original tenants of the Everything Store concept that went all the way back to its original conception in the D.E. Shaw days. And that was the idea of just being a middleman, of not having big, costly warehouses and things like inventory to worry about. Amazon, to this day, does not have physical retail locations, and in a sense it does still function as a giant middleman, but it definitely abandoned that original idea of frictionless retail. wholly embracing by certainly 1998 and 1999, the idea of inventory and warehousing and logistics in a way that no one, at least in e-commerce, has even attempted to match since.

But you could see at the time that this abandonment of frictionless commerce and this embrace of big-time warehousing was eminently logical. If Amazon warehoused up fast alongside getting big fast, then it could also be able to. then it could offer greater selection than any retailer in the world, not just any book retailer, but literally any retailer. It could offer greater efficiency to customers than anyone. Order that thing you want, that kayak, if that's what you want, and it shows up at your door in a matter of days. You never have to leave your house.

And all those Walmart hires, all the emulation of Walmart's vaunted distribution and supply chain, well, that's kind of exactly the vision that investors in Amazon were suddenly and quite eagerly buying into. Because, let's be honest, if Amazon is in some way aping what Walmart did, and Walmart does, say, $300 billion a year in sales, then around the time of Amazon's IPO and the time that e-commerce was starting to interest investors in a big way, investors began imagining a day when maybe Amazon might do $300 billion a year in sales. But if Amazon ever reached those numbers, it would do so without the added expenses that the giant superstore centers had, the Walmarts of the world, with their real estate and utility costs,

and more importantly, the labor costs in the form of all those mills, millions of sales clerks. Heck, Amazon wouldn't even need all those Walmart tractor trailers running around the country keeping stores resupplied. With Amazon's model, FedEx and UPS took over the actual delivery of products to customers. When we discussed Netscape, I mentioned the idea that what made investors fall in love with Netscape as an investment was that the Netscape IPO, they felt, represented a chance to invest in the next generation Microsoft. Well, the investor love story with Amazon, in a way, has always been about investing in the next generation Walmart. And Walmart, like Microsoft, was another stock from the 80s and 90s that so

many investors kicked themselves for not getting in on early. And so now it's time that we take a look at not Amazon the company, but Amazon the stock market darling. Because even more so than Netscape, or even Yahoo, more so, in fact, than almost anyone else in the dot-com era. Amazon became the poster child for dot-com era stocks, dot-com era companies. It was certainly the poster child for e-commerce, and as we'll see, e-commerce was basically the main driver of the dot-com stock market bubble. It was the quintessential.com stock. And in the 1990s, as a stock, if you were able to hang on for a wild ride, Amazon sure was one hell of an investment.

Only a year after Amazon's May 1997 IPO, Amazon's stock had appreciated 1,450%. This appreciation, as I've said, was driven by its insane sales growth. It's nothing but crazy growth. At one point in time, Amazon sales numbers were doubling every quarter for six consecutive quarters. Somewhere between 1998 and 1999, Amazon blew past $1 billion in sales for the first time. Again, a far cry from the $100 million in sales that was Jeff Bezos' original best-case scenario.

By 1998, November of 1998, in fact, Amazon stock stood at $220 a share, and that was, in fact, a far cry from the original IPO price of only $18 a share. And then, on December 15, 1998, Henry Blodgett, a then obscure analyst with Oppenheimer, predicted in a research note that, Amazon would hit $400 a share within 12 months' time. This was obviously a bold claim, saying that Amazon would basically double its market value within a year, going from roughly $200 to $400. Despite the fact that it was already at this point valued at an astronomical 97-times sales. For comparison, Walmart stock at the time traded at only 1.6 times sales.

But Blodgett stood by his prediction, claiming, quote, we continue to believe that Amazon.com is in the early stages of building a global electronic retailing franchise that could generate $10 billion in revenue and earnings per share of $10 within five years, end quote. To say that others on Wall Street were skeptical of this claim, if not of Amazon itself, is putting it mildly. one analyst told Forbes magazine, Amazon will be the brand name of a tulip someday. Jonathan Cohen, a more well-known analyst at Merrill Lynch, placed his own Amazon price target at $50 a share, not the $400 that Blodgett was claiming, and Cohen declared, quote,

it's fair to say that at this moment in time, Amazon is probably the single most expensive publicly traded company in the history of U.S. equity markets. End quote. What happened? Well, a mere 13 days later, 13 days, Amazon stock price actually surpassed Blodgett's original prediction. Blodgett, who would later liken his prognostication to throwing gasoline on a bonfire, Blodgett would become a Wall Street rock star overnight, and in fact, he soon moved to Merrill Lynch, where he would replace no less than Jonathan Cohen as chief analyst.

So, was Blodgett right and Cohen wrong? Well, yes and no. Obviously, almost 20 years on, with Amazon boasting a market cap of 270 billion and generating yearly sales of around 90 billion, you could certainly say, with the benefit of hindsight that Blodgett was brilliant for picking Amazon as a horse to ride. But in a way, Cohen wasn't wrong. It just depends on at what time you're considering the argument, especially considering that Amazon famously has never shown very much of a profit.

And if you were an Amazon stockholder in, say, 2001, when Amazon stock was all the way down to $5 a share, then you might have thought that $400 a share was indeed insane and that Cohen had won the argument. The truth is, get big fast was always a religion for Jeff Bezos. He really does believe that we are still in the early innings of the game in which technology will transform all of our lives. And so while investors have always had this famously funny,

relationship with Amazon, patiently indulging Jeff Bezos, confident that with all the sales growth and revenue growth, one day there will come a day when the spigot is turned on and Amazon will generate easy and bountiful profits. Even 20 years on, Bezos does not think that today is that day. He still thinks we're in the early innings, and he certainly thought Amazon was in the early innings in the late 90s. So the question is, when is the right time to decide if Amazon is successful or not? After the dot-com bubble burst, when Amazon seemed like it might go the way of the other dot-com flameouts, or 15 years later when sales have increased by 90 times.

Or maybe someday in the future when Bezos turns on that mythical spigot, and Amazon can stockpile profits like Apple or Google is done. In the Yahoo slash search portals chapter, I mentioned how the dot-com era bubble was fueled not only by IPOs and soaring stock prices, but also by the mergers and acquisition activity of the large search players. In the late 90s, because Jeff Bezos had raised all this money, because he believed it was the early innings and he had to strike while the iron was hot, because he was a true believer in e-commerce and getting big fast, Amazon certainly contributed to the M&A frenzy just as much as the Yahoo's of the world did, and thus did its own role to create the dot-com bubble that we'll be talking about shortly.

The M&A spending spree that Amazon embarked on scooped up a whole range of properties, properties that tended to build out on Amazon's obvious e-commerce strengths, properties like Jungley, a price comparison search engine, for example, or the internet movie database, which would obviously complement the move into movie sales, or the online payments pioneer accept.com, or even the web traffic measurement company Alexa. But to put it mildly, Bezos would,

not shy with spreading his money around. There were a whole range of other investments. Some of them were designed to scoop up possible e-commerce competitors. Some of them were strategic investments in other e-commerce verticals like the investment in Drugstore.com that Amazon made. But there was just a wide range of dot-com era e-commerce hopefuls, most of which did not survive. And Amazon had investments, or purchased many of them, including pets.com, gear.com, wine shopper.com, greenlight.com, homegrocer.com, and of course, that infamous delivery service, cosmo.com. And actually, interestingly, Amazon's first ever acquisition was a pioneering social networking site called planetall.com.

which is why, ironically enough, the quote-unquote patent for social networking is actually owned by Amazon, not Facebook. All of this wild spending, all of these acquisitions came, of course, on top of the investments that Amazon was continuing to pour into warehousing and logistics, and came at the same time that Amazon was paying tens of millions of dollars now to create exclusive market. partnerships with the likes of AOL. There was a $40 million tie up with AOL once Amazon could supplant Barnes & Noble. And there were similar deals with the likes of MSN, Yahoo, Excite, all the others. All the while, it seemed like Bezos couldn't pass up a chance to spread his bets on e-commerce, on this day-one opportunity, to invest in another strategy that might build a competitive mode

around Amazon's own operations. And in fact, one of Amazon's costliest endeavors came when the company tried to combat what it saw as a threat from the other major e-commerce pioneer of the era, eBay. In a way, you can understand why Jeff Bezos might have felt threatened by eBay. The online auction site sort of represented the frictionless commerce model that Amazon had just recently abandoned. eBay didn't have any warehouses. It didn't have or have to carry any inventory. It really was that true middleman, facilitating sales between individual parties and taking a small cut for providing the platform.

Perhaps for a brief window of time, Jeff Bezos might have feared that he had strayed from the one true model of e-commerce, and that eBay's model, that true frictionless model, model was perhaps superior. One of the things that eBay could claim that Amazon couldn't was that from day one of its operations, eBay was a profitable concern. It was making money. And so overtures were made to eBay about a possible takeover. But as we'll see when we get into our chapter on eBay, those overtures were rejected. And so, in a few short months, Amazon simply created its own auction system completely from scratch, a monumental and monumentally costly endeavor.

It's largely forgotten now, but the early Amazon versus eBay battle for auction supremacy was actually a major conflict that Amazon threw a ton of resources into, including acquisitions like Exchange.com, and investments in things like the 250,000. year old auctions house Sotheby's. In the end, though, Amazon simply couldn't overcome the network effect that eBay enjoyed as its own competitive mode. The sellers stayed where the

greatest numbers of buyers were, and the buyers stayed where the greatest numbers of goods were on sale, and that was eBay. So, quietly, Amazon would shudder its auctions experiment, and in the end, the massive

investment that Amazon made to combat eBay proved to be money not well spent. But it did turn out to provide a valuable learning experience for Amazon. The experiments in auctions in providing third parties with a commerce platform of their own using eBay's existing systems led to other Amazon experiments like Z-shops. And Z-shops eventually morphed into the third party Amazon fulfillment and storefront operations that we know today, and that would actually, in fact, go a long way toward helping Amazon survive the coming.com bust. After all, if Amazon had built all of these giant warehouses and logistics systems and had them in place anyway, why not do whatever it took to keep them filled up?

Amazon would eventually make its first real, real money running web commerce operations for other partners, partners like Toys R Us, as well as tens of thousands of other vendors. In a way, this is always what Bezos has promised to investors. Experimentation, investment, seizing opportunities where they might arise, and not being afraid to make costly mistakes. This, in the end, is why Amazon, to this day, famously, does not make a lot in profits. In Amazon's very first letter to public shareholders, Bezos was explicit, quote, 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, end quote. So it's not that Amazon is to this day losing money on every sale it makes, although there might have been times in the 90s when that was the case. Indeed, for most of its life, its margins on what it sells have always been quite healthy. It's simply that Jeff Bezos has always seen opportunities to plow more money into Amazon, into growth, expansion, new ideas.

Bezos once told the magazine Business 2.0, quote, Profits are the lifeblood of a company, but not the reason to exist. You don't live for your blood, but you couldn't live without it. We were profitable for about an hour in December 1995, but it was probably a big mistake, end quote. Bezos's wild bets on Amazon and on e-commerce in general have certainly paid off. By the end of the decade, the end of the 90s, Amazon was approaching 30 million customers. In five short years, its yearly sales had reached the billions of dollars. Quite simply, few companies have ever grown as big as quickly as Amazon did.

In 1999, Time magazine named Jeff Bezos its person of the year. And yet, that same year, Amazon recorded losses, once again, of a $350 million. And that was the contradiction of Amazon at the height of the dot-com bubble. It was the poster child for e-commerce, for dot-com stocks, for the massive social and economic disruption that the dot-com bubble was wrecking on the entire economy. And it was a blue-chip stock among the hundreds of dot-com companies that were popping up online and going public and gaining billion-dollar valuations.

And yet, like all of those other dot-coms, as the 90s drew to a close, Amazon was losing money just like all the others every single quarter. And in the coming nuclear winter that would be the dot-com bust, Amazon itself for a time seemed like it too could possibly join the likes of pets.com in the ranks of Chapter 11 ignominy. As I've said previously, most people don't remember that there was a time when Amazon was a $5 stock. There were years when it was by no means clear that Jeff Bezos's wild bets and his get-big fast religion and his in shakable faith in e-commerce as a new, better model would actually pay off. In fact, it's a little-known story that Bezos himself around the turn of the century was in fact in danger of being pushed. aside in his CEO role for a former Black and Decker executive named Joe Galley, Jr. Amazon's board of directors were so fed up with Bezos' spendthrift ways and so concerned about the coming dot-com downturn that they considered bringing Galley in as an adult replacement

for the founder Bezos. This would not have been unusual, as you'll know. quote unquote adult supervision has very often been brought in quite successfully in dot com companies. The likes of eBay and Yahoo are good examples in the persons of Meg Whitman and Tim Kugel, respectively, who replaced the original founders as CEOs of those companies. It would not have been outside the realm of possibility for Jeff Bezos to have stepped aside, let's say, around 1999, when he had recently had his first child and was actually at the time still very, very young at the age of 35. And if that had happened, then we'd be telling a different story about the brilliant founder who so wisely knew when it was time to step aside so that others could come in and save the company he had so brilliantly started.

But he didn't step aside. And the fact that Bezos did not step down and the fact that he guided Amazon to survival after the dot-com, bubble burst is just as much a testament to Bezos's business genius as his original version for e-commerce ever was. But Amazon in the era after the dot-com bubble burst is a story for another chapter. For now, we should probably just end things by tipping our hats to that original vision that Jeff Bezos had. Today, as this is recorded in 2015, e-commerce represents 30% of all commerce done in the United States, excluding restaurants and car dealerships. The belief that within 20 short years, e-commerce could capture almost a third of all commerce

in this country is something that we have to give credit to Bezos alone for having. He was the first to see this and the first to capitalize on the opportunity. In 2013, Amazon's e-commerce sales totaled more than those of the nine other largest e-commerce merchants combined. If you include cars and restaurants in overall commerce sales, e-commerce still only represents about 5% of total U.S. retail sales, but that number is growing all the time, and Amazon alone accounts for about one-fourth of all e-commerce. There is not today an Amazon for clothes, and an Amazon for electronics and an Amazon for toys.

there's just Amazon for everything. I've wondered publicly on this podcast why there weren't other companies that could compete, why there isn't a Pepsi to Amazon's Coke. But maybe the answer to this is really quite simple. It all comes down to the audacity of Jeff Bezos being the first to bet big on e-commerce and the faith that he always maintained in the Everything Store concept

and his fidelity to the get-big fast-stress, that has always kept Amazon so far ahead of any other e-commerce players. And all of this from what was once a small little web bookseller. By the way, about those books, today Amazon is, of course, the largest book retailer by far, responsible for 41% of all books sold.