We Study Billionaires - The Investor’s Podcast Network - TIP506: How Jeff Bezos Built Amazon

Starting point is 00:00:00 You're listening to TIP. Hey, everyone. Welcome to The Investors Podcast. I'm your host, Clay Fink, and on today's episode, I'm going to be talking about one of the best performing companies in terms of stock performance over the past 25 years or so, and that is Amazon. We study a number of different billionaires on the show, but very few have been as successful as Jeff Bezos, as he has accumulated a fortune of over $117 billion, according to Bloomberg as of November 2022. For this episode, I've read through Brad Stone's book, The Everything Store. This book was released back in 2014, and he did a really good job of covering the early

Starting point is 00:00:43 days of Amazon and the foundation that was laid beginning in 1994 to set up for the monstrous growth in the years to come. Brad has been on our show a couple of times to talk about his books. He was on the show back in 2017 on episode TIP 142. In the second time he came on, he chatted with Trey about his most recent book, Amazon Unbound, on episode TIP 362. During this episode, you'll learn about why Amazon originally started to focus only on books, how Bezos transitioned from Wall Street to entrepreneurship, why Amazon was so misunderstood

Starting point is 00:01:19 by the majority of people in the early days, why they were one of the only dot-com companies to survive the collapse of the 1999 tech bubble, the keystead. Amazon's astronomical growth, as well as my biggest takeaways from studying Jeff Bezos. Without further ado, here's my episode covering the brilliance of Jeff Bezos and the Everything Store. You are listening to The Investors Podcast, where we study the financial markets and read the books that influence self-made billionaires the most. We keep you informed and prepared for the unexpected. Now, when I look at companies to invest in, I always find it interesting to look back at the

Starting point is 00:02:09 company's founding story to get a better understanding of its roots, its founders, its history, as well as get a better understanding of the business overall. During last week's episode, TIP 503, I covered the story of Airbnb, which is one of my very favorite founding stories I've ever read as Brian Chesky is just an incredible visionary who I believe is still in their early innings. Today, I'd like to cover the founding story of Amazon and cover Bradstone's book, the Everything Store. In the preface of his book, Stone writes that the words relentless and ruthless stating that these two words show up repeatedly in the book as they are extreme but familiar values at the most successful companies. Getting the lethal combination precisely right has been

Starting point is 00:02:57 Bezos's biggest talent and perhaps Amazon's greatest asset. We all know the Amazon of today that millions of people use every single day, but during this episode, I wanted to do that more into the founding story of Amazon and the trials and turbulence that Bezos had to encounter to take Amazon to become what it is today. Over the years, most people believe that Amazon was forever doomed because it wouldn't be able to reach a scale that would allow them to profitably sell retail products. However, Amazon was super lucky to have Jeff Bezos at the forefront, who understood every single detail and cared more about the company more than anyone else. Despite years of bottom line profits being negative, Bezos was able to build a shareholder base

Starting point is 00:03:42 similar to Warren Buffett that brought into this vision as he built trust with them that he was setting the stage for a much better future for those long-term shareholders. This is also an idea I dove deep into during my episode covering Nick Sleep's investment approach on TIP 492. When asked about Amazon success, Bezos stated that, quote, If you want to get to the truth about what makes us different, it's this. We are genuinely customer-centric. We are genuinely long-term oriented, and we genuinely like to invent. Most companies are not those things. They are focused on the competitor rather than the customer.

Starting point is 00:04:23 They want to work on things that will pay dividends in two or three years, and if they don't work in those two or three years, they will move on to something else. Additionally, they prefer to be close followers rather than inventors because it's safer. So if you want to capture the truth about Amazon, this is why we are different, end quote. Now, Bezos grew up going to school in Houston that selected students who were gifted within the elementary school system. He was extremely smart and talented from a very young age, as his elementary teacher stated that at the time, there were no limits to what he could do given a little guidance. Amazon.com started as an idea that floated through the New York City Wall Street office of D.E. Shaw, which was a quantitative hedge fund.

Starting point is 00:05:08 Bezos was a Princeton graduate of 1986 with a major in computer science and committed himself to the idea of one day owning a business he could call his own. He started his career at a company called Fytel, a telecommunications startup. He spent two years moving up the ranks at Fytel, but the startup failed to get off the ground, so he took another job at Bankers Trust. Again, he He moved up the ranks quite well, but became bored of it after two years, as he was just tired of the reluctance of companies to challenge the status quo. So in 1990, he took a new position at D.E. Shaw, which was a very new hedge fund that would trade and take advantage of arbitrage opportunities in the market.

Starting point is 00:05:50 As a vice president, he started researching new business opportunities on the rapidly growing internet, which of course had extraordinary potential in the early 1990s, as it wasn't yet very well known. During his time at D.E. Shaw, Bezos met McKenzie Tuttle, who also joined the company. Her office was right next door to his, and the two got engaged just three months after they started dating and got married in 1993. D.E. Shaw was a company full of innovators and talented engineers, and they saw the gigantic potential of the internet, as it was just beginning to reveal itself through the applications they were using to trade the markets. David Shaw, The founder of D.E. Shaw and Jeff Bezos would meet for a few hours each week to brainstorm ideas

Starting point is 00:06:37 for the wave of new technologies that would be coming. Several ideas came to mind for them. One was a concept of a free ad-supported email server for consumers, which essentially is Gmail today. Another idea they discussed was what they called the everything store. The idea was simple. It was an internet company that served as an intermediary between customers and manufacturers and sold nearly every type of product all over the world. One important element in the early vision was that customers could leave reviews on any of the products. Bezos was intrigued by the potential of what the internet could become, so he started to dig deeper into researching how big it could potentially be. He then found a statistic like the number of bytes transmitted over the

Starting point is 00:07:25 web and how it increased by a factor of 2,000 times from 1993 to 1994, and the number of packets sent over the web had increased by 2,500 times. This definitely peaked Bezos's interest and fascinated him and really compelled him to want to get ahead of this trend as we know as the internet today. Bezos concluded that becoming an everything store at the very beginning was very impractical, So he made a list of 20 possible product categories, including computer software, office supplies, apparel, music. Then he concluded that the best option would be books because they are just pure commodities

Starting point is 00:08:06 and buyers knew exactly what they would be getting if they ordered a book on the internet. Additionally, there were only two primary distributors of books at the time, which would make the logistics of getting the books much easier for him. and most importantly, there were 3 million books in print worldwide, which was far more than any physical bookstore could possibly stock on their shelves. So the competitive advantage the online store would have would be the vast selection of products that the physical stores couldn't offer. Additionally, people that didn't live close to bookstores would be able to order online and have the books delivered to their doorstep. Bezos could hardly contain his excitement

Starting point is 00:08:47 on this idea. The recruiting chief at D.E. Sheper, investigated some of the early online bookstores, and they still have record of a book they purchased from the website Future Fantasy Bookstore for $6, and the book arrived in very poor shape, so Bezos smelled opportunity. D.E. Shaw had started a number of other internet companies, which Bezos wouldn't have ownership of, and he knew if he pursued this venture within D.E. Shaw, that it wouldn't be his company. Bezos always wanted to be the true owner in the long. leader of this new venture with a significant equity stake, so he knew he needed to leave his

Starting point is 00:09:26 career on Wall Street if he wanted to do such a thing. Bezos then approached David Shaw and let him know that he planned to leave the company to create an online bookstore. Shaw understood where Bezos was coming from as he was in the same position when he decided to leave Morgan Stanley, but he reminded Bezos that he did already have a great job with a great company that was already growing really rapidly. D.E. Shaw might actually end up competing with Bezos's new venture. So Shaw simply asked Bezos to really think it over, so Bezos had a somewhat difficult decision to make. To come to his ultimate decision, Bezos used what he famously calls his regret minimization framework. Bezos said he would look ahead and think about his 80-year-old self.

Starting point is 00:10:13 Bezos said that when he was 80 years old, he knew he was 80 years old, he knew he was, might sincerely regret not having participated in this thing called the internet that he thought was going to be revolutionary. When he thought about what decision would minimize his regret for his future self, it was an incredibly easy decision for him to make. Most of our regrets in life are acts of omission, the things that we didn't try, the path untravelled, rather than the things we did try and give it a shot. Like I mentioned with Brian Chesky's parents in last week's episode, Bezos's parents were also very worried about their son leaving his high-paying job to sell books on the internet. They said he should do so in the evenings and do it on the weekends, but Bezos insisted that things were moving too fast and he needed to act quickly.

Starting point is 00:11:03 Bezos decided to call his company Cadabra Inc. And already upon leaving, a member of his team at D.E. Shaw, Jeff Holden wanted to join Bezos. But Bezos's contract with D.E. Shaw stipulated that if he left the firm, then he couldn't recruit anyone from the company for at least two years. So Jeff Bezos and McKenzie packed up their things as they wanted to move out of New York to get started. Bezos was aware that online companies didn't need to collect sales tax in states they didn't operate in, so it was wise to not start up an office in California or New York because there's high populations there, so they started searching for a new home. Jeff was 30 years old and McKenzie was 24.

Starting point is 00:11:45 The two eventually laid down their roots in Seattle as the city had a reputation as a technology hub and was close to one of the primary book distributors. Since people often misheard Cadabra as cadaver, Bezos eventually changed the name of his company to Amazon.com. At the time, Bezos was registering a number of potential URLs he'd use. Even to this day, I think it's pretty cool. if you type in Relentless.com into your browser, you'll be redirected to Amazon's website. Bezos convinced Shell Caffin to pack up his things from Santa Cruz, California to join

Starting point is 00:12:23 Bezos in Seattle as a setup shop in Bezos's garage. In late September of 1994, Bezos drove to Portland, Oregon to take a four-day course on bookselling sponsored by the American Booksellers Association, while Kauffan started to work on building out the website, which was no easy task in those days. The company was funded with $10,000 of Bezos's money, and over the next 18 months would be financed with $84,000 in interest-free loans, while Kaffan purchased $5,000 of stock upon joining. Bezos and Kaffon both were assigned an annual salary of $64,000, which was a 50% pay cut for Kauffan at the time. I'm somewhat surprised they gave themselves a salary so early, given that they were just getting started and they were just building out their website.

Starting point is 00:13:12 Now, in early 1995, Bezos' parents invested $100,000 in Amazon.com. Jeff handed them the business plan that for the most part went over their heads and really didn't make sense to them. And Jeff told them that there's a 70% chance that they would probably lose all their money. McKenzie would become the company's accountant handling the company's finances, writing the checks and helping Jeff make new hires, and Paul Davis was the next one to join the team as a programmer. The team ended up staying in the garage only for a few months, as they were using too much energy that the house couldn't handle, plus Bezos wanted to bring in more employees.

Starting point is 00:13:51 The release of their initial website was very bare and unimpressive, but they had a website that included a virtual shopping basket, a safe way to enter credit card information, and a search engine that scoured through a catalog of books. Each time someone made a purchase through Amazon, a bell would ring on Amazon's computers and everyone would go and check and see if it was someone they knew that made the purchase. But it would only take a few weeks that there were so many purchases that they ended up turning off this feature. When a customer purchased a book, the book would get sent to Amazon and then they'd ship it

Starting point is 00:14:26 to the customer directly. One customer from Ohio was thrilled to find Amazon. as he wrote the company to say that the nearest bookstore was 50 miles away. Another customer from Chile ordered a book, and after the order was successful, the customer placed a second order for several dozen copies of the same book. Amazon was beginning to see the benefit and appeal they were getting from a very small subset of people. Now, similar to how the review system was critical for Airbnb that I covered in last week's episode, Bezos believed that if Amazon had more user-generated book reviews than any other site, it would give the company a huge advantage.

Starting point is 00:15:07 In Amazon's very first week, officially launching, they took in $12,000 worth of orders. The next week, they did $14,000. They quickly tried to bring on more people to help as they were already overloaded with books they needed to ship out to customers. Just running some quick numbers myself, if the average price of a book was $10,000, and that would be 1,200 books they would need to package and have the team send out to customers. And if you only have a handful of people, that's quite a bit of work, given that they were just getting started and just building out their website. Just one week after the launch, two Stanford graduates that started Yahoo had reached out

Starting point is 00:15:46 and asked if they would like to be featured on their site. Now, Yahoo at the time was one of the most popular sites on the internet. Kaffan thought about this and thought this would be like sipping out of a fire hose. because he figured that this would lead to a substantial number of orders, but of course, they ended up accepting the offer. In the first month, Amazon had sold books in all 50 states and in 45 countries. It's just insane that they were able to get this off the ground right away, and they were able to have this just flood of orders come in right away, very first week, very first month. Again, as I go through this story, I can't help but compare it to the story

Starting point is 00:16:24 of Airbnb. Amazon is bringing in so many orders that they can barely make the time to ship them all out, while Airbnb really struggled to get off the ground. And once they eventually did, scaling was much easier for them because a lot of their business was digital and didn't include shipping any packages. Now, each employee at Amazon was working tirelessly to keep this business on its feet. In the fall of 1995, Bezos was considering raising more money, so he turned to his family who invested $145,000 more into the company. Additionally, Bezos worked with Nick Hanauer to get connected with individual investors to raise $1 million in total at a $5 million valuation. In the meetings with investors, Bezos told them that the company had $139,000 in assets, $69,000 of

Starting point is 00:17:16 which was cash, and that the company had lost $52,000 in 1994 and was on track to lose $3,000, $3,000,000 $100,000 that year. He also said that he expected Amazon to do 74 million in sales by 2000, which was six years away and predicted that they'd be moderately profitable by that time. Let's take a quick break and hear from today's sponsors. All right. I want you guys to imagine spending three days in Oslo at the height of the summer. You've got long days of daylight, incredible food, floating saunas on the Oslo Fjord. And every conversation you have is with people who are at. actually shaping the future. That's what the Oslo Freedom Forum is. From June 1st through the 3rd,

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Starting point is 00:21:40 That's Shopify.com slash WSB. All right, back to the show. To give you a little bit of a spoiler, the company actually did $1.6 billion in sales in the year 2000. Although it didn't make sense to most people at the time, Bezos imagined a future where everyone would have high-speed internet, which would give companies like Amazon a tremendous opportunity to serve these customers through a better and more convenient shopping experience than what the big box stores offered at the time. Many people turned down the opportunity to invest in Amazon because it was such a radical idea,

Starting point is 00:22:20 but those who did invest believed more so in Bezos's ability to execute more so than the idea. Bezos really wanted to only hire the best and brightest people he could find. This was really difficult to do because the company was growing faster than they could really keep up with, so sometimes they needed to hire people that they otherwise would have passed on. Bezos would test the intelligence of applicants by asking them for their SAT scores and curveball questions like how many gas stations are in the United States to try and test the applicant's level of thinking. By March of 1996, they outgrew their three small room office space with four desks in each office and upgraded to a more spacious warehouse just a few blocks from where they were currently at.

Starting point is 00:23:07 Bezos had developed a culture where most employees were working over 60 hours a week. week, and he had extremely high ambitions for the company. By early 1996, revenues were growing at 30 to 40% per month. If you extended that growth rate out to a year, that would be 2,200% annualized. People were working so hard at this time that they would have trouble fully recalling this time period as there were just simply gaps in their memory. That summer, Amazon launched one of their first big innovations, which allowed other websites to collect a fee when they sent customers directly to Amazon to buy a book, otherwise known as a referral commission, which at the time was 8%. Amazon was swiftly burning cash during this time period, continually reinvesting back

Starting point is 00:23:56 into their growth. They raised another $8 million from venture capital in exchange for a 13% stake in the company, valuing them at $60 million. Upon getting this injection of capital, Bezos was as motivated as ever as this could be the beginning of one of the very first internet companies that were built to last. He gave his employees his new model of Get Big Fast, as he knew that the bigger the company got, the lower prices they would be able to get from their distributors. He knew that whichever internet company that got the lead now was very likely to keep that lead in the future.

Starting point is 00:24:33 Now, by this time, the company had grown to around 150 employees and they were working to expand their website to get a bit more customized. What they did was start grouping their customers together that had similar purchasing habits. So if one customer bought a specific book, then another customer with similar taste might be shown that same book as a recommendation. This led to many customers finding books that they otherwise wouldn't have found. Greg Linden, who was an engineer that works on the project, recalls Bezos coming into his office, getting on his hands and knees, joking around, and praising him for his team's great work on this innovation and project.

Starting point is 00:25:14 Bezos stated that, quote, Great merchants have never had the opportunity to understand their customers in a truly individualized way, and e-commerce is going to make that possible, end quote. With the venture capital funding and growth that Bezos had achieved, It was time for him to put together a team of experienced executives to eventually take the company public. He had called Jeff Holden from D.E. Shaw, who originally couldn't join him because of the non-compete clause, but the clause had now expired, and others joined the leadership team coming from Barnes & Noble to Mantex and Microsoft. Now, Bezos was big on taking advantage of every single opportunity to appear in public to tell the story of Amazon.com.

Starting point is 00:25:57 He also believed that going public would help solidify the company into people's minds and establish their brand. He also wanted to be sure to fend off the book-selling giant Barnes & Noble. In 1996, Amazon had $16 million in sales while Barnes & Noble was dominating the industry with $2 billion in sales. Barnes & Noble was led by Lynn Riggio, who called Bezos and wanted to visit Seattle to see him. Bezos, Rizio, and two others joined them for dinner as Rizio told Bezos that they were soon going to launch a website and crush them. But they also said that they admired what they had done thus far. They stated that they were open to the possibility of potentially working together. Ultimately, Bezos decided that he didn't want to work with Barnes & Noble and he tried to take them head on.

Starting point is 00:26:50 When pitching investors, Bezos and his new CFO, Joy Covey, told them that Amazon had much higher potential. returns on invested capital, they and their counterparts because their fixed costs relative to their revenues were much lower than their offline competitors. They got a ton of pushback from potential investors that told them they were going to fail that Barnes & Noble was growing to crush them and that them withholding internal data was ridiculous. Three days before Amazon's IPO, Barnes & Noble filed a lawsuit against Amazon claiming that they had falsely advertised itself to be the Earth's largest bookstore. Riggio was obviously worried about Amazon, but the lawsuit ended up giving them even more attention as Barnes & Noble was finally getting their own site launched.

Starting point is 00:27:36 While Barnes & Noble seemed to be quite focused on their competition, Bezos told his employees to be worried about the customers and focus on where the company was heading. Amazon then started to expand into other product categories like music and DVDs. Bezos had predicted that Barnes & Noble would have serious trouble competing online, and he was right as they were reluctant to lose money and put focus on the online portion of their business. Amazon IPOed on May 15, 1997, and it was a success, although a relatively mild one compared to the IPOs to come in the late 90s. The IPO raised $54 million for the company and created widespread attention. During that year, Amazon's annual revenue grew by an astounding

Starting point is 00:28:22 900%. Amazon's growth even caught the attention of Walmart as well. Amazon wanted to recruit Rick Dalzell from Walmart to join them. He was infatuated with Amazon and was somewhat torn on his decision as his colleagues at Walmart told him that the Amazon model would not work at scale because they didn't store the products themselves. They were ordering from others and then shipping them out. Bezos kept pressing on Dalzell to quit Walmart to join him. But eventually, he did join Amazon as their CIO, so Walmart started to get upset that Amazon was poaching some of their employees. At this point, Kaffan who started Amazon with Bezos, was sidelined and put into an advisory

Starting point is 00:29:06 role as the CTO with no direct responsibilities. The writing was on the wall that Bezos had lost trust with Kafan, and that he didn't have near the leadership ability that Bezos had. Kaffan couldn't imagine himself walking away from the company he had. helped start, but eventually he ended up doing so in the fall of 1999. When Kauffan did this, Bezos made little effort to persuade him to stay. Bezos would describe Kafan as, quote, the most important person ever in the history of Amazon.com, but Kafan said that the way he was treated was one of the biggest disappointments

Starting point is 00:29:43 of his entire life. Now transitioning into the late 90s in the tech bubble, this was a time when Yahoo was valued higher than Disney and Amazon was valued higher than Sears, which was just ridiculous at the time. Everyone was hyped about the internet and getting rich on the stock market as cheap money flowed everywhere, but as Brad Stone put it in his book, no one placed bigger and bolder bets on the internet than Jeff Bezos. Bezos stated that his own company is undervalued and that the world just doesn't understand what Amazon is going to be. Bezos took advantage of the cheap capital as he raised over one $1.5 billion prior to the tech bubble and another $2.2.2 billion from 1998 through early 2000.

Starting point is 00:30:28 Bezos knew that many of the investments they'd make wouldn't work out well, but he wanted to be bold rather than be timid, with the goal of maximizing long-term shareholder value, even if that meant lower profits in the short term. Here's an excerpt from one of Bezos's very early shareholder letters. We believe that a fundamental measure of our success will be the shareholder value we create over the long term. This value will be a direct result of our ability to extend and solidify our current market leadership position. The stronger our market leadership, the more powerful our economic model. Market leadership can translate directly to higher revenue, higher profitability, greater capital velocity, and correspondingly, stronger returns on invested

Starting point is 00:31:13 capital. Our decisions have consistently reflected this focus. We first measure ourselves in terms of the metrics most indicative of our market leadership, customer, and revenue growth, the degree to which our customers continue to purchase from us on a repeat basis in the strength of our brand. We have invested and will continue to invest aggressively to expand and leverage our customer base brand and infrastructure as we move to establish an enduring franchise. So it's very clear that Bezos had this long-term vision that has actually played out over the years. During the late 90s, Amazon and Bezos went on a buying frenzy as they purchased a number of companies to try and continually build out their competitive moat, such as the movie database, IMDB,

Starting point is 00:32:00 the British Web Bookstore bookpages, among others. They even invested in internet companies such as pets.com, gear.com, winechopper.com, among others as well, most of which ended up failing in the stock market crash that followed. So Amazon ended up losing. using hundreds of millions of dollars with these investments, which turned out to be a big mistake, as they didn't have the bandwidth to work closely with all of them. One new competitor Amazon had to deal with was eBay, as they were also exploding onto the scene with a slightly different business model. Their sales were exploding as they made $5 million in 1997, $47 million in 1998, and $224 million

Starting point is 00:32:42 in 1999. Although Amazon was a customer-focused company, it's hard not to notice a similar e-commerce company bursting onto the scene while also understanding the importance and the power of network effects within an internet company. eBay was unique because the individuals were the sellers in an auction style on their site. And eBay didn't handle any of the selling or the shipping of the items, unlike Amazon where they were the seller. This led Amazon to eventually release third-party sellers to allow individuals to see individuals to

Starting point is 00:33:14 start selling on Amazon, but out of fixed price rather than the auction style format. One thing that surprised me reading this book is how willing Bezos was to acquire all these sorts of companies, even though most of them didn't work at all. If I were a shareholder of Amazon at the time, I would have been quite concerned that the management team was just being totally reckless with their acquisitions that were happening month after month. But I think Bezos eventually did come to realize these mistakes and correct them over the years to come. Bezos is really known for pushing frugality within a company. Upon purchasing one company based out of the UK, Bezos was presented with an opportunity to share Amazon's five core values,

Starting point is 00:33:58 customer obsession, frugality, bias for action, ownership, and a high bar for talent. Later, Amazon would add a six core value of innovation. Since Bezos was a six-core value of innovation, since Bezos was just a workaholic and really pushes employees to work a ton of hours, many executives left that either wanted to spend more time with family or wanted to start a family of their own. There wasn't much of a work-life balance if you worked for Amazon in the early days. When Bezos was pressured to establish a better work-life balance, he stated, the reason we are here is to get stuff done. That is our top priority. That is the DNA of Amazon. If you can't excel and put everything into it, this might not be the place for you. Through one company that Amazon acquired,

Starting point is 00:34:45 Bezos found out about Google and used his high profile to get into one of their early rounds of equity financing. So Bezos not only created one of the most valuable companies in the world through Amazon, he also was one of the very first investors in Google as well. At the end of 1999, sales were up 95% over the previous year as they added 3 million new customers, and had 20 million accounts on their site. Bezos was named Times Person of the Year and credited as the King of Cyber Commerce. I looked back at how Amazon stock performed during the 1999 tech bubble and it peaked out somewhat in a double top formation. In the first half of 1998, the stock traded for under $10 per share. It hit the $100 range at the start of 1999, then dropped 50%, but rose again

Starting point is 00:35:36 back to that $100 figure before crashing down to $6 per share in 2001. And these are in share price terms not considering their recent 20 to 1 split. So if you look it up online yourself, you're going to see different numbers when looking at the share price. In 2000, Amazon was on track to lose over $1 billion as tech optimism transitioned to tech pessimism in the stock market. Now here's a clip I wanted to play of Bezos talking about the crash of the tech, bubble during the David Rubinstein show. Give it a listen. So what propelled you to sell things more than books? After books, we started selling music and then we started selling videos. And then I got smart. And I emailed a thousand randomly selected customers and asked them besides the things we sell today,

Starting point is 00:36:28 what would you like to see us sell? And that answer came back incredibly long-tailed. The way they answered the question was with whatever they were looking for at that moment. So like I remember one of the answers was, I wish you sold windshield wiper blades because I really need windshield wiper blades. And I thought to myself, we can sell anything this way. And then, so then we launched electronics and toys and many other categories over time. And the vision became, because you read the original business plan, it's just books. Your stock at one point I think went to $100, but then it went down to $6 or something like that. peak of the internet bubble, our stock peaked somewhere around $113. And then after the internet bubble

Starting point is 00:37:12 busted open, our stock went down to six. It went from 113 to six in less than a year. My annual shareholder that year starts with a one-word sentence. And that one-word sentence is the word, ouch. So most of those internet companies of the dot-com era are out of business. Yeah. You survive. What was that made you to survive and virtually the rest of them are gone? That whole period is very interesting because the stock is not the company and the company is not the stock. And so as I watched the stock fall from 113 to 6, I was also watching all of our internal business metrics, number of customers, profit per unit, you know, everything you can imagine, defects, et cetera. Every single thing about the business was getting better and fast. And so

Starting point is 00:38:02 as the stock price was going the wrong way, everything inside the company was going the right way. And I, you know, so I wasn't, we didn't need to go back to the capital markets. We didn't need more money. The only reason, you know, a financial bust like the internet bubble bursting is, you know, it makes it really hard to raise money. But, you know, we already had the money we needed. So we just needed to continue to progress. Wall Street kept saying, well, Amazon's not making any money. They're just getting customers. Where are the profits? Where are the profits?

Starting point is 00:38:33 And Wall Street kept beating you up on that. And your response was, I don't really care what you think. Amazon was, you know, people always accused us of selling dollar bills for 90 cents and said, look, anybody can do that and grow revenues. That's not what we're doing. We always had positive gross margins. It's a fixed cost business. And so what I could see is that from the internal metrics is that at a certain volume level, we would cover our fixed costs, and the company would be profitable. Now, investors started to realize that these tech companies should be given more consideration

Starting point is 00:39:07 and scrutiny as the collapse of Enron and the 9-11 terrorist attacks put downward pressure on the stock market overall. Out of the purge of technology and internet companies in the years that followed, Amazon would be one of the few that actually survived. Although it's easy to say that the company and the stock are two different things, many employees were granted stock options, which gave them an incentive to work hard. hard because if they helped the company succeed, then they would ultimately benefit, assuming the stock price would increase. But many of the employees who joined recently would find that

Starting point is 00:39:41 their stock options were worthless. And because the stock price was way down and credit contracted in the overall economy, there was a big need to run the company much more efficiently and be much more mindful of how capital was allocated. So it's easy to look back and say, hey, the company was doing well, the stock was way down. But when you're actually living through that time period, and if you're actually an Amazon executive or an Amazon employee, it's much harder to actually live through that type of period. An analyst at Lehman Brothers said that Amazon was in a world of trouble. They weren't creditworthy and they were likely to run out of cash within just four quarters unless they managed to secure an additional financing hat trick.

Starting point is 00:40:26 The report spooked the markets as it led to the stock dropping 20% in the midst of its downtrend. Although Amazon was probably in a position better than what the analyst believed, the report presented the possibility of this downward spiral of negativity, either by suppliers demanding immediate payment or customers believing that the internet indeed was a fad that would eventually pass. Bezos looked deeply at Amazon's financials and he really cut costs. the best he could. He removed any excess and he wanted to help relieve investors' concerns, as he publicly stated that Amazon would be profitable by Q4 of 2001. Analysts like the one at Lehman were making the critical mistake that they believed the internet was a fad, which is another

Starting point is 00:41:16 reason why Amazon was so misunderstood by so many. While the stock price was falling, Bezos told his employees that, quote, you don't feel 30% smarter, when your stock goes up by 30%. So when the stock goes down, you shouldn't feel 30% dumber. And he's also reminded of the Benjamin Graham quote that says, in the short run, the stock market is a voting machine. In the long run, it is a weighing machine that measures the company's true value. Amazon up to this point wasn't keen on partnering with their competitors,

Starting point is 00:41:48 but they were in more of a desperate situation at this point to ensure future growth to cover their fixed cost. Toys R S would be one of the larger companies they ended up partnering with. Toys were a tricky category because most of the sales occurred around the holidays, and it was really difficult for companies to predict which products would sell the best and how much each of these products would sell. So you really have to plan ahead for this really seasonal type business. Toys R S were the experts in regards to this,

Starting point is 00:42:19 and Amazon was really the expert at delivering to customers at their doorstep. so the two struck an agreement to sell Toys R S products on Amazon's website. The products would be stored in Amazon's distribution centers. In order to get the products quickly to the customers, the products would be stored in Amazon's distribution centers. The deal was then used as a template to work with other companies. Initially, Amazon struggled to get companies to join them. However, once they did gain traction, it becomes this network effect.

Starting point is 00:42:52 If one electronics company is benefiting tremendously from selling on Amazon, then other electronics companies are going to want to do the same and take advantage of Amazon's millions of customers in their platform. On the flip side, companies who end up partnering with Amazon delayed the necessary education they needed to learn about the revolution of the internet themselves. Plus, they were pushing customers to go to Amazon's website rather than their own. So it's kind of a double-edged sword with partnering with Amazon or not and becoming sort of a technology company yourselves. Let's take a quick break and hear from today's sponsors.

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Starting point is 00:46:40 prospectus at fundrise.com slash income. This is a paid advertisement. All right. Back to the show. Now, when Amazon started, they had originally just sold their own products, but they were also looking into allowing the third-party sellers to come on their platform as well to offer more selection to customers. Once they launched the books category for third-party sellers in November of 2000, publishers were furious as this could lead to a wave of people selling used books, thus cutting into the sales of new titles and hurting the publishers and the authors. This wasn't an easy decision for the company because allowing third-party sellers meant more

Starting point is 00:47:20 competition on the site for the company's existing products and the products offered by their partners. Meanwhile, Bezos was receiving pressure from shareholders to start increasing prices to ensure the viability of the business model. Now, Bezos was really hesitant when he was getting this pressure, and he was reminded of Jim Senegal, the founder of Costco, and how Costco made the commitment to offer low prices to customers, and they resisted the pressure from shareholders to raise their prices. This is similar to the commitment Sam Walton had made for Walmart as well. Bezos recognized that Costco's commitment to low prices created customer loyalty. On a Saturday morning in the spring of 2001, Bezos got coffee with the Costco CEO and learned

Starting point is 00:48:07 why Costco's business model was so successful, including their annual membership fee to be a part of Costco's club of members that received the lowest prices. That Monday, just two days later, Bezos held a team meeting wanting to apply what Costco did to Amazon's business model. That summer, Amazon announced that they were going to be cutting the prices of many of their products by 20 to 30 percent, stating that there are two kinds of retailers. Those who work to figure out how they can charge more, and those who work to figure out how they can charge less. When we are going to be the second full stop, he stated. In 1994, Bezos suspected that the internet would be a huge part of humanity's future, but it wasn't until 2001 did he really start to figure

Starting point is 00:48:56 out how to build the best company on the internet. In the meantime, many executives were leaving because the stock had been tanking, the outlook did not look as good as it used to, and they were actually underpaid relative to their peers and really overworked as well. However, Bezos persevered and made it through these difficult times, reporting Amazon's very first profitable quarter for Q4 of 2001, posting a net income of $5 million, a measly one cent per share, which sent the stock up 25% on this news. As Amazon reached profitability, Bezos continued to expand the company into new categories such as sporting goods, apparel, and jewelry, as well as new countries like Japan and China. Chaos then started to ensue in the distribution centers that were costly and unreliable because Jimmy Wright, who had come from Walmart, had implemented the logistics network based on his experience at Walmart.

Starting point is 00:49:55 So Bezos brought in a young executive named Jeff Wilkie in 1999 to help fix the messes in their distribution centers. Upon being hired, Wilkie set out to fill the ranks of Amazon's logistics division with scientists and engineers rather than with retail distribution veterans. He wrote down a list of 10 of the smartest people he knew, and he ended up hiring them all. The logistics in the warehouse were very unique as someone might order one book, one DVD, some tools, maybe gift-wrapped them, maybe not, but that combination of items might not ever be repeated again. So in many ways, it was a lot closer to manufacturing and assembly

Starting point is 00:50:38 rather than a retail-type setup. Wilkie was meticulous in tracking a number of metrics and for his general managers to optimize for them and improve on them, including how many shipments each fulfillment center received, how many orders were shipped, the per unit cost of packaging and shipping, and it's no doubt that the innovations that Wilkie helped bring the light were critical to Amazon's long-term success. With the focus on eliminating unnecessary costs after the crash, Bezos implemented a more decentralized decision-making structure where those actually working on the issues at hand had the power to make decisions. Rather than constantly running these through the manager. In Bezos's mind, the more unnecessary communication

Starting point is 00:51:24 that occurred, the more time that was wasted. Bezos saw that companies like Microsoft had many layers of management that really added friction to decision-making and sought to avoid such a structure that stifled innovation. Many know Steve Jobs is the guy who could be really volatile in the office, suddenly making a split decision to fire someone in an elevator or just fire them in a snap, on a phone call. Many tech CEOs can be interpreted as harsh and intimidating as they expect so much from the people they work with. Bradstone stated that Bezos definitely fit this description as well, and his manic drive and boldness trumped other conventional leadership ideals, such as building consensus in promoting civility. While he was charming

Starting point is 00:52:11 and capable of great humor in public, in private, Bezos could bite an employee's head off. Some noteworthy quotes that employees provided to Bradstone for his book were, I'm sorry, did I take my stupid pills today? And are you lazy or just incompetent? And why are you ruining my life? These words, of course, from Bezos led some to say that Bezos lacks empathy when working with others. By 2004, Bezos had come around to releasing what he called Super Saver Shipping, which allowed users to receive two-day shipping for an annual fee of $79.

Starting point is 00:52:46 Now, every financial model you could possibly run with regards to this would have said that this idea was totally crazy. Like, you'll never make money with this because each shipment would cost the company $8. So any customers that place more than 10 orders in a year would lose Amazon money on this deal. But Bezos ended up going with this gut, and he ended up relating this, knowing that it would encourage customers who sign up to place larger orders and look to shop in new categories. as well. As we all know, this feature would later become known as Amazon Prime in a greatly accelerated Amazon's flywheel effect. As more and larger orders led to better economies of scale,

Starting point is 00:53:30 this in turn led to lower prices to attract more and more customers. Now, ever since the late 1990s, Bezos had referred to Amazon as a technology company rather than a retailer, despite that they had made the majority of their revenues from selling things to customers. I cannot help but think of Tesla and Elon in recent years, as his fans have repeatedly stated that Tesla is a technology company and not a car company. One other tech company that was rising to the scene at the time was Google. And Bezos did not like that Google was stepping between him and the customer, as people would go on Google.com and search for products there rather than just going straight to Amazon.

Starting point is 00:54:12 So he really didn't like that Google was stepping in between him and the customer. Bezos was also very mindful of how powerful Google was, as he stated, treat Google like a mountain. You can climb it, but you can't move it. Google and Amazon were in stiff competition for hiring the very best engineers, making things even more difficult for Amazon, as many thought that the pay was too low and the workload was too high. I suspect Bezos stated that quote after trying to compete with Google Search, as Amazon had started a general search engine called A9, which ended up fairly.

Starting point is 00:54:46 failing after a key computer engineer left Amazon. Many people today are aware of Amazon Web Services or AWS as Amazon's Cash Cow today, which Stone describes as the business of selling basic computer infrastructure like storage, databases, and raw computing power. The service is woven into the daily life of the technology community. According to the book, various divisions of the U.S. government such as NASA and the CIA are high-profile AWS customers. AWS alone did $62 billion in revenue in 2021 to give you reference for how important this

Starting point is 00:55:26 creation was for them. Essentially, the way that AWS came into fruition is because Amazon allowed their groups of engineers to get together to brainstorm ideas they could work on. Bezos stated that, developers are alchemists, and our job is to do everything we can to get them to do their alchemy. Chris Pinkham and Rick Dalzell wanted to build out a service that would allow a developer to run any application on Amazon servers. Pinkham was moving to South Africa and actually set up an office northeast of Cape Town, and his team's work would become the Elastic Compute Cloud or EC2, which is a service that is at the heart of AWS and that became the engine of the Web 2.0 boom, according to the book. As the Web Services Division really began to emerge, Bezos needed someone to lead that charge.

Starting point is 00:56:19 This is where Andy Jassy comes into play, who is now the CEO of Amazon today. Jassy joined Amazon in 1997 and was later given the unique opportunity of shadowing Bezos, which entailed him following Bezos around and sitting with him in every single meeting. Once his shadowing with Bezos had ended after 18 months, Jassy was a natural fit to, be the new head of AWS. It almost seems that Bezos was willing to try anything to widen the company's moat as a technology company, trying a hundred different things with AWS happening to be the one that struck big and stuck for them.

Starting point is 00:56:59 This is very similar to Google's other Betts division, which seeks to create new technologies that have the potential to pay off huge sums in the long term. So it's investing in all these projects where one of them will have huge asymmetric upside. Initially, Bezos just wanted to break even on the service in order to undercut any of his competitors. He believed that Amazon had a natural advantage in its cost structure and its ability to survive as a low-margin business, while companies like IBM, Microsoft and Google, he suspected, would hesitate to get into this type of market because it could hurt their own profit margins getting it going.

Starting point is 00:57:36 When legendary investor Bill Miller asked Bezos about the profitability prospects of AWS, Bezos predicted that it would be good over the long term, but said that he didn't want to make the mistake of Steve Jobs of pricing the iPhone in a way that was so fantastically profitable that the smartphone market became a magnet for competition, which goes to show how Bezos thought about business. He wanted lower profit margins today to prevent any other business from being attracted to competing with them. High margins attract a competition, while low margins attracted customers. Fast forward a few years, and about every startup was using AWS to power their business, which of course eventually led to Microsoft, Google, and others eventually entering

Starting point is 00:58:23 the field later. As Bradstone put it, the emergence of AWS was transformational in a number of ways. Amazon's inexpensive and easily accessible web services facilitated the creation of thousands of internet startups, some of which would have not been possible without it. and it provided larger companies with the ability to rent a supercomputer in the cloud, ushering in a new era of innovation in areas like finance, oil and gas, health and science. It's not hyperbole to say that AWS helped lift the entire technology industry out of a prolonged post.com malaise. Also, there's a strong case to be made that Amazon wouldn't be near as valuable today without the creation of AWS, which wasn't their core business with Amazon in which it was first created.

Starting point is 00:59:16 Additionally, AWS is a cash cow that allows them to continue to invest in their retail business or any of their other businesses if they'd like, which makes it even more difficult for companies like Walmart to compete with them. AWS would prove to the world that Amazon was, in fact, a technology company like Bezos intended. In 2004, we would see the start of another successful venture within, Amazon. Bezos started a Silicon Valley Skunk Works with the name of Lab 216 and told them that they were to disrupt Amazon's own book selling business with an e-book device that met his high standards.

Starting point is 00:59:55 It wasn't until 2007 that Amazon actually unveiled their Kindle product, and this was largely inspired by Steve Jobs and The Rise of Apple and their popular handheld products. Meanwhile, Steve Jobs was extremely passionate about music as iPods in the iTunes store took over the industry. And Bezos, frankly, was not that passionate about music, so their initiatives really went nowhere for the most part in that industry. Physical CDs, however, were a big part of Amazon's business at the time that the iPod took consumers' interests, while Amazon focused on the Kindle to try and claim the e-books base themselves. Bezos and his executive team had read Clayton Christensen's book, The Innovator's Dilemma, that explained why great companies fail, not because they want to avoid disruptive change, but because they are reluctant to embrace promising new markets that might undermine their traditional

Starting point is 01:00:49 businesses and segments that don't satisfy their short-term growth requirements. Bezos told Steve Kessel that it was his job to put everyone who was selling physical books out of business, knowing that if Amazon didn't dominate this space, then Google or Apple would. It doesn't look like Kendall sales are reported by Amazon today, but this is nowhere near a major revenue driver for the company, although it does still exist. Statista estimates that in 2021, there was $1.1 billion in ebook sales for the industry as a whole. However, in 2004, Amazon sold the majority of books in the United States. and they were strict with the publishers who were pushing back on the better terms that Amazon demanded.

Starting point is 01:01:36 When Amazon didn't get what they wanted for terms, they would unplug these publishers from their personalized recommended systems and the publishers would see their overall sales dropped by up to 40%. Then about 30 days later, the publishers would come back to Amazon agreeing to the terms that they originally wanted. Turning to the next step for the company, Amazon Prime ended up being a big success for them and really helped accelerate their flywheel as those who purchased Prime tended to double their spending after becoming a Prime member. As Stone puts it, a Prime member was like a shopper who walked into Costco for a case of beer and walked out with beer, an armful of DVDs, a 9-pound smoked ham, and a flat-screen TV. Customers loved the convenience

Starting point is 01:02:24 of two-day shipping, which led to more third-party sellers wanting to join the fulfillment network that allowed Amazon to deliver third-party seller products within two days if they stored it with Amazon. In April of 2007, Amazon reported strong and accelerated growth of 32% year-over-year and $3 billion worth of sales in that quarter. This implied that their prime membership was leading customers to buy more on Amazon and less at other internet companies and physical retailers. Stocks were really hot in 2007, and Amazon stock was even hotter, as it jumped by 240%, only to later crash during the Great Financial Crisis, as we all know. Many customers and sellers at this point had experience using eBay and found that Amazon's site

Starting point is 01:03:11 was improving, and the Prime membership made the experience for both parties much easier, thus naturally leading customers and sellers to migrate over to Amazon's platform. High shipping fees were also an issue with eBay, and Amazon was much more savvy in bringing shipping costs down through their economies of scale with their large network. By the end of 2007, Amazon had done $14.8 billion worth of sales, which was more sales than two of their early competitors combined, Barnes & Noble with $5.4 billion, and eBay with $7.7 billion. Rick Dalzel, who was the senior manager of engineers, decided that his time was up with Amazon and wanted to spend more time with family. Rick reflected on the time, working.

Starting point is 01:03:57 with Bezos, stating that, quote, Jeff does a couple of things better than anyone I've ever worked for. He embraces the truth. A lot of people talk about the truth, but they don't engage their decision making around the best truth at the time. The second thing is that he is not tethered by conventional thinking. What is amazing to me is that he is bound only by the laws of physics. He can't change those.

Starting point is 01:04:21 Everything else he views as open to discussion, end quote. Amazon really learned from their mistake in the late 90s of purchasing unproven startups, so they hardly made any acquisitions at all in the 2000s, one of which was Audible in 2008 for $300 million. Bezos also learned many lessons from Jim Collins, who is one of our very favorite authors here at TIP, who wrote the very popular books, Good to Great, and Built to Last. Bezos learned to prefer to build out the company rather than acquire his way to growth, which he learned from good to great. Collins suggested that you should only acquire other firms when they had fully mastered their

Starting point is 01:05:03 virtuous cycles and acquisitions can then be used as an accelerator of the flywheel effect and not the creator of it. Another company that caught Bezos's attention was Zappos, whose name was synonymous with buying footwear online. Zappos started in 1999 and sales soared from $8 million in 2001 to $300,000,000,000,000,000, and $70 million in 2005, and the company, like Amazon, was obsessed with doing what's best for the customer. Initially, Zappos had no intention of selling out to Amazon. But Zappos really ran into issues during the great financial crisis. The credit market tightened up, and the company's sales

Starting point is 01:05:44 growth contracted significantly. Meanwhile, Amazon continued making acquisition offers and investors were starting to become pretty impatient, realizing that Amazon could potentially take over. Zappos in their whole category and essentially put them out of business. It almost seemed like a moment of desperation for Zappos from the perspective of, you know, the housing market had collapse and the employee morale was really low. And if Zappos did sell out to Amazon, the employees would receive a really big payout as, you know, it'd be like a token of appreciation by the CEO and the board for their hard work during a very difficult time in the economy. So Amazon purchased Zappos for $900 million in November of 2009, and Zappos demanded that the payment be made with

Starting point is 01:06:30 equity rather than cash, which isn't something that Bezos really likes to do. Stone stated that the great financial crisis was in many ways a gift for Amazon. The crisis not only led them to acquiring Zappos, but it hurt the sales of physical retail stores, sending them into survival mode, while Bezos was investing in new categories and more rapid distribution. Looking back at the stock's performance over that period, Amazon stock peaked around $100 in late 2007, dropped all the way to 20 shortly after in late 2009, before swiftly rebounding and soaring practically straight up through the end of 2013, where it reached around $400 per share.

Starting point is 01:07:12 As the stock was very volatile, sales continued to march upward year after year going from nearly $15 billion in 2006, $19,000, 2007. $24 billion in 2008, $34 billion in 2009, and $48 billion in 2010, so up by roughly $33 billion in just four years. Amazon was finally being spoke in the same breath as Google and Apple and not considered an afterthought anymore as the company blasted off and seemed to defy gravity. The company had been doubted for many years, and Bezos would often say that they were misunderstood by others and they had a strong willingness to be misunderstood. understood. Brad Stone stated that, quote, Bezos deflected attacks by claiming that Amazon was a missionary company, not a mercenary one. Missionaries have righteous goals and are trying to make the world a better place. Mercenaries are out for money and power and will run over

Starting point is 01:08:09 anyone who gets in their way. To Bezos, there was no doubt where Amazon fell, end quote. Bezos stated that one of those great paradoxes is that it's usually the missionaries who end up making more money, which is a concept I talked about during my episode covering Charlie Munger, TIP 494. Charlie has always said that doing right by your partners and not trying to screw anyone over is the right way to do business. And you actually end up making more money this way in the long run. Amazon was a company that committed to low prices to their customers, and many of their competitors tried to demonize to Amazon by saying that they were trying to create a monopoly and undercut their competitors by selling their products at a loss.

Starting point is 01:08:53 Now, like I touched on earlier, one of the controversial pieces of Amazon's business was the way in which sales tax was applied to their purchases. If Amazon didn't have a physical presence in the state they sold in, then they didn't need to collect sales tax on purchases in that state. It was up to the customer to pay that themselves, which, in my opinion, seems somewhat ridiculous, but I'm no expert in sales taxes. Amazon polled all sorts of clever tricks to do whatever they could to avoid sales tax collection wherever possible.

Starting point is 01:09:24 For example, they called their fulfillment centers or other offices as wholly owned subsidiaries that earn no revenue, so they didn't claim these sites as a physical presence in the state if they could get away with doing so. Bezos stated in his 2008 shareholder meeting that we're not actually benefiting from any services that those states provide locally, so it's not fair that we should be obligated to be their tax collection agent since we're not getting any of the services. Now, in my mind, I just see this as Bezos's way of trying to offer lower prices to customers and continue to extend Amazon's market position. In many states, Amazon lost this advantage

Starting point is 01:10:04 and would have to compete with its offline rivals on a level playing field. Amazon also had trouble with many companies who didn't want their products to be listed on Amazon at such low prices, many times prices that resulted in a loss for Amazon. Nike is a prime example of this. Nike wants their products to be perceived as a higher-end product, and this gives them higher profit margins. Now, Stone talks about this company called Wustov that he uses as another example. Wustov was a premium product that had much difficulty working with Amazon. This company had higher-end razors and knives and started supplying their products to Amazon in the early 2000s. Now, because it was a great company with really high-quality products, they were able to price their

Starting point is 01:10:52 products in the premium category. For example, they had chef's knives that sold for $125, even though similar-sized knives at Target would maybe go for $20. Now, manufacturers are not allowed to enforce the prices in which retailers end up selling their product, but they can decide which retailers to sell to, and they can include in the contract a price floor in which the retailer ends up selling the product. Initially, Amazon respected the manufacturer's desires on where they would like the product's price, and quickly, Amazon became Wustov's largest online retailer and the second largest U.S. seller overall. But sometimes Amazon would price match other online retailers that offer the knives at a cheaper price. Wustov felt the

Starting point is 01:11:39 need to defend the value of its brand and protect the smaller independent knife shops that were responsible for about one-fourth of their overall sales that didn't have the power to match these really low prices. In 2006, they decided to come to the painful decision to quit working with Amazon, and just three years later, they ended up changing their mind and going back. Amazon didn't believe in setting price floors, as they always wanted to be known as the online low-cost option where their prices just couldn't be beat anywhere else. Any company that decided not to list on Amazon was ultimately shooting themselves in the foot because they almost always made the decision to go back. Bezos took to heart that many people didn't like Amazon and the negative

Starting point is 01:12:23 connotation that people associated with them. And this really reminds me of Elon where people will talk bad about Tesla or about SpaceX. I probably sound a bit like an Elon fan boy right now, but I just see so many similarities with Bezos and Musk here when reading his story. Bezos realized that much of the way people just perceived Amazon was just based on what they've read and based on what people were telling them. So it was just based on their individual perception of the company. Now you can think about Apple. We don't view Apple as a phone company that rips people off with high prices and exploits

Starting point is 01:12:59 child laborers overseas. Apple is perceived as a company that's cool. It's authentic. It's inventive. Apple's associated with Steve Jobs, who's known for being unconventional, for thinking big, taking risks, and changing the status quo. So Bezos was very mindful that people won't always perceive you of who you really are. Even if you're a really good person, other people with different interests might try and

Starting point is 01:13:24 portray you as a really bad person. At the very end of the book, Stone wraps it up by talking a lot about Bezos. And, you know, a story of Amazon is really a story of Bezos because the company is just really a reflection of him being at the helm for so many years. He says that Bezos is like a chess master playing countless games simultaneously, with the boards organized in such a way that he can efficiently tend to each match. At the time that Stone wrote the book, he stated that Bezos spent more time on Amazon's newer businesses such as AWS, the video streaming,

Starting point is 01:14:01 unit, Kendall and Kendall Fire. He said in these divisions, stress levels are high, and any semblance of balance between work and home falls by the wayside. Advertising is another new business unit that would prove to be a key revenue driver for the company going forward. According to status to Amazon's ad revenue was $4 billion in 2017 and $31 billion in 2021, and that's projected to grow to $64 billion by $26. Amazon owns much of the most value digital real estate where customers go there specifically to make a purchase. This naturally leads to many companies wanting to advertise and they'll continually pay more and more as the value of that digital real estate continues to increase. This is one of their many scalable businesses where

Starting point is 01:14:48 it's easy for them to continually increase their ad rates while adding practically no additional costs. I didn't talk about this much during the episode, but the book also discussed Bezos's aspirations to go to space, as he started Blue Origin in 2000. The book talked about his deep desire to get very wealthy so he could explore space. I haven't heard him talk about this too much publicly, so I was personally quite surprised to read about that. Bezos grew up in Houston during the Apollo era, and this was during NASA's heyday. Now, knowing that Bezos is no longer the CEO of Amazon, it really does make me wonder how well Jassy will handle growing the company over the longer term, as Bezos now maybe has a less

Starting point is 01:15:34 active role with the company. It is nice that Jassy has been with the company since the late 90s, so he knows the business and its history as well as anyone, but just knowing how committed Bezos was to the mission of Amazon, you know, it's just really hard to replicate that. So in studying Bezos, what are my biggest lessons and what have I learned? First, instead of focusing on what's going to change in the future, Bezos puts so much focus on what's not going to change. People are always going to want low prices, fast delivery, and big selection. So we really narrowed down how he can provide those benefits to customers in a way that is better than his competitors. Second, be willing to accept the hard facts and cannibalize yourself.

Starting point is 01:16:21 It's better to create a new business that wipes out your old business than to let somebody else do it themselves. This could even apply to your job. If your job's being rapidly disrupted, then start learning and preparing for the way of the future. Bezos figured that e-books would be a big part of the future, so he hired someone internal to cannibalize his own business, which originally started with selling physical books. And then things like thinking long term, thinking big and making bold decisions, work on something you're really passionate about and something you enjoy. Put intense focus on the customer. ruthlessly cut costs all come to mind as well.

Starting point is 01:17:01 All right, that concludes today's episode covering Brad Stone's book, The Everything Store, and Jeff Bezos. Special shout out to Brad for writing such an incredibly well-detailed piece. Sitting down and reading the two books I did over the last two weeks really just made me so grateful that I have the opportunity to read and learn from these incredible billionaires and authors, just share it with the world. Thank you so much for tuning in, and I'll see you again. next week. Thank you for listening to TIP. Make sure to subscribe to millennial investing by the

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We Study Billionaires - The Investor’s Podcast Network - TIP506: How Jeff Bezos Built Amazon

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