Amazon was launched on July 16, 1995, as a humble online bookstore operating out of the garage of founder Jeff Bezos. In little more than two decades, the company is now the largest eCommerce retailer in the world with annual revenue in 2020 of $386 billion. Bezos originally wanted Amazon to be called Cadabra – a shortened version of Abracadabra. In 1994, Bezos and then-wife MacKenzie Tuttle began registering several domain names. These included Awake.com, Browse.com, and Bookmall.com. The pair ultimately settled on Amazon.com after searching through a dictionary for inspiration. As the biggest river in the world, it aligned with a goal Bezos had to make his online store similarly vast.
- What’s in a name?
- The early years
- Get big fast
- Surviving the dot-com bubble
- Amazon pre-dot-com bubble
- The near death experience
- The paradigm shift
- The experiments that lead to becoming a tech giant
- The Amazon’s mindset
- Amazon’s renewed business playbook
- Any lessons Amazon learned during the dot-com bubble to find business model-market fit that we haven’t mentioned? Plain luck?
What’s in a name?
Bezos originally wanted Amazon to be called Cadabra – a shortened version of Abracadabra.
However, his lawyers advised him that the reference to the popular magic catchphrase might be too obscure. They also contended that Cadabra could be misconstrued as “cadaver” instead.
In 1994, Bezos and then-wife MacKenzie Tuttle began registering several domain names. These included Awake.com, Browse.com, and Bookmall.com. The pair ultimately settled on Amazon.com after searching through a dictionary for inspiration. As the biggest river in the world, it aligned with a goal Bezos had to make his online store similarly vast.
The early years
The original Amazon business model of selling books online was met with much derision from skeptics. Many argued Amazon would not be able to compete with established chains such as Borders and Barnes & Noble.
Where Amazon differed from these established players was convenience. Bezos wanted to deliver online orders directly to any customer anywhere in the world – a process we take for granted now that was revolutionary at the time.
Very early on, a bell would ring in the Amazon office every time a customer made a purchase. The company was so small that employees would crowd around to see if they personally knew the customer.
After a few short weeks, however, orders became so frequent that the bell had to be removed. During its first month of operations, Amazon had sold books to people in all 50 states and 45 different countries. Each order was personally transported to the post office and dispatched by Bezos and his employees.
Get big fast
While the company was not profitable until 2001, Bezos noted that books were easy to source, package, and distribute.
With great business acumen, he noted that books would allow him to capitalize on the massive growth potential in online eCommerce. In fact, he believed online retailers would only be successful if they adopted the mantra “Get Big Fast” – a slogan Bezos had printed on company t-shirts.
After several online bookstore acquisitions in Europe, the product range was extended once more to include consumer electronics, home improvement items, software, toys, and video games, among other things.
The rest, as they say, is history.
- Amazon founder Jeff Bezos originally wanted the company to be called Cadabra. However, the idea was canned after lawyers noted its obscure reference to magic and possible confusion with the word “cadaver”.
- Amazon’s original business model of selling books was derided by critics who suggested it could not compete with established players. To provide a point of difference, Bezos maintained a focus on customer convenience.
- Amazon grew rapidly because Bezos identified how easily the sale of books could be scaled to achieve growth. This idea became a company mantra that is responsible for a large part Amazon’s success.
Surviving the dot-com bubble
Since its inception in 1994, and its IPO in 1997, going to the 2000 dot.com bubble Amazon was not a profitable company. Indeed, as Amazon established itself as one of the strongest online brands, and the strongest bookstore online, already by 1996-1997, it quickly expanded to offer more and more, from DVD to any other item imaginable. That sort of expansion was driven to gain as quickly as possible market shares of, at the time, embryonic e-commerce market. Thus, Amazon lost money, year after year. Yet, the company still managed to generate positive cash flows, thanks to its positive cash conversion cycles and exponential revenue growth, until the dot-com bubble kicked in.
As Amazon revenue growth slightly slowed down, its cash generation also declined and from $822 million at the bank, in 2000, Amazon ended up with $540 million at the bank by 2001, thus burning over $280 million in cash.
Amazon pre-dot-com bubble
While at the time Amazon had already expanded in many categories and product types, it still didn’t think as a platform. Amazon was an incredibly successful e-commerce with a broad selection of items, low prices, discovery, the 1-Click technology, fulfillment, “look inside the book” feature, reviews, wish list and more.
As we’ll see it would be only in 2001 that Amazon would start three core programs (Merchant@amazon.com Program, Merchant Program, Syndicated Stores Program), that would help Amazon gain substantial traction, with revenues moving from over $3.1 billion in 2001 to over $5.2 billion by 2003, and for the first time in its financial history (at least from its IPO) Amazon turned a profit and cash started to flow in again.
The near death experience
During the 2000s with the explosion of the web, capital was flowing at a high rate. This was mostly a top-down approach where venture capitalists invested billions of dollars in companies hoping they would build something valuable. A simple idea coupled with a domain name was enough to spur excitement and inflated stock growth.
To have an idea of how gloomy was the scenario. As the Guardian highlighted in June 2000, in an article entitled “Amazon.bomb:“
Analyst Ravi Suria highlighted Amazon‘s “weak balance sheet, poor working capital management, and massive negative operating cashflow – the financial characteristics that have driven innumerable retailers to disaster through history.” It was a day during which Amazon‘s shares lost 20% of their value, and 51m of them changed hands. A company worth about $40bn (£25bn) just before Christmas had ended the day worth $12bn (£7.5bn), and things did not improve during trading yesterday.
At those comments, Jeff Bezos replied at the time:
Three years ago our stock was $1.50 a share, today it’s $30-something. There have been many, many days when our stock has gone up 20% in a day” – that laugh again – “and if stocks can go up 20% in a day, they can go down 20% in a day. All internet stocks are volatile, including Amazon.com… we are nowhere near running out of cash, and we are not at all worried about it.
And he was right. Even though the company had burned a few hundred million in cash in 2001.
It had managed to get a long-term loan of over six hundred million back in 2000, right before the explosion of the dot-com bubble. Thus, guaranteeing enough cash to go through that bad period.
Indeed, as of 2001, Amazon still had over five hundred millions of cash sitting in its bank account. To understand how bad Amazon reputation might have been at the time (of course not all agreed with that), an article dated April 26, 2001, by Doug Casey, author of “Crisis Investing,” highlighted:
I’ve said several times that Amazon is a cinch for bankruptcy, certainly Chapter 11 (a reorganization) and maybe even Chapter 7 (a liquidation), although I consider the latter a bit of a long shot.
Luck for sure played a key role. Amazon, like many other companies during the dot-com bubble, played with a very aggressive playbook skewed toward market domination and investing the whole resources brought back into the business for more aggressive growth and expansion. This became clear when, in 2000, Amazon found itself in a cash squeeze. The company was burning cash, and although one deal with AOL brought in an additional $100 million in cash as an investment into the company.
There was another event that saved Amazon from bankruptcy, and it happened a month before the dot-com crash. Amazon sold $672 million in convertible bonds to overseas investors and it did so at just the right time. Had Amazon waited just a bit longer it would have failed miserably.
Given the perfect timing of that capital raise, as the dot-com busted, investors also filed a class action against Amazon, that would be finally settled in 2005. It’s important to remark that many internet companies underwent lawsuits during that time, as the bubble burst, leaving off the table billions and billions of investors’ money.
That near-death experience taught Amazon to rehaul its whole playbook. It wasn’t any longer just about aggressive growth and expansion for its own sake, with an aggressive financial model where it was all about cash flows, but Amazon started to become more nimble and also to come up with programs such as Amazon websites (third-party) and many other programs that would lead to the success of the company.
Today Amazon praises itself as the most customer centric company on earth.
To understand also the shift on how Amazon spent money also in terms of product/technological development below a fragment from the Amazon financials back in 2001:
Technology and content expense was $241 million, $269 million and $160 million for 2001, 2000 and 1999, respectively, representing 8%, 10% and 10% of net sales for the corresponding periods, respectively. The decline in absolute dollars spent during 2001 in comparison to the prior year primarily reflect our migration to a technology platform that utilizes a less-costly technology infrastructure, as well as improved expense management and general price reductions in most expense categories, including data and telecommunication services, due to market overcapacity.
The paradigm shift
The turning point was 2001, after the dot-com bubble burst. Amazon realized it needed something to change its pace of growth. They stopped thinking in terms of a traditional business operating on the web and therefore using the web as a sales channel and they started to think of the web as a platform for business model change.
Thus they started to think in terms of ecosystem, so how do we enable other businesses on top of our platform? From there Amazon started to experiment some key programs that would not only enable the transition toward becoming a platform (most items sold on Amazon would be third-party) but also to develop later in the 2000s the cloud infrastructure that would evolve into AWS, today the most valuable part of the business, which is giving rise to another phenomenon, that of the AI company.
Back in the 2000s, Amazon opened up to brands like Toysrus.com, Inc., Target Corporation, Circuit City Stores, Inc., the Borders Group, Waterstones, Expedia, Inc., Hotwire, National Leisure Group, Inc., Virgin Wines, and others which further amplified Amazon’s brand.
If you could buy something from Target on Amazon, you would trust its brand more easily.
In 2001, we began marketing three services for third-party sellers that are designed to provide catalog retailers, physical store retailers and manufacturers with cost-effective e-commerce solutions and to expand the selection on our Websites for the benefit of our customers:
The third-party seller services strategy revolved around three core ones:
- Merchant@amazon.com Program: here third party seller could offer their products on Amazon, either in its online stores or in a co-branded store on the Amazon site, or both. And they could also fulfill those thorough products Amazon by paying the company a fixed fee. Companies like Target and Toysrus were part of it.
- Merchant Program: with which the third-party seller had its own URL and Amazon provide the option of providing fulfillment-related services on behalf of the third-party.
- Syndicated Stores Program: which represented third-party seller’s e-commerce websites were offering products available on Amazon, which product were fulfilled by Amazon and the company paid commission to syndicated store.
The experiments that lead to becoming a tech giant
Some of the technologies that helped Amazon become a successful e-commerce company in the first place were the “1-click patent” and by 1999 Amazon had also launched its seller marketplace, that used to be called zShops, where sellers could sell their used merchandise.
While, the turning point came by 2003, when Amazon launched web hosting services, that would become AWS, in reality, the real turning point was in the 2000, when Amazon started to order their jumbled mess to offer third party to build their sites on top of Amazon, what was known at the time as Merchant.com.
As Tech Crunch reports:
What you may not know is that the roots for the idea of AWS go back to the 2000 timeframe when Amazon was a far different company than it is today — simply an e-commerce company struggling with scale problems. Those issues forced the company to build some solid internal systems to deal with the hyper growth it was experiencing — and that laid the foundation for what would become AWS.
As explained in Amazon 2017 annual report:
It’s exciting to see Amazon Web Services, a $20 billion revenue run rate business, accelerate its already healthy growth. AWS has also accelerated its pace of innovation – especially in new areas such as machine learning and artificial intelligence, Internet of Things, and serverless computing. In 2017, AWS announced more than 1,400 significant services and features, including Amazon SageMaker, which radically changes the accessibility and ease of use for everyday developers to build sophisticated machine learning models. Tens of thousands of customers are also using a broad range of AWS machine learning services, with active users increasing more than 250 percent in the last year, spurred by the broad adoption of Amazon SageMaker. And in November, we held our sixth re:Invent conference with more than 40,000 attendees and over 60,000 streaming participants.
The Amazon’s mindset
As Jeff Bezos recounted back in 2006, “many of the important decisions we make at Amazon.com can be made with data. There is a right answer or a wrong answer, a better answer or a worse answer, and math tells us which is which. These are our favorite kinds of decisions.”
Indeed, opinion and judgment, in that case, mattered way more. As Jeff Bezos recounted in 2006:
As our shareholders know, we have made a decision to continuously and significantly lower prices for customers year after year as our efficiency and scale make it possible. This is an example of a very important decision that cannot be made in a math-based way. In fact, when we lower prices, we go against the math that we can do, which always says that the smart move is to raise prices. We have significant data related to price elasticity. With fair accuracy, we can predict that a price reduction of a certain percentage will result in an increase in units sold of a certain percentage. With rare exceptions, the volume increase in the short term is never enough to pay for the price decrease. However, our quantitative understanding of elasticity is short-term. We can estimate what a price reduction will do this week and this quarter. But we cannot numerically estimate the effect that consistently lowering prices will have on our business over five years or ten years or more. Our judgment is that relentlessly returning efficiency improvements and scale economies to customers in the form of lower prices creates a virtuous cycle that leads over the long term to a much larger dollar amount of free cash flow, and thereby to a much more valuable Amazon.com. We’ve made similar judgments around Free Super Saver Shipping and Amazon Prime, both of which are expensive in the short term and—we believe—important and valuable in the long term.
In particular, Jeff Bezos cited a paper called “The Structure of ‘Unstructured’ Decision Processes” published in 1976 by Henry Mintzberg, Duru Raisinghani, and Andre Theoret.
More, in particular, the paper highlighted how, when an institution made decisions, primarily based on data and math, that made them take efficient operating decisions. Yet, as long-term, strategic and “unstructured” (based on processes that have not been encountered in quite the same form and for which no predetermined and explicit set of ordered responses in the organization) decisions, might not rely on quantitative understanding, will get underestimated.
That happens, because decisions that can be taken on a quantitative basis can be measured, thus institutions but also companies and managers in the field focus too much on measurable analyses. Yet those decisions might be good for the short-term. They might prevent an organization from focusing on long-term, hard and strategic decisions. Amazon, a company that relied over and over again on quantitative analysis of things that could be measured, optimized and maximized. Also relied a lot on judgment, opinion, and human decision-making when it came to long-term, strategic decisions that could not be based on previous experience or scenarios, but needed to be tackled. This point is very important. In a world of management that focuses more and more on the quantifiable, and measurable. Getting data-driven might mean losing the strategic focus.
Amazon laid out the foundation of its decision-making process, based on few key principles, defined in 1997, in the first Shareholders letter:
- We will continue to focus relentlessly on our customers.
- We will continue to make investment decisions in light of long-term market leadership considerations rather than short-term profitability considerations or short-term Wall Street reactions.
- We will continue to measure our programs and the effectiveness of our investments analytically, to jettison those that do not provide acceptable returns and to step up our investment in those that work best. We will continue to learn from both our successes and our failures.
- 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.
Amazon’s renewed business playbook
In the annual letter of 2001, Jeff Bezos highlighted:
And he continued:
Why focus on cash flows? Because a share of stock is a share of a company’s future cash flows, and, as a result, cash flows more than any other single variable seem to do the best job of explaining a company’s stock price over the long term.
Therefore, even though Amazon did survive the dot-com bubble, the business model which would enable the company to make it through the first phase of scale-up was drafted around the beginning of the year 2000, right at the bottom of the dot-com bubble.
In short, even though Amazon emphasized so much on cash flows, during the dot-com, the company was burning a substantial amount of cash. And Amazon itself still saw the web as a distribution platform, rather than a business model enabler.
Therefore, Amazon‘s survival through that period was nonetheless due to a bit of lack. However, Jeff Bezos led Amazon through that period with vision and extreme passion, and he kept pushing the company to a new business model.
Any lessons Amazon learned during the dot-com bubble to find business model-market fit that we haven’t mentioned? Plain luck?
- Customer Obsession
- Invent and Simplify
- Are Right, A Lot
- Learn and Be Curious
- Hire and Develop the Best
- Insist on the Highest Standards
- Think Big
- Bias for Action
- Earn Trust
- Dive Deep
- Have Backbone; Disagree and Commit
- Deliver Results
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