The Everything Store: Jeff Bezos and the Age of Amazon (10 page)

Joy Covey believes that from the beginning, Bezos planned to expand beyond books, but he was looking for the right moment to do it. “He always had a large appetite,” she says. “It was just a question of staging the opportunities at the right time.”

So that spring, Jassy researched music, Kilar looked into the home-video market, a former Harvard classmate named Victoria Pickett examined shrink-wrapped software, and the list went on. At a management offsite at the Westin Hotel, the MBAs presented their findings. Amazon executives chose music as the first expansion target, and DVDs as the second. To the discomfort of early employees wedded to the zeal of creating a literary hub on the Web, the mission was now more comprehensive. The motto on the top of the website changed from Earth’s Largest Bookstore to Books, Music and More, and, soon after, to Earth’s Biggest Selection—the everything store.

Near the end of the daylong offsite, Bezos asked everyone to write down a prediction of the company’s revenues in five years. Eugene Wei, a strategic planning analyst who was there to take notes, recalls that Bezos’s guess was one of the highest in the group but suspects
that no one came close to getting it right. They simply had no idea what was coming down the pike.

To open new categories and build more warehouses, Amazon needed more than a plan: it needed additional capital. So that May, the company raised $326 million in a junk-bond offering, and the following February, another $1.25 billion in what was at the time the largest convertible debt offering in history. With a 4.75 percent interest rate for the latter offering, it was exceedingly cheap capital for the time. To their surprise, Covey and Bezos did not have to head back onto the road to pitch the Amazon story to hidebound institutional shareholders. Investors who had been raised on a steady diet of dot-com hype over the preceding year lined up eagerly to buy the bonds.

Randy Tinsley, Amazon’s treasurer and corporate development chief, met finance colleague Tim Stone on a Saturday at an auto-repair shop in Issaquah to sign the promissory notes for the convertible-bond deal. Tinsley was having a car stereo installed in his jeep and he showed the papers to the bewildered attendant behind the desk. “You want to know what this is?” he bragged. “This is 1.25 billion dollars.”

The two-year frenzy that followed would come to be known as the dot-com bubble.

In the late 1990s, the Web evolved from the province of geeks to the stuff of front-page newspaper stories, day traders, and regular folks who were venturing for the first time into what was then popularly called cyberspace. The resulting mania for the widely predicted changes to business and society sparked an equity bubble that made rational observers question their own sanity. Yahoo was valued more highly than Disney; Amazon was worth more than storied Sears. In Silicon Valley, entrepreneurs and their backers got drunk on the overflowing optimism and abundant venture capital and threw a two-year-long party. Capital was cheap, opportunities seemed limitless, and pineapple-infused-vodka martinis were everywhere.

During that time, no one placed bigger, bolder bets on the Internet than Jeff Bezos. Bezos believed more than anyone that the Web would change the landscape for companies and customers, so he sprinted ahead without the least hesitation. “I think our company is undervalued” became another oft-repeated Jeffism. “The world just doesn’t understand what Amazon is going to be.” In those highly carbonated years, from 1998 to early 2000, Amazon raised a breathtaking $2.2 billion in three separate bond offerings. It spent much of that on acquisitions, but even just a few years later, it was difficult to show that any of those deals helped its primary business. It opened five new state-of-the-art distribution centers in the United States and later had to close two of them and lay off hundreds of workers amid the inevitable retrenchment.

During those misadventures, Bezos seemed unperturbed. If anything, the setbacks made him push the company even harder into new territory. He said to Rick Dalzell, the former Army Ranger who’d joined Amazon from Walmart, “Physically, I’m a chicken. Mentally, I’m bold.” Susan Benson remembers riding up the Columbia Building elevator one morning with Amazon’s founder. She had Rufus in tow, and Bezos quietly studied the corgi. “You are a very sweet dog, Rufus,” he said. Then he looked up at Benson. “But you know, he is not bold.”

Bezos used that word a lot:
bold.
In the company’s first letter to its public shareholders, written collaboratively by Bezos and Joy Covey and typed up by treasurer Russ Grandinetti in early 1998, the word
bold
was used repeatedly. “We will make bold rather than timid investment decisions where we see a sufficient probability of gaining market leadership advantages,” they wrote. “Some of these investments will pay off, others will not, and we will have learned another valuable lesson in either case.” The letter also stated that the company would make decisions based on long-term prospects of boosting free cash flow and growing market share rather than on short-term profitability, and one section in particular served as a guidepost for the unorthodox way the company planned to approach Wall Street.

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 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, and 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.

Inside Amazon, the shareholder letter became the equivalent of holy scripture. Bezos rereleases the letter each year with the company’s annual report, and the company has hewed remarkably close to the promises and philosophies laid out in it.

Amazon started its dot-com-era sprint with what it called its megadeals. It paid tens of millions of dollars in the late 1990s to be the exclusive bookseller on the popular sites of the day like AOL, Yahoo, MSN, and Excite. These sites were called portals, because they were the main entryways to the Web for the new and technically unsophisticated masses. The portals were accustomed to receiving equity stakes for these kinds of deals, but Bezos refused to give that—he was as stingy about handing out stock as he was about allowing employees to fly business-class. Instead, he paid cash and convinced each portal to throw in a freebie: links to Amazon books within search results. For example, if someone searched AOL.com for ski vacations, he would see a link to books about skiing on Amazon.

Bezos enforced strict frugality in Amazon’s daily operations; he made employees pay for parking and required all executives to fly coach. But he was surprisingly profligate in some ways. In early
1998, when he hired Randy Tinsley from Intel to become director of corporate development, one of the first things he said to him was “I am really looking forward to going shopping with you.” Their resulting splurge was epic. Amazon bought the movie database IMDB.com, the British Web bookstore BookPages, the German Web bookstore Telebuch, the online marketplace Exchange.com, the pioneering social-networking service PlanetAll, and a data-collection company called Alexa Internet—among many other purchases. The acquisitions brought in experienced executives, but Amazon was moving too quickly, and was too chaotic internally, to properly integrate the companies and their technology. Most of the executives left after a year or two, repulsed by the frenetic pace, the dreary Seattle weather, or both.

Amazon also veered disastrously into the venture-capital arena. In 1998 Bezos and venture capitalist John Doerr saw an opportunity for an online pharmacy and founded Drugstore.com, recruiting longtime Microsoft executive Peter Neupert to run it. Amazon owned a third of the company. The venture got off to a promising start, so for the next two years, Tinsley and Bezos invested tens of millions of Amazon’s cash in a variety of dot-com hopefuls, including Pets.com, Gear.com, Wineshopper.com, Greenlight.com, Homegrocer.com, and the urban delivery service Kozmo.com. In exchange for its cash, Amazon took a minority ownership position and a seat on the board for each, and the company believed it was well positioned for the future if those product categories succeeded on the Internet. The startups believed they had a powerful partner invested in their success. Almost all of them went down in flames, though, during the collapse of the dot-com bubble in 2000, and by then, Bezos had his own problems and possessed neither the temperament nor the time to try to save them. The company lost hundreds of millions on these investments. “Amazon had to be focused on its own business,” says Tinsley. “Our biggest mistake was thinking we had the bandwidth to work with all these companies.”

Inside Amazon, employees lived under Bezos’s frugal edicts while they watched in awe as he kept pushing more and more chips
into the pot. Gene Pope was an early engineer at Apple who reunited at Amazon with his former colleague Joel Spiegel. After watching the wild expansion for a few months, Pope said to Spiegel, “What we are doing here is building a giant rocket ship, and we’re going to light the fuse. Then it’s either going to go to the moon or leave a giant smoking crater in the ground. Either way I want to be here when it happens.”

As the company grew, Bezos offered another sign that his ambitions were larger than anyone had suspected. He started hiring more Walmart executives. In early 1998, Amazon pursued one of Rick Dalzell’s former colleagues, a retired Walmart vice president of distribution named Jimmy Wright. At Walmart, the abrasive Wright had proven himself so exasperating that once during an argument in his office, Dalzell, the Army Ranger, had lifted Wright entirely off his feet, deposited him outside the office, and slammed the door shut. But Dalzell knew that if anyone could accomplish Bezos’s ambitious vision of a rapid build-out of distribution capacity, it was Jimmy Wright. “I’m not sure anyone else in America could have done it,” Dalzell says.

Bezos courted Wright for months and that summer got him to tour the Dawson Street warehouse. Bezos said he wanted a distribution system that was ten times larger than it currently was, and not just in the United States but in Amazon’s new markets in the United Kingdom and Germany. Wright asked Bezos what products they would be shipping. “He said, ‘I don’t know. Just design something that will handle anything,’ ” Wright recalls. “I’m going, You’re kidding me, right? And he said, ‘No, that is the mission.’ I had to have a solution to handle everything but an aircraft carrier.”

Wright had never experienced a challenge of that magnitude. At Walmart, distribution centers shipped containers of products predictably, once a day, to all the stores in the surrounding area. At Amazon, there were innumerable packages going to countless destinations. And there was no predictability, because Amazon sales were growing by 300 percent a year.

As Wright started planning, Amazon navigated a tumultuous 1998 holiday season. Around Thanksgiving, Joy Covey realized that the gap between the number of orders being placed on the website and the number of packages being shipped to customers was widening, and she raised an alarm. Amazon declared an all-hands-on-deck emergency, and, in a program dubbed Save Santa, every employee from the main office took a graveyard shift on Dawson Street or in a new facility in Delaware. They brought their friends and family, ate burritos and drank coffee from a food cart, and often slept in their cars before going to work the next day. Bezos held contests to see who could pick orders off the shelves fastest. After Christmas was over, he vowed that Amazon would never again have a shortage of physical capacity to meet customer demand.

Around that time, Wright showed Bezos the blueprints for a new warehouse in Fernley, Nevada, thirty miles east of Reno. The founder’s eyes lit up. “This is beautiful, Jimmy,” Bezos said.

Wright asked who he needed to show the plans to and what kind of return on investment he would have to demonstrate.

“Don’t worry about that,” Bezos said. “Just get it built.”

“Don’t I have to get approval to do this?” Wright asked.

“You just did,” Bezos said.

Over the next year, Wright went on a wild $300 million spending spree. He not only built the warehouse in Fernley but purchased and retrofitted existing warehouses, one near Atlanta, two in Kentucky, and one in Kansas. He turned them into real-life versions of an M. C. Escher drawing, automating them to the rafters, with blinking lights on aisles and shelves to guide human workers to the right products, and conveyor belts that ran into and out of massive machines, called Crisplants, that took products from the conveyors and scanned and sorted them into customer orders to be packaged and shipped. These facilities, Wright decreed, would be called not warehouses but distribution centers, as they were in Walmart’s internal lexicon.

Wright kept his home and private consulting office in Bentonville, and during his fifteen months at Amazon he shuttled back
and forth to Seattle. He did something else in that time as well. In backyard barbecues and at the Bentonville community fitness center, he canvassed his former colleagues and pitched them on joining the online retailer. “Walmart did not even have Internet in the building back then,” says Kerry Morris, a product buyer who moved from Walmart to Amazon. “We weren’t online. We weren’t e-mailing. None of us even knew what he meant by online retail.”

Amazon knew Walmart would react poorly to Amazon’s poaching from its ranks. Morris says that her interview process was conducted stealthily. She stayed at a friend’s in Seattle rather than at a hotel and interviewed for the job at a Starbucks, not at Amazon’s office. Amazon, she says, paid for her expenses with cash. That year, more than a dozen Walmart employees moved to Amazon.