Read The Everything Store: Jeff Bezos and the Age of Amazon Online
Authors: Brad Stone
The rapid growth once again required the company to initiate the Save Santa operation. Employees said good-bye to their families and headed off on two-week shifts to staff the customer-service
phone lines or work in distribution centers across the country. Frugal to the bone, Amazon packed them two to a hotel room. To some, it was the greatest experience they had ever had at the company. Others hated it and complained vociferously. “I won’t say they were prima donnas but they weren’t used to it, they didn’t expect it, and a lot couldn’t handle it,” says Bert Wegner, the general manager of the Fernley distribution center.
In Fernley, some employees stayed at the Golden Nugget in Reno, and after they worked the graveyard shift, they met for beers at the casino bar at six a.m. Later, a few swore they had been working alongside furloughed prisoners from a nearby jail, though that is difficult to prove. Early employee Tom Schonhoff was among a group that went to Delaware, where the facility was having problems with the quality of the temporary labor pool. “There were a lot of temp workers that looked like the rehab center had pushed them out the back door,” he says. He watched one worker get fired for intoxication and then wet himself while he tried to protest.
Schonhoff and his team labored for a week clearing up Delaware’s backlog and organizing the staff. “We worked with sincerity and diligence. Can I say that without sounding like an ass?” he says. “The goal was to get Christmas out the door and uphold our brand promise. We believed in it.”
A team led by Kim Rachmeler and Joel Spiegel descended on the new eight-hundred-thousand-square-foot distribution center in McDonough, Georgia. The facility was not yet finished, so employees had to wear hard hats. Their group focused on a problem called FUD: fillable, unfilled demand. These were cases where products had been sold on the website but had not yet shipped because they were lost somewhere in the cavernous distribution center. This was a more serious problem than a hundred or so customers not getting their orders for Christmas (which itself was bad enough). During the holiday season, when the sorting machines were operating at absolute peak capacity, any order that didn’t successfully ship clogged up a chute and backed up another customer order, which then also wouldn’t ship on time. So as the FUD accumulated, it
started to stall large parts of the facility. Rachmeler’s team worked to clear up the backlog but eventually it became evident that there was one item in particular that was causing the distribution center to go haywire—a missing pallet of Pokémon Jigglypuffs.
The Amazon database insisted that the Jigglypuffs had been delivered to the facility, but if so, they were either misplaced or stolen. Although Rachmeler put together a search team, the task seemed nearly impossible. The group was looking for a single box inside an eight-hundred-thousand-square-foot facility. “It was very much like that scene at the end of
Raiders of the Lost Ark,
” Rachmeler says. She dashed out to a nearby Walmart to buy a few pairs of binoculars and then passed them out among her group so they could scan the upper levels of the metal shelving.
After three days of exhaustive searching, at two o’clock in the morning, Rachmeler was sitting, spent and dejected, in a private office. Suddenly, the door flew open. A colleague danced in, and Rachmeler briefly wondered if she was dreaming. Then she noticed that the woman was leading a conga line of other workers and that they were jubilantly holding above their heads the missing box of Jigglypuffs.
When the 1999 holiday season ended, employees and executives of Amazon could finally take a breather. Sales were up 95 percent over the previous year, and the company had attracted three million new customers, exceeding twenty million registered accounts. Jeff Bezos was named
Time
’s Person of the Year, one of the youngest ever, and credited as “the king of cybercommerce.”
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It was an incredible validation for Amazon and its mission.
The company had stumbled and would write off $39 million in unsold toys. Still, thanks to herculean efforts up and down the ranks, there were no obvious disasters or disappointments for customers. Meanwhile, the websites of rivals like Toys “R” Us and Macy’s barely survived their first major holiday season and were plagued by customer complaints, bad press, and even an
investigation by the Federal Trade Commission into unfulfilled promises made to shoppers.
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In January, after everyone recovered and many took well-deserved vacations, Amazon held its annual holiday costume party. Warren Jenson, the new chief financial officer, bought a few dozen Barbie dolls on Amazon and sewed them onto a sweater. He darkly joked that he was dressed as excess inventory. Harrison Miller thought it was only kind of funny.
Amazon had battled chaos and lived to fight another day. But it had come closer to the precipice than anyone knew. Its internal accounting was in disarray; rapid growth had led to misplaced and stolen inventory, which made it impossible to close the books on the company’s fourth quarter. Accountant Jason Child was working for Amazon’s German operation at the time but was called back to Seattle to take over as comptroller and tackle the problem. “It was the craziest quarter in Amazon’s history,” he says. The company sought outside help and hired a consultant through Ernst and Young. He came in, took a good look at the bedlam for a few weeks, and quit. Child and his colleagues had barely closed the books when the quarter ended in late January.
Now Amazon’s board had to deal with the leadership crisis. There were complaints about Galli, who was clearly agitating to be CEO, and Bezos, who many employees felt was not taking the time to cultivate other leaders, listen to their issues, or invest in their personal growth. John Doerr quietly phoned many of the company’s senior executives to get their take on the boiling tensions in the management team. To adjudicate the matter, he turned to a Silicon Valley legend, a former Columbia University football coach named Bill Campbell.
An amiable former Apple exec and the chief executive of Intuit in the mid-1990s, Campbell had a reputation for being an astute listener who could parachute into difficult corporate situations and get executives to confront their own shortcomings. Steve Jobs considered him a confidant and got him to join the Apple board when
Jobs returned to the helm of that company in 1997. At Amazon, Campbell’s stated mission was to help Galli play nicely with others. He commuted between Silicon Valley and Seattle for a few weeks, sitting quietly in executive meetings and talking privately with Amazon managers about the metastasizing leadership problems.
Several Amazon executives from that time believe that Campbell was also given another, more secret mandate by the board: To see if Bezos should be persuaded to step aside and let Galli take over as chief executive. This was consistent with the overall philosophy in Silicon Valley at the time, which was to bring in “adult supervision” to execute the plans of a visionary founder. Meg Whitman had taken over at eBay; a Motorola executive named Tim Koogle had replaced founder Jerry Yang at Yahoo. The Amazon board saw Amazon’s egregious spending and widening losses and heard from other executives that Bezos was impetuous and controlling. They were naturally worried that the goose who laid the golden egg might be about to crack the egg in half.
Board members, including Cook, Doerr, and Alberg, deny they ever seriously considered asking Bezos to step aside, and in any case, it would have been fruitless if Bezos resisted, since he controlled a majority of the company. But Campbell himself revealingly described his role at Amazon this way in an interview with
Forbes
magazine in 2011: “Jeff Bezos at Amazon—I visited them early on to see if they needed a CEO and I was like, ‘Why would you ever replace him?’ He’s out of his mind, so brilliant about what he does.”
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Regardless, Campbell concluded Galli was unnaturally focused on issues of compensation and on perks like private planes, and he saw that employees were loyal to Bezos. He sagely recommended to the board members that they stick with their founder.
Galli says that the final decision to leave Amazon was his own. Before he joined the company, he had read the book
Odyssey: Pepsi to Apple,
by John Sculley, who had joined Apple as CEO in the mid-1980s and then ousted Steve Jobs in a boardroom coup. “Before I went out there, I promised myself and my family that I would never do to Jeff what Sculley did to Steve Jobs,” Galli says. “I just felt like
Jeff was falling in love more and more with his vision and what the company could be. I could anticipate it was not going to work. He wanted to have a more hands-on role. I’m just not a great number two. It’s not in my DNA.”
In July of 2000, Galli left Amazon for the top job at a startup called VerticalNet, which perished soon after in the dot-com bust. Within a few months, he moved over to Newell Rubbermaid, a troubled consumer-goods company, where he managed four turbulent years of layoffs and declining stock prices. He later became CEO of the Asian manufacturer Techtronic Industries, which makes the Dirt Devil and Hoover vacuums. He has since presided over six years of growth.
After Galli left Amazon, the board tried to pair Bezos with another chief operating officer. Peter Neupert, the former Microsoft executive who ran Drugstore.com, sat in on S Team meetings for a few months. But Neupert and Bezos couldn’t agree on a way to collaborate permanently, and Bezos was coming to recognize that he enjoyed being needed by colleagues and engaged in the details and that he wanted to be an active chief executive. “He decided to spend the next umpteen years of his life building the company, as opposed to gradually withdrawing to pursue other interests,” says Tom Alberg.
The Galli experiment and all of the misadventures from that year would leave permanent scars on Amazon. As of this writing, the company has not given another executive the formal title of president or chief operating officer. Amazon wouldn’t make another significant acquisition for years, and when it did, Bezos carefully considered the lessons from his reckless binge.
As a new millennium dawned, Amazon stood on the precipice. It was on track to lose more than a billion dollars in 2000, just as the sunny optimism over the dot-com economy morphed into dark pessimism. As he had been doing over and over since the company’s very first days, Bezos would have to persuade everyone that Amazon could survive the cyclone of debt and losses that it had created for itself during a singularly feverish time.
The turmoil in Amazon’s management during the company’s frenzied years of expansion was only the start of a much longer test of faith. In 2000 and 2001, the years commonly thought of as the dot-com bust, investors, the general public, and many of his employees fell out of love with Bezos. Most observers not only dismissed the company’s prospects but also began to doubt its chances of survival. Amazon stock, which since its IPO had moved primarily in one direction—up—topped out at $107 and would head steadily down over the next twenty-one months. It was a stunning fall from grace.
There were several immediate reasons for the stock market’s reversal. The excesses of the dot-com boom had begun to wear on investors. Companies without actual business models were raising hundreds of millions of dollars, rushing to go public, and seeing their stock prices roar into the stratosphere despite unsound financial footing. In March of 2000, a critical cover story in
Barron’s
pointed out the self-destructive rate at which Web companies like Amazon were burning through their venture capital. The dot-com boom had been built largely on faith that the market would give these young, unprofitable companies plenty of room to mature; the
Barron’s
story reinforced fears that a day of reckoning was coming. The NASDAQ peaked on March 10, then wobbled and began to spiral downward.
The outbreak of negative sentiment toward Internet companies in general would be nudged along by other events over the course of the next two years, like the collapse of Enron and the 9/11 terrorist attacks. But the underlying reality was that many investors decided to doff their rose-colored glasses and look at Internet companies more pragmatically. And those companies included Amazon.
While other dot-coms merged or perished, Amazon survived through a combination of conviction, improvisation, and luck. Early in 2000, Warren Jenson, the fiscally conservative new chief financial officer from Delta and, before that, the NBC division of General Electric, decided that the company needed a stronger cash position as a hedge against the possibility that nervous suppliers might ask to be paid more quickly for the products Amazon sold. Ruth Porat, co-head of Morgan Stanley’s global-technology group, advised him to tap into the European market, and so in February, Amazon sold $672 million in convertible bonds to overseas investors. This time, with the stock market fluctuating and the global economy tipping into recession, the process wasn’t as easy as the previous fund-raising had been. Amazon was forced to offer a far more generous 6.9 percent interest rate and flexible conversion terms—another sign that times were changing. The deal was completed just a month before the crash of the stock market, after which it became exceedingly difficult for any company to raise money. Without that cushion, Amazon would almost certainly have faced the prospect of insolvency over the next year.
At the same time, rising investor skepticism and the pleadings of nervous senior executives finally convinced Bezos to shift gears. Instead of Get Big Fast, the company adopted a new operating mantra: Get Our House in Order. The watchwords were
discipline, efficiency,
and
eliminating waste.
The company had exploded from 1,500 employees in 1998 to 7,600 at the beginning of 2000, and now, even Bezos agreed, it needed to take a breath. The rollout of new product categories slowed, and Amazon shifted its infrastructure to technology based on the free operating system Linux. It also began a concerted effort to improve efficiency in its far-flung distribution centers. “The company got creative because it had to,” says Warren Jenson.