One Click: Jeff Bezos and the Rise of Amazon.com Part 3

But Bezos prepared himself for the compet.i.tion. He kept adding features that kept the compet.i.tion a step behind no matter how fast they ran. Although virtually all the customer service features would later be automated, in the early days everything had to be done with human intervention. In the daily Spotlight, Amazon editors highlighted certain books with extra information and reviews. When publishers failed to provide sufficient information about a book the editors wanted to spotlight, they started writing their own, even if it meant visiting a nearby bookstore and scribbling down notes from a dust jacket.

Soon, Amazon's human editors were recommending books to customers based on similar purchases they had made in the past. They might alert, say, Cormac McCarthy fans that their favorite author had released a new book, or American history fans that the latest edition of The Civil War Battle Guide had arrived. These were all the kind of services once reserved for regular patrons of local bookstores with knowledgeable staffs.

But Bezos was also determined to add features that would be difficult or impossible for physical bookstores to put in place. The Internet offers two-way communications, and Bezos realized that he could get his customers to do some of the editorial work themselves, while indulging their pa.s.sion for books and their desire to pontificate. Amazon invited readers to offer their own reviews, had other customers rate the reviews, and asked authors to answer questions posted online by readers. The company also allowed people to visit the site as "visible" or "invisible." With the former option, people browsing the same category of books could communicate with each other and recommend books they liked. In one terrific publicity stunt, John Updike started a short story t.i.tled "Murder Makes the Magazine" for the site and asked readers to submit additions to the story. That brought in four hundred thousand endings for the story. For six weeks, Amazon chose a weekly winner from the selections and awarded them $1,000. From those six, a final winner was randomly chosen for a $100,000 prize. Amazon wasn't just a selling site; it became an early social network site for book fans.

This feedback from customers was originally controversial. They were allowed to write bad reviews of books, and compet.i.tors couldn't understand why a bookseller would allow such a thing. Who would buy a book that someone panned? Some local bookstores have employees write reviews of books they like, but they just ignore books they don't like. It was all part of Jeff's plan "to create the world's most consumer-centric company." Within a few weeks after starting the customer review process, he has said, "I started receiving letters from well-meaning folks saying that perhaps you don't understand your business. You make money when you sell things. Why are you allowing negative reviews on your Web site? But our point of view is we will sell more if we help people make purchasing decisions."

These tactics worked partly because they were such unusual moves. Customer reviews and recommendations taught people that Amazon was a different kind of store, one that could be relied upon to point out books that were probably a waste of time and money. It helped build up goodwill. It reinforced Bezos's image as an executive who actually cared about his customers.

This was an important example of Bezos's attempt to fully take advantage of the Internet, to do things online that couldn't be done in a physical store. Strangers don't generally start recommending books to each other in a bookstore. "I'm an outgoing person, but I'd never go into a bookstore and ask a complete stranger to recommend a book," Bezos has said. "The semi-anonymity of the online environment makes people less inhibited." Amazon also started "redecorating" the store for each customer, calling up books in genres people had expressed interest in, or recommending books based on past buying patterns. "These interactive features are going to be incredibly powerful," Bezos predicted in 1996. "And you can't reproduce them in the physical world. Physical stores have to be designed for the lowest common denominator."

Research and feedback from customers indicated that selection and convenience were very important to them. In order to improve those features, Bezos worked on developing much stronger relationships with the book distributors. In the summer of 1996 there were no written contracts with the distributors, and no one to ensure deliveries were running smoothly. The ordering department was made up of one employee and two PCs. Amazon had no one in charge of returning books to distributors when they didn't sell, and many of them were backing up on shelves. So Bezos hired some people to take over and get it organized. In six months, the company went from ordering a hundred books a day to ordering five thousand.

Another important talent Bezos has always displayed is a willingness to jump on new ideas that come from any source. One clever idea came from one of his customers. In July 1996, the company got a request from someone who liked recommending books on her own Web site. She asked for permission to link those reviews to the corresponding books on Amazon, so people could buy them. Bezos realized that this could be a big boost to his business. So the company created its a.s.sociates Program, inviting businesses and other organizations to link to books in Amazon's database. Whenever someone clicked on that link and bought a book on Amazon, the a.s.sociated site would get a commission of 5 to 15 percent on the sale, depending on the item sold.

Aside from the revenues it brought in, the program proved to be a big boon to Amazon's reputation as a site where enthusiasts of any subject could find books they wanted. Since a site for, say, fans of cla.s.sic Mustang cars could link to books on the subject, the idea that Amazon could find any book on any topic grew. In 1998, Bezos described the program as "one of the most innovative things that we have done." The idea of the a.s.sociates Program was also patented by Amazon.

This patent also became controversial, with claims that it was already being done elsewhere on the Internet. Sites often linked to other sites where people could make purchases, sometimes even collecting a fee for the referral. But Bezos argued that his approach was different. The a.s.sociate sites were essentially mini virtual bookstores themselves, using Amazon's technology to locate the books and buy them. The other difference was that it was a broad program for which anybody could sign up without negotiating deals with Amazon, or even talking to anyone at the company first. The patent was granted several years later, but Bezos never sued anybody for creating their own affiliate programs, the practice spread, and the controversy faded away.

Still, this is the kind of program that many executives find abhorrent. In 1997, for example, Microsoft's Sidewalk sites, which listed things to do in town, started linking to the page on Ticketmaster's site where people could buy a ticket to a particular event. Ticketmaster sued. Ticketmaster executives wanted Microsoft to pay for the privelege of sending buyers to the site and, when Microsoft turned them down, managed to get a paying deal with compet.i.tor Citysearch. For Microsoft, Ticketmaster would only allow links to its home page, despite the inconvenience to customers.

Ticketmaster was widely derided by Internet pundits for its counterproductive self-serving att.i.tude. Two years later, Microsoft gave in and agreed to link only to Ticketmaster's home page.

And yet, some sites are still resistant to allowing other Web sites to send people their way, even though those people might be paying customers or actually interested in the sites' ads. Most of the reluctance comes from news sites that complain about search engines giving news summaries along with links to the original stories, even though it is well doc.u.mented that the links vastly increase traffic to the news sites and boost their ratings in search engines. People like News Corporation's Rupert Murdoch keep threatening to sue Google for putting teasers of News Corporation articles on Google News and linking back to the original source.

By not only accepting the practice, but actually paying other sites to provide links, Bezos demonstrated the difference between an entrepreneur embracing the Internet and its unique capabilities, and older executives who didn't understand the new medium and only reluctantly joined the virtual world. Fueled by that understanding, Bezos started moving even faster in the race to the top of the dot-com heap.

Chapter 8.

Money to Burn Through.

We know two percent today. I think Amazon.com may know as much as any other company about e-commerce, but I bet you we know two percent of what we will know 10 years from now. This is the Kitty Hawk era of e-commerce, and most of the inter- esting stuff hasn't even begun to be invented yet.

-Jeff Bezos, 1998.

Amazon's growth was stellar in its first year and a half. But it was still limited by a shortage of cash. Like most young companies, Amazon was losing money. Bezos was focused not just on keeping up with the growth that seemed to be coming so easily, but on setting up the organization to quickly become profitable. That meant he had to spend judiciously and to keep his boldest ambitions in check.

By the time the company launched in the summer of 1995, Bezos had to start raising more money. He had run through the cash he and his family could contribute. That's when he called his friend Nick Hanauer, who had said he wanted to invest and helped convince Bezos to start his company in Seattle. Hanauer started making calls to people around Seattle who had money-some of them from the sale of their Microsoft stock. But there was a problem. Although Hanauer was impressed with Bezos, he said Bezos was terrible at convincing potential investors "how smart he was, how accomplished he was, and how focused he was." That meant trouble, because the idea of an online bookstore sounded to most people like little more than a novelty in 1995, despite the buzz being generated online.

Sure enough, it was hard to raise the money, although some of the investors have said they were impressed with Bezos's intelligence. One potential investor didn't seem impressed with Bezos's enthusiasm about petri-dish growth, because everyone kept telling him that people loved going into bookstores and did not want to buy online. But Bezos could recite an extraordinary amount of statistics from his research, and it eventually made a difference. A Seattle-based Smith Barney stockbroker named Eric Dillon was interested in investing, but thought that the valuation Bezos had put on the company-$6 million-was pulled out of thin air, until Bezos sat down with him to show how much other Internet companies were trying to raise. Dillon talked Bezos down to a $5 million valuation, and put in some money. A prominent Seattle businessman named Tom Alberg was impressed with Bezos's projections that Amazon could turn over the equivalent of an average bookstore's inventory 20 times a year, compared to 2.7 times for most bookstores-with details to lend credibility to the claim.

In the end, Hanauer managed to get some commitments by making the first investment himself. Others followed, and by the end of the year another twenty investors kicked in money, most of them around $30,000 apiece. Bezos raised $981,000. In order to add more management talent to the company, Bezos brought investors Nick Hanauer, Eric Dillon, and Tom Alberg in as advisers to the company.

Then, in 1996, the tide changed with a roar. Wall Street was starting to catch Internet fever. Millions of new users were getting online every year. Furthermore, Netscape had stoked the investment fires with its spectacular IPO in August 1995. So in early 1996, the inevitable happened. A venture capitalist called Jeff Bezos.

Ramanan Raghavendran was surfing the Internet one day, and happened to hit upon Amazon.com. Raghavendran was responsible for finding Internet investments for General Atlantic, an investment firm in Connecticut. He was impressed with what he heard from Bezos in their phone conversation, and wanted to put in some money at a valuation of about $10 million-twice what the company had been valued at in its private round of funding just a few months earlier.

Bezos did not jump at the offer. Instead, it got him thinking. Just how much interest would there be from the venture capitalist community? How much money could he raise if he got serious about it? Amazon was approaching an annual revenue run rate of $5 million, and growth was getting faster all the time. Forget the idea of giving the company a total value of $10 million, Bezos and his advisers started thinking about raising $50 million for just part of the company. They went shopping for investors.

One thing Bezos has never lacked is faith in himself, even if others didn't always share that view in Amazon's early days. So he went straight to the top. His advisory board and some of his employees had connections at Kleiner Perkins Caufield & Byers, so people started making calls to probably the top venture capitalist in Silicon Valley, KPCB's John Doerr.

Doerr didn't return their phone calls. But other venture capitalists did. It was the precursor to the dot-com era, when any business plan that incorporated the Internet into its model was starting to look like it was written on gold. Bezos and his advisers got c.o.c.ky. They decided that, with an offer from General Atlantic on the table, they could take the time to find the best deal. They researched other venture capitalist firms, but still liked KPCB best. Bezos talked to other companies that KPCB had invested in, both successes and failures, and wanted John Doerr and his company behind him.

The team met with General Atlantic again. Dillon let the potential investors talk for an hour and half before saying anything. Finally, they looked at him, and he put some very high cards on the table. "We're only willing to sign a deal with you guys today if you're willing to give us a valuation of $100 million." The General Atlantic team was stunned. Dillon admitted that he and Bezos came up with that number because it was a "staggering, outrageous stop-us-in-our-track number." The plan was to just see how high they could go, while researching other venture capitalists. "Afterwards, Jeff and I went out to dinner and we just laughed all night long about their reactions. In the annals of Amazon, it was just a really fun day."

General Atlantic returned later with an offer that would value the company at $50 million. Bezos and Dillon turned it down. Then the offer was upped to a valuation between $60 million and $70 million. Negotiations started getting serious.

Finally, though, someone from KPCB did call Bezos. Bezos acted cool and said Doerr should travel to Seattle to meet with him. The fact that there was already a good offer on the table allowed Bezos to play hardball. KPCB offered $8 million for 13 percent of the company's stock, giving it a valuation of $60 million. Bezos demanded that Doerr join the company's board as part of the investment. Doerr held out for a while, but finally gave in because there was so much interest from others. Although Amazon might have gotten a better valuation from General Atlantic, Bezos felt that Doerr's name was worth the extra $10 million he might have gotten in valuation. In the spring of 1996 he took the offer. Despite the fact that others have said that Bezos was determined to get Doerr and KPCB from the start, his hardball tactics with the company worked. "We had to compete like crazy for the right to invest in Amazon," Doerr was later to say.

Now Bezos was playing with real money. With that, his strategy changed. He had been planning to make the company profitable quickly so that he could either bootstrap operations or attract serious investors, but he had now done that without profits. So he decided that rather than trying to run the company at a profit, he would invest heavily in more people, new technologies, and new market opportunities. It was now a race: Whoever captured market share first would establish the pole position and would be difficult to pa.s.s. The mandate now was, "Get big fast."

He made no secret about the strategy. "We are not profitable," he told The New York Times in January 1997. "We could be. It would be the easiest thing in the world to be profitable. It would also be the dumbest. We are taking what might be profits and reinvesting them in the future of the business. It would literally be the stupidest decision any management team could make to make Amazon.com profitable right now."

That didn't mean he became profligate with his cash. Antic.i.p.ating compet.i.tion from much better-funded bookstore chains like Borders and Barnes & n.o.ble, he spent money on things that would give Amazon an advantage. He moved Amazon into larger facilities, but stuck to his door-desks. At a 1997 picnic, in order to promote the idea of growing quickly on a minimal budget, Bezos handed out T-shirts silkscreened with a blazing sun, the center of which held a hot dog and the words "Get Big Fast . . . Have Another Hot Dog!" And that's exactly what the Amazonians were fed.

Bezos didn't have to rely on the KPCB money for very long. On May 14, 1997, just one year after getting his venture capitalist investment and less than two years after opening the doors for business, he took Amazon public at $18 per share, raising another $54 million and valuing the company at $429 million. At any other time in history, that would have been outrageous. When the company first announced plans for its IPO two months earlier, a.n.a.lysts thought his initial plan to sell stock for up to $13 per share for a $300 million valuation was crazy. But this was the early stage of Internet fever. Bill Ba.s.s, an a.n.a.lyst at Forrester Research, insisted the valuation was way too high. "Some people smoke Internet inhalant and their judgment gets bizarre," Ba.s.s said. Of course, this was the same firm that dubbed the company Amazon.toast.

Investors in the IPO didn't seem worried about Amazon's lack of profitability. The IPO prospectus spelled out the strategy and the risk clearly. Not only was Amazon unprofitable, it said, "The rate at which such losses will be incurred will increase significantly from current levels, and its recent revenue growth rates are not sustainable and will decrease in the future." Bezos then kept his word to remain unprofitable by slashing the price of four hundred thousand of Amazon's books by up to 40 percent in order to keep the superstores from making inroads online.

But Bezos couldn't just ignore the bookselling superstores. Barnes & n.o.ble had sued the company to stop it from advertising that it was "the world's largest bookstore," since Amazon carried relatively little inventory itself. Bezos countersued, claiming that Barnes & n.o.ble did not deserve the privilege of selling books without charging sales tax, since that right was reserved for online sales to customers in states where the company had no physical presence, while the company had physical bookstores in almost all states in the United States. The companies later settled their suits without disclosing any terms.

One year after the IPO, Amazon's stock was selling for $105 per share, valuing the company at $5 billion, more than the valuations of Barnes & n.o.ble and Borders combined. It had lost another $30 million since the IPO. So why were investors so ready to put money behind this apparently shaky company? Amazon had become the premier Internet commerce site. With a two-year head start over the compet.i.tion, huge brand name recognition, and growth in revenues, it had become an Internet star. It also had low inventory and pulled in $300,000 in sales per employee, more than three times the revenue-per-employee rate of physical bookstores. Plus, Bezos was holding on to 41 percent of the company's shares himself, with KPCB holding another 12 percent (its holding had been diluted since its investment), so high demand drove up the price of a relatively hard-to-get stock.

But mostly, people had come to love the site. The famous Jeff Bezos attention to detail and performance had paid off. The view of Amazon was described by Time magazine a month before the IPO: "The site is so fast and responsive it almost feels alive; it's thrilling to have every t.i.tle in the language at your fingertips, and reader-produced reviews add a layer of egalitarian interactivity."

Growing quickly without even trying to turn a profit became the mantra for virtually all other Internet companies that followed, the strategy that defined the dot-com era of the late 1990s. For most it didn't work. Netscape was trying the same strategy, but was later sideswiped by Microsoft, which had much deeper pockets. The dot-com companies collapsed when the market crashed in 2000 and 2001, unable to reach profitability. But Bezos played the strategy just right. Amazon became the first Internet company to completely redefine an industry.

Chapter 9.

Growing Up.

Changing an industry requires a lot more than a great idea. It requires a thousand new ideas, near-flawless execution, and a lot of guts. Once he had secured his venture capital funding, Bezos started adding features to the Web site and hiring new people like a kid collecting Halloween candy. In September 1997 he added the 1-Click shopping feature. Five months later he decided to offer other bookstores the opportunity to sell through Amazon on consignment with the Advantage Program, giving small, independent bookstores access to Amazon's formidable online presence.

He also pushed advertising heavily in order to get the company's name beyond the technology elite, the early adopters of Internet technology. According to Jupiter Communications, he spent more than $340,000 in the first half of 1996, and ranked thirty-fourth in Web ad spending. He set up multiyear advertising agreements with Internet portals including Yahoo, Excite, and AOL. He hired a Silicon Valley ad agency, USWeb/CKS, which came up with a series of memorable ads designed to show the breadth of Amazon's offerings in a humorous way: "163 books on marriage, 798 books on divorce"; "16 books on male pattern baldness, 128 on hats"; "460 books for Marxists, including 33 on Groucho."

By mid-1998 he was spending over $26 million on marketing in just three months, running ads both online and in major newspapers such as The New York Times and The Wall Street Journal, then moving into radio and cable news shows such as CNN. By the end of 1998, he was spending nearly a quarter of his revenues just on advertising. Today Amazon is a huge advertiser-it spent nearly $600 million on advertising and promotion in 2009.

Hiring went into high gear. By late 1996 there were a hundred and ten employees, fourteen of them dedicated to answering emails from customers. Some of the new hires had little to do at first. "He had hired more managers even though they weren't needed yet," says early Amazon programmer Peri Hartman. "They might have just a couple people reporting to them. But it gave them time to get to know the company. He let them be managers before they had to handle a large number of people." Some of the new hires in key positions even had previous experience that applied to their new jobs: marketing, project management, distribution, finance, even an executive from Barnes & n.o.ble.

And Bezos managed to hire only the best. The interview process for new hires was as demanding as going through oral exams for a Ph.D. in subparticle physics. Each candidate would go through interviews with several employees, then with Jeff, who would also grill all the other interviewers. He would create elaborate charts on a whiteboard listing the candidate's qualifications, and rejected anyone about whom he had the slightest doubt. References were asked to list the candidate's greatest strength and worst mistake. In the interview, candidates were hit with random tough questions such as "How would you design a car for a deaf person?" (The best answer: Plug your ears and drive around to see what it's like to be a deaf driver.) In meetings to discuss the candidates, questions asked ranged from "What do you admire about this candidate?" to "What is he terrible at?"

"One of his mottos was that every time we hired someone, he or she would raise the bar for the next hire, so that the overall talent pool was always improving," said Nicholas Lovejoy, who joined Amazon in 1995 as the fifth employee. Bezos put the philosophy this way: Five years after an employee was hired, he said, that employee should think, "I'm glad I got hired when I did, because I wouldn't get hired now."

However, he managed to get his new employees ridiculously cheap. Amazon was now becoming a hot place to be. Lovejoy already knew Bezos from working with him at D. E. Shaw. He left Shaw to teach math in suburban Seattle for $27,000 per year. Bezos convinced Lovejoy to join his tiny company, but Lovejoy had to take a pay cut.

Bezos also wanted people who did not fit the usual corporate mold. In 1998, Customer Service Director Jane Slade told BusinessWeek , "We tell the temporary recruiting contact agencies, 'Send us your freaks.' " Few of them actually had any prior experience in the bookselling world. But Bezos did lean toward people who had other interests and special talents outside of work-such as people who were champion spellers in grade school, lovers of Baroque music, terrific athletes, or avid mountain climbers. "When you are working very hard and very long hours, you want to be around people who are interesting and fun to be with," Bezos has said. But they also had to be smart. Job candidates were asked to supply their SAT scores and college grade-point averages. One hire was Ryan Sawyer, vice president for strategic growth, a Rhodes Scholar who studied poetry at Oxford.

Bezos kept an unusual work environment. People brought in their dogs, who roamed the new building. That included Jeff and MacKenzie's golden retriever, Kamala, which was named after a metamorph from an episode of Star Trek: The Next Generation, t.i.tled "The Perfect Mate." Executives held business meetings in the midst of all the chaos. The main office became so crowded that Bezos had to expand into the parking garage on the ground floor. Even the company kitchen served as an office for several people.

Bezos also invested a lot of money to improve the site and add features without making it confusing. He knew that an unhappy customer could spread complaints to thousands of people through Internet chat rooms and newsgroups. From then on, Amazon became an unprofitable business that relentlessly poured its IPO money into new innovations.

These new features also came from many places; the mind of Jeff Bezos, employees, his two-pizza brainstorming teams, even other companies that seemed to have good ideas. They didn't always work out. But often enough, they added real value to the site. These brainstorming sessions, for example, came up with the Gold Box, an animated icon at the top of the page that begged to be clicked on. When that happened, it revealed specials that would last just one hour after customers clicked on it.

Amazon programmer Greg Linden used to tinker with new ideas on his own time. One day he was thinking about the process the company used to automatically check and see if books were available in the warehouse. As soon as someone looked at a book on Amazon, the software would check the inventory list in the background to see if it was in stock so it could tell the customer, if the customer decided to order it. If it was not in stock, the software checked to see how soon the book could be ordered from the distributors, and that meant running off to check the huge databases at the distributors. It was a big piece of software that used up a lot of computer cycles and was very slow. So Linden got an idea. Did the computer really have to check the inventory list every time someone looked at a book? Perhaps the inventory list could be stuck in a cache, essentially put into the memory of the computer running the site, and updated periodically. Then the computer could quickly check the cache without heading off to view the inventory database.

He hacked something together, and found the site could look up the inventory list much more quickly with his idea, although (since the cache was only updated periodically) the data was "a little stale." It was still a prototype, but he started showing it to the other programmers and asking for feedback. It turned out some of them were working on a big redesign of the site, and they wanted to be able to immediately show if a book was available as soon as someone searched on it. So his caching system was "dressed up and pushed out the door." It was a program that no one had asked him to build, but when it showed up, it turned out to be just what the site needed.

One hugely important addition that was critical to Amazon's success was the one Bezos never wanted when he started: huge warehouses from which to distribute books. As Amazon grew, the company could no longer rely on shipments from distributors and publishers to reach customers quickly. It was a miscalculation that Bezos corrected in a big way.

In September 1997, Bezos announced that Amazon would increase its Seattle warehouse by 70 percent and build a new distribution center in New Castle, Delaware. The added warehouse capacity increased the number of books Amazon could hold to 300,000, six times its previous capacity. Although Amazon by this time could tap into a database of 3.1 million books, this new warehouse capacity was enough to stockpile and ship 95 percent of its orders for in-print books the day the orders were received. Amazon could also get these books directly from the publisher instead of from the distribution middlemen. Bezos was now taking the process of stockpiling and distributing books into his own hands. "The logistics of distribution are the iceberg below the waterline of online bookselling," he said at the time.

At the same time, the distributors were trying to build up the top of that iceberg. Ingram decided if it could store and distribute books, it could "drop-ship" them directly to the customers itself. It developed the capability to ship books in small quant.i.ties directly to consumers. Then it started opening a few online bookstores to compete with Amazon. The test program failed, however, because its online stores couldn't attract customers. Amazon already had them all. Ingram's next step was to make a bid to buy Barnes & n.o.ble, creating one integrated retailing and distribution conglomerate.

The threat of that combination started a war of press releases. First Bezos issued a release a.s.suring people that he was not intimidated. "Those who make choices that are genuinely good for customers, authors and publishers will prevail. Goliath is always in range of a good slingshot," it read.

That shot was not only noticed by the press, but by executives at Barnes & n.o.ble as well. The company issued a response in its own press release: "Barnes & n.o.ble is amused at Jeff Bezos's quote where he describes himself as an independent bookseller. Well, Mr. Bezos, what with market capitalization of some $6 billion, and more than four million customers, we suppose you know a Goliath when you see one. Your company is now worth more than Barnes & n.o.ble, Borders and all of the independent booksellers combined. Might we suggest that slingshots and potshots should not be part of your a.r.s.enal."

Of course, that release just served to remind people that Bezos was winning the online bookselling war. So Bezos offered a simple response. He issued another press release that had but one word. "Oh."

Nevertheless, the Ingram and Barnes & n.o.ble deal was never consummated. Independent booksellers also complained, the Federal Trade Commission threatened ant.i.trust action, and Congress got ready to convene its own hearings on the merger. The two companies decided to drop the plan.

Although distributors failed in their attempts to get into Amazon's business, Amazon was able to make inroads into the distributors' business. Bezos knew that shipping most of the books from Amazon's warehouses would be faster. It was a process he could control and improve himself, and the race to build ever larger and more automated distribution centers was on. "There are huge efficiencies to be gained through drop-shipping [from the distributor], but they are paid for by increased complexity in sorting," Bezos said. "Your partner [the distributor] has to be very adept, because if it is done wrong you can really mess up your customer service."

Bezos didn't want to build just any warehouses. His distribution centers had to organize books, find them quickly, match them with shipping orders, package them, and get them in the mail. He wanted the most efficient high-tech distribution centers in the world, and started hiring people to help bring that about. One place he started hiring from was Wal-Mart, known for its computerized distribution centers.

Wal-Mart executives were not pleased. On October 16, 1998, they sued Amazon for hiring away executives who knew trade secrets about its distribution centers, claiming it was an attempt to steal the secrets. The complaint a.s.serted that Amazon was causing it "economic damage." Most of that suit was dismissed, so the following January, it filed a second suit, naming fifteen employees Amazon had taken. It also included Amazon venture capital firm KPCB in the suit, as well as the recently launched online retailer Drugstore.com, of which Amazon owned 46 percent.

Wall Street pundits who follow the companies were perplexed. An online bookseller that would end 1998 with $610 million in revenues and no profit was going to sully the financial picture of a diversified retailing giant that brought in $118 billion in revenues? Plus, Wal-Mart's profit, of over $4 billion that year, was nearly seven times Amazon's entire revenue stream. Perhaps Wal-Mart knew something about Amazon's future that most people didn't yet see.

Bezos jumped on the case. To show that he wasn't the only executive who poached key personnel from other companies, he searched Amazon's database for books about Wal-Mart, and purchased three of them. From those he found comments from Wal-Mart founder Sam Walton about how he liked to troll compet.i.tors for new talent. Bezos used that information in Amazon's court filings.

The following April, the companies decided to settle out of court. One former Wal-Mart employee was a.s.signed to a different job at Amazon, and eight others agreed to restrictions in their work a.s.signments with their new employer.

Once he decided to get into the distribution business, Bezos zoomed ahead with his expansion plans. By the end of 1999, he had built five huge high-tech warehouses with computerized systems that tracked the products with bar-code readers and radio transmitters and distributed them to the packing stations along ten miles of conveyor belts. That increased his storage and distribution capability by almost tenfold, to 2.7 million square feet. The company could ship nearly one million boxes a day. "This is the fastest expansion of distribution capacity in peacetime history," he boasted.

He also quadrupled Amazon's computer capacity and increased his staff to five thousand by the end of the year. He had to keep tapping the company's store of publicly traded stock, which kept soaring, in order to finance it all. He took in revenues of $1.5 billion in 1999, but spent over $2 billion.

He had no qualms about spending all that money in order to make sure he could deliver the goods to his customers quickly, easily, and at low cost, even if it meant spending more than he had to. The alternative-trying to just meet demand and taking the risk of having even a few unhappy customers-just wasn't worth it. "You could say we will disappoint some small fraction of people but we will make a lot more money," Bezos said. "But if you disappoint people, you lose brand reputation, and that's worth a lot more to us right now than money."

Besides, the need for all the expanded storage capacity was soon to become clear. He had already decided that Amazon was going to be more than just a bookstore. In December 1996, he had taken executives on a retreat to the Sleeping Lady Resort in Leavenworth, Washington, where they discussed where they would take the company next. The answer, essentially, was, "Everywhere." They even picked out the first likely new markets to pursue: Music CDs, and video and DVD movies. But that was just the beginning. It turned out that the Wal-Mart executives had reason to worry after all.

Chapter 10.

Who You Calling a Bookstore?

Bezos's plans to expand beyond books started a year before those plans became known to most of the world. By the end of 1998, Bezos had proved his online model was able to compete with physical bookstores, at least in terms of selling, if not in profitability. With sixteen hundred employees at the time, his annual revenues amounted to $375,000 per employee. Barnes & n.o.ble's twenty-seven thousand employees were delivering less than a third of that amount apiece. Since he opened the store in 1995, sales had doubled every 2.4 months, on average. At the end of 1998, sales were still growing at over 300 percent a year, compared to 10 percent at Barnes & n.o.ble. The site was able to turn over its inventory two dozen times a year, compared with three times a year at Barnes & n.o.ble.

Now he was ready to take on more than books. In June of that year, after months of planning, he debuted a music store to sell CDs under the same model he was using to sell books. It had a database of 125,000 t.i.tles people could buy, ten times the number most physical music stores had to offer, and the t.i.tles were discounted by up to 40 percent. The site included professional and customer reviews, a top-sellers list, music news, recommendations, and an "essentials" list for anyone creating a collection of music. It also offered sound clips of 225,000 songs.

With that announcement, Bezos revealed his true ambition. "Our strategy is to become an electronic commerce destination," he said. "When somebody thinks about buying something online, even if it is something we do not carry, we want them to come to us. We would like to make it easier for people online to find and discover the things they might want to buy online, even if we are not the ones selling them."

Besides, he said, it was something he'd always planned to do, although few people seem to have known it beforehand. In an October interview with the San Jose Mercury News, a reporter asked Bezos if selling CDs was a natural outgrowth of Amazon's business or if it was a possibility from the beginning. "We've always said we would expand into areas where we could leverage the three things that businesses can often leverage: our brand name, our skill sets and our customer base," he replied. "Music was a natural place where you can leverage all three of those."

Bezos had help building the site. He could do something no traditional retailer could easily manage. Months before launching, he sent out invitations to "build the music store of your dreams" to Amazon customers. About twenty thousand responded. Although Bezos touted the importance of the feedback, the customers just asked for the same things they liked about Amazon's bookstore: selection, low prices, and convenience. To ensure the last feature, he simply integrated the CD store into Amazon's already existing infrastructure: The site was redesigned to make it easy to switch back and forth between the bookstore and the music store, and features like 1-Click ordering and consolidated shipping worked with both types of products in one shopping basket.

It was not surprising that selling music CDs was the second business he tackled; it was the second choice on the list he had come up with when he first considered starting an online retail business. It was also not surprising, given the rise in Internet commerce, that this time he had to come up against existing compet.i.tion. CDNow.com and n2k.com had started selling music online at about the same time Amazon started selling books. CDNow had twice the inventory of Amazon's music store. In order to fight off the compet.i.tion from Amazon, CDNow and n2k decided to merge their companies.

Many observers were as skeptical of Bezos's ability to expand beyond books as they were of his ability to successfully sell books online in the first place. The Wall Street Journal called it "risky," saying that "Amazon could lose cachet with bibliophiles if its forays into other media dilute its reputation as a destination for book-lovers." Besides, it was going to face compet.i.tion from bigger companies, such as Columbia House and BMG Entertainment.

One big concern: Getting into new retailing businesses, which have notoriously low margins, might keep the company from ever turning a profit. "The company has been able to show it can sell lots of books for less without making money, and now it has shown it can sell lots of music for less without making money," said Merrill Lynch a.n.a.lyst Jonathan Cohen. Still, most Wall Street a.n.a.lysts were happy that Amazon's soaring stock was making them so much money, and kept their "Buy" ratings, confident that Bezos could keep delivering.

Bezos was equally as confident that he could pull it off. "This is not a winner-take-all kind of business," he said. "On-line commerce is a big arena. It's not going to be the case where you have one company who dominates this marketplace. You are going to have a leader and, clearly, we want to be that leader in every area that we enter into. And the way you become that leader is to focus obsessively on the customer experience. That's why in the book s.p.a.ce we're nine times the size of our nearest compet.i.tor."

In other words, Bezos felt he simply had to do what he was doing in books: Focus on the consumer and give them what they want. Bezos could leverage all the technology the company had developed for selling books-technology and ease of use its compet.i.tors had never managed to match. And he was right. Within four months, Amazon had sold over $14 million worth of CDs, outselling CDNow, the previous leader in selling online music. And, true to the skeptics' a.s.sertions, he lost money doing it.

It's important to note that Amazon isn't invincible. Bezos has a simple formula that's not so simple to pull off: Outinnovate the compet.i.tion and give customers what they want. Companies that have been around long enough to get comfortable forget those mandates. They focus on profits and stock price, believing that raising prices and laying off employees is the way to win. Bezos does not make that mistake.

However, neither is he the world leader in innovation and satisfying customers' needs. Steve Jobs claims that t.i.tle, and when he put Apple into the business of selling music online by simply offering tunes that could be downloaded electronically, n.o.body could beat him, including Bezos. It seems that Bezos was focused on physical goods, and neglected to jump in early to offering electronic products for downloading. (After Jobs launched iTunes in April 2003, of course, Bezos caught on to the idea, and started working on the Kindle.) It didn't take long for Bezos to move beyond CD sales. In November 1997, Bezos made a phone call to Alan Jay, a guy who had created a London-based Web site called the Internet Movie Database (IMDb). The site was a place for movie buffs to post reviews, and to share information about movies, television shows, actors (dead or alive), and trivia. That phone call from an American entrepreneur selling books was a surprise, because the IMDb site didn't sell books, or anything else, for that matter. Originally launched in 1990 and reliant on donations, it didn't even have much of a revenue strategy-it had started accepting advertising and licensing arrangements in 1996.

Bezos proposed a meeting in London. The owners of IMDb met with him for a full day, then had another meeting in Seattle. He offered to invest in the company, promising to keep it free and independent. In April 1998, Amazon bought the entire company, his first acquisition, and set it up as a subsidiary. The reason for the unusual move, of course, was to aid Bezos in his plan to start selling DVD movies online. The acquisition became an advertising venue for Amazon to push DVD sales, which started that November. Forty-five days later, Amazon was the biggest retailer of videos on the Internet. And he still wasn't turning a profit.

In July 1998, Bezos moved beyond selling products with a couple more acquisitions. One was PlanetAll, which offered an Internet-based address book and calendar system. The calendar could also send reminders to email. Many companies offer these services today, but this was a unique offering at the time-and Bezos recognized its significance. "PlanetAll is the most innovative use of the Internet I've ever seen," he said. "It's simply a breakthrough in doing something as fundamental and important as staying in touch.... I believe PlanetAll will prove to be one of the most important online applications."

The second was Junglee, a shopping comparison site. When people searched for a product using Junglee, the site would search the Web for other sites selling the product, and list them with the price for each. "Junglee has a.s.sembled an extraordinary team of people," Bezos said. "Together we'll empower customers to find and discover the products they want to buy."

With that, Bezos demonstrated that providing a great service for his customers was even more important than making every sale. "We don't even necessarily have to be selling all those things," says Bezos. "We just help people find things that are being sold elsewhere on the Web." It wasn't until Google came along that the idea of actually sending people away from a site was considered a valuable way to gain the goodwill of the public.

But Bezos also had an ulterior motive for these moves. The programs were later incorporated into and replaced by zShops, which later became Amazon Marketplace, where individuals and retailers of all stripes could sell their products through Amazon (which takes a cut from 5 to 25 percent of the sale). That allowed retailers to tap into Amazon's purchasing software and gave buyers confidence that products would arrive as promised.