One Click: Jeff Bezos and the Rise of Amazon.com Part 6

The executives soon realized that they could have a gold mine in their cubicles. By making its data and tools available to outside programmers, Amazon could actually outsource the development of new products-for free. Amazon Web Services was launched in July 2002. "We're putting out a welcome mat for developers," announced Bezos. "This is an important beginning and new direction for us." Developers began creating new sites with original features that could send new buyers to Amazon and help them find and buy products.

One former Amazon developer, for example, created a site that he dubbed "Amazon Light." It included a search box to find any product for sale at Amazon and sported the company's "Buy" b.u.t.ton, but added a feature. Search for a DVD, for example, and the site would also tell you if Netflix had the DVD for rent. Look for a CD and the site would also tell you if it was available on Apple's iTunes. Look for a book and the site might even let you know if it was available at your local library.

Again, this is not the kind of thing most CEOs would tolerate. Offer people alternatives to your own store? What was this, the Macy's Santa from Miracle on 34th Street? No, but it was a great feature that benefitted customers. Besides, if the customers did decide to buy from the outside site, the transaction actually went through Amazon, which collects a fee for the transaction. Site owners who sent customers to Amazon to buy Amazon products got about a 15 percent cut of any sale they sent to Amazon.

Web services-the process of sharing services between Web sites-had been discussed by Internet pundits for years. Amazon was the first to make the concept a reality in a big way. About two years after the launch of Web services, Amazon boasted sixty-five thousand developers using the program and sending some ten million queries a day to Amazon's servers.That's a lot of new customers.

Further, the offering began to look a lot like the phenomenon now known as cloud computing-tapping into a program sitting on a Web server somewhere rather than one sitting on your own desktop. Another company using the service, for example, Monsoon of Portland, Oregon, offered software that companies could use to tap into Amazon's software to simplify their own inventory management. "Web 1.0 was making the Internet for people; Web 2.0 is making the Internet better for computers," Bezos predicted in a speech at the Web 2.0 conference in San Francisco in 2004. Amazon became known as one of the most innovative companies in cloud computing.

From its initial start in 2002, Amazon Web Services offerings just kept expanding. It can distribute content for other companies (such as Netflix) from its own computers and networks. One of the most important services, EC2, or Elastic Compute Cloud, allows companies to rent exactly as much computing power from Amazon as they need, turning on or off "server instances," a block of specific computer power, within minutes. They pay for instances by the hour, using them to run their own programs without the need to buy their own computers. Amazon can even run a separate computer network for a company's internal communications, and can handle billing and product shipping for other retailers. It's a great way for entrepreneurs to get started without investing in their own computer power, since they can use Amazon's services for pennies a minute, increasing or decreasing the amount of computer power they rent based on their demand at any given time. Some venture capitalists even hand Amazon gift cards to entrepreneurs to help them get started.

That business is growing phenomenally. In 2010, Amazon Web Services brought in about $500 million in revenues to the company. That's less than 2 percent of overall sales. But it has higher profit margins than the retail businesses-up to 23 percent operating margins compared to 5 percent in the rest of the business.

During the company's shareholder meeting in May 2010, Bezos saved most of his ever-present enthusiasm for a discussion of cloud computing services. "It has the potential to be as big as our retail business," he said. In his opinion, Amazon can do a better job than most compet.i.tors in the business. Cloud computing, he said, is "a very large area right now [and] it's done in our opinion in a very inefficient way. Whenever something big is done inefficiently that creates an opportunity."

That's an astounding claim, since Web Services provides less than 2 percent of revenues today. But Bezos is now on a 1999-style rush to build up the business and maintain an early lead advantage. Every day Amazon adds as much computing power as it had to run its entire business in 2000, when it had revenues of $2.8 billion. It's building specially designed buildings of up to seven hundred thousand square feet-the size of about sixteen football fields-to house the computers. And just in case it builds too fast, in 2010 Bezos introduced Spot Services, which auctions off idle computing power to other companies at cheaper prices than its normal rental rate.

Bezos is dreaming up new ways to use that computing power. His latest move is to lease it not just to companies, but to individuals. On March 29, 2011, he announced Cloud Drive, which allows people to store their digital files on Amazon's computers through the Internet. In a move aimed directly at Apple's iTunes (the latest salvo in an increasing war with Apple and Google), he targeted the first use at music lovers-although people can use the service to store any digital information. While Apple and Google waited for the record labels to decide if they would license music for streaming, Bezos decided to take a chance, launch the service first, and ask for permission later. By storing the music online, people can access it from any device. Amazon will charge $20 per year for twenty gigabytes of storage s.p.a.ce. (Google charges $5 for the same amount of storage, but not for music files.) Amazon is kick-starting the service by offering up to five gigabytes for free, or twenty gigabytes for free for one year for anyone who buys an alb.u.m from its MP3 3 store.

As of early 2011, Bezos would only say that there are "hundreds of thousands" of customers using Amazon Web Services. Wall Street a.n.a.lysts estimate it will be a $750 million business for Amazon in 2011, and $2.5 billion in 2014.

It's hard to imagine a business more distant from retailing than this-except for the fact that Amazon has created such sophisticated computer services for itself, so why not offer that power to others for a fee? It's a business that doesn't follow the seasonal ups and downs of retailing, and so provides a more stable revenue stream. And it shows just how bold Bezos can be when adopting new opportunities.

That boldness even extends to a willingness to start competing with some of the companies using his services. In February 2011, for example, Bezos started up Amazon's own video-streaming service to compete with Netflix. After all, he knows how to do it now (although he's still negotiating with film studios and other video producers to build up his video inventory).

When the Amazon video-streaming service was announced, the stock of Netflix dropped temporarily, then recovered. For now, most industry observers don't feel that Amazon will kill off Netflix. For one thing, Netflix is now in a position to grow in overseas markets before Amazon gets its act together. Also, Netflix customers don't see any need to switch. Investment bank Credit Suisse surveyed over a thousand Amazon customers, and found that four hundred of them were also Netflix subscribers. When that group was asked if they would be likely to drop Netflix for Amazon's service, fewer than 1 percent of them said yes. Most of them thought Netflix provided better value for the money, and liked the fact that they could get both streaming technology and DVDs by mail. This could be an experiment that ends up about as successful as Amazon's earlier attempt to compete with eBay with its own auction service. Unless Amazon can come up with some distinct advantage over Netflix, such as lower prices or better streaming technology, there is no compelling reason to change services. This time, Netflix has the first-mover advantage.

Bezos faced the same obstacle in 2004, when he rolled out Amazon's own search service, called A9. His home-built search algorithms were initially just designed to find products on Amazon's site, while he got a license to use Google's search engine to find items elsewhere on the Internet. Twenty months later Bezos announced his own Web search business to compete with Google. Other Web sites could use A9 to offer search from their own sites, paying only for the storage s.p.a.ce or processing power they used on Amazon's computers. That one didn't work out so well, and was later discontinued. Google was just too much of a juggernaut.

Still, Bezos is not likely to ever give up on old-fashioned acquisitions in order to grow his business. He bought another half dozen companies in 2010. His biggest deal was in 2009, when the news spread that Bezos had spent some $1 billion in Amazon stock on a shoe store.

Zappos was founded in 1999 under the name ShoeSite.com. It's known for selling hard-to-find shoes, including vegan shoes (made from artificial leather), but it eventually expanded into other lines: first handbags and purses, then clothing, sungla.s.ses, electronic devices, and DVDs. This looked like a company that might eventually give even Amazon some compet.i.tion. In 2005, it reached $370 million in revenues, and planned to hit $1 billion revenues by 2010 (a goal it reached in 2008).

But the most important thing about Zappos, and the secret of its success, was its culture. It focused on exemplary customer service and extraordinary treatment of employees. It shipped products to customers for free (even paying return postage if customers decided to send them back), had a one-year return policy, and provided a customer-service call center open twenty-four hours a day. It also paid 100 percent of employees' health care premiums.

How could Bezos resist a company with such ideals and ambitions ? In 2005, he visited CEO Tony Hsieh at Zappos headquarters in Henderson, Nevada, to discuss buying the company. Hsieh turned him down, worried that being absorbed into Amazon would destroy the unique Zappos culture. "We told Jeff that we weren't interested in selling at any price," Hsieh wrote in an essay in Inc. magazine.

But Bezos returned four years later. Hsieh still didn't want to sell. Zappos was now profitable, but the economy was in a recession, and Bezos was offering an astounding amount of money, although in the form of stock rather than cash. In April 2009, Hsieh flew to Seattle to talk about the company and its culture, including Hsieh's philosophy on "the science of happiness-and how we try to use it to serve our customers and employees better." Bezos suddenly piped up with the question, "Did you know that people are very bad at predicting what will make them happy?" That exact question was the next slide in Hsieh's PowerPoint presentation. From that point on, Hsieh relaxed, feeling that Bezos did understand his dedication to his company's culture: both men were more dedicated to customers than to short-term profits.

They struck a deal on July 20 and closed it on November 1 (at which time the value of the Amazon stock being traded was worth $1.2 billion). The deal included a doc.u.ment "that formally recognizes the uniqueness of Zappos's culture and Amazon's duty to protect it," according to Hsieh. It seems to have worked so far. Hsieh still runs Zappos as an independent subsidiary. In the first quarter of 2010, revenues were up almost 50 percent from the same quarter in 2009.

Of course, it's not certain whether this marriage will remain blissful after the honeymoon. Large acquisitions rarely survive without changing the culture of the acquired company. But there are few executives who would even allow such a crazy culture to continue. Even the board of directors at Zappos just tolerated the philosophy as a social experiment. But Bezos was so excited about this acquisition that he made his own video to discuss it (now available on YouTube).

"Zappos is a company I have long admired for a very important reason," he said in the video. "Zappos has a customer obsession. . . . I get all weak-kneed when I see a customer-obsessed company." In fact, he seems to just love everything about the Zappos culture. "Zappos has a totally unique culture," he added. "I've never seen a company with a culture like Zappos's. . . . That culture and the Zappos brand are huge a.s.sets that I value very much, and I want to see those things continue."

Even when not buying companies to add to Amazon, Bezos likes to invest in other companies he believes are exceptional. Despite a lot of bad dot-com investments in the late 1990s, Bezos has not been shy about trying again. He was an early investor in both Google and Twitter. Bezos has learned not only how to create a great company, but how to recognize other great companies in the making. He knows how to pursue his dreams.

And his dreams don't end with Amazon. He has started a second company to try and fulfill a dream he has had since childhood. He wants to explore s.p.a.ce.

Chapter 17.

Step by Step, Courageously.

In 2000, even as Amazon seemed to be falling apart, Bezos started a new business. That was the year he incorporated a company called Blue Origin. But n.o.body knew about it until Newsweek reporter Brad Stone started investigating the name in 2003. It adorned a warehouse on a run-down block along Seattle's Duwamish Waterway. n.o.body there would tell him what they were up to, but Stone found information in state databases that revealed it was a s.p.a.ce-research company owned by Jeff Bezos.

The first part of the program the firm is pursuing is called New Shepard, a tribute to Alan Shepard, the first American astronaut in s.p.a.ce. It is designed to take pa.s.sengers to the edge of s.p.a.ce, and later into orbit, using a propulsion system of peroxide and kerosene. It is destined to become a commercial enterprise, giving s.p.a.ce tourists a chance to see the earth and stars from orbit. But its long-term goal, says Stone in his article, is "establishing an enduring human presence in s.p.a.ce." It goes back to the dream Bezos presented at his high school valedictorian speech. "We want to try to make it safer and lower-cost for people to go into s.p.a.ce," he said in 2003. At that time, the cost of developing this first stage was estimated at $30 million.

Crazy? It's not the first time that adjective has been applied to Bezos as an epithet. But in the age of scaled-back NASA budgets and missions, Bezos is one of a few super-rich entrepreneurs (including Sergey Brin from Google, Elon Musk of Tesla Motors, and Richard Branson of Virgin Atlantic Airways) who are pursuing or funding private alternatives to NASA. Blue Origin is also filled with former NASA engineers and other s.p.a.ce scientists.

The company's slogan is the Latin phrase "Gradatim Fero-citer," which may be translated as "Step by Step, Courageously." But Internet sites offer translations from "Bit by Bit, Ferociously" to "Step by Step, Arrogantly" to "By Degrees, Fiercely." Any of them might apply to Jeff Bezos.

The first translation is the most likely. On the company's Web site, a note from Bezos explains the company's goals:We're working, patiently and step-by-step, to lower the cost of s.p.a.ceflight so that many people can afford to go and so that we humans can better continue exploring the solar system. Accomplishing this mission will take a long time, and we're working on it methodically. We believe in incremental improvement and in keeping investments at a pace that's sustainable. Slow and steady is the way to achieve results, and we do not kid ourselves into thinking this will get easier as we go along. Smaller, more frequent steps drive a faster rate of learning, help us maintain focus, and give each of us an opportunity to see our latest work fly sooner.

Bezos has also described Blue Origin modestly, as "but a small part of a big, challenging, hard technical effort." His big desire is to make s.p.a.ce travel safer and more efficient than anything a big-budget government organization could achieve. The first ship is called G.o.ddard, after Robert Hutchings G.o.ddard, an American physicist credited with building the first liquid-fueled rocket in 1926. G.o.ddard was also ridiculed for his grandiose visions of s.p.a.ceflight.

And Blue Origin is making progress. The first prototype ship, which looks like the cone of a conventional rocket, is designed for vertical takeoff and landing. Vertical landings have never been seriously pursued by NASA, which instead preferred ocean splashdowns or gliding in for a touchdown like the s.p.a.ce shuttle. G.o.ddard, however, has succeeded in its first test. On November 13, 2006, Bezos, his family, friends, and employees, gathered at the company's launch site in Culberson County in West Texas to witness G.o.ddard's first flight. It took off, rose about 285 feet, then lightly touched down again. Reaching the edge of s.p.a.ce will require it to reach an alt.i.tude of about sixty-two miles. It's unclear what propellant was used, but it's very clean-burning, without the dramatic blast of fire and smoke that accompanies NASA launches.

Blue Origin publicized the successful launch with a video on the company's Web site (www.blueorigin.com/letter.htm), along with a letter from Bezos. The video seems designed primarily to attract new scientists to the project. The letter starts with the sentence, "Blue Origin wants you!" But be prepared to present your SAT scores and GPA. To further impress viewers, Bezos even sticks an ad in his letter, mentioning that the videos are streamed from Amazon's own Simple Storage Service (S3), which any company can tap into to run its own business.

Then again, the original plans of Blue Origin called for it to begin commercial flights in 2010. In a second test a month later, weather and malfunctions appear to have prevented liftoff.

Nothing more was heard from Blue Origin until early 2010, when NASA awarded it a $3.7 million grant-primarily to design an astronaut escape system and to build a prototype of the rocket for testing on the ground. It was part of a $50 million grant parceled out to five companies (including Boeing) in hopes of starting commercial s.p.a.ceflight. Then, in 2011, NASA invited eight companies, including Blue Origin, to the Johnson s.p.a.ce Center in Houston to present their proposals for further NASA funding. NASA plans to hand out another $200 million-a.s.suming it gets enough funding from Congress.

The future of s.p.a.ceflight may indeed be dependent on commercial efforts. If that opportunity arises like bacteria in a petri dish, Bezos wants to be there. If Blue Origin ever turns into a real business, it could even displace Amazon in Bezos's heart and brain. s.p.a.ce exploration, after all, was probably his earliest ambition.

Bezos is applying the same philosophy to Blue Origin as he has to Amazon. The first part of this philosophy is to obsess over customers, in this case creating a comfortable, safe, and exciting service to see the stars.

The second is to invent, and reinvent, tenaciously, until he gets it right. He has enormous faith in his talent for invention. As he explains in a video now available on YouTube, "Whenever we have a problem, we never accept either/or thinking. We try to figure out a solution that gets both things. You can invent your way out of any box if you believe that you can."

Third is to focus on the long term, and Blue Origin will probably be a decades-long project. True, it was easier for Bezos to run Amazon at a loss while the stock was still soaring. The stock crash forced him to pull back for a while to readjust his growth-at-all-costs strategy to one that aimed at a shorter goal of profitability, but he knew that it was time to make that shift in order to a.s.sure that Amazon still had a big future. He has always kept his eye on the more distant prize.

The fourth he describes as "It's always Day One." There are always new challenges ahead, new ideas to explore, new directions to turn. As with all great entrepreneurs, his job never becomes mundane or dull. He never thinks of his company as a finished product.

These are extraordinarily simple rules. The only surprising thing about his philosophy is how few executives seem able to follow it. Bezos will stop to rest when he's dead. Until then, he's simply going to keep working, reinventing, trying new things, striving to reach the stars. Someday he may just get there.

Notes.

Chapter 1: One Click Is Not Enough.

Page 2. Bezos later told an executive: Jeff Bezos, "A Bookstore by Any Other Name," speech to Commonwealth Club, July 27, 1998, http://www.commonwealthclub.org/archive/98/98-07bezos-speech.html.

3. Richard Howard, for example: Richard Howard, "How I 'Escaped' from Amazon.cult." Seattle Weekly, July 15, 1998.

5. "We're never going to: Kathy Rebello, "A Literary Hangout-Without the Latte." BusinessWeek, June 14, 1997.

5. "When we do make: Bezos, "A Bookstore by Any Other Name."

6. "If publisher X: David Streitfeld, "Booking the Future; Does Amazon .com Show That Publishing Clicks on the Internet?" Washington Post, July 10, 1998.

10. "People don't just buy: Bezos, "A Bookstore by Any Other Name."

10. "To be nine times: Ibid.

10. When one elderly woman: Peter de Jonge, "Riding the Wild, Perilous Waters of Amazon.com," New York Times, March 14, 1999.

11. One of Bezos's: Bezos, "A Bookstore by Any Other Name."

12. So what we think: Ibid.

13. "probably the most: R. M. Ballardini, "The Software Patent Thicket: A Matter of Disclosure," (2009) 6:2 SCRIPTed 207, www.law.ed.ac.uk/ahrc/script-ed/vol6-2/ballardini.asp.

14. one more example: http://oreilly.com/amazon_patent/amazon_patent.comments.html.

Chapter 2: Portrait of the Entrepreneur as a Young Man.

19. Jeff's family's Texas roots: Joshua Quittner, "Jeff Bezos: An Eye on the Future," Time, December 27, 1999.

20. "what I considered: "Interview with Jeff Bezos," Time, May 4, 2001.

20. "One of the things: Rob Walker, "America's 25 Most Fascinating Entrepreneurs," Inc., April 1, 2004.

20. "You become really self-sufficient: Helen Jung, "Amazon's Bezos: Internet's Ultimate Cult Figure," Seattle Times, September 19, 1999.

21. "I've never been curious: Quittner, "Jeff Bezos: An Eye on the Future."

23. "I think single-handedly: Robert Spector, Amazon.com: Get Big Fast, HarperCollins, 2000.

23. A kid who valued: "Jeff Bezos," CEOBios.com, Kirby Directory, June 12, 2010, http://ceobios.com/2010/06/jeff-bezos-amazon-com/.

23. "I would like to: Jeffrey P. Bezos interview, Academy of Achievement [no author], May 4, 2001, www.achievement.org/autodoc/page/bezoint-1.

23. The school now boasts: www.absoluteastronomy.com/topics/River_Oaks_Elementary_School_(Houston).

25. One of the stories: Chip Bayers, "The Inner Bezos," Wired, March 1999.

26. the greatest thinkers: Academy of Achievement interview.

27. "He was always: Bayers, "The Inner Bezos."

27. "Now the French: Ibid.

27. Their venture made: Sandra Dibble, " 'New Pathways of Thought' on Summer Breeze," Miami Herald, July 4, 1982.

29. "The only reason: Brad Stone, "Amazon Enters the s.p.a.ce Race," Wired, July 2003.

29. "The Effect of Zero Gravity: Robert D. Hof, "Jeffrey P. Bezos" (in "The E.Biz 25") BusinessWeek, September 27, 1999.

29. "preserve the earth": Dibble, "Ex-Dropout Leads His Cla.s.s," Miami Herald , June 2, 1982.

30. I wouldn't mind: Bayers, "The Inner Bezos."

30. "One of the great things: Ibid.

30. The Miami Herald published: Dibble, "Ex-Dropout Leads His Cla.s.s."

31. "I was taking all: "Interview with Jeff Bezos."

31. "I always had: Bayers, "The Inner Bezos."

32. "I'm not the kind: Ibid.

Chapter 3: Jeff Gets a Job.

33. "The Universe says: Spector, Amazon.com: Get Big Fast.

33. "ultimately decided that: "Interview with Jeff Bezos."

36. "this was something that: Spector, Amazon.com: Get Big Fast.