Amazon went public in 1997. If you invested $10,000 in the S&P 500 on that day, your investment would be worth about $30,000 today. You’d have done better if you had invested in Apple. Then you’d have a whopping 2.5 million-dollar nest egg. But if you invested the same amount of money in Amazon, and held it, you’d have stock worth 4.9 million dollars.
A lot has changed since 1997. Bill Clinton was President then, and that’s the year that Madeline Albright became the first woman Secretary of State. Tiger Woods was 22 and just beginning his career. And the internet was a new and strange place to most folks.
Web sites were crude by today’s standards and many businesses didn’t even have one. Today we settle disagreements by using Google on our smartphones. Children born in 1997 have grown up with the web, and are what we call digital natives. Their world and ours has been shaped disproportionately by the company called Amazon.
The Amazon Creation Story
Amazon’s founder, Jeff Bezos, was working for the hedge fund and technology development firm D. E. Shaw when he read a study that showed that the internet was growing at the rate of 2,300 percent per year. The number was so big that Bezos thought the study might be flawed, so he dug in and checked the methodology. The study was solid.
He decided to start a company that would exploit that explosive growth. He knew it was going to be an online business, but he wasn’t sure what it would be. He made a list of possibilities. The list included books, but it also included music CDs and software and different versions of stock trading. He chose books.
Books are a commodity. The copy of Gone with The Wind that you get from Store A has the same content as the copy of Gone with The Wind that you get from Store B. Readers buy lots of books, and there are more books coming out all the time. There were already digitized catalogues that could be searched by author, title, and subject.
Now we come to the interesting part. Bezos wasn’t conceiving an online bookstore. He was thinking about selling books as the first step in what would become Amazon. The best proof of that is the name itself.
Amazon has an association with great size, it’s the largest river in the world, but not with any particular product. And it has no particular connection with commerce. Bezos thought that being a “store” would put you in a box. Choosing the name Amazon let him create the largest possible company with the broadest range of possibilities.
Since those first days, just over twenty years ago, Amazon has been enormously successful. I think there are three main reasons why.
Amazon Keeps a Ruthless Focus on The Customer Experience
The Amazon mission statement makes it very clear what Bezos expects Amazon to be.
“To be the earth’s most customer-centric company, where people can find and discover anything they want to buy online.”
After twenty years, it’s hard to remember that Amazon did many things first that other people only copied later. There was one-click ordering, which they protected with a patent. There was a button to automatically gift wrap and add a gift card. There is “collaborative filtering.” That’s the feature that tells you that other people who bought the book you’re considering also purchased several other books.
And there are customer reviews. Early on, many people advised Bezos not to allow negative reviews, but he thought customers would have a better experience if they could read all kinds of reviews. Today, a report from PowerReviews indicates that 95 percent of consumers use reviews when they’re purchasing a new product, and 85 percent say they are essential.
My story is typical. A few months back, I wanted to buy a leaf blower. I had a good one that was corded, but I was tired of pulling the cord around and I didn’t want a gas-powered blower. I figured I’d buy a cordless leaf blower. I bought it from Amazon because of the reviews, among other things. I don’t know much about leaf blowers, but I know how to read reviews. So, I read the reviews and I used the ask questions feature to get some answers.
I could ignore the advice that the cordless leaf blower wasn’t strong enough, because that came from people who lived in a very wet climate. I didn’t need the power they did. What Amazon and the reviews let me do was make a purchase in an area where I had no expertise and make it with certainty that I would get a good product. I also knew that Amazon would let me return it if I made a bad choice. And, oh yes, shipping was free.
That customer-centric focus remains a driver for everything Amazon does. They keep an operational eye on the fact that people basically want three things when they buy something online. People want to know the price and availability, and they want to know about product details and whether it will work for them. That’s been constant for 20 years. It’s part of Amazon’s long-term focus.
Amazon Maintains A Ruthless Focus on The Long-Term
Just about every company I’ve ever encountered claims that they are customer-centric, but most aren’t. Almost all of them claim to make decisions looking at the long-term good of the company, but most don’t. So far, Amazon really means it.
From the very beginning, has kept an eye one the future. In 2000, while dot-coms were exploding and licking their wounds, Amazon added the Amazon Marketplace to allow other vendors to use Amazon to sell their wares. If you’re looking through the short-term lens, that’s a bad idea. It cuts down on sales and profit margins. But if you’re looking long-term, it makes the site a place where more people want to shop.
Amazon increased distribution capacity far ahead of its needs at the time. In the early part of the century, staff analysis at Amazon suggested that there should be four major distribution points to cover the United States. Bezos thought it would take five. The investment to build out those distribution centers was huge. It was about 30 percent of sales. That looked bad until the Christmas season of 2007.
2007 was the first year that lots of people went online to buy Christmas gifts, and hardly any retailers were ready. The media filled up with stories about undelivered gifts, except for Amazon. The capacity they had built in advance made it possible for them to be the star of the 2007 Christmas season and win a bunch of new customers in the process.
Jeff Bezos can be stubborn about things like that. Despite immense pressure and the best advice of a battalion of experts, he has refused to advertise on television because it costs a lot and he doesn’t think it drives results. But he started offering free shipping because he thought it would attract customers.
He trusts his analysis and his gut, but he doesn’t believe in the divine right of CEOs or founders. When the times change or a better idea comes along, Amazon will change.
Amazon Is Willing to Change
Originally, Bezos had a solid business plan for Amazon. The idea was to get profitable quickly and then use the profits to grow slowly and steadily. But he changed his mind almost immediately.
Amazon had opened for business in July 1995. In August of that year, Netscape went public. Their initial offering raised a ton of money, and inspired Bezos to rethink his strategy. He quickly switched Amazon from “get profitable fast” to “get big fast.” Amazon went public in May 1997. They pursued a “damn the losses, full speed ahead” get big fast strategy until the business climate changed.
After the Dot Com Bubble burst. business media and the analysts were wondering when Amazon would get profitable. If Amazon wasn’t profitable soon, they reasoned, the company would be just like all those Dot Com companies that disappeared beneath the waves. Wags called the company names like “Amazon.bomb” and “Amazon.con.” Bezos says his favorite was “Amazon.org,” implying that the company was really a nonprofit. He could have a laugh over the situation, but he also knew he had to do something.
So, in July 2000, Bezos took his senior team off for a three-day meeting to create a profitability plan. The plan called for achieving profitability in the fourth quarter of 2001. Amazon did just that.
Through its entire history, Amazon has shown the ability to change course quickly and profitably. Originally, they tried to outsource everything but online sales. They discovered that they couldn’t maintain their customer service that way, so they decided to do their own fulfillment. Originally, Amazon was just a web company, now they’re rolling out brick and mortar stores, too.
Change also means coming up with new products and services. Some, like Kindle, were dramatically successful. Others like the Amazon Wallet were pretty much dead on arrival and still others, like the Fire phone failed once but are being tuned up for different markets. When a new product idea fails, Amazon usually says that it learned a lot from the experience and will use that learning down the road. Every company says that, but Amazon appears to mean it.
Not all new ventures are products, either. Amazon had to develop much of the ecommerce software that makes the place run. They’re learned to leverage that development by using what they’ve learned to offer services to other companies. Amazon Web Services (AWS) is one of the largest IT companies in the world, with $16 billion in revenue.
Yale Professor Richard Foster says that today’s average company listed on the S&P Index lasts about fifteen years. Amazon has already surpassed that and is doing quite well. The secret (if it is a secret) seems to a ruthless focus on doing things to please their customers while making decisions with an eye on the long term. Those two things, being customer-centric and long term focused, don’t change, but everything else is up for grabs.