Kill your own business
- BuyThe Everything Store: Jeff Bezos and the Age of Amazon by Brad Stone
Bantam, 384 pp, £18.99, October 2013, ISBN 978 0 593 07047 5
Jeff Bezos thinks of himself as a great man, and why shouldn’t he? ‘Our vision is to have every book ever printed, in any language, available in under 60 seconds.’ He wrote that ten years ago; now it’s almost true. When he graduated from high school, first in his class, he gave a speech to his classmates on how the fragility of the Earth required them to explore outer space and work towards rehousing humanity in orbiting space stations. He has used some of his fortune to turn 290,000 acres in West Texas into a giant laboratory for new spacecraft, which he claims will be so efficient and inexpensive to service that everyone will eventually be able to leave the planet. In his annual letter to the shareholders of Amazon, he acknowledges that some of his decisions may seem inexplicable, but ‘it’s all about the long-term.’ To that end, he has donated $42 million to the construction of the Clock of the Long Now, which is supposed to tick for 10,000 years. His temporarily is not our temporarily.
Bezos was born in 1964 in New Mexico. His mother was 16; his father, not much older, was a unicyclist in a circus. Bezos never knew him, and he was adopted by his mother’s second husband, a Cuban petroleum engineer who fled Castro as a teenager and told Brad Stone that he takes credit for passing on a ‘libertarian aversion to government intrusion into the private lives and enterprises of citizens’. To taxes, for example. Jeff did well at school, particularly in maths and science; he went to Princeton; and by the age of 28 he was one of the vice presidents of a New York investment firm. In 1994, when the World Wide Web was a year old, he made a list of things that he might be able to sell in great quantities over the internet. In a supposed triumph for mail order and catalogue companies, the US Supreme Court had decided that businesses weren’t required to collect sales tax on behalf of any state in which they lacked a ‘physical presence’. Anything sold online was going to be cheaper than almost anything sold in a shop. Someone was going to make a fortune. Bezos created a ‘regret minimisation framework’:
I knew when I was eighty that I would never, for example, think about why I walked away from my 1994 Wall Street bonus … At the same time, I knew that I might sincerely regret not having participated in this thing called the internet that I thought was going to be a revolutionising event. When I thought about it that way … it was incredibly easy to make the decision.
Bezos’s list included clothes, computer software and office supplies. What he liked about books was that they were ‘pure commodities’: copies of the latest Stephen King sold online would be no better or worse than those sold in shops. But no actual shop was big enough to offer all the three million-plus books in print. Two distributors, Ingram and Baker & Taylor, handled distribution for most American publishers: Bezos wouldn’t have to make separate deals with each publishing house. Books also came assigned with International Standard Book Numbers and were catalogued on CD-ROM: that would save time, and Bezos was in a hurry.
The company’s motto was ‘Get Big Fast’. The Amazon isn’t just the largest river in the world: it’s larger than the next seven largest rivers combined. Bezos preferred the name Relentless.com, but friends persuaded him that it sounded sinister. (Type Relentless into an address bar and you still get directed to Amazon.) He also considered Bookmall.com (but he knew that soon enough he wouldn’t only be selling books) and Cadabra.com (sounded too much like ‘cadaver’). Naturally he couldn’t set up the business in New York – too many potential customers lived there, and he didn’t want to charge them all sales tax – but somewhere isolated would make it difficult to hire engineers. The compromise was Seattle: at least Microsoft was nearby. Washington is also one of the few American states that doesn’t charge any personal income tax. (In 2010, Bezos donated $100,000 to a campaign that successfully defeated Initiative 1098, supported by Bill Gates, which would have started taxing those who earn more than $200,000 a year.) Bezos took a four-day bookselling course through the American Booksellers Association. He used his savings and took out loans to hire a small staff, and his parents put up money from their retirement fund. They didn’t know anything about the internet, but they trusted him.
At first only web geeks shopped from Amazon, and for a year its bestselling book was How to Set Up and Maintain a World Wide Web Site: The Guide for Information Providers. To make the site livelier Bezos hired an editorial team to review books, but sacked them when he realised that customers preferred doing it themselves. (My first book review was a freebie for Amazon: five stars for Jane Eyre.) Distributors made Amazon order ten books at a time, but Bezos got round the system:
You didn’t have to receive ten books, you only had to order ten books. So we found an obscure book about lichens that they had in their system but was out of stock. We began ordering the one book we wanted and nine copies of the lichen book. They would ship out the book we needed and a note that said: ‘Sorry, but we’re out of the lichen book.’
Amazon advertised itself as the world’s largest bookstore, but didn’t actually hold any stock: a customer would order a book from Amazon, Amazon would order it from a distributor and pass it on. It was the kind of transaction that ordinary bookshops do all the time: the difference was that Amazon – run from Bezos’s garage, later from crummy offices in the cheapest part of town – could afford to take 30 or 40 per cent off bestsellers, 10 per cent off everything else. Any business meetings were held in a café inside a branch of Barnes and Noble.
According to Stone’s The Everything Store, which charts Amazon’s growth from bookseller to all-around mercantile hegemon, one of Bezos’s favourite books is Sam Walton’s autobiography, Made in America, about the creation of Wal-Mart. Bezos made his top employees read it, then realised that it was simplest just to replace or augment them with executives from Wal-Mart – so many of them that Wal-Mart sued, alleging that Amazon was stealing trade secrets. Walton’s creed, as Bezos understood it, was to have lower prices than your competitors, even if doing so cut into your profits or meant you had to treat your employees like garbage. With lower prices you’ll get more customers; with more customers you can push suppliers to lower their prices, which will let you lower your prices even further, thereby attracting more customers; repeat until your competitors are dust. Mega-bookstores – Borders and Barnes and Noble – were slow to take to the web, but Bezos prepared for them by patenting ‘1-Click’ checkout, which just meant that customers’ shipping and billing details were saved and stored: no need to type them out next time. The patent was written so broadly that when Barnes and Noble did start selling books online, Amazon was able to prevent their ‘Express Lane’ checkout, even though it required two clicks. Every American webstore was forced to be clunkier than Amazon unless, like Apple, it paid Amazon huge licensing fees. This lasted until 2006, when a New Zealand actor with a side interest in intellectual property law finally produced evidence that another e-commerce company had actually patented one-click shopping first, under a different name. But by then most of Amazon’s would-be competitors were defunct.
In 1995, the pioneer web-browser Netscape went public at $28 a share and tripled in a day, even though it had never made money. Raising capital would no longer present Bezos with any difficulties. Amazon started making its own deals with publishers, cutting out distributors and building warehouses: as at Wal-Mart, they were first called ‘distribution centres’ and were miserable. Few of them had air-conditioning: on hot days it was cheaper just to station private ambulances outside to cope with the employees who inevitably collapsed. Workers carried little devices that kept track of their speed on the floor, and Amazon regularly got rid of the slowest. (The best article about what it’s like to work in one of these places is Mac McClelland’s ‘I Was a Warehouse Wage Slave: My Brief, Backbreaking, Rage-Inducing, Low-Paying, Dildo-Packing Time Inside the Online-Shipping Machine’, which was published in Mother Jones last year.) No other company was as good at sending things out, fast and cheaply. Stone explains:
A customer might place an order for a half dozen products, and the company’s software would quickly examine factors like the address of the customer, the location of the merchandise in the Fulfilment Centres, and the cutoff times for shipping at the various facilities around the country. Then it would take all those variables and calculate both the fastest and the least expensive way to ship the items.
The company still didn’t make a profit after it went public in 1997. One business writer, Matthew Yglesias, likes to say that Amazon is practically a charity run by investors for the benefit of the world’s consumers. Bezos assured his shareholders that Amazon was betting big on the future: any idiot could make Amazon profitable overnight just by not investing in infrastructure. Cheap books had coaxed people to try shopping online; now Amazon would begin to sell them everything else. It added a music store, then movies, bought companies in China and offices in Luxembourg to shelter its taxes. In a failed attempt to create a rival to eBay, Amazon Auctions, it spent $175 million to acquire the company Accept.com. According to Stone, its most avid user may have been Bezos himself, who spent $40,000 on an ‘Ice Age cave bear, complete with an accompanying penis bone’. A price comparison site, Junglee.com, cost Amazon $187 million, and was then abandoned; PlanetAll, an early social media site, cost $93 million; a premature entrance into the toy market cost $39 million in unsellable merchandise. For several years the company bought or invested in almost every major site that was trying to sell things over the internet and lost money on all of them. But with each failed acquisition, the company was acquiring scores of programmers at a time when there weren’t enough good ones in the US for all the tech companies that needed them. (Amazon has since joined Apple and Microsoft to lobby for immigration reform. Top priority: more work visas for Indian engineers.) It learned how to reshape the site for each user, constantly, instantly. Programmes to recommend products to customers based on their previous purchases were so effective that Amazon could leverage them. If a small publisher wouldn’t give Amazon deeper discounts than it offered other booksellers, Amazon would promote a competitor’s titles instead. It was all part of the Gazelle Project, after Bezos said Amazon should go after publishers the way ‘a cheetah would pursue a sickly gazelle’. Publishers would sometimes hold out against lowering prices for a few weeks, but Amazon stocked books that no one else would; and they paid their bills, when suddenly there weren’t very many other booksellers around to pay them.
Bezos told the Washington Post (before he bought it) that ‘to be nine times bigger than your nearest competitor, you actually only have to be 10 per cent better.’ And his site was better, though by how much who could say? In 1999, when Toys ’R’ Us launched its website in time for Christmas, Amazon bought out its entire stock of the most popular toys (taking advantage of a free shipping promotion), and resold them on its own site. Toys ’R’ Us was fined by the Federal Trade Commission for over-promising. A department within Amazon called Competitive Intelligence noticed that a New Jersey company called Quidsi was having success with a site called Diapers.com: it sold nappies at a loss to entice customers to buy its other baby products. Amazon tried to acquire the company, but Quidsi wasn’t interested. So Amazon started selling its nappies for even less than Quidsi, though it meant losing $1 million a day. When Quidsi still wouldn’t sell, Amazon threatened to start giving away nappies. Quidsi sold to Amazon; nappy prices went back up. To make Amazon’s catalogue deeper than barnesandnoble.com, it bought up stock from used book dealers, then started letting the dealers sell their stock on Amazon’s site for a fee. Publishers didn’t like their new books competing with cheaper versions of the same titles, but Amazon made money either way. In addition to selling products from their own warehouses, they would become the biggest middleman of the internet: more than two million registered ‘marketplace sellers’ pay Amazon fees and commissions to have their products listed on the site, or pay Amazon to warehouse and ship their products for them. There are blogs that keep track of the more unlikely items: tanks, wolf urine, simulation models for infant circumcision, uranium ore, live ladybirds, Zimbabwean trillion dollar banknotes. Type in ‘dog Halloween costume’, and you’ll see thousands. The more different things the site sold, the more people used the site, the more businesses would pay to have their products listed on the site. Customers were a commodity like anything else.
But it was losing out on music. Apple had taken control of the digital music market while Amazon kept pushing CDs. They wouldn’t allow the same thing to happen to books. Hence: the Kindle. ‘Your job is to kill your own business,’ Bezos told the engineer in charge. ‘I want you to proceed as if your goal is to put everyone selling physical books out of a job.’ He was convinced that Apple had made the iPhone too profitable: the smartphone market became glutted with cheaper competitors. Instead Amazon would lose money when people bought the Kindle, but make money when they used it – by buying e-books from Amazon. ‘Publishers that didn’t digitise enough of their catalogues, or didn’t do it fast enough, were told they faced losing prominence in Amazon’s search results or in its recommendations to customers.’ Amazon’s plan to charge only $9.99 for e-books frightened publishers, who knew it would cut into their hardback sales. When five major US publishers attempted to create an electronic bookstore with Apple, Amazon complained to the US Department of Justice, arguing that the publishers were conspiring to raise prices for electronic books in violation of antitrust law. The publishers paid at least $164 million to make the charges go away; they also gave up their bookstore.
Stone has covered Amazon almost since its creation, first for Newsweek, now for Bloomberg Businessweek. He admires it because it’s good at giving us what we want, which is why he thinks we should fear it; and he thinks it will ‘expand until either Jeff Bezos exits the scene or no one is left to stand in his way’. In the few months since Stone’s book went to press, Amazon has bought eight million square feet of warehouse space and taken on 70,000 temporary American workers for the Christmas rush; launched Amazon India and a Kindle store in Mexico; unveiled a new tablet; started the largest website for the sale of fine art; begun selling groceries throughout Los Angeles (other markets to be announced); and made an unprecedented deal with the US Postal Service to have customer deliveries on Sundays. London is to get Sunday deliveries too, via Amazon’s own trucks. The company is also preparing to launch its own smartphone (possibly with ‘eye-tracking’ software: no clicks necessary, just blink) and is manufacturing a box that will let users access Amazon content through their televisions. All this in addition to building up its own publishing house, television and film studio, and continuing its dominance over the sale of server space for tech companies.
The Everything Store is listed for sale on Amazon. MacKenzie Bezos, Jeff Bezos’s wife, has reviewed it on the site: one star out of five because she doesn’t think it’s accurate. Shel Kaphan, Amazon’s first employee, also reviewed it – four stars – and says that it is, ‘by and large’. You can buy it new in hardback at 46 per cent off list price; or cheaper used; or even cheaper on Kindle. You can also listen to it through Amazon’s company Audible.com – for free if you’ve never tried Audible.com before. Shipping is free if you’re willing to buy something else too, and they’re betting you will.