In early 1998, Amazon founder Jeff Bezos and CFO Joy Covey co-authored a letter to shareholders discussing the previous year’s accomplishments. That letter has become holy writ inside the company, and is republished every year in its annual report.
The letter and its contents struck me as incredibly prescient, or perhaps simply potent, as I read through Brad Stone’s excellent The Everything Store: Jeff Bezos and the age of Amazon. It’s no surprise that the letter has continued to be viewed as a touchstone for the company and its employees. The tenets set out in it are clearly represented by the way that the company develops and releases products, and the approach that it takes to everyday business.
One of the most commonly discussed aspects of Amazon’s business is its attitude toward profit margins. The company famously makes a ton of money every year and manages to spend most of it, ending up with slim or no profits shown on its quarterly balance books. For some folks, obsessed with the way numbers look in a column, this is endlessly frustrating. How can a company that makes so much money, and continues to be such a darling of the stock market, end up with so little profit to show for it?
The letter holds the answer, and makes Amazon and Bezos’ views incredibly clear. Here’s the relevant passage:
We believe that a fundamental measure of our success will be the shareholder value we create over the long term. This value will be a direct result of our ability to extend and solidify our current market leadership position. The stronger our market leadership, the more powerful our economic model. Market leadership can translate directly to higher revenue, higher profitability, greater capital velocity, and correspondingly stronger returns on invested capital.
Our decisions have consistently reflected this focus. We first measure ourselves in terms of the metrics most indicative of our market leadership: customer and revenue growth, the degree to which our customers continue to purchase from us on a repeat basis, and the strength of our brand. We have invested and will continue to invest aggressively to expand and leverage our customer base, brand, and infrastructure as we move to establish an enduring franchise.
The letter follows that up with a nine-point layout that describes Amazon’s decision-making approach. You can view the letter here to read the points, but if you look at recent Amazon moves, almost all of them are consistent with the tenets set out there. Some of them, such as “when forced to choose between optimizing the appearance of our GAAP accounting and maximizing the present value of future cash flows, we’ll take the cash flows,” speak directly to Amazon’s desire to remain a lean company.
Stone’s book paints a crisp portrait of Bezos as a man leaning into it at every turn. A key example of this in the book is an anecdote about then marketing executive Mark Breier bringing Bezos the results of a survey that showed that the majority of customers didn’t use Amazon and would probably never do that because they didn’t read books.
At the time, all Amazon sold was books. This was not great news.
Bezos’ response? “I brought him very bad news about our business, and for some reason, he got excited,” said Brier.
Instead of seeing the news as a major roadblock to Amazon’s continuing success, especially right after IPO, Bezos saw it as the perfect time to start exploring other categories of products that were under-served in brick-and-mortar establishments. After research, some of it performed by future Amazon cloud exec Andy Jassy and future Hulu CEO Jason Kilar, Amazon expanded into DVDs and music. And the rest, well, you know how the saying goes.
What the anecdote says about Bezos’ handling of Amazon is very simple, and I believe is overlooked a lot when people think about why the company does one thing or another.
Put simply, Jeff Bezos views Amazon as a young company.
As a survivor of the dot-com boom and bust, and a nearly 20-year-old company, Amazon is often viewed by tech writers and analysts as a venerable pillar of Internet business. An aging superpower that trades blows with everyone from Apple to Google these days. But that’s not the way Bezos sees it, and that’s not the way he wants his employees to see it.
In the eyes of the people running Amazon, it’s still focused on growth, still becoming whatever it wants to be. When you look at it through that lens, decisions to reinvest nearly everything it makes into expansion and new products, such as the Kindle Fire — even though those decisions negatively impact the balance books — make a lot more sense.
In this time of massively high valuations for companies with seemingly little intrinsic value and no revenue to speak of, we’re comfortable talking about billion-dollar sums. But when Amazon is concerned, we feel reluctant to use the same frameworks to discuss it, simply because of its “maturity.” But viewed as a company still in its infancy — reframed that way — it actually becomes a lot easier to understand. The age of Amazon? Younger than you’d think.
The Amazon presented in Stone’s book is still uncomfortable with its own success, and the Bezos depicted is still just getting started. It’s a fascinating read. I recommend it for students of the company or those simply interested in a ripping business yarn.
[Image: AFP/Getty Images]