The birth of Amazon.com

The Everything Store: Jeff Bezos and the Age of Amazon is an interesting book for those of us who planned and programmed early ecommerce sites.

Here’s a bit about Amazon’s early infrastructure and design…

Amazon’s first engineers coded in a computer language called C and decided to store the website in an off-the-shelf database called Berkeley DB that had never seen the levels of traffic to which it would soon be exposed.

[Fact check by Greenspun: "Oracle was always used for transactional business data, e.g. CUSTOMER, SESSION, SHIPMENT, etc. Berkeley DB was used for non-transactional data like the product catalog and were always built by offline processes." -- someone who knows]

One early challenge was that the book distributors required retailers to order ten books at a time. Amazon didn’t yet have that kind of sales volume, and Bezos later enjoyed telling the story of how he got around it. “We found a loophole,” he said. “Their systems were programmed in such a way that 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.’ ”

In early June, Kaphan added a reviews feature that he’d coded over a single weekend. Bezos believed that if Amazon.com had more user-generated book reviews than any other site, it would give the company a huge advantage; customers would be less inclined to go to other online bookstores. They had discussed whether such unfiltered user-generated content could get the company in trouble. Bezos decided to watch reviews closely for offensive material rather than read everything before it was published.

The site went live on July 16, 1995, and became visible to all Web users.

How well were the founders/managers able to predict the business trajectory?

In the meetings, Bezos presented what was, at best, an ambiguous picture of Amazon’s future. At the time, it had about $139,000 in assets, $69,000 of which was in cash. The company had lost $52,000 in 1994 and was on track to lose another $300,000 that year.

Against that meager start, Bezos would tell investors he projected $74 million in sales by 2000 if things went moderately well, and $114 million in sales if they went much better than expected. (Actual net sales in 2000: $1.64 billion.) Bezos also predicted the company would be moderately profitable by that time (net loss in 2000: $1.4 billion). He wanted to value the fledgling firm at $6 million—an aggressive valuation that he had seemingly picked out of thin air.

What happened when a group of MIT geniuses were pitted against one Lisp programmer from Utah?

That fall, the company focused on customizing the site for each visitor, just as Bezos had promised his original investors it would. Its first attempt relied on software developed by a firm called Firefly Network, an offshoot of the MIT Media Lab. The feature, which Amazon called Bookmatch, required customers to rate a few dozen books and then generated recommendations based on their tastes. The system was slow and crashed frequently, and Amazon found that customers were reluctant to go through the extra effort of evaluating books. So Bezos suggested that the personalization team develop a much simpler system, one that made recommendations based on books that customers had already bought. Eric Benson took about two weeks to construct a preliminary version that grouped together customers who had similar purchasing histories and then found books that appealed to the people in each group. That feature, called Similarities, immediately yielded a noticeable uptick in sales and allowed Amazon to point customers toward books that they might not otherwise have found.

The author adopts a worshipful attitude toward Jeff Bezos, whose advice is almost always so prescient that people refer to him as “prescient”:

Later Bezos recalled speaking at an all-hands meeting called to address the assault by Barnes & Noble. “Look, you should wake up worried, terrified every morning,” he told his employees. “But don’t be worried about our competitors because they’re never going to send us any money anyway. Let’s be worried about our customers and stay heads-down focused.”

Brin and Page left Shriram’s house after breakfast. Revealing once again his utter faith in passionate entrepreneurs’ power to harness the Internet, Bezos immediately told Shriram that he wanted to personally invest in Google. Shriram told him the financing round had closed months ago, but Bezos insisted and said he wanted the same deal terms as other early investors. Shriram said he would try to get it done. He later went back to the Google founders and argued that Bezos’s insight and budding celebrity could help the fledgling firm, and they agreed. Brin and Page flew to Seattle and spent an hour with Bezos at Amazon’s offices talking about technical issues like computer infrastructure. “Jeff was very helpful in some of those early meetings,” Larry Page says. Thus did Jeff Bezos become one of the original investors in Google, his company’s future rival, and four years after starting Amazon, he minted an entirely separate fortune that today might be worth well over a billion dollars. (Bezos adamantly refuses to discuss whether he kept some or all of his Google holdings after its IPO in 2004.) “He’s so prescient. It’s like he can peer into the future,” says Shriram

At the same time, Bezos is a slave-driver:

The assumption was that no one would take even a weekend day off. “Nobody said you couldn’t, but nobody thought you would,” says Susan Benson. Eric Benson adds, “There were deadlines and death marches.”

Parking was scarce and expensive. Nicholas Lovejoy suggested to Bezos that the company subsidize bus passes for employees, but Bezos scoffed at the idea. “He didn’t want employees to leave work to catch the bus,” Lovejoy says. “He wanted them to have their cars there so there was never any pressure to go home.”

During one memorable meeting, a female employee pointedly asked Bezos when Amazon was going to establish a better work-life balance. He didn’t take that well. “The reason we are here is to get stuff done, that is the top priority,” he answered bluntly. “That is the DNA of Amazon. If you can’t excel and put everything into it, this might not be the place for you.”

Kim Rachmeler shared a favorite quote she heard from a colleague around that time. “If you’re not good, Jeff will chew you up and spit you out. And if you’re good, he will jump on your back and ride you into the ground.”

Amazon does not share the Fortune 500′s fondness for PowerPoint and Kumbaya:

“Communication is a sign of dysfunction. It means people aren’t working together in a close, organic way. We should be trying to figure out a way for teams to communicate less with each other, not more.” At that meeting and in public speeches afterward, Bezos vowed to run Amazon with an emphasis on decentralization and independent decision-making. “A hierarchy isn’t responsive enough to change,” he said. “I’m still trying to get people to do occasionally what I ask. And if I was successful, maybe we wouldn’t have the right kind of company.”

PowerPoint is a very imprecise communication mechanism,” says Jeff Holden, Bezos’s former D. E. Shaw colleague, who by that point had joined the S Team. “It is fantastically easy to hide between bullet points. You are never forced to express your thoughts completely.” Bezos announced that employees could no longer use such corporate crutches and would have to write their presentations in prose, in what he called narratives. The S Team debated with him over the wisdom of scrapping PowerPoint but Bezos insisted. He wanted people thinking deeply and taking the time to express their thoughts cogently. “I don’t want this place to become a country club,” he was fond of saying as he pushed employees harder.

“What we do is hard. This is not where people go to retire.” There was a period of grumbling adjustment. Meetings no longer started with someone standing up and commanding the floor as they had previously at Amazon and everywhere else throughout the corporate land. Instead, the narratives were passed out and everyone sat quietly reading the document for fifteen minutes—or longer.

Bezos refined the formula even further. Every time a new feature or product was proposed, he decreed that the narrative should take the shape of a mock press release. The goal was to get employees to distill a pitch into its purest essence, to start from something the customer might see—the public announcement—and work backward.

Amazon can be a comfortable place to work, however:

[in 2006] A temporary employee in the Coffeyville, Kansas, fulfillment center showed up at the start of his shift and left at the end of it, but strangely, he was not logging any actual work in the hours in between. Amazon’s time clocks were not yet linked to the system that tracked productivity, so the discrepancy went unnoticed for at least a week. Finally someone uncovered the scheme. The worker had surreptitiously tunneled out a cavern inside an eight-foot-tall pile of empty wooden pallets in a far corner of the fulfillment center. Inside, completely blocked from view, he had created a cozy den and furnished it with items purloined from Amazon’s plentiful shelves. There was food, a comfortable bed, pictures ripped from books adorning the walls—and several pornographic calendars.

Amazon dominated cloud services with low prices:

Bezos believed his company had a natural advantage in its cost structure and ability to survive in the thin atmosphere of low-margin businesses. Companies like IBM, Microsoft, and Google, he suspected, would hesitate to get into such markets because it would depress their overall profit margins. Bill Miller, the chief investment officer at Legg Mason Capital Management and a major Amazon shareholder, asked Bezos at the time about the profitability prospects for AWS. Bezos predicted they would be good over the long term but said that he didn’t want to repeat “Steve Jobs’s mistake” of pricing the iPhone in a way that was so fantastically profitable that the smartphone market became a magnet for competition. The comment reflected his distinctive business philosophy. Bezos believed that high margins justified rivals’ investments in research and development and attracted more competition, while low margins attracted customers and were more defensible. … Bezos’s belief was borne out, and AWS’s deliberately low rates had their intended effect; Google chairman Eric Schmidt said it was at least two years before he noticed that the founders of seemingly every startup he visited told him they were building their systems atop Amazon’s servers. “All of the sudden, it was all Amazon,” Schmidt says. “It’s a significant benefit when every interesting fast-growing company starts on your platform.”

Amazon employs at least 80 full-time people to navigate the world of taxes:

Color-coded maps were widely distributed to employees at headquarters in Seattle. Travel to green states like Michigan was okay, but orange states like California required special clearance so that the legal department could track the cumulative number of days Amazon employees spent there. Travel to red states, like Texas, New Jersey, and Massachusetts, required employees to complete an intensive seventeen-item questionnaire about the trip that was designed to determine whether they would make the company vulnerable to sales-tax collection efforts (number 16: “Will you be holding a raffle?”). Amazon lawyers then either nixed the trip altogether or obtained a private letter ruling from that state spelling out its specific treatment of that particular situation.

“The economic outlook for many states is bleak,” read one early 2010 internal tax memo to employees that was filed in the Vadim Tsypin case record. “As a result, states are pursuing taxpayers more aggressively than before. Amazon’s recent public experiences with New York and Texas provide timely and pertinent examples of the heightened risk. That’s why our attention to nexus-related issues are more important than ever.”

As the era of tax-free online purchases was ending in many states, the true architect of Amazon’s tax strategy and chief of its eighty-person tax department, an attorney named Robert Comfort, stepped out of the shadows. Comfort, a Princeton alumnus who joined Amazon in 2000, had spent more than a decade employing every trick in the book, and inventing many new ones, to minimize the company’s tax burden. He created its controversial tax structure in Europe, funneling sales through entities in Luxembourg, which has a famously low tax rate. In 2012, this arcane tax structure nearly collapsed amid a wave of populist European anger directed at Amazon and other U.S. companies, including Google, who were trying to minimize their overseas tax burden.

Shopping for your next car? Want to know what a billionaire chooses for his family?

On a cold, wet Tuesday morning in early November 2012 at around nine o’clock, a Honda minivan pulled up to Day One North, on the corner of Terry Avenue and Republican Street in Seattle’s South Lake Union neighborhood. Jeff Bezos, sitting in the passenger seat, leaned over to kiss his wife, MacKenzie, good-bye, got out of the car, and walked self-assuredly into the building to start another day.

Factcheck by Greenspun: I asked one of the first Amazon employees what he thought of the book. Here is the response: “Substantially accurate, yes. I did get some stress flashbacks while reading. My biggest problem with the book is that it paints Jeff as a capricious tyrant. While this was a side of him that we saw, I think Brad went overboard on this. Jeff is not Steve Jobs or Bill Gates. He is neither bipolar nor an autistic savant. He is capable of non-manipulative genuine human emotion. Most of the time he was a reasonable person making audacious decisions that turned out to be correct.”

More: read the book

7 Comments

  1. paul kramarchyk

    April 10, 2014 @ 2:14 am

    1

    For me Amazon is like a carnival midway with seven people constantly shouting at you, each trying to out obnoxious the other for your attention. I think it’s messy with an exceptionally unelegant UI. I use B&H when I can, Amazon if I must. Although I have to say that Amazon’s customer service gets good marks from my experience.

    Amazon is a digital Sears catalog. It was inevitable. Bezos had the vision and energy to make it happen first. Congrats! Jeff Bezos is an ambitious, hardworking entrepreneur. But not in the same league as Steve Jobs or Bill Gates. Half the genius of Amazon is in UPS and FedEx.

  2. Chaminda

    April 10, 2014 @ 2:41 am

    2

    Phil, I like your review specially factcheck.

    Did you had chance to read one star comments for the book at amazon.com? Those are quite interesting as several times current employees defending the company.

  3. Jack Crossfire

    April 10, 2014 @ 8:44 pm

    3

    Still remember Jeff on the late night talk shows, when he wasn’t profitable & building a $1.7 billion business by selling rubber duckies seemed ridiculous. Considering bookstores are all gone, there’s no technical reason for books to require a distributor, who knows if amazon’s current profit isn’t the product of interest free credit & quantitative easing.

    It’s 1 of the few web applications that’s very easy to use, works incredibly well & does exactly what a user would want, rather than forcing horribly convoluted labyrinths of sidebars & menus down our throats like google. It’s too bad making something that good requires giving up all your time off & driving a car to a parking lot every day.

  4. philg

    April 11, 2014 @ 12:30 am

    4

    Paul: If you read the book I will be interested to hear whether or not your perspective changes. There is a lot of impressive innovation and technology behind Amazon’s ability to sell you a small order of some random stuff, ship it out immediately, and do that for a tiny markup.

    Chaminda: Thanks for the pointer. Bezos’s wife has the best line: “One of the biggest challenges in non-fiction writing is the risk that a truthfully balanced narration of the facts will be boring”. You could say the same about politics. What U.S. politician would stand up and say “Probably there are a lot of people in the U.S. who don’t have jobs because their skills aren’t good enough that any employer can make a profit by hiring them.” We can be pretty sure that the author got a lot of facts wrong and that some of the grand themes he pulled out are wrong (after all, the writer is not a business person nor a programmer so fundamentally he knows nothing about anything that is important to Amazon). But still he put in the time at a word processor and relates some interesting stories.

  5. bjk

    April 11, 2014 @ 6:20 am

    5

    In 21 Dog Years, a book by an Amazon employee, there’s a story about employee #5, the original programmer and the guy who invented Amazon referrals, who by the end of his 5 year stint at the firm was playing Rogue for five or six hours a day.

  6. paul kramarchyk

    April 11, 2014 @ 8:52 pm

    6

    I agree the level of order processing, warehouse inventory automation, and shipping are impressive. Does Amazon claim to have invented that? Doubt it. I know a little something about Walgreen’s distribution system. Walgreen built a large distribution warehouse near my office. We all watched it go up day by day. As we were business neighbors in the same clean industry/office park, when it was complete Walgreen staff invited us over for a lunch time tour. Both incoming truck offload and outgoing truck order load are fully automated. Staff’s job is to make sure the computers and pallet/package handling equipment are performing as designed. “People” don’t touch anything. I realize shipping a single USB cable to my front door overnight takes an extra level of processing and handling but let’s face it, we’re not talking about the invention of the integrated circuit or the Salk vaccine.

    $ — Walgreen (WAG, $64.26) was up 1.36% today, Amazon (AMZN, $311.73) was down 1.70%. Morningstar reports:
    WAG: Market Cap = $61.3 billion
    AMZN: Market Cap = $143.2 billion

    WAG: P/E = 22.6
    AMZN: P/E = 526.3

    WAG: TTM EBITDA = $5,691 millions
    AMZN: TTM EBITDA = $3,900 millions

    Amazon is not making money. “It’s a growth story.” Or so investors hope.

    And while I’m here, I repeat, the Amazon UI stinks. I was part of the design team for the first digital control room for nuclear power plants. So I have different priorities and sensibilities regarding man/machine interface. Clutter and confusion are the enemy.

  7. Mark Lutton

    April 15, 2014 @ 3:33 pm

    7

    Paul: When you designed the digital control room, was the primary purpose of the system to get the user to spend as much money as possible, often by luring him onto side trips on the way to the initial goal?

    If not, then yes, of course you have different priorities and sensibilities.

    Clutter and confusion are the enemy only of the user, not of the seller. If I want to buy one particular product and I can quickly get in, buy it and get out, you’ve made only the profit of that one product.

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