11 Notes on Jeff Bezos

Today: Jeff Bezos is stepping down as Amazon’s CEO. I’ve been reading and writing about him a lot over the years.

Source: Wikimedia Commons

The Agenda 👇

• Jeff Bezos went to Seattle, not San Francisco

• He withstood the dotcom bubble bursting

• It doesn’t seem easy to work for him

• Bezos is obsessed with customer experience

• He excels at growing a business made of bits and atoms

• It’s all about capital allocation, really

• It’s also about training investors to behave

• Bezos went through a difficult period in 2019

• Then he had his revenge—on Donald Trump

• He might be the Andrew Carnegie of our time

• Further readings about Jeff Bezos

Five years ago I wrote an essay titled 11 Notes on Amazon as part of the The Family Papers series. It’s one of my most read pieces ever, and if you want to learn a thing or two about Amazon I really encourage you to give it a read.

• But this week, there was a big piece of news, which is that Jeff Bezos, who founded Amazon in 1994 and is its current CEO, will soon step down and become executive chairman, leaving his position to Andy Jassy, the current CEO of AWS.

I didn’t mention it in yesterday’s edition, even if the news had already been made public. But today, as we’re nearing the weekend, I wanted to pay tribute to a business leader I really admire, opting for a familiar format: 11 Notes on Jeff Bezos 😊 

---

1/ Away from Silicon Valley

I love when people tell the early story of how Bezos decided to tackle the challenge of selling books online. Some say it’s because he himself was a voracious reader, therefore he was especially interested in and comfortable with the idea of selling books, of all things. Others suggest it’s because, being a hedge fund guy (specifically from D.E. Shaw, a pioneer in quant investing), he had crunched the numbers and discovered that books had unique characteristics that made them ideal goods to be sold online.

• Whatever his motive, he decided to take the leap and, according to legend, made a road trip with his newlywed wife MacKenzie from New York City to Seattle. And this is the part that especially interests me: why Seattle? Well, his parents lived there, but he also expected he would be able to tap into the infinite pool of tech talent brought to Seattle by the likes of Microsoft.

In turn, it turned out to be a major competitive advantage considering he was tackling a challenge in an industry that didn’t lend itself to such high returns to scale as those which the likes of Yahoo and Google were electing to enter. Here’s a quote from my 2016 essay:

Amazon is one of our favorite examples when it comes to explaining The Family’s investment thesis. It is one of the oldest digital companies around. And contrary to most of its peers, from the beginning it operated a business that included tangible assets (operating warehouses, delivering stuff) and lots of employees. Amazon, which is located in Seattle, was reportedly despised in Silicon Valley for that reason: why would an Entrepreneur even bother founding a low-margin, difficult-to-scale retail business when they could make tons of money in the ad-clicking industry?

This is one reason why I admire Bezos: he envisioned that the Internet would give birth to hybrid businesses, ones that would mix bits and atoms—and he decided to not wait before seizing business opportunities in that space. His reward? He’s now among the richest people in the world!

---

2/ Revealed by crisis

Another interesting episode in the Amazon/Bezos saga is the bursting of the dotcom bubble, which almost wiped Amazon off the map. When the company eventually weathered the storm, Bezos apparently announced that never again would they go through a near-death experience for reasons that were entirely unrelated to what they were doing as a company. He decided to turn Amazon from a retailer selling mostly books into an actual tech company. Here’s what I wrote 5 years ago:

When the tech bubble burst in 2000, it didn’t wipe out the whole digital economy. On the contrary, as explained by Carlota Perez and William Janeway, it marked the beginning of the deployment phase that has now seen digital companies enter industries such as healthcare, car manufacturing, energy and education. But the bubble was a tough time for companies that were operating at the time, especially if they had low margins. Amazon survived by laying off workers and cutting costs even more, but it was a wake-up call. Something had to be done to hedge against those low margins and to finally become a technology company.

According to Brad Stone’s The Everything Store, Tim O’Reilly provided Bezos with the solution. “Why not,” he essentially said, “open your infrastructure to harness user participation and enroll outsiders in the process of making the company more scalable?” That marked the day when Amazon entered the digital economy: not only using digital technology to take orders and process payment, but also leveraging it to make the whole business model create more value. The company’s marketplace for third-party sellers had been launched in November 2000. Amazon Web Services was envisioned in 2002. After turning its first quarterly profit in Q4 2001, Amazon finally broke even in 2003.

It really takes a leader such as Bezos for a company to resist all the external pressure—creating what economist Philippe Aghion calls a “neck-and-neck firm”. In short, faced with adversity, some companies bulge and disintegrate, while others double down on innovation and make bold moves that let them emerge stronger from the crisis. Bezos definitely wants to be in the second category, and Amazon and its shareholders can thank him for that.

---

3/ A difficult man

The fact that Bezos is the dream CEO in a time of crisis doesn’t mean it’s a pleasure to work with him on a day-to-day basis. In fact there are many anecdotes that you can find online about how Bezos can be harsh on those he works with. I was especially impressed by Steve Yegge’s tales about the time when the whole of Amazon had to work double shifts to turn its IT system into Amazon Web Services:

Bezos’s Big Mandate went something along these lines:

1. All teams will henceforth expose their data and functionality through service interfaces.

2. Teams must communicate with each other through these interfaces.

3. There will be no other form of interprocess communication allowed: no direct linking, no direct reads of another team's data store, no shared-memory model, no back-doors whatsoever. The only communication allowed is via service interface calls over the network.

4. It doesn't matter what technology they use. HTTP, Corba, Pubsub, custom protocols -- doesn't matter. Bezos doesn't care.

5. All service interfaces, without exception, must be designed from the ground up to be externalizable. That is to say, the team must plan and design to be able to expose the interface to developers in the outside world. No exceptions.

6. Anyone who doesn't do this will be fired.

7. Thank you; have a nice day!

Ha, ha! You 150-odd ex-Amazon folks here will of course realize immediately that #7 was a little joke I threw in, because Bezos most definitely does not give a shit about your day.

---

4/ An obsession with customer experience

A few years back (I remember that was when we were living in London’s Islington neighborhood), I was spending hours everyday watching Jeff Bezos being interviewed on YouTube. What was amazing about that was that it’s always interesting and rather pleasant to listen to him, and yet he’s always repeating the same thing! 

• This is what inspired many observers to think that Bezos is the most on-message tech CEO out there—which reflects his incredible ability to focus on the long term and maintain continuity of direction.

One of the few ideas that always comes back in Bezos interviews is the obsession with customer experience, which I wrote about in 2016:

Jeff Bezos understood something else that didn’t exist when Sam Walton operated his first stores in Arkansas: competition is even higher on digital markets. And his conclusion was not that you should drop the prices even lower than Wal-Mart ever did: if Amazon had done that it would have disappeared just as many — among them Thomas Friedman— predicted it would. Bezos concluded that the only way to retain customers without bringing down the prices was to provide an exceptional customer experience.

---

5/ Bezos’s secret dashboard

I mentioned the fact that Bezos saw an opportunity in the nascent Internet: building a hybrid business mixing up bits and atoms, rather than sticking with a purely intangible business. He suffered a great deal of punishment for many years for this early odd choice. But eventually he got his revenge—once everyone realized that hybrid industries were in fact the real deal.

I believe the reason why Bezos was uniquely able to navigate the difficult route to building a successful hybrid business at scale is because he designed a dashboard for himself—one that focused on making sure that increasing returns on the ‘bits’ side were enough to compensate for the diminishing returns on the ‘atoms’ side. Here’s the related quote in my 2016 essay:

The key to understanding Amazon’s business model is that precarious balance between the Northern Side and the Southern Side: as long as returns increase more on the Southern Side than they diminish on the Northern side, Amazon can open many new, costlier warehouses and create even more value for its growing user community.

I have no insight into this, but somehow I’m convinced that every night and every morning, Jeff Bezos glances at some dashboard just to check that the Southern Side weighs more than the Northern Side — which means that the company, even if it’s already so large, can continue to sustain its growth with (slightly) increasing returns.

---

6/ A master capital allocator

What Bezos is effectively doing using this unique personal dashboard is allocating capital: where should Amazon reinvest its free cash flow? Well, I draw a graph to try and offer my explanation of how capital flows through Amazon, eventually creating value. Here it is (from Financing Perpetual Growth: The Rise of a New CFO):

---

7/ The financial markets’ overlord

A key part of Bezos’s success as the CEO of Amazon is explained by his unique ability to train investors to behave. There’s a remarkable article by Justin Fox dedicated to just that—linked here:

There isn’t really a need to retell the amazing story of Amazon’s relationship with its investors. Justin Fox has done it in this remarkable piece published by the Harvard Business Review in which he reminds us that Jeff Bezos is “a hedge fund veteran who has always taken a skeptical view of Wall Street, treating it more as a loopy rich uncle than the efficient information processor of standard finance theory.”

A key lever that Bezos has used to train investors is his pen—based on Amazon’s annual shareholders letter, he is widely considered as one of the best business writers of our time. Have a look at Jean-Louis Gassée’s Bezos: A CEO Who Can Write:

Bezos’ letters make splendid material for a Business School course on Strategy and Communication. (I’d love to teach it — if I were twenty years younger.) A caveat applies, however. Most of the strategies and practices advocated by Amazon’s founder have broad applicability, but a central mystery remains: Bezos himself, his combination of early life experience, intellect, emotional abilities and communication skills. Being Bezos isn’t teachable.

---

8/ Has Bezos come close to burn out?

Some time ago I was struck by Ben Thompson’s writing in Day Two to One Day (September 2019):

Consider this story in the Wall Street Journal about how Amazon reportedly adjusted its search algorithm to favor its own products:...

Note how badly this decision fares relative to Bezos’ advice:

• Shifting results away from relevance towards factors that benefits Amazon’s bottom line is not a decision that results from “true customer obsession”.

• Goal-seeking for profit is a poor proxy for that customer obsession that Bezos focused on in the 1997 shareholder letter attached to every subsequent letter.

• Amazon allegedly spent “years” deciding whether or not to do this, which is definitely not “high-velocity decision making”.

To be fair, Amazon is embracing the external trend of raising antitrust concerns, which are probably overblown given the company’s single-digit share of retail in the United States. There are no objections to Walmart, for example, having store brands or pay-for-placement programs, despite the fact that Walmart’s share of retail is about 33% larger than Amazon’s (8.9% of consumer retail spending in the U.S. versus 6.4 percent), so it’s not clear on what basis the digital equivalents of these programs would be prosecuted.

With regards to Bezos’ warning, though, the antitrust discussion is a moot point: companies that spend months or years arguing about the legality and customer friendliness of tilting the scales are usually well into Day Two.

What Ben is writing about here is the fact that sometime in 2019, there was a point when astute observers could point to the fact that Amazon had seemingly reneged on its promise to always advance their customers’ interests. Now it appeared willing to sacrifice its customers for the sake of profitability, thus exposing itself to aggressive action by antitrust regulators.

Interestingly it coincided exactly with when Bezos was divorcing his wife MacKenzie (the separation was announced in January 2019). Since then, I’ve constantly been haunted by the idea that Amazon flirting with Day Two was due to the fact that its CEO had other fish to fry—and thus was not there anymore to be a fierce advocate for Amazon’s customers in the boardroom. 

And what will become of those customers now that Bezos is leaving for good? 🤔

---

9/ Bezos’s masterful move against Donald Trump

Now, that episode (Bezos’s divorce) was followed by one of the most remarkable episodes (according to me) of the Trump presidency. Summing it all up:

• Trump has always hated Bezos, who is everything he is not: smart, brainy, long-term focused, able to build a successful business at scale, and able to claim he’s made his own luck—as opposed to being born rich and benefitting from his father’s fortune to move up in life.

• On top of that, Bezos has been the owner of The Washington Post since 2013. As a result, Trump deemed him responsible for every article published by the newspaper that was critical of his administration. It has certainly fueled Trump’s anger toward Amazon’s CEO.

• Add to that the fact that Amazon has been a prime contributor to the demise of traditional retail malls, and there seems to be a lot of people in Trump’s entourage who have lost a lot of money due to Amazon’s shaking up the retail industry. 

Well, the end result of all of that is that Trump-friendly tabloids have preyed on dirty stories related to Bezos’s divorce, with one of them, the National Enquirer, even threatening to publish pictures of Bezos naked as well as lavish extracts of his correspondence with his new partner Lauren Sanchez.

Bezos’s response to this blackmail is definitely worth reading in its entirety—seriously: No thank you, Mr. Pecker. Something unusual happened to me… | by Jeff Bezos. 

I’m even sympathetic with what sex columnist Dan Savage wrote in The New York Times following this incredible turn of events:

Jeff, you have the power to make the world safer for your kids and mine, to say nothing of all the adults out there swapping nude photos with complete strangers or their spouses. (And to say nothing of all the other billionaires out there who, according to Bloomberg News, are now very worried about the whereabouts of the pics they’ve sent to their mistresses.) By releasing your own photos, you can normalize what is already normal and protect the professional and political futures of all the young adults who have been taking and sending nude selfies since they got their first phones.

In any case, it was a masterful move: if someone tries to blackmail you, just release the material (or acknowledge its existence) and withstand the consequences—which, as it turns out, are not much when you’re Amazon’s CEO and one of the richest and most powerful people in the world.

---

10/ Jeff Bezos beyond Amazon

Let’s not mince words here: for me, Bezos is the Carnegie of our time. In part, it’s due to the fact that he joined the game early enough in the current technological revolution to be able to come out wealthier and more powerful than others. But it’s also because he’s simply better than many of his peers: more relentless, less risk-averse, more able to focus on the long term, and aware of the pitfalls that everyone has to avoid if they want to practice the tough discipline of capital allocation.

Still, he was lucky that Amazon came early in the current paradigm shift. As I wrote back in 2016,

Amazon is more than 20 years old. It was founded even before the Netscape IPO, the very event that launched the dotcom bubble in 1994. In that extraordinary context, it was easy for Amazon to raise capital, deploy its infrastructure and conquer its market. From its IPO in 1997 to its first (slightly) profitable year in 2003, Amazon burned through 3 billion dollars! This is the amount you have to invest to deploy such a large hybrid infrastructure.

Raising that kind of money would be very difficult in today’s public market. But thanks to its early start and easy access to capital, Jeff Bezos is now to the digital economy what Cornelius Vanderbilt was to the railroad economy and Andrew Carnegie was to the steel-powered heavy engineering economy...

Therefore this last note is not so much a lesson to draw as it is a reminder of the extraordinary circumstances that surrounded the founding of Amazon. Many things have changed since, notably the fact that technology has been commoditized (including by Amazon Web Services) and that it is now cheaper than ever to start a digital company. But for all of you who would like to reenact Jeff Bezos’s prowess, remember that it demands taking bold risks and, at some point, raising a lot of money.

---

11/ Further readings on Jeff Bezos (and Amazon)

• Open Source Paradigm Shift (Tim O’Reilly, O’Reilly Media, May 2004) 

• 2010 Letter to Shareholders (Jeff Bezos, 2010) 

• Amazon and the “profitless business model” fallacy (Eugene Wei, Remains of the Day, October 2013)

• At Amazon, It's All About Cash Flow (Justin Fox, Harvard Business Review, October 2014) 

• Borges' Map: Navigating a World of Digital Disruption (Philip Evans & Patrick Forth, BCG Perspectives, April 2015) 

• 11 Notes on Amazon (me, The Family Papers, January 2016)

• The Real Reason Jeff Bezos Grinds Trump's Gears (Virginia Postrel, Bloomberg, August 2017)   

• What is Amazon? (Zack Kanter, Zack’s notes, March 2019)

• Day Two to One Day (Ben Thompson, Stratechery, September 2019) 

• Amazon: Top of the Game (me, European Straits, May 2020)

• The Relentless Jeff Bezos (Ben Thompson, Stratechery, February 2021)

---

If you’ve been forwarded this paid edition of European Straits, you should subscribe so as not to miss the next ones.

---

From Munich, Germany 🇩🇪

Nicolas