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Quick takeaways
- Jeff Bezos's decision to leave his job and pursue his entrepreneurial instincts led to the creation of Amazon.com and revolutionized the e-commerce industry.
- Seattle was chosen as the ideal location for Amazon.com due to its proximity to major book distributors, lack of state income tax, and access to technical talent.
- Amazon's focus on building native distribution and supply chain capabilities, inspired by Walmart's successful strategy, contributed to its rapid revenue growth.
- Amazon's IPO in 1997, despite initial challenges, helped the company establish itself as a major player in the e-commerce industry.
- The launch of Amazon Marketplace and the Prime membership program played significant roles in Amazon's continued growth and success.
- Amazon's willingness to adapt, learn from failures, and take risks led to the creation of strong competitive advantages and wide moats.
Deep dives
The Birth of Amazon
Jeff Bezos, a senior vice president at D.E. Shaw, decides to leave and pursue his own entrepreneurial venture. He comes up with the idea for an online retail store called the Everything Store, which would revolutionize the way customers buy and manufacturers sell. Bezos chooses books as the ideal category to start with due to their perfect commodity nature and the lack of a dominant player in the market. He raises $1 million in funding over a year and incorporates the company in Seattle, attracted by the proximity to printer suppliers and Washington state's tax advantages. The talent pool from Microsoft also makes Seattle an appealing choice.
The Regret Minimization Framework
Bezos applies the regret minimization framework to make the decision to leave D.E. Shaw. After a long walk in Central Park with David Shaw, Bezos decides to pursue his entrepreneurial instincts and build the Everything Store on his own. He takes into account his long-term vision and potential regrets in the future, realizing he cannot pass up the opportunity to build Amazon and make a significant impact in the e-commerce industry.
Seattle's Appeal and Strategic Considerations
Seattle is chosen as the location for Amazon due to its proximity to Roseburg, Oregon, where one of the major book distributors, Ingram, is located. Additionally, the lack of state income tax in Washington state and access to technical talent, such as Microsoft employees, make Seattle an attractive choice for establishing and growing the company. Bezos recognizes the potential of Seattle's bustling tech scene and the advantages it has to offer for his visionary venture.
The Rise of Amazon
Amazon, led by CEO Jeff Bezos, experiences rapid growth in revenue, raising over $50 million in their IPO in 1997. They attract attention from Barnes & Noble, who sues them over claims of having Earth's largest selection of books. Despite initial challenges, Amazon's revenue continues to grow, reaching $150 million in 1997. The company focuses on building native distribution and a supply chain for e-commerce, inspired by Walmart's successful strategy. They also recruit Rick Dalzell, formerly of Walmart, to join their team.
Amazon's IPO and Challenges
Amazon files for IPO in May 1997, under the lead underwriters Deutsche Bank, with a market cap of $438 million. The IPO does not fare well initially, but after reporting strong Q2 1997 earnings of $28 million, the stock takes off. Jeff Bezos, aware of competition like Barnes & Noble, focuses on beating them by building native distribution and logistics for e-commerce. He draws inspiration from Jeff's mentoring, and Jeff's experiences with Walmart. Amazon works on recruitment, targeting key talent from Walmart and studying the Walmart playbook for growth.
Recruitment and Focus on Distribution
Amazon recruits Rick Dalzell and focuses on building a strong distribution network for e-commerce. Jeff Bezos believes that beating competition like Barnes & Noble requires building native logistics and supply chain capabilities. The company sets its sights on Barnes & Noble and the challenge of building a dominant e-commerce site amidst growing competition. Despite initial setbacks, Amazon's revenue continues to grow rapidly, reaching $150 million in 1997.
Amazon's Journey to Profitability
During a period of financial instability after the dot-com crash, Amazon faces the challenge of achieving profitability. They launch initiatives like Amazon auctions, partnerships with Target and Toys "R" Us, and third-party selling on their platform. These strategies help generate cash flow and improve the company's financial situation.
Building a Better Search Experience
Recognizing the importance of search in e-commerce, Amazon invests in improving its own search capabilities. They create a subsidiary called A9 and hire search experts to enhance the search experience on Amazon.com. This move helps Amazon differentiate itself from competitors like Google and eBay.
Introducing Amazon Marketplace
To expand its product offerings and increase customer satisfaction, Amazon launches Amazon Marketplace. This platform allows third-party sellers to list their products directly on Amazon's product pages, leveraging Amazon's authoritative product catalog and review system. Marketplace becomes a major component of Amazon's business and contributes to its continued growth.
The Power of Prime and the Flywheel Effect
Amazon's Prime membership program, which offers fast and convenient shipping, plays a crucial role in driving customer loyalty and repeat purchases. By attracting more customers to join Prime, Amazon gains leverage to invest in better distribution and logistics, creating a positive feedback loop. This scale economies and network effect, as more customers and suppliers join the platform, fueling further growth and optimizing operational efficiency.
Brand Power and Customer Behavior
Amazon's strong brand power drives customer behavior. Customers are willing to pay slightly higher prices for the convenience and reliability of shopping on Amazon. The trust and familiarity associated with the brand influence customer decision-making, leading to repeat purchases and brand loyalty. Additionally, the Amazon brand provides a competitive edge against other retailers, making customers more likely to choose Amazon over other options.
Amazon's strategy of utilizing capital
Amazon's strategy in the late 1990s and early 2000s focused on the effective use of capital. They understood the importance of the weighted average cost of capital (WACC) and how it plays a role in the profitability of investments. By utilizing profits from selling goods and delaying payment to suppliers, Amazon was able to invest heavily in expansion without the need for external financing. This strategy allowed them to outrun costs and fuel their continuous growth.
Amazon's ability to adapt and learn from failures
Amazon's success can be attributed to its willingness to adapt and learn from failures. Despite facing numerous challenges and setbacks, such as the burst of the tech bubble, Amazon persevered and continued to build out its business. They were unafraid to invest and take risks, even during challenging times, which ultimately led to the creation of wide moats and strong competitive advantages. Jeff Bezos and his team demonstrated a remarkable ability to navigate through uncertain terrain and remain customer-focused throughout their journey.
Amazon. No company has impacted the internet — and all of modern life — more than this one. We’ve waited seven years to do this episode, and are so, so excited to finally dive into every nook and cranny of this legendary company. And of course because we’re Acquired and this is Amazon, we couldn’t contain it all to just one episode… even a 4+ hour one! So today we focus on Amazon.com the retail business, and we’ll have another full episode on AWS coming soon. And because all great series are trilogies, to fully understand Amazon we highly recommend starting first with our previous episode on Walmart, which truly is the giant’s shoulder that Jeff Bezos stood upon. Let’s go!!
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Links:
- Jeff’s first public Amazon interview
- Our early-Acquired-days interview with Tom Alberg
- Episode sources
Carve Outs:
- Rick Rubin on the Lex Fridman Podcast
- Ursula Le Guin
- Dissect Season 2 on My Beautiful Dark Twisted Fantasy
- Elden Ring (again)
Note: Acquired hosts and guests may hold assets discussed in this episode. This podcast is not investment advice, and is intended for informational and entertainment purposes only. You should do your own research and make your own independent decisions when considering any financial transactions.
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