Amazon.com

0:00 Hey Quiet listeners, in the time between when we recorded this episode and now when we're releasing it, longtime Amazon board member and Madrona Venture Group founder, Tom Allberg. Sadly passed away. And we wanted to Instead of our usual funny cold opener here,

0:18 Take a moment and dedicate. This episode to Tom. Tom had such a huge impact on David and my career's Tom also had such a huge impact on Seattle and really the whole technology ecosystem helping to build the law firm Perkins Coue.

0:33 And the telecommunications firms Western Wireless and Macaw Cellular that really make up a large part of the infrastructure we all use for our phones today. We also were lucky enough to uh have Tom on Acquired and it was really wonderful getting to spend the time in person with him. Gosh. Four or five years ago now, David.

0:52 Yeah. Tom was the longest serving Amazon board member other than Jeff himself, I believe twenty three years. was the lead independent director and had a huge impact on the company.

1:05 Well, all remember Tom. He gave back in So many wonderful ways, and this episode is dedicated to you, Tom Alberg. Thank you. Who got the truth? Is it you, is it you?

1:18 You who got the truth now Is it you, is it you, is it you Me down, say it straight. Another story Welcome to Season 11, Episode 2 of Acquired, the podcast about great technology companies and the stories and playbooks behind them. I'm Ben Gilbert, and I am the co-founder and managing director of Seattle-based Pioneer Square Labs and our venture fund, PSL Ventures.

1:45 And I'm David Rosenthal and I'm an angel investor based in San Francisco. And we are your hosts. Our story today is probably the single most interesting business of the past thirty years. For the longest time, David and I resisted doing an Amazon episode because it almost felt like a trope. Or that we needed to do something maybe more unexpected.

2:07 We've tackled bits and pieces like our interview with former board member Tom Alberg in the Amazon IPO episode, our episode with Alfred Lynn on Zappos, and of course by referencing Bezos' famous two thousand and nine speech about outsourcing anything that does not make your beer taste better over and over. And over again. And over again. Yeah. But we decided that no self-respecting technology business historians like ourselves could skip over this incredible, tumultuous, death defying, and and ultimately very, very successful story. Today we'll be tackling

2:43 Amazon.com The website that sells books and now everything else on the world wide web As you know, Amazon is also one of the rare companies that built a completely separate and dominant business in Amazon Web Services, and we'll save that for our next episode. Oh. This story is for longtime students of Amazon and newcomers alike.

3:06 So while you may be familiar with Jeff's Flywheel diagram or the famed DoorDesks or the Barons article from the dot com bust, headlined Amazon.bom. I can tell you from staring at my mountain of notes that uh there are some details in here that I certainly didn't know and you may not have known either. Oh, it's just such a good story, too. Yeah. I'm so glad we did.

3:30 Walmart first. We almost didn't. Because it just perfectly sets the stage for Amazon. Oh yeah. Yeah, the big thing that we're doing today is we're gonna try and answer the question, how did Amazon succeed to such an incredible degree that it has, where so many of their dot cob siblings burst into flames. So first we have some big, big news here at Acquired WorldHQ. After seven years of beating back requests, we are finally launching a merch store. We've been holding on to this bit for a while because we can think of no better episode to launch our internet storefront.

4:06 than here on the Amazon episode. So we're partnering with what I think is the single highest quality merchandise platform on the internet, Cotton Bureau. They make really nice stuff that I have tons of in my closet. We are launching with men's and women's t-shirts, sweatshirts, tanks, and even onesies. If you like David have a little one at home. And uh if you decide to be first in this first wave of people to support the fashionable acquired merch, you should tweet at us at acquired FM and we will retweet some of our favorites. So the link is in the show notes, or you can go to acquired. dot fm slash store.

4:42 All right listeners. Now is a great time to talk about a new partner of ours here on Acquired, Lagora. The agentic operating system that is redefining how the world's best legal teams work. Yep. It's sort of obvious that AI is gonna completely change the legal industry. I bet most of you listening have dropped a contract into some sort of AI chatbot out there. Ligora took that insight and asked the question, what if you really built something with that power from the ground up for the legal industry? So the founders did exactly what great founders do.

5:15 operate with obsessive customer focus. They embedded inside a massive law firm. For months. They sat with the lawyers just watching how the work really gets done. And that's how you get features that customers love, like tabular review, where you

5:31 Drop in a folder of hundreds of contracts and it pulls every key term into a grid a lawyer can actually work with. Legor's bet here is interesting, since it lets each lawyer handle more complexity, any given person can increase the quality of their work and do higher value work. And this means that the pie can grow even as each individual task takes less time. And they recently launched Lagora Agent, offering greater intelligence and performance. The agent lets lawyers set an objective. Then it can handle the planning and the execution and delivery of the final product. Legal teams get to maintain full control and transparency since they're still involved where judgment is required. And Lagora works where you already work. You can use it within Microsoft Word while redlining or drafting. The early Lagora numbers essentially speak for themselves. When they have a head to head pilot with their top competitor, they win seventy percent of the time. Lagora now has over a hundred thousand lawyers on the platform from twelve hundred legal teams in fifty countries.

6:32 And crazily, they went from one million In about Eighteen months. Mm.

6:40 truly insane numbers. And that is the real test. Plenty of things demo well, but the question is whether a busy associate actually reaches for it during crunch time, or whether a partner trusts it before going into a conversation with a major client. If your legal team wants to check it out, whether you're a law firm or you're in-house at a company, you can learn more at Lagora.com/slash acquired. And just tell'em that Ben and David sent you. Well, after you finish this episode, go check out the LP show by searching acquired LP show in the podcast player of your choice. Our next episode will be an interview with Austin Federa, who many, many of you know from the Acquired Slack, where he's been a member since like 2016. Austin is at the Solana Foundation.

7:23 very deep in the world of web three and crypto and gave us a great, great primer on the world of web three today. So check that out. And if you want early access, it's already live for paid acquired LPs at acquired.fm slash LP. All right. Now without any further ado, David.

7:43 onto our story and listeners, this show is not investment advice. David and I may have investments, uh certainly have investments certain in the companies we'll discuss this time. Do your own research and this is for entertainment purposes only. Oh man, Amazon was my Not only my idea dinner pick at the Arena show.

8:02 But Has been like my favorite company in stock and number one position in my portfolio for At least ten years now, I think. More than ten years. Incredible company.

8:14 I had some conversation with you in maybe twenty fourteen. About how you basically owned Amazon stock by owl real estate and you were doubly long Amazon with your very concentrated holdings in the company and owning your house in Seattle. That's true. The only time I've Ever sold any meaningful amount. was to buy our first

8:34 Seattle house because of it, I needed the capital for the down payment. And I figured I was like essentially getting a tracking stock on Amazon. Yep. Yeah, yeah. Alright. Well, we start.

8:45 In a very fun. Yeah. Which is the end of The most recent acquired episode on Walmart.

8:53 And I realized I could have sworn. That we said this on the episode, but I went back and I read the transcript. We didn't. You tweeted about it. But

9:02 At the end of Made in America. Sam writes in nineteen ninety two, literally as he lays dying, Sam Walton Right at the end of the biography. Could a Walmart type story still occur in this day and age.

9:19 Of course. Somewhere out there right now. There's someone. With good enough ideas to go all the way. Providing

9:29 That someone Wants it badly enough to do what it takes. Oh such a good quote. And he was running that in nineteen ninety two while Jeff Bezos was ideating on what ideas could work on the internet while working at DE Shaw. Oh my god, if he only knew. It was like the prophet speaking.

9:48 Yes. He was describing reality in history as it was happening and he had no idea. Uh amazing. Yeah.

9:57 Well, speaking of books. We have a big Thank you. That we owe To Bradstone.

10:04 And Brad is just The best. We've done episodes with Brad in the past. The Everything Store is the canonical history of the first twenty years of Amazon. For sure. We actually talked to Brad the other week when we were preparing for this. Well we had to. It was both the question of like, okay, with 10 years or whatever it's been of history, what else would you want to say that wasn't in the everything story? And also give us some context around it.

10:28 No doubt in my mind it is one of the best Business books written of the last year. twenty years, you know, of the two thousands for sure. Oh, it's a thriller. Yeah. Brad actually said this when we were talking to him. He's like there's two reasons to write a business book. One is it's a thriller.

10:43 The other is it's a how to manual. And The everything story is both of those. Yep. All right. We jump.

10:52 From nineteen ninety two. In Bentonville, Arkansas. Two Albuquerque, New Mexico. On january twelfth.

11:03 Nineteen sixty four. Where One Jeffrey. Preston Jorgensen. Is born.

11:12 Many people listening, especially if you've read Brad's book. You know this story. But it's pretty. Amazing. When

11:20 Young Jeffrey's mother. became pregnant. She was sixteen. His father, Ted Jorgensen, was eighteen. They went to the same high school in Albuquerque. And they were dating at the time.

11:34 Turns out their fathers actually worked together. And this is part of the story. There was a very specific reason why both of their families lived in Albuquerque. And that is because Both of their fathers worked together.

11:49 At Sandia National Laboratories. Which for folks who don't know, that laboratory was established, I think, because it played huge part in the nuclear program's development for the United States. So Los Alamos, New Mexico, which I think is like a hour, hour and a half north of Albuquerque, I think. That's where the Manhattan Project happened and that's where

12:11 The atomic bomb was. Developed. After World War Two though, quite a while after World War Two. The government split.

12:19 The US nuclear program. into like research. And that was Los Alamos and a bunch of other labs around the country. And then actual like management of the weapons. So there's like nuclear research and nuclear energy, and there was nuclear weapons.

12:35 So Sandia is The organization. Developed by the government and it's actually a private operation now.

12:43 That manages nuclear weapons. And so both Of Jeff Bezos' biological Grandfathers worked there together. And Jeff's

12:53 Mom Jackie. Her dad was named Lawrence Preston. GC. Pop. He went by Pop Geesy. He actually not only worked at Sandia

13:03 He was the head of Sandia. Oh wow. He ran The US nuclear weapons program. And before that, he was one of the original members of DARPA. Whoa. Encourages the development of the ARPANET, the internet.

13:18 The Dark Challenge. Obviously that was much after his time, but Man, you can't make this stuff up. That's crazy. Yeah. So their kids managed to get pregnant in high school. And Ted and Jackie decide to get married before

13:33 The baby is born. Which they do. The marriage. Doesn't last though. I mean it's not really set up for success here. And when Jeff is about eighteen months old. They end up getting divorced.

13:47 And Jackie, Jeff's mom. Takes the baby, moves back in with her parents,'cause she's still only like eighteen or nineteen years old at this point. Eventually, a couple years later, when Jeff is four, Jackie remarries and moves in with her new husband. Who is a petroleum engineer for Exxon.

14:04 And H New husband's name is Miguel. And yell. Vezos Perez.

14:11 Today who goes by. Mike. Mike Bezos. Yeah. Jeff Bezos is. Yeah.

14:17 And his story is Incredible. And actually sort of touches our stories in a very small way. Huh. Mike. Is from Cuba.

14:26 And He was a student at a like elite private high school. In Cuba when the revolution happened and Castro took over. And His parents were able to get him out.

14:37 And send him to Miami. Wasn't there some like exfiltration program through the church for gift of youngsters? There was. Mike was Part of this. So he gets shipped. To Miami.

14:50 Doesn't know anybody in America, doesn't speak English. He ends up From Miami. Getting shipped to Wilmington, Delaware, where he lives In a group home.

15:01 And He attends Silesianum High School, which I don't that probably doesn't mean anything to you because you didn't do high school and Boomington like I did. But I played sports against Sally's growing up. And this is so awesome. He and Jackie last year just gave a twelve million dollar Donation to Silesianum. Which I

15:21 Single donation to a Catholic. High school. In America. Wow. Mike and Jackie must have really made some smart investment decisions at some point in their life to be able to make that kind of investment. Oh, we will get into it. David, how does every single episode have some tie to South East Pennsylvania or Delaware? I know. I think we're picking favorites here.

15:40 We totally are. So Mike Is super smart. He quickly learns English. And by the next year, when he graduates from Sleesianum, he ends up getting a full scholarship to go to the university of

15:53 Albuquerque to study. Engineering. And while he's there, he pays his living expenses. Working his way through college. By working at a local bank where he meets

16:03 Jackie. They fall in love, they get married. Mike adopts Jeff as his adopted son. They go on to have two more children and when Mike graduates He gets the job. With Exxon, he would end up working his whole career.

16:17 At X on the M. And becoming like a pretty senior executive, right? Very senior executive, so he had some capital to invest a few years later, which we will get into. And they move the family. Two.

16:29 Houston. A Mike's story is just amazing. B Bezos grew up, his dad worked for Exxon, like standard oil. Like there's the connection. Right. And grew up in Houston around the space program. I mean, we're not gonna get into Blue Urgent on this episode, but I think the last time we would have sort of talked about Jeff's space roots would have been I think

16:54 On the Virgin Galactic episode when we were talking about the development of the X Prize and SEDs, the college organization for students for the I think it's exploration and development of Space, something like that. But basically this college space club. Jeff was the head of that club, the president of the one, and maybe the founder of it at Princeton. And so there's this very clear through line from spending time during his childhood in Houston through that. And obviously Blue Origin.

17:22 I didn't think about that. Definitely Pop Geese, his grandfather has a big influence on. Jeff, which we'll talk about in one sec. And introduces him to science fiction and space. 'Cause he was involved in all that at DARPA.

17:34 But I didn't think about that yet. Jeff grew up in Houston. During the Apollo era. This was the heyday of NASA. Yep. Super cool. So Jeff goes to a Montessori preschool.

17:46 In Houston. And he gets put into A new program for gift young students in the Houston elementary school system.

17:55 This is crazy. So at the time there was a woman Named Julie Ray. who was writing a book about this whole new concept of like gifted streams in elementary school education. And uh

18:07 Houston is one of the kind of leading school systems that's doing this. So she goes to the administration and she's like Hey is there, you know. A student that I could shadow and like see how gifted education is working. And they're like, we have exactly the student. For you.

18:24 Jeffrey Bezos. I mean there's a number of ways we could highlight how special Jeff was even as a very, very young child. But This is a pretty darn good one. He was the student chosen for the person writing the book on this type of special program.

18:42 in the school selected for special gifted programs. I mean he was like one of one of one, and he would go on to be valedictorian of many things in his life, but here's sort of a first sort of proxy. Super cool. There's a quote in the book. So it's a Written under he's a pseudonym, he's quote unquote Tim. In the book.

19:00 To protect the identity of a child who can't yet pick if they want publicity, right? Totally. I mean he's in elementary school. So there's this quote in there. Where Julie, the author, Ask. Tim and Jeff's teacher, what grade level he's performing at. So he may must be in like second or third grade at this point.

19:17 And the teacher says. I really can't say. Except that there is probably no limit to what he can do. Given a little guidance. Foreshadowing.

19:26 So Right around the time when the family moves to Houston, Pop. Retires from Sandia. And he and Jeff's grandmother

19:36 Move back to a Big range. In West. Texas. And by big ranch.

19:42 I mean a twenty four thousand acre ranch in West Texas that is one hundred miles From the nearest. retail outlet. And starting at this point. So Jeff's four when this happens.

19:56 Every Summer. On the ranch. Living with his Grandparents.

20:02 A hundred miles from the nearest Store. And he's just hanging out with his grandparents. That's pretty formative. In in a number of ways. One of which is that His grandpa Well, one, he's remote and so you can't go buy anything and you need to be unbelievably self sufficient, but like

20:16 What an interesting playground for the mind being around his hyper intelligent grandfather and having sort of just uh nothing but time and space. You know, Brad writes about this in the book, but And Jeff talks about this too. Like I think this is one of the most formative experiences of the person that becomes Jeff Bezos. Because for the months that he's there every summer, they have to do

20:38 Everything. Like they build their own tools, they perform their own veterinary work. There's a story about performing surgery on one of the bird dog's tails. It's Crazy, they're rebuilding farm equipment when it breaks. How have we had we went two hundred and fifty episodes without a bird dog ever coming up and now two episodes in a row mentioned bird dogs. I know, I know. Clearly there's a there's a connection here. Yes, great retailers growing up around bird dogs.

21:03 But yeah, like you said, man. It's not like he's just doing manual labor out in the countryside. He's doing it with This guy who ran the nuclear weapons program for America. Man, it's so hard to do a podcast about Amazon and Jeff Bezos now because

21:20 the company and Jeff as a person are a symbol for so many different things to so many different people. But I think one of the sort of things that hit me when, you know, of course I follow Jeff on on Instagram and you see him in sort of his cowboy boots with the blue origin rocket. And I remember when I first saw those before really understanding his past, I was like, well that's sort of disingenuous. Like tech billionaire guy throws on his cowboy boots and heads to West Texas and he's like acting like I'm one of the locals. But like that's what he grew up doing on the farm. Yeah.

21:52 Yeah. The ranch in Van Horn, Texas, I think it is now. Where All of Blue Origins, uh Operations are based.

22:00 Like it's there. That's why it's in West Texas. And there's a lot of space. Pretty good place to launch rockets. There's literally space. To launch it. So when Jeff's a teenager for high school. Exxon moves his dad to

22:15 Florida. First to Pensacola and then to Miami. This is like you know so cool little cap for this episode to Mike's story. He comes back to Miami, you know, all these years later. As this big time executive at Exxon, which I think was the largest company in America at that point in time. Had to be, yeah.

22:33 It goes from like literally steps off the plane in Miami. Has nothing. And now he brings his family back to Miami. With so much. So cool. Jeff.

22:43 As you said. graduates high school has Valedictorian. And like all Great talented high school graduates goes on to Princeton. I'm biased. Of course.

22:54 A few of his fellow Princetonians. While he's in college studying. Is that really what they how you say it? That is it is I may Princetonian. I see. Or or a tiger, if we're being less you know, pretentious here. Uh a couple of his fellow tigers. While Jeff is studying computer science. Yeah. Princeton.

23:12 Brook Shield. Michelle Obama. And Jeff Wilkie. is also there at the same time. I don't think they I don't think they were friends. Jeff was a couple years behind, but they were there at the same time. Fascinating.

23:23 So When Jeff graduates from college in Nineteen eighty six. He does not Go into finance right away. He goes.

23:33 And worked for a startup. He works for this company called PhyTel. Which had been founded by a couple Columbia computer science professors. And was developing like a

23:44 very, very early. network technology for high speed trading applications. Huh. They were like tech for I don't know if it was exactly like Today all that stuff is co-located in data centers with the NASDAQ and the New York Stock Exchange. But like kind of a precursor to that.

24:02 So he does that for two years. And then in nineteen eighty eight, he's like Alright, like I'm you know. Working for this startup building infrastructure for this.

24:12 Then Completely new. discipline of finance of like quantitative Trading and finance. Those guys our customers are actually making a lot more money. Maybe I should go work for them.

24:24 But it is pretty good. I mean great experience at that point in time. being around early networked computing was pretty beneficial to give him not just the sort of like basic understanding of how it works, but also like what all the numbers mean. Like when I'm watching bits and bytes fly back and forth, or I'm looking at packet counts, or I'm looking at what hardware can support what bandwidth. What are the practical implications so that you can sort of feel the types of applications you could build? using infrastructure

24:53 of the day. The reason we're spending so much time on Jeff's early years. And now we're gonna spend a lot of time on this chapter. It's totally like one of those Steve Jobs things. Like you can't connect the dots looking forward, but when you look back Through Jeff's past. Joy Covey, who we'll talk about, actually has like this quote that she gives to Brad Stone, like

25:11 It's like a straight line, you know, from birth to Jeff Bezos today. Like it makes total sense. Well, it's really hard to cover Amazon as a business without it being a Jeff Bezos biography because in so many ways Amazon isn't an extension of Jeff Bezos' brain. Like it really is a company made in his image. And that's kind of the case for a lot of these types of people. Like you look at Apple, those very much the case for Steve Jobs.

25:37 Also, by the way, an adopted son of immigrants. Yep. I've always just found that interesting. But In some ways I'm thinking, okay, cool, let's get to the Amazon story, but

25:47 Even though it's called Amazon. at least for a very long time, call it its first decade, it really is just Jeff Bezos at scale. Probably arguably for longer than that. I mean until Recent times. Yep. So

26:00 In nineteen eighty eight, he leaves I tell the start up. And he goes to work actually in Banking, I believe almost surely. I don't know for sure, but I can't imagine he's not doing

26:11 Quantitative trading and finance. Like he's a technical guy. He's a computer science graduate. He had been working in this sort of network operations for early stage quant. Finance.

26:21 That's probably what he's doing. So he goes to Investment bank. Bankers Trust. Which then through a series of mergers as always happens on Wall Street. becomes part of Deutsche Bank. Deutsche Bank's gonna come back up later in the episode.

26:35 Yep, yep. He's worked at startups. He you know Computer science league. He's got this entrepreneurial kind of bug. So On the side. He becomes friends with a guy named Halsey Minor.

26:47 Which uh Listeners probably a bunch of bells are going off. And they almost start A start up together at this point in time. The idea was it was gonna be a financial newsletter idea.

26:57 But they become buddies. That doesn't work out. But Halsey, like right around this time, right after that. Goes on to start. See that.

27:06 It's crazy. The internet was so freaking small then. And also like if you were to squint and describe Cnet at a really high level. It's like distributing the written word over this budding world wide web, which is sort of what Amazon did. Yeah. Ultimately it distributed them through an abstraction layer where you print the words on paper first and then you ship the paper. But they would go on to start businesses riding the same wave. Yeah.

27:31 And I think they remain friends for Well, uh certainly for a while, if not still to this day. And Bezos does always sort of chuckle at that, where People would say, Wait, you're starting this business that's meant to take advantage of this new piece of technology.

27:45 And the new piece of technology is particularly good at distributing hypertext over a globally available network. And the way that you're doing that is Specifically not by putting the text. in the browser, which can read the hypertext directly onto a screen. And he does always chuckle about that, but It is funny to this day. You still can't really search books.

28:05 you Google search something, you're gonna get websites. You're not gonna get books. And despite Amazon and Google and everyone trying The book publishers have Sort of very physical DRM'd these books. Such that you cannot

28:18 Search them in a very digitally native internet way. Yeah, it's funny. Even today. So In nineteen ninety. Jeff gets a

28:28 Fateful call. From a headhunter. Jeff's happy where he is. He was thinking about starting this startup. And uh Convinces Jeff to go interview.

28:37 At a new Firm, financial firm. That has been started just a couple of years earlier. Called D. E. Shaw. And

28:48 Yeah. I think unexpectedly. Completely. Falls in love. Falls in love in uh many ways at T Shop. So

28:58 Some history on DE Shaw for folks who don't know. I didn't know a lot of this. So the founder. David E. Shaw. was a Stanford computer science PhD.

29:09 From the eighties. Who then went on to become A computer science professor at Columbia. University. I assume with some of the

29:18 Professors who went on to go found Fitel that Jeff originally worked for. Yeah. He was like a serious Is a serious academic. He's actually back in academia now. He won the Gordon Bell Prize. David Shaw is back in academia. Yeah. Oh wow. Not at a institution, but he's a member of the National Academy of Engineering and the National Academy of Sciences. Like he's the real deal.

29:40 His stepfather, when he was growing up, was a finance professor at UCLA. And so he'd always kind of been interested in finance, but had studied computer science and was an academic. In nineteen eighty six. He left

29:55 Columbia to join Morgan Stanley. And then started D.E. Shaw in nineteen eighty eight. And I think his model for this Was Jim Simons Who In nineteen eighty two started.

30:08 Renaissance technologies and Ren Tech. I bet actually a lot of people listening don't know. Like I just said that name and a lot of people like oh what's okay, great. What are these guys talking about? It won't hit you as like, oh right, the firm that consistently produces the greatest returns of all time, but they're not taking any more capital and so you can't get your capital in. Dude, Rentec. And Simon's is

30:29 Unreal. I'm pretty sure they are the best performing investors. Of all time, full stop. Period. We should do an episode on RenTech. If we can get any information. I mean, that's the interesting thing about RenTech is like it's a fortress.

30:43 So Supposedly. The core medallion fund, which is now all private capital of Rent Tech employees and Simons himself. Like there's no outside investors. Mm-hmm. averaged a sixty six point one percent annual return from nineteen eighty eight

31:02 to 2018. Thirty years. What? At sixty-six percent compounding. Nobody's ever beaten that. We may need to go regrade our uh Berkshire Hathaway episode. Yeah, seriously. Seriously. But that was the inspiration for Tee Shaw and D Shaw has not performed that well, but of hedge funds today that People can actually invest in like D Shaw and a couple others. or the legacy of that.

31:26 Right. And while this was the business model of DE Shaw being a quant hedge fund, they always resisted the idea that that's what defined them. They very much thought of themselves as this sort of group of Creative. artisans who, you know, invested in businesses and started businesses and came up with new ideas and viewed the world through different lenses. And sure, this is how they make money, but Desco or D E S Co Was so much more than that.

31:52 Totally. Well, and I think this is what Jeff falls in love with about The firm and about David. So Jeff joins. He rises through the ranks super quickly. He becomes

32:03 The fourth senior. Vice President at the firm. So like highest level below David. And I assume. By far.

32:11 The youngest. He's like in his mid to late twenties at this point. He is like the future, like the rising star at DE Shop. And he and David Become.

32:20 Super close. Now there's not a lot written about this, which you'll maybe see why in a second. But like they were very close, and and I gotta imagine that David kinda saw himself as a You know, a mentored.

32:32 Yeah, Jeff. Oh, for sure. So Jeff loves it there. He's involved in recruiting, bringing in all these super smart People of all disciplines, into D Shaw, and the MO was kinda like We just want to find the smartest people in the world. Doesn't matter if they know nothing about business and finance. It's kinda like Bridgewater today is kinda the inheritor of this. Like just bring'em in here and we'll figure out stuff for them to do. So

32:57 A bunch of people who become really key early Amazon employees. Jeff Holden, I believe Bezos is involved in recruiting. Who would later, of course, join Amazon right around two years after its founding. Amazing how that happened. Yeah, but maybe like there's a non computer or something. Nonsolicit. Nicholas Lovejoy. And

33:21 Another Princeton Grad. who joined the firm. Mackenzie Scott. Tuttle.

33:28 And uh That's what we were referring to of Jeff falling in in love at the Shaw in more ways. Then One. Cap Jeff and McKenzie would.

33:37 Get married and I think technically McKenzie was the first. Amazon in play. Yes. It's interesting. I don't know technically. In terms of like literally was she the first person to

33:47 become a W Two'd employee, but certainly she was already doing work, I think particularly on accounting working with legal kind of setting up the operations of the business before Jeff hired Shell Kappan, who was the first engineer, the first sort of full time hire other than he and McKenzie. Yeah. But Mackenzie was like Definitely like an employee of the business doing work on the business. So within DE SHA, kinda like you said.

34:13 They're this quant trading firm and like, yeah, that's how they make their money. But they view themselves as being kind of entrepreneurial and starting these other businesses and doing stuff. And so David has Jeff. Working on a bunch of this stuff. The first project he leads is is building out what they called the third market business. And it was an idea that

34:32 to create a sort of separate market from The exchanges. Where retail investors could trade without paying at that time, you're paying a lot in commissions to your burgerage house. So super cool. Which by the way, this feels like it's probably the predecessor to Dark Pools. Oh.

34:49 I mean, if they're making transactions off exchange and then batch shipping them to exchanges to get lower fees, that is sort of the financial world that we live in today where lots of transactions happen off the exchange, then that's sort of the predecessor to payment for order flow. I mean they they were at the early days of all this stuff. Robin Hood and Citadel and all that. Well, they definitely were because At the same time, the internet is it's so early. You know, we're in like early, you know, mosaic Netscape days like ninety two, ninety three. But David and Jeff, you know, given their backgrounds.

35:22 And like David having done his PhD at Stanford. They know all these people that are starting the internet. And even Bezos himself, I mean when he was I think in college, he had used the internet when it was fully just command prompt based and there was no GUI. It was just the very basic protocols and a Unix command terminal and you can Maybe tellnet? was around at that point, but Yeah, there was no world wide web.

35:47 Yes. So David and Jeff get really excited about this and David kind of reassigns Jeff as one of the most senior people in the firm.

35:57 That the two of them are gonna work together. to come up with business plans that they're gonna start. Internet opportunities within Down. I think the first one that they do

36:09 is a Online. retail brokerage for financial trading, like e trade. It was a competitor e Trade. And I don't know for sure, but I wonder if that may be The third market business that Jeff was working on might might have like transformed into

36:25 This. Because it makes so much more sense over the internet. Yeah, totally agree. They also started Juno, which that became reasonably successful. Like I remember seeing commercials for it, getting CDs for it, and that was like early email. Juno was one of the first free email services on the web. And then they merged with Net Zero and became an ISP And an email provider.

36:49 Yeah, but it was started. By Jeff and David within D.E. Shaw, like both of these. So like that's what they're doing during these years. You know, I think that's like Jeff's main job is The two of them would meet every week. They would brainstorm ideas.

37:05 Jeff would then go off for the rest of the week and like Research, you know, the feasibility of the ideas and then like work on them with employees within DE SHA and then they launch them and they did this with a couple Businesses. And they weren't the only ones doing this. It's interesting how there were other people who observed

37:23 Oh my god, the internet. And it was like okay, cool, like this is clearly the next technology wave. Like we had the PC, what do we do with this thing? And Microsoft is one that comes to mind. This is the Rich Barton story with Expedia. That was a division of Microsoft looking at Internet. potential businesses and saying, how do we start them? And of course, I think longtime listeners will know that The way Expedia ended up happening is Rich basically said, Hey, this online travel agency thing needs to happen. If we keep it in Microsoft too long, it's gonna kill it. Gotta spin it out, brokering that deal. DE Shaw, I think, was actually before Microsoft in realizing, okay, the internet's gonna be huge by a handful of years, but the thing that sort of led to the dot com mania

38:03 was people realizing all at once, Oh my God, the title wave is coming. Yeah. They were ahead of the pack though. For sure. There were not many folks that were recognizing this at this point in time. So

38:16 They've done the The online trading thing, the e Trade competitor. That ended up getting acquired by Meryl Lynch. They did. Do you know? And they're, you know, brainstorming all these other ideas.

38:28 And One day they come up with an idea that they both get pretty excited about. And uh as Brad writes about In the book. The name for the idea.

38:39 Is The Everything Store. Which ends up being a pretty great name for a book. So the concept was In one way.

38:47 Amazon dot com. Exactly. But There was also a pretty fundamental difference in the idea. At this point in time.

38:56 The idea. Was that you could use the internet. To build. A whole new intermediary layer. between consumers and manufacturers.

39:06 That would bypass traditional retail. So, you know. The discounters, Walmart, Kmart, you know, Sears, all that physical stuff. You're just gonna cut them all out. And This kind of beautiful internet business. is gonna be just the kind of algorithmic matchmaker.

39:23 Between customers that want to buy stuff. And Manufacturers who make stuff. And that's sort of what Amazon is. There's definitely this like, well, you know, the internet is gonna change so much that um factories will just be able to sell right to consumers online. And it's sort of like rounding away all the messy middle that we talked about on our episode with Jeremy from Italic of like you've got the manufacturers, you've got the product designers, you've got the distributors, you've got the brand, then you've ultimately got retail. And maybe you can own two parts of that, but you're probably not going to own all of it. Yeah.

39:59 It was like this sort of very low res picture of the way the retail landscape worked. This totally reeks of like nineteen ninety nine era MBA business plan that like, you know, I'm gonna drop out of HBS and I've got this startup idea and a business plan. I'm gonna get it funded and go, you know But to their credit, they were a few years ahead of this. And like nobody knew at the time. Like nobody actually knew how the internet was gonna play out. Yep. This seemed maybe Plausible.

40:29 You know, and if it would work, it'd be beautiful, right? Like you wouldn't have to actually do anything. You'd just sit in the middle and take a tax on transactions. And so the idea was that the manufacturers would drop ship the orders directly to customers. Oh man. Right out of their factory, which is totally their core competency. Yeah, totally. Like that's gonna work. But importantly, while Jeff is still at D E Shaw and sort of regularly doing this ideating, he starts to dive really deep on what categories could make sense for this as a starting place. Yes. So the two of them They're both very excited about this, as they should be.

41:07 Commerce, pretty big market, huh? Yeah, turns out like retail in the America is maybe other than US real estate, maybe the biggest market in the world. Yeah. Auto. I think, and maybe food. So they like you said, man, they They quickly.

41:23 Okay, if we're gonna do this, you can't just start with the everything store. You need to pick one category. Build that. Build the consumer brand and you know the website and the traffic. And then you can add categories over time on top of that. So Jeff goes off, you know, doing his weekly research activities and he researches and he decides. That books.

41:45 Or the ideal category for a few reasons. One. They are. Perfect commodities. So like a paperback copy of book X. It's a paperback copy of Book X. Doesn't matter where you bought it, how you bought it.

41:57 To the customer experience, it's Basically the same thing. Yep. Two. There are only

42:04 Two major actual distributors of physical books in America. There are many publishers, but distributors who actually like have The inventory, the books. Ingram and Baker and Taylor. And do you know where Ingram is located?

42:19 Mm. Oregon, right? Yep, Roseburg, Oregon. A convenient one day drive or less, half day drive from Seattle. Although Jeff was not thinking about that at the time. No. Not yet. That'd be the next step.

42:31 So it's actually be pretty easy to enter this market because all you need to do is establish accounts with Ingram and Baker and Taylor. And then you get the vast majority of the commercial market for commercial books. You have access to the inventory.

42:46 Yep. There were a few other things too, like especially Books are great because when you compare them, you know, with music, there's six different record labels that you'd have to get each of them on board. So they could be considered music, cause obviously shipping books and shipping CDs, pretty comparable experience from a weight perspective and packing perspective and all that. So to the extent that it's going to be shipping to people, then you sort of have to just look at the industry dynamics of each of those, because just like books, CDs are perfect copies, perfect commodities. Oh, in many dimensions, they're better than books. Lighter weight to ship, standardized packaging, et cetera. Yes.

43:21 But with books, unlike where music that we talked about in our Taylor Swift episode, there's six labels, there are forty two hundred book publishers. So while you can sort of very quickly get the whole catalog of the two distributors, If you end up actually negotiating with publishers, there's a lot of individual publishers. And all these small publishers actually do matter because there's three million different books that are active and in print worldwide, and the long tail matters. Yep. It's not just like everyone wants to listen to Taylor Swift in books. There are lots of rare or out of print books that people totally want. There's genres, there's niches, there's yeah. And the status quo is going to Barnes and Noble and special ordering something and paying a bunch of extra money for that so it can arrive in a month.

44:07 And I think David and Jeff considered Music and CDs as well. Yeah, I suspect this is probably the reason they decide to go with books. Actually, Brad quotes Jeff In the everything store, quote with that huge diversity of products.

44:22 three million books in print. You could build a store online that simply could not exist in any other way. You could build a true superstore with exhaustive selection and customers value. Selection. You know, Borders and Barnes and Noble, they'd like Say they're book superstores, but I think they only stocked like eighty thousand or so, maybe titles, like which is a lot, but it's not three million. it's not the infinite shelf space of the internet. Also worth noting, Barnes and Noble and Borders each only had less than twelve percent of the retail market each. So it's not like there was somebody who already had eighty percent market share that you had to go fight. You ostensibly could

45:02 reasonably quickly become Barnes and Noble or Border Scale. Yep. Yeah. And David, you said something important there, which is that Only with the internet could you really build this true superstore.

45:13 And Bezos keys on this very quickly. In the very first interview that he gave, which we'll link to in the the sources, it was actually at a uh conference in Seattle. Someone sort of just interviewed him right outside the conference. And I think people have probably seen this video or screenshots of this video. It's worth watching the whole few minutes because it's Unbelievably prescient. He basically points out if you can do something in the old paradigm, you should. And when there's a new paradigm like the internet.

45:40 You basically wanna find things that you could not do any other way. Oh, I love that. In order to really exploit the power of the new paradigm. Oh, that's such a great playbook theme that we should highlight here. Like I be I mean, I'm thinking about web three, right? Like Like it's so obvious. Yeah, you can build stuff in web three that you can do in web two. I'm like that's sort of fine.

46:04 But like really you want the stuff you want to find the stuff that you can't do. Otherwise. Right. Don't go create the banner ad and slap it on the internet and be like, see, it's like a magazine, but on the internet, you know, invent the feed format. Totally.

46:17 Oh, that's so great. I hadn't seen that interview. That's Awesome. So Jeff, you know, like we've been saying, like he he just keeps getting more and more excited about this the more he digs in. And he and a couple other employees at DE Shaw, they start researching competition'cause th there were other online bookstores at this point in time. There was books.com, a few kind of local physical Bookstores around the country had started up e commerce internet storefronts. You could buy books from

46:43 XYZ local bookshop around the country and have them ship it to you. And so they start experimenting with the competition. And they realize that Nobody's got. The whole catalogue, so to speak, the infinite selection. It's still all In this kinda.

46:57 old school physical paradigm. Like, yeah. We'll put up an e commerce storefront, we'll put up a website, but we're just selling our inventory out of the you know what we got in the back here. And importantly, it's it was basically all static. The notion of a web server was a very new thing. There were HTML pages and you could put those up on a a server so that somebody using a browser could hit it and get that static page back. But this notion of like

47:22 code executes when you hit a URL to dynamically generate a page, that really wasn't happening yet. And so all you could ever do is fetch these static sites. And so it kind of just relied on whatever bookstore put up that page to make sure it was updated with what's actually in the store. Yep. So Jeff is like Yeah. This is a big idea. There is a window to go do this right now. Oh somebody's gonna figure this out. Do you know the stat on internet growth? Oh, yes. He gets it wrong, right? I think the stat is that as Jeff looked at two different research reports.

47:58 And basically approximated the middle. What he was analyzing was basically the amount of traffic. Yep. The number of packets sent over the internet. Of web packets sent over. The year of nineteen ninety three. It grew twenty three hundred percent. In that single year.

48:16 Ah, no no no no. This is the error that Brad writes about in the book. It grew twenty three hundred. X from January first. Nineteen ninety three.

48:27 to January first, nineteen ninety four. Wait, he was off by a hundred? Yes, which is Two hundred and thirty thousand percent. What? Somehow I missed that. Yeah, he would later quote in speeches that he read this report and he saw the traffic was growing

48:43 twenty three hundred percent and like it jolted him out of his complacency and realized this idea is huge. I gotta go like do this on my own. Holy crap. No, I mean I was gonna make the point of like If you see anything growing twenty three hundred percent, you should start a business on top of it. But I didn't realize that I was with the outdated stat. There's a minimum threshold at which you should stop doing whatever you're doing if you see something like this and go do that. That threshold is below twenty three hundred percent. But if you see something that's growing two hundred and thirty. thousand percent in one year. You really gotta quit your job and go do this. It is crazy. Like, you know, being in venture, we sort of look for like, oh what's the next

49:25 technology wave and what's the next paradigm and is it web three and is it Some form of VR or AR. That's true. You and I have never seen this in our professional lifetimes. We have never witnessed this. No. We have never seen anything within an order of magnitude of this. Mobile didn't happen this quickly. There was no single year in mobile that was nearly as fast as the rapidity of the internet adoption. And so

49:49 A lot of us in venture and in startup land right now are starting businesses and investing in businesses that It's innovating around the edges and it's innovating on stuff that's pretty mature. There's nothing that is the sort of fish in a barrel opportunity of suddenly everyone appeared over there using garbage tools, and all we have to do is make a pretty good tool, and everyone's already on the thing. Yeah. I think we should just like Pause the episode right now and highlight. Everything comes from this. Like all we are doing now

50:17 Is like Capitalizing on the ripple effects or the aftershocks of this giant earthquake of which We m will probably never see another one in our lifetimes. The internet Is it. It's all the internet. And this is the beginning. Everything now is still just

50:34 Derivative of the internet. Yeah, the idea that suddenly everyone is networked together and can obtain any information very quickly. There wasn't even really an interaction model yet. It was just about obtaining information. Yep. There were GET requests, but there weren't post requests. And I don't know if that's technically true, but that's one reasonable way to think about it is you could load any web page, but there weren't a whole lot of forms you could type things into to send information back to those companies or those servers. You know, in Jeff's head and lived experience, this is all like happening at once. He's been working on this internet stuff. There's this new idea that they're working on that these

51:07 Probably more excited about than any of the other ideas. He reads these reports, you know Dulce amount of his complacency. Dang. I've got this really cushy job here at DE Shaw.

51:18 But I might need to leave this and go do this. On my own. What happens next is sort of uh open for debate. You know, Jeff wrestles with this decision for a little bit. He and McKenzie, they just got married, they love their life, they love D. Shaw, they love living in New York. Jeff really is kind of the heir apparent to take over.

51:40 D Shaw, and actually, like I'd said it just a few years later. In two thousand one. David. retires. Goes back to computer science research leaves the firm in the hands of other people, like

51:52 Very reasonable that that could have been Jeff. If he hadn't left. Yeah, absolutely. Jeff calls up his parents, calls up Mike and Jackie, and it's like what should I do? And they're like, Oh You should stay at D Shaw. Of course.

52:05 It's very successful, you get a great salary, you're well thought of in your industry. Yep. How many twenty eight year old, thirty year olds? have the kind of, you know, success and opportunity that you do. Not many. Just thinking about what to do and he talks about

52:19 Later he comes up with this. framework for making the decision. That he calls the regret. Minimization. Framework.

52:28 I love this. It really is. It's such a beautiful way to think about big life decisions like this. I've used it. It's really great. Absolutely. Me too. The framework for people who don't know. is when I'm eighty years old and I'm looking back On my life. And I look back at this fork in the road here.

52:46 Which Path. Am I going to regret the least? What will cause the least amount of regret when I am eighty and I'm looking back and like, I made that decision. Do I regret it?

53:01 More or less than what the alternative would have been. Hm. And when you look at it that way. The answer is just Brain dead, obvious.

53:09 When he's eighty. looking back and he's like well I could have built Amazon. But I say to D Shaw. That's gonna be some serious regret. And he really I mean he's just an entrepreneur. It ultimately wasn't really a choice because he wasn't gonna take over this thing and be a manager of someone else's vision. That's um wholly unbezos. Which is funny too. I've actually been coming to think like I've used the regret minimization framework to make decisions.

53:35 I was thinking about this. Preparing for the episode. I would've made all those decisions anyway. It was just justification. People are gonna do what is in their blood to do, I think. And you're so right. This was in his blood. He was gonna do this. Yep.

53:50 So He goes to tell. David? Yeah. He's gonna leave.

53:56 He's gonna build the everything store. On his own. Yeah, not only am I gonna leave to be an entrepreneur to capitalize on The internet. I'm gonna do the exact thing that we've been the most excited about.

54:07 that I've been working on on your dime. Yes. This is where The legend is David's like Let's go for a walk.

54:16 And They go off from the skyscraper office in midtown Manhattan. Go for a walk through Central Park for like two, three hours. They talk through it all. And David supposedly says to Jeff, look

54:29 You got a future here. I very much want you to stay and build this within D E Shaw. I will compensate you appropriately. It will be worth your time.

54:40 But I also understand The entrepreneurial impulse. Like I left Morgan Stanley to start DE Shaw. I get it. I've been in your shoes. Yep. And if you leave and and and do this on your own, like

54:54 I'll regret it, but you have my blessing. That's the legend of how it went. Whether that actually is what happened, like I I I genuinely don't know. But it's a very nice legend. Let's put it that way. You're suggesting that it could be a little bit more adversarial, or that there could be a little bit of uh of ill will of hey, I thought you were working on this under the umbrella of the Shah, right?

55:16 Well Jeff goes to raise money for Amazon and He doesn't raise it from David. Yeah, right. Like that would be an obvious source of capital. And it's not like Jeff magically had a check waiting for him. Jeff ended up taking the better part of a year and to raise one measly million dollars

55:33 over 60 meetings ultimately from twenty two different investors to sell twenty percent of the company. In order to raise that first million. If it was an option for him to call David and shortcut that. You would think he would have. At the end of the day, none of this matters.

55:49 Because I am one hundred percent convinced. There's no doubt in my mind, nor I think should there be in anybody's that Had Jeff stayed. at DE Shaw there would be no Amazon. Regardless of it being worth Jeff's time or compensation, like this is the beauty of venture capital and the American entrepreneurial system. Usually building things that are great are hard. And

56:12 Usually when things are hard, if you are just an employee making a salary and somebody else owns The company You don't have a level of maniacal progress. Yes. that Amazon did in its early days. Certainly. Certainly did that we're gonna talk about so and the idea was completely flawed. Like the business plan was worthless. Because

56:33 Lots of people had that business plan, you know, and it was completely unrealistic. Right. It is interesting thinking about who the internet appealed to at this moment. And

56:45 It appealed to Jeff or it was on Jeff's radar because Jeff is a nerd. Yes. He has a CS background. He was really into Star Trek. He loved obscure novels. He loved storytelling. And The internet appealed to technical librarians.

57:03 at this point in history. That's probably the best way to describe the cult following that bootstrapped the original network of the internet. It was academics and it was people who loved libraries and programming. It was also the counterculture movement, or the legacy of the counterculture movement, which had kinda died down and morphed into this out in California. For sure. So this is the sort of thing that put it on Jeff's radar. It's also the sort of thing that

57:29 really defined who would be willing to join Jeff on this crazy adventure. It wasn't that he was going and recruiting right away the very sort of best and brightest out of the top institutions with the shiniest resumes and who could really do anything. It was people whose heart burned for I want to make it easier for the world to consume knowledge. I want to make it easier to find rare out of print books. Yeah. That was the sort of seed of the original culture of the people who were attracted to Amazon, both as customers and employees.

58:01 Which was not the Shaw. No. And I think this is also another reason why Jeff really struggled with it because He loved DE Shaw. He met his wife there. Right. He loved those people. Eventually that DNA would come into Amazon. But yeah, let's talk about Shell Cappen. And The first non McKenzie employee

58:20 Erwärme sie an. To move the story along, so he decides he's doing this He decides, okay, I need to incorporate the company. He picks a few candidate cities that he could operate the business in,'cause Manhattan is not a wonderful place to be running a sort of bootstrapped startup at the time. By this point in time, I think he had finally figured it out that shoot, I might actually have to Take delivery of some of these books and then ship them back out to customers and Midtown Manhattan is Not a great place for that.

58:49 Right. He starts sort of narrowing it down. There's three cities on the list. Seattle's obviously one of them of a candidate city, in part because of its proximity to Roseburg, Oregon. I believe the second candidate city was Boulder, but anyway, they end up deciding on Seattle. And of course, part of it is that proximity reason. The other part is related to the sort of tax environment of Washington State. As folks know, there is no state income tax in Washington State, much like Florida or Texas. But you would think given Jeff's history, Florida or Texas would make more sense.

59:22 But there's another big one too. Well, there are two more big ones. One of them is the access to technical talent. Yes. Microsoft was just absolutely in its heyday and Jeff respected what Bill Gates and crew had built and thought, you know what, opening up a business right next to Microsoft if I'm gonna be attracting programmers seems like a good idea.

59:40 Yep. And what's the fourth? Well the fourth. You have to rewind a little bit to the recruiting of Shell.

59:48 So Shell. Jeff got introduced to actually through a DE Shaw colleague. And shell. was a engineer.

59:56 Uh programmer. Who lived in Santa Cruz, California, and I worked for a bunch of kind of early Silicon Valley startups. Yep. Including And the whole earth.

1:00:07 Catalog. Oh yeah. Absolutely. Yeah. At the whole earth truck store. In Menlo Park. Which is like A rare books retailer, right?

1:00:16 You know, it was counterculture. It was seven it was like curiosities that Stuart thought was cool and would be in the whole earth catalog and then they sold them out of the back of a truck in Menlo Park. Perfect. And for listeners who are like whole earth catalog, Stuart Brand, what are you talking about? Well, there is one other element of tech history which will quickly jolt you out of your seat and go, oh, that's what we're talking about here. When Steve Jobs, who is sort of widely attributed to the quote, stay hungry, stay foolish, when he originally invoked that, He was citing Stuart Brand and it was printed in the cover. I think the inside cover.

1:00:56 It was of the last issue. The last issue. Mm when they start publishing it. The photo the iconic photo. from outer space of

1:01:06 The earth as seen from outer space. And then said stay hungry, stay foolish. And was a total inspiration for Steve Jobs. Yeah, so Shell was working there. Which is so cool,'cause then Stuart sort of gets woven into the Amazon story in in this way, of course, but then Bezos also has reverence for the whole Earth catalog and gets to spend time with Stuart Brand and a bunch of those folks down the line, too. Yep. And uh

1:01:30 They work on um The clock of the long now, I think it is. The ten thousand year clock. Which was a investment from Bezos Expeditions. I think it's a uh It was one of the earliest sort of projects that he backed when he became individually wealthy. Hm. Oh, how did Jeff become individually wealthy? Hmm. It wasn't necessarily from selling his Amazon shares. We'll get to that.

1:01:51 Yep. You are not gonna believe it when we tell that story. How Jeff Bezos became a billionaire and it had nothing to do with Amazon.com. That would be the clickbait. If we were like uh YouTube native podcasts. That would be the title of the episode. In fact, maybe we'll clip this into a segment and put it on the acquired stories channel. Yeah.

1:02:07 We do a photo shoot of us in like crazy post like Oh my God, like you know title card. Uh YouTubers, man. Alright, so Jeff gets introduced to Shell. Shell's part of this deep legacy of Everything. Silicon Valley, startups, you know, what becomes the internet. I believe

1:02:25 The original intention was Jeff and McKenzie were gonna move out to Santa Cruz. They're gonna build. Amazon and Silicon Valley. Like duh, why wouldn't you? Yeah, maybe it's a little farther to Oregon to Ingram's, but like not that much farther. Fine. But

1:02:38 I didn't realize how recent this had happened like this all at the same time in nineteen ninety two. The Supreme Court Has ruled on a decision. that retail companies Do not have to collect

1:02:52 Sales tax. in states where they don't have physical Presence like operations. Right. Now it doesn't mean that customers don't have to pay sales tax when they buy items from a retailer that is not physicated in their state. Not on the retailer. Which of course every individual is going out and saying, What purchases did I make last year that I should be paying sales tax on that may not have been charged to me by the Oh my God, it's like crypto taxes. Yeah. People will pay taxes if it's easy. They won't if it's hard.

1:03:27 So Jeff finds out reads about this. And he's like Oh no no no no no no We cannot base this company in California. Not New York. Not New York. Not Texas. Probably not Florida.

1:03:39 What is the Venn diagram of like close to book distributor? Has access to technical talent. Not too populous. But enough. Technical people I can hire. But not so much that I'm cutting out a huge swath of my market.

1:03:55 Seattle is the obvious choice. Which you wouldn't pick today because This self perpetuating thing because of Amazon. And the ecosystem that they and Microsoft would jointly create here. Seattle's population has been going crazy, especially with people with unbelievably high disposable income. And so

1:04:15 You would not want to in this day and age Make that same decision. execute this strategy and make that decision about Washington State. But totally Jeff Azus hadn't created Amazon yet, and so therefore it was a perfect place. Actually I kinda resonate with this my own personal story. Jeff Had.

1:04:30 Zero connection to Seattle. You didn't know anybody. I was exactly the same way when I came to Seattle. And dude, it was the place where you got a VC job offer and you were like, I want to be a VC. It's the land of opportunity. Yep. And it was the land of opportunity for Jeff Bezos. You know, the legend is that he and McKenzie are driving across country, they realize this, they like veer hard to the right in Texas, and instead of going due west to California, they go northwest to Seattle. Meanwhile, I think they've been on the phone with lawyers or a lawyer incorporating the business while they've been driving out and that's the whole

1:05:04 Thing about the name. That's probably a story worth telling. Definitely. The veering to the right while driving that didn't happen. But it's a good story. But I think a thing that did happen while McKenzie is driving and Jeff is sort of working on the drive out is Jeff's on the phone with a lawyer. He's like, incorporate the business. I want it to be called Kadabra. Kadabra, like, Oh, it's magic. I can get. You know, whatever I want. Anything I want, whatever I want. And you know, Jeff's like, Yeah, cadaver. And he's like, cadaver?

1:05:34 And so that was like the first sign of uh this may not be the best name. And he would have a series of other potentially bad names too, including Relentless.com. Relentless.com, which still goes to Amazon. Redirects to Amazon. Yeah, supposedly he and McKenzie both really liked Relentless dot com. This may be completely

1:05:55 You know, don't hold me to this, but I wonder if that's a little subtle dig at DE Shaw. Of like I'm gonna go be an entrepreneur. Relentless, like I wouldn't be relentless if I were in a cushy skyscraper in Manhattan. It's not a very customer centric name. No, it's definitely not. It's uh very much like I'm gonna come at you competitors. Well, that's what I'm wondering, like where did that come from? Yeah. I mean you would you would use it to describe Jeff's personality, but it's an odd name for the business. Definitely.

1:06:23 So eventually friends convince them that relentless Sounds kinda sinister. And The story goes, Jeff starts looking in a dictionary. Now I don't know if he was specifically looking at

1:06:36 At A words. If so, he was very smart because A names are Name starting with the letter A. He actually was because sites like Yahoo, like portal sites, directory sites listed alphabetically. Totally. I mean this like we've been such a beneficiary of this at acquired. This is our secret. Podcasts are the the last vestige of the old internet. Totally, because things are listed alphabetically on

1:06:58 Well we will talk about Yahoo. He's looking at A names. And he's going through the list and he sees Amazon. Perfect. Earth's largest river. Earth's largest selection on Amazon.com.

1:07:10 A to Z, how could it be? Anymore perfect. So perfect. So They just need one more thing. They've hired Shell at this point. He's moving up to Seattle. They rent a house in Bellevue famously.

1:07:23 You actually biked by it the other day, right? I did. I was in the neighborhood and I was listening to uh great podcast on the Internet History Podcast with friend of the show, Brian McCullough. He was interviewing Shell about the early days about this. you know, a house that Jeff McKenzie lived in and they have the garage retrofitted to be an office, Amazon's first office, and Shell is programming sitting in that garage. And I looked and it was like a few blocks from me and I was like, I got to ride by You texted me the phone I was so So jealous. Which felt wrong. You know, someone lives there and all that, but it is a historical landmark in the world. Well you didn't go knock on the door. No, but no.

1:08:00 I think that's fine. So they just need one more thing. Which is Capital. You know, Jeff and McKenzie had done great at D Shaw. So they put in Ninety five thousand dollars.

1:08:11 To start. Shell. Himself puts in Five thousand dollars. This takes me back to the Walmart episode and gosh so smart of like having your employees actually invest dollars in the business. Jeff's

1:08:24 Parents. Mike and Jackie. put in another hundred thousand dollars. So they have two hundred thousand dollars. That's enough. They hire a couple more engineers to work with Shell. Start building out.

1:08:35 So Jeff goes and starts working on relationships with Ingram and Baker and Taylor. Mackenzie's doing all the bookkeeping and is sort of like the first CFO of the company. Jeff, this is fun. Also echoes of Sam Walton. Did you read about this? How He goes down and takes a course in bookselling. Down in Portland.

1:08:55 Yes. That was awesome. At like the National Booksellers or Book Retailers Association, right? Totally. Oh, so smart. I assume that's how he starts to build relationships in the industry and Get Baker and Taylor and Ingram to take him seriously. So great.

1:09:09 Yeah. It's worth pointing out at this point. So you know, we sort of glazed over like all right, Shell gets hired and he starts programming. There's very interesting set of technology choices that are made here. And Shell turns out to be the perfect hire. Jeff got very lucky. I don't think Amazon would exist today if it weren't for Shell. And I think that's sort of a widely acknowledged thing among the ear team, including Jeff. But

1:09:32 There's not really like a spec. Jeff, I think, coded up the first HTML webpage himself, that sort of white one with the A with the Amazon River running through it that predates the logo. But when he starts describing it to Shell, Shell's pretty much like, Okay, cool, like I know what to build. It's gonna be a store, and there's not like a lot of these yet, but like it's a website where you can buy stuff online. Great. And he just sort of starts coding.

1:09:54 And There's a couple of interesting things here. One of which is the technology choice of databases. And do you know what database they would eventually sort of choose to standardize on because Shell was not a database guy before this. I'm tempted to say Oracle. Definitely Oracle. Yeah, interesting.

1:10:12 It was a bake off between two, and Shell basically was like, Okay, cool, what database software am I gonna procure? And the choices were Cybase and Oracle, and Cybase did not return Shell's call. And so he chose Oracle. Oh my God. Talk about freaking foreshadowing here. Like if you are an enterprise technology company, you ignore startups at your own peril. Absolutely.

1:10:39 I love that story. Oh, that's amazing. There's a couple other interesting things here, and anybody who's been a PM or an engineer working on like an engineer PM team or a business guy tech guy team. And remember, the internet at this point just very Very pathetic.

1:10:56 Like it's just not the internet as you think about it today in terms of speed or graphics or interface or trust or anything. Especially trust around credit cards. Like people were not yet comfortable entering credit cards on the internet. In fact, more people were comfortable entering credit cards via email, even though it was no more secure. They actually got more people emailing them their credit card information. And they had a way in which you could do stuff like enter just five digits of your credit card and then call us and then we would get the rest of it from you and match it up with the five you had entered on your order.

1:11:25 But Jeff tells Shell. Hey. People are gonna wanna access this store.

1:11:32 Viet Methods. is the web, which is of course up and coming, the other of which is email, which people seem to trust a lot. So build two storefronts, one that's accessible via email and one that's accessible via web.

1:11:47 And Shell kind of just ignores the email thing. He's like I'm in this technology a lot. I don't think it's gonna be an email based store. And it's a good thing that he started with web, and by the time they had sort of gotten that stood up, it was clear that Jeff had sort of lost interest in the email based store. But it was almost like a posterist type approach where they're like, What if you could brow and buy from your email? That's how crappy the web was, is it wasn't clear that that was a better form factor than email. In Brad's book, I get the sense that that's very typical of early Jeff management style of we gotta go do this.

1:12:19 And then You know, some of them like you actually gotta do it, then some of you like, Well if I ignore this for a little while Yeah. Oh, we're gonna do the right thing here. Yeah.

1:12:28 It also became clear in listening to a lot of these interviews with early engineers that They use the word front end engineer and back end engineer differently than we do today. Today when we say front end and backend, it means front end being like client side JavaScript typically stuff that executes in your browser, which of course did not really work or exist then. And back end meant server side. But what was clear at Amazon in the early days was front end meant consumer facing and back end meant

1:12:57 warehouse facing technology. And It was basically all server side. In fact, there weren't even cookies yet. And so Shell had to basically invent this way for users to maintain favorite items or a shopping cart without leaving a cookie. And so how do you do that without cookies or sessions? He invented this

1:13:18 Really insane. engine is basically a rendering engine called Obidos, which if anybody knows their South American geography It's a tributary to the Amazon, right? Yeah. And for people who remember browsing Amazon in the early days. You'd go to like Amazon.com slash exec slash obidos slash something something something. Oh, I definitely didn't do this. This is awesome. It was a

1:13:41 part of the URLs. And so what Obidos did was It could append IDs to the URL and pass them through so that the backend, as we know it in today's parlor and so that the server could match up

1:13:57 Oh, this customer just added this other thing to their cart. And so dynamically generate a new web page for them that includes that other thing in their cart. Or what would go on to be include you may also like or similar products or recommended personalized products. Oh, so cool. This was the very first thing that allowed Amazon to be like a dynamic web application without the use of cookies, and it was just passing these IDs through the URL.

1:14:26 And it was all this obscure. sort of dynamic web serving engine that Shell built. I love it. I love it. That's so cool. Yeah. So

1:14:36 Yeah. Michelle is like you're so right, like He was the right guy for the job. Yep. This was a grizzled sort of veteran. Of

1:14:46 Building software systems. That could work on the internet. There were not many people who could do that at that point in time. No, and in fact in job postings, I think Bezos put things like experience with websites would be a bonus, but not required. Cause like there weren't web developers because there weren't web applications. You would think about it like

1:15:06 Hey, I need someone who can write some C code and then figure out the glue to make it so that that interfaces with the HTML that gets generated. But that was all sort of like. Brand new at the time. Yeah. Amazing. So Shell and the Early team of the

1:15:22 engineers that they Bring on working together. They get a beta bill like pretty fast. Really fast. It was summer of ninety four.

1:15:31 when Jeff and McKenzie leave D Shaw. And then it takes a few months to figure all the stuff out. And uh Garage in Bellevue. In April.

1:15:41 of nineteen ninety five. They ship a beta version of the site. They send out a link to friends and family, like, try it out. You can buy any book you want. Shell's friend John Wainwright makes the first purchase on April 3rd, 1995. A book called Fluid Concepts and Creative Analogies by Douglas Hofstedder. Doug Hofstetter's awesome. He wrote Gürtel Escherbach. Oh.

1:16:06 It's super cool. Anyway, it's all like about the nature of consciousness and like I carve out for another day. Yeah. But super cool and very Apt. Gee.

1:16:16 First purchase on Amazon.com. Again, illustrating who the types of people who were interested in Amazon and the movement at the time were. Yep. And then shortly after that, July sixteenth, Nineteen ninety five.

1:16:30 They launched the site to the public. I totally understand now. what Mark Andreessen was saying when he was like I freaking missed it. I mean, I guess Mark was part of starting this wave. So he was talking about the previous wave, but like Me now looking back, I'm like, we freaking missed it, Ben.

1:16:46 I have FOMO. You have FOMO. Yeah. This would never happen today. They launched it. And people came. People loved it. Like it freaking worked. Immediately. Yeah.

1:16:56 Yeah. And it went very quickly from like a thing that obscure nerds wanted. to This has a good enough user experience where regular people are using it quickly and deriving real value. It's not just like it had growth rates of a bunch of bots interacting with each other and therefore the volume looks high. This is very real people. who are one or two clicks out from the early adopters solving real problems that they had before. And it's just

1:17:24 Everybody telling their friends. In fact, I think there's a stat the entire first year after the public launch, they spent zero marketing dollars and it was all word of mouth at inbound media inquiries because what they were doing was so novel and so useful to the mass market consumer. Oh, inbound media inquiries. Okay. So they launch it. In the first two weeks.

1:17:46 They do twenty-five thousand dollars in revenue. There's just people telling their friends can't do that today. Like twenty five thousand dollars in revenue like in two weeks. You launched something today. Nobody's gonna use it. And then they get an inbound. Media. Inquiry.

1:18:00 Two weeks after they launch it. From David Filo and Jerry Yang. Saying Hey.

1:18:08 We heard about the your site. Amazon. It looks pretty cool. Do you mind if we feature it? On our Homepage. And Jeff's like.

1:18:17 Wait a minute, your homepage. I think a lot of people go to that. And that was the brand new At that point, like literally brand new. Yeah.com David and Jerry, of course, had started their

1:18:30 Guide to the web when they were at Stanford. grad students the year before. In nineteen ninety four, and they had just Incorporated, raise money from Sequoia Capital.

1:18:41 Turn it into an actual Business and created. Yahoo only in March of nineteen ninety five. Wow. It's all happening all at once.

1:18:50 Gotta assume it was the first. Place to buy books. Featured on the front page with the letter A. on yahoo.com. Growth hack. So apparently they get the email. And had they raised their seed round, their million dollar angel round yet? No. No, no, no. So uh all that context you had on shell, oh, this makes so much more sense now.

1:19:09 I thought he was just being conservative, but he knows what he's doing. They get the email. And they're all talking about what to do. And Shell's like Guys. I don't think we're ready for this. I don't think we can handle what's about to happen here. 'Cause he's only been at startups that didn't really work. Yes.

1:19:27 He made stuff functional. And he was thinking of a certain scale, but he wasn't thinking like millions scale. Of course, Jeff being Jeff is like Damn the torpedoes like full speed ahead. We're doing this. We're gonna say yes to Yahoo. So they do it.

1:19:43 Від некст So we're just Four weeks after launch here. They have sold books to people in all fifty states. In the country.

1:19:52 And forty five countries around the world. There by the end of those two weeks, they are doing twenty thousand in sales. A week. On books. These things cost like twenty or thirty bucks each. And people don't read books. You know, yeah, there's Barnes and Noble and Bor like people don't read books. They made all their money on DVDs and CDs. Nobody reads books. We, you and me in the acquired community, like we read books, but we're a vast minority. Most Americans read one book a year. I think that's like the mode of number of books per year per person.

1:20:23 Totally. So that first half year That the site is live to the public. They do half a million dollars in revenue in six months with the two hundred thousand dollars in friends and family. funding. The initial insight is like pretty perfect product market fit right out of the gate.

1:20:38 I mean, it's one of these situations, it's like an Uber or a Twitter where you have this idea. And then you put it up. And then that's exactly the thing that people want. I'm sure there will come an age again like this, but in some way, shape, or form, but I can't stress enough like this does not happen today.

1:20:53 Right. I'm feeling the FOMO. The question is, David, would you have recognized it? Right. That's the thing. We all have to be intellectually honest with ourselves over like, would we be hanging out in these circles? with these people. And

1:21:09 truly believing like they did. Not in nineteen ninety six that the internet was gonna be a thing, in nineteen ninety three that the internet was gonna be a thing. Yep. We sort of did this a little bit. Not Intentionally.

1:21:22 With podcasting, I think. And acquired. Yeah. A little bit we got a similar type wave. Right. Honestly, though, judging by what you and I were doing a few years later, I do actually think we would have had the personality characteristics and the interests. If we were not young children at this time.

1:21:40 To be. Yeah, yeah. Oh yeah. In some ways I'm feeling the massive FOMO of like God if I was just born five or ten years earlier. Yeah. Yeah.

1:21:50 I mean it's This is who we are. And I imagine who Many of our listeners are too. Yeah, I imagine if you're listening to three hour podcasts, then you're the type of person who wanted to buy an obscure book from someone on the internet where you had to call in your credit card number. The infrastructure is just completely falling apart. One thing they did do right in the infrastructure though, because by the way, very quickly they became Oracle's largest ever instance by traffic. The Oracle people were like, Oh my God, we can't help you. No one else is seeing this many reads or writes per second. So let us make a new version for you. But

1:22:22 One thing that was very clear is that Shell and the team were building things at a very low level of abstraction. I mean, they were building everything in basically a click out from assembly. Most of the stuff was in C, some of it was in Perl, but they're not really writing in high level languages or using sort of high level frameworks. So Even though the technology at the time sucked. I mean, there was no bandwidth. Compute was really, really, really hard to come by. You had to be unbelievable efficient as you're starting to roll out things like, and I know we'll get to this reviews and the collaborative filtering stuff where it was like you may also like people who bought this also bought the algorithms mattered a lot.

1:23:02 but the environments that you were writing them in, the low level languages were really important. Yep. And they basically could take advantage of these early internet technologies before the bandwidth in compute was really ready for most people to develop applications for them. Totally right. I guess I sort of Mm. technology to some extent, the tech in infrastructure.

1:23:22 I meant more like the garage. Here is the kicker of why this is never would have worked within D Shaw. It's super clear. You can't do drop shipping. Amazon's got a Handle the logistics. themselves to make this work. And the way they were doing that was not to take inventory at the time. They were ordering retail first from other bookstores. and then reselling it and just eating the margin as the proof of concept. But then they were moving to this world where they would just order from the distribut as soon as they got an order and it was taking obviously forever to actually get that to the customer. The distributors had minimum order sizes. So they were ordering big boxes of stuff.

1:23:58 Coming to the garage. Do you know the hack? Let's say they ordered a popular book where pretty quickly you could get to eight out of ten. Let's say the minimum order size was ten. They'd wait to get two more. I think it was ten. Yeah. And that way they could place an order with the distributor. The hack was if it's sort of an obscure book and they know we're never gonna get to ten, they would take that one book and they would order nine of a book that they knew was

1:24:22 not in stock, the system would let them make the order since 10 books could be shipped out. And then of course they would get the rejection of hey, this book's out of stock. So that was their hack to make it so the distributors would actually send them the one copy of the one book that they wanted. The sales levels we're talking about. There's a lot of boxes. coming and going out of the garage. Yes. So quickly they get a warehouse in Soto in the kind of industrial neighborhood down by the Kingdom at that point in time. They start staffing it up with temp workers. Famously they tell the staffing agency to quote send us your freaks. Which made it through to print in an article. And of course, that was the sort of clickbait thing that everyone anchored on.

1:25:01 This was the era of grunge in Seattle, so all these grunge club musicians are like working in Amazon warehouses after their gigs. Super cool. Yep. Famously Nick Lovejoy from D Shaw. He comes up with the idea of Packing tables. This becomes like Amazon lore. At first they're literally just reassembling, you know, and doing shipping just like on their hands and knees on the floor. And he's like, We should get some tables to do this up above the floor. Yeah. And on the Sent Us Your Freaks thing There's this great interview with Jane Slade that Brian McCullough did where she's the one who gave the quote in that interview about send us your freaks. And she said that because the temp agency was like sending them all these people that were basically professionals. They would expect to use modern tools. And at Amazon The low level software thing wasn't just for their infrastructure. They expected their customer service people to like use Unix terminals.

1:25:52 and write commands so that when someone write right in and they're like, Where's my order? like everything's on command line. And so Jade's using that to try to articulate to the temp agency, here's the profile of person that we need because All these people are kind of useless to us if they expect a bunch of very good tools to do their job. Uh huh. I didn't know that context. That's awesome. What's cool here is these are quaint stories, but this is the beginning. of the competitive advantage and the moat.

1:26:19 That Amazon starts. To build and we're gonna talk about eBay in a minute here, but it's just like the Walmart story. And fighting against Kmart and other people like Amazon now.

1:26:32 Is building. A native Logistics supply chain and distribution. For e commerce. that they are gonna own and operate.

1:26:43 that nobody else, literally nobody else in the world is doing this. Not Walmart, not Kmart, not Barnes and Noble. They all have their own incredible Logistics systems. But they're tuned for I've got this book superstore of eighty thousand titles and I've got thousands of them across the country. Amazon's

1:27:02 Building distribution for I have millions of customers. Across the world. And basically no two orders are the same. So I always need to put a unique brand new combination of books into a box every single time. That is a totally different combinatorial problem to solve than the Walmart thing of, hey, we need to make sure that a truck goes from this distribution center to this store once a day with about this stuff. And you know, maybe there could be a little variance.

1:27:28 It's completely new. And so Amazon needed to fail completely, invent something new tailored to their use case, and then suddenly be the industry leader for the way you do that thing on the internet. And packing tables is such a great first paradigm of Oh. Our warehouses will need these, but other distribution centers in the Walmart land and that old school world don't. Yeah. And that would just happen ten thousand times. Again, compound and compound and compound.

1:27:56 Well I'm with claws like Yeah, there are big differences between the Walmart supply chain and the Barnes and Noble supply chain and Amazon but eBay sure as hell isn't building packing tables. Yeah. So They need some more money. Capitalize all this. So Jeff goes out to raise that first seed round that

1:28:12 We did the whole episode with Tom Allberg about Back in early acquired days, Tom is just the best. Tom is the best. I re-listen to that episode. And I was thinking like oh this can be terrible because this was like very early and acquired.

1:28:25 It's so not, and it's very listenable. And Most of that is because Tom is an unbelievable guest. He's kind and he also is so earnest, but lived the whole thing. I mean, he was an early check in Amazon in that one million dollar on five million dollar post money round and stayed the course with Jeff all the way through the late twenty tens as a board member. Yeah, longest serving board member in Amazon history other than Jeff.

1:28:51 So cool. So they raised that one million dollar round from a bunch of kind of local business folks in Seattle of which Tom is one and one of the most involved in the company. Nick Hanauer, bunch of local business folks here. So

1:29:06 In Nineteen ninety six. Remember they did half a million in revenue. for the half year of nineteen. ninety five that they were alive. They do fifteen point seven million in revenue in nineteen ninety six. They have a tiger by the tail here. You would have to be accelerating so much to go from whatever the run rate was in December of

1:29:26 Ninety five. So they about fifteen Xed in their first year, but they fifteen X' off a base of five hundred thousand. It's not like off of nothing. Yeah, they didn't go from like Five to a hundred or something like that. When I'm looking at SaaS companies, I'm like, oh my God, you quadrupled? That's like nearly unheard of. Yeah. Good companies triple. And then you look at it and it's like you went from twenty K ARR to a hundred K AR. Right. And this is yeah, wow. Five hundred K in six months to fifteen point seven. The following year. Okay, so that's nineteen ninety six. That's nineteen ninety six. So As this rise is happening, obviously more and more.

1:30:01 People start paying attention and we can go listen to the whole episode, but Tom tells the story on our episode with him. I'll just quote from Tom here. So I come home one night after work at like six PM or something. And my wife says Do you know some guy named John Door? And I said, Well, actually I do.

1:30:21 And she said. Well, he calls every 15 minutes and keeps saying he needs to talk to you now. And then Tom says, It was one of John's great strengths. which is his persistence. Tells you something about how to sell yourself and show your interest. And of course that is the legendary John Door.

1:30:40 Of Client Perkins. It's been many years, and so there's lots of names of key folks at Sequoia and at Benchmark and at Indrees and Horowitz that we think of as like wow, these incredible venture capitalists. John Doer was pretty widely known to be the greatest of all time at this point in history. He was like all of today's all stars in Venture Capital. within the industry and among founders. If you aggregate all of those all stars into one single person.

1:31:08 That would have been John Door at that point in time. So this shows you how much Cloud. John. had well A just the hustle, the persistence, even though he was the legendary John Door, he's calling Tom like every 15 minutes, calling Tom's wife. To get a lead on the deal.

1:31:24 Amazon ends up Choosing Kleiner. to lead their series A. Eight million dollars at a sixty million dollar Post money.

1:31:33 Evaluation. And I think they were competing against General Atlantic. Many firms, including General Atlantic, which was the first runner up. Now there was some structure to the deal. So it wasn't like a clean the cleaner term sheet was clean. I don't remember exactly what the structure was, but Tom refers to this on our episode. They were a New York firm, you know, generally But they were offering like double the valuation. Close to double, I think. Wow. And Amazon and Jeff went with John. And Kleiner. Because they were John and Kleiner. And there's a fun little sidebar of John wins the deal. And this was kind of his playbook at the time. Great, you know, I'm gonna be involved, but I've got this great associate who I'm gonna put I'm gonna put on your board. And it's gonna be great. VCs still do this today. Jeff wasn't too happy about this, so he goes to talk to Tom, like, what should I do about this? And

1:32:20 The brainstorm they come up with an idea and Jeff calls John back and is like I'm really sorry. I really wanted to work with Kleiner Perkins then, but I guess we're gonna be going with General Atlantic. If you're not gonna join my board, that was really the appeal for me. You know, and John's like I don't know the bandwidth. I on too many other boards right now. He's got what, Netscape? Netscape, compac, sun micro systems, into it. This is before Google. We will.

1:32:47 Definitely talk about Google in a minute, but he's a little busy. Nothing to sneeze at. But This was such a hot deal and Jeff was so persuasive that

1:32:56 John made time. And I think he's probably glad that he made time to join the board. Yeah. So They raise this money from Kleiner. Jeff. Does two things.

1:33:07 And this was seven million. Eight million. Eight million. So so far in the lifetime of the company's raised nine million dollars. A little more than nine because there was the friends and family money. The Bezos family as a whole. Nine two. It was actually more like nine four,'cause the Bezos family as a whole, not just Jeff's parents.

1:33:25 Jackie and Mike, but also his siblings put a little more money in before the cleaner round. So That was what we were alluding to at the beginning of the show of Gosh, man, Mike and Jackie. They must have done some good investing. Which is funny,'cause like that's Bezos' siblings having some of the greatest investment returns of all time. It proves venture capital is access, access, access.

1:33:46 Oh, I cannot wait to talk about how Jeff Bezos and McKenzie got wealthy. It's gotta wait just a little bit longer. Gotta wait a little longer. All right, all right. So Jeff does two things after he raises the round from Kleiner. I didn't write down the quote, but Somebody who was involved in the company at that point said something like Jeff viewed this stamp of imprimateur from Kleiner and John Dor as like a shot of steroids into himself and the company. It certainly emboldened his vision. He sort of views this as like someone waving the flag of like go, go, go, like you should feel free to have a much, much more ambitious plan now.

1:34:19 Jeff, I don't think is the kind of person who ever felt like he needed permission, but to the extent he did feel like he needed permission or that the right thing to do was to get big fast, which is one thing that he does that he makes that the motto Which literally became the motto, which printed on T shirts at the company. Holiday party. Yeah. Get big fast. Yep. decline around and John joining the board was absolutely That for him.

1:34:44 So he also makes a critical Higher. Which is the first official professional CFO. into the company.

1:34:54 Joy Covey. To come on at this time. Who originally had zero interest. This is another person who unbelievably accomplished, really brilliant. curious, but she lives in California. She's not gonna move to Seattle. She's only marginally interested, but Jeff And she meet and she's completely turned around. She's like, Oh my God, I have to work with this guy and oh my god, this is the best business model of all time.

1:35:16 And I'm sure John had something to do with this. My understanding from the history is that like one of John's real superpowers was recruiting. It was winning deals, obviously, but helping companies recruit too. Yeah. Joy's story is just amazing. She dropped out of high school and then ended up becoming a CPA. She took the CPA exam in California. And got I think like the second highest score. in history the history of the exam, ended up going on to both Harvard Business School and Harvard Law School. She dropped out of high school. Her life was going in one direction and

1:35:47 There's so many people like that involved in Amazon that are Yeah. Just like these incredible stories of perseverance. As a lot of folks know, we're talking about Joy in the past tense because she sadly passed away in twenty thirteen in a bicycle accident. A car hit her. So absolutely tragic, brilliant, kind person who the world lost too early. Just to keep going on Joy a little bit, we're gonna talk about the Amazon letter, which many of you have read, that original nineteen ninety seven letter to shareholders, which she wrote with Jeff. And of course, as we talk about Amazon, really the playbook of how they got big, we'll talk a lot about them reinvesting every single dollar of profit they had to plow it back in to grow the business. That is

1:36:27 of course attributable to Jeff, but is in in large part a Joy Covey invention too. I mean she was really the sort of co architect of that strategy. She spent a lot of time with Brad as he was writing The everything store. She wrote him this email right before she had the accident and tragically passed away. And Brad publishes the whole thing at the end of the book. And I'll just quote from it here. Joy's telling Brad.

1:36:50 I think about the early days and the level of clarity, vision, potential, and values that Jeff brought. And then I look at Amazon today, this is in 2013, and reflect on some conversations I have had with him in the intervening years. It is easy to draw a straight line from the vision he had back then to the Amazon of today. There were a few little wobbles and detours in places, but But really I don't know. Any other company that has created such a juggernaut that is so consistent with the original ideas of the founder.

1:37:21 It's almost like he fired an arrow. And then followed that arc. I think Jeff is one of the most capable and effective founders ever. And I think the Amazon juggernaut is still in its early. Stages. Which she would have been right about in twenty thirteen. Oh my God.

1:37:38 We're not gonna get to twenty thirteen in this episode, but that was a crazy thing to say in twenty thirteen. Amazon was a hundred and twenty billion dollar market cap company when she said that. Not many people would have said that. Amazon's just this incredible Rorschach test. There is a way to look at it where it is he shot an arrow and then follow the arrow straight. There's another way to look at it, which is They tried way more things that did not work than ones that did, but were unbelievable at learning from the mistakes and quickly following them. The only thing that Amazon launched that had perfect product market fit right away. Was Amazon.com. Was Amazon.com was the original idea. And then everything else was a brute force algorithm for finding your way through a maze where it's just like try this pathway. Oh, crap, nope, back up, back up, back up, back up, refine, turn. Amazon brute forced their way to success a lot in just finding out where all the doors were by trying all of them. Yep.

1:38:35 There's them. Great way to put it. It is worth highlighting this period of time, this 94 to 97, this pre-going public time, even though they had the impramatur, as you put it, David, of Kleiner Perkins, and even though they were located in Seattle near Microsoft, and even though they had this product market fit and unbelievable 15x year over year growth. in revenue dollars. Not like usage, revenue. And customer retention was increasing. Like every single metric of the business is like, Oh my God, oh my God. Oh my God.

1:39:05 The internet is going crazy and A bookstore actually doesn't look like an interesting thing on the internet to most engineers. So they actually had a recruiting problem where talented engineers who were like, Oh my God, this is a really interesting. Next generation. technology that I want to build on.

1:39:25 are much more interested in working at other companies who are building web applications, things like search engines, even things like you mentioned eBay that we'll get to here in a second. Yeah. That's a much in many ways a much harder computational problem of building a good experience and backend system for facilitating a real time auction. Marketplace. Yeah. And countdowns. And the online bookstore thing seems kinda boring. And so it's Remarkably hard for them to recruit. There are a couple great Eric Schmidt.

1:39:57 quotes in the everything store. Mm-hmm. Eric Schmidt, of course, former CO of Google. This is so great. And they're like so like begrudging backhanded compliments to Amazon and Jeff. But one of them is talking about AWS. Uh

1:40:11 The book guys figured out computer science. And then of course, like we're telling the story, like do you have freaking new computer science, you know, back in the Oh, when he was fighting that narrative from day one, he wanted it to be a technology company, everyone was like you're a retailer and even one click down, you're a book retailer. He's like, We are a technology company. And he sort of like willed them being a technology company into existence. And I don't think anybody now is like, oh, they're a retailer or they're a any specific category of retailer. They're like Yeah, they're a dominant technology firm. Yeah. Now he probably wishes that people were like, Oh, don't worry about Amazon, you know? Okay, back to the story.

1:40:47 So Joy joins right at the end of ninety six, right after the Kleiner round. And Jeff definitely'cause he wanted to do it and you know is consistent with get big fast. Maybe it was also sort of like this test for his new high potential CFO, like I'm gonna see what she's really made of. He's like Or you can go public. No. No. You know, Tom talked about this too in our interview with him.

1:41:12 Part of it was the capital markets were opened. The revenue growth was insane. Like the dot com Mania is just starting to heat up. Strengt leads to strength, all of that. Jeff also thought

1:41:24 that it would be a great marketing event for the company. And like he was totally right. You know, the amount of coverage they got in mainstream media, they went from even though John Dore had joined the board. The average person didn't give a crap about John Door or Venture Capital or Startups. It was not like today, John Door was a legend. In Silicon Valley, but that was a very small place. millions of people of all types all over the country and the world. Yep. And it turned out they did

1:41:53 Get something right in this notion of like long tail books. There's very few people who want one particular book in the long tail. But most people want something in the long tail. And so their product market fit sort of originally came from we can get you special order books quickly and easily, and your user experience in buying them will be basically the same as buying in a Harry Potter book and a bestseller. And this gets sort of alluded to in the Everything Store and A function of Amazon.com that was appealing to mainstream America was

1:42:24 buying stuff that you wouldn't necessarily want to walk into a store and order yourself in person from your neighbors. Like every new technology. Like every new technology. Let's just leave it at that. Yes. And the other thing to point out about them identify books is there's this seminal Wall Street Journal piece about the company in nineteen ninety six that drives a lot of traffic. It's like the Yahoo event on steroids. And they have this really interesting stat, which is in nineteen ninety five, the web attracted more than one hundred thousand Retailers. Which I would not have guessed that happened until like Shopify, but apparently that happened in nineteen ninety five.

1:43:01 With some spending more than a million dollars each on eye popping sites, yet worldwide retail sales on the web amounted to just three hundred and twenty four million last year, which averages out to slightly more than three thousand in sales per retailer. Ho ho ho ho. So Amazon nailed A category and an operational model. where they were able to be like the one dominant

1:43:26 E commerce site and you know, this predates pets.com, this predates cosmo dot com. eBay. They were Almost the earliest. They were of the first wave and just nailed it on a bunch of vectors where there's this great quote from Jane Slade, there were no grown-ups that could help us. Mm. Every time they would bring in a vendor for like customer service software or database software or anything, the implementation reps would just look at all the numbers and be like, what?

1:43:53 our software actually can't help you. And so they had to build a lot of this stuff in house because they were basically the only successful big retailer of this scale using the internet. Yeah. Well, Like we learned on the Walmart episode, if the infrastructure off the shelf for what you need to do to make your beer doesn't exist. If you want to make your beer taste better, you gotta build your own infrastructure.

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1:46:04 That Ben and David sent you. Okay, so Joy joins. At the end of nineteen ninety six. Jeff Slake. We can go public now.

1:46:12 So spring of nineteen ninety seven. They file to go public. With Lead Underwriters, not Goldman Sachs.

1:46:21 Not Morgan Stanley. Deutsche Bank. And some might say it's Uber bankers. Frank.

1:46:29 Quatrone. And Bill. Girly. Yes. Leading the IPO. So cool. And we asked Tom on the Amazon IPO.

1:46:38 Episode that we did. Why did Jeff on Amazon choose Deutsche Bank over The gold plated, you know, never get fired for choosing Goldman Sachs or Morgan Stanley. And Tom's answer was

1:46:50 Well if you knew. Quatron and girly. You would know that the answer is quadrant and girly. Yes, and of course Frank Quatron has gone on to do bunch of very impressive deals at Catalyst and Bill Gurly became future Bill Gurley.

1:47:03 So Yes, but this is in his banking career. Now When they filed to go public. But before they actually do go public.

1:47:13 Just like Jeff was envisioning, this attracts A lot of attention. And that's mostly A good thing. He's correct on the marketing exercise. This is a big way to legitimize them to consumers. It enables many more people to feel comfortable typing their credit card on the internet, things like that.

1:47:29 Everything like that. And also this other thing ultimately is a good thing too. Not at the time. It attracts the attention. The Ridio brothers. Who are the yeah? Founders and CEO and chairman. Separately CEO and chairman.

1:47:44 of Barnes and Noble. You know, they knew about Amazon, but they're like, Whatever, you know, Amazon Internet, like you know, we don't need to worry about that. Well all of a sudden This little company in Seattle is filed to go public. And is claiming to be Earth's largest bookstore. Yeah, they're like

1:48:01 That doesn't sound right to us. I just think of like borders. Like, yeah, Born to Noble is great, but borders was the big thing, but now we know from the Walmart episode Borders was out of the game. Kmart had acquired them and The founders had moved on, Louis Border had moved on. To start Web Van To start web van. So great. So great. Isn't that crazy?

1:48:22 Barnes and Noble. was the juggernaut. No. The Ridio Brothers. When Amazon files for an IPO.

1:48:29 They fly out to Seattle. And they Schedule a dinner. With Jeff. Jeff brings along.

1:48:36 Tom. Because Tom in addition to being just wonderful human, great advice. mentor to both of us. He was a lawyer earlier in his career. He was like a very high profile corporate lawyer. So he's got the right set of skills to Bring to this dinner. Yes. So The Ridio Brothers.

1:48:52 Their father. Was a New York City cab driver. And a semi professional boxer who twice defeated Rocky Graziano. Len, the kind of lead of the two of them, I think the older brother, he technically did go to NYU, but like let's just say uh They went to the University of Hard Knox.

1:49:12 Their way of doing business is Very different. Hm. Also We gotta talk about this. I I don't think you have any idea.

1:49:21 Do you know? Just like We talked about last episode about the whole crazy, you know. Borders, Kmart, web van Kiva came out of WebVAN, which of course Amazon acquired and is Kiva Robotics.

1:49:34 Yep. Incredible history. Do you know? With the Rudio Brothers spun out of Barnes and Noble. I'm not talking about the nook. Or Barnes and Noble dot com.

1:49:45 You're never gonna guess this. No. It actually makes sense. GameStop. No way, really? I'm dead serious. So okay. It was actually software, et cetera. I gotta look at the stock price of both of these. GameStop is the merger of software, et cetera, which spun out of Barnes and Noble, and Babbage's software. Remember Babbage's?

1:50:07 Back in the day. Mr. Sounds vaguely familiar. They were like a video game and computer software retailer. Yeah. GameStop. Freaking GameStop. Oh my god. Okay, what do you think Barnes and Noble Education Inc. Is

1:50:23 From a market cap perspective today. Off. Maybe five hundred million? One hundred and forty three million. Okay. What's GameStop today?

1:50:35 Ten point three billion. Yeah. Boom. purely from an intrinsic value model that I have here in front of me. Stonks, baby. I assume Barnes and Noble Education Inc. is Barnes and Noble. the big company, B N E D is their ticker. I think there might have been a bankruptcy in there. I'm not sure. Yeah, that makes sense. I don't think you end up

1:50:57 cratering this far without some kind of recapitalization or something happening. Well, speaking of Barnes and Noble cratering, this dinner didn't help. So uh these two like, you know, tough New York guys, they're like, Where are you coming? This nerd out in Seattle. Goal is noor episode with Tom. His personality is not blustery, you know, brash New Yorker, you know, like I'm sure the Regios came to this dinner and they were just like We're gonna freaking crush these geeks. Oh boy did they not.

1:51:30 So they go home after the dinner. And the dinner was sort of like a soft we wanna buy you or was the dinner a soft we're gonna run you out of business? It was both. Yeah.

1:51:40 It was Hey, we've heard about you. You know we're burns and noble, right? And You know, we've been thinking about doing the internet. We're gonna do it.

1:51:50 We could buy you and you could be our internet thing. Or we could crush you. I think that's how the dinner went. And by the way, the nineteen ninety six Wall Street Journal piece that did wake the world up to this was titled Wall Street Wiz Finds Niche Selling Books on the Internet. Mm-hmm.

1:52:07 I always think back on the Wall Street whiz for Jeff Bezos. Well and actually. What the Rizzo brothers are saying. This is what everybody thinks. So w when Amazon does go public It's not a great IPO. They Price

1:52:20 On May fifteenth. Nineteen ninety seven. They raise$54 million at a$438 million market cap. And then they trade down. On Day one.

1:52:30 It was like seventeen dollars a share that they went public at and then I think They trade down on day one, but uh they would eventually trade all the way down to like five bucks a share in the dot com bust. Well, it would rocket back up. They went through the wave and then the fault. Yes. But The

1:52:46 Head of Forester Research, you know the big research firm. They write a note. About Amazon in the industry. Called Amazon dot toast. They title it Amazon dot toast. And it's not cause of eBay. It's not cause of blah blah blah. It's not cause of the dot com crash. It's because they think Barnes and Novel's gonna kill them. Oh boy.

1:53:05 So what are the Rizzio brothers doing? They go back home. To New York. And they do two things. One They Launch a new project.

1:53:14 New, you know, initiative. Within the company. with the code name Book Predator. In case there was any confusion. In case there's any confusion about what the intent of this is, and that they're gonna kill Amazon with the new Barnesand Noble dot com. The other thing they do is

1:53:32 Sue Amazon. And they conveniently For them or inconveniently for Amazon, announced the lawsuit three days before the IPO. Prices. Brutal. Hence the Amazon dot toast. Memo.

1:53:44 And they sued them for, Ben, what you said of Amazon claiming to have Earth's largest selection of books. And I think the suit is like, Well, you don't have a store, you can't go select the books. That's so pedantic and annoying. So Like I said, the IPO happens, it's not great, the stock trades off. But

1:54:01 Couple weeks later. Amazon does their first quarterly financial reporting as a public company. They report Q two Nineteen ninety seven earnings. of twenty eight million dollars. Remember, they only did 15.7 the whole year before.

1:54:15 They did twenty eight million that quarter. Unbelievable. So uh Wall Street reverses course, the stock takes off. For the full year of 1997, they do just a hair under 150. million dollars in revenue. So that's ten X.

1:54:29 The year before. Oh my God. 10Xing on that kind of base. Especially right when you're going public. I mean, this is the stuff that makes investors go nuts. You can see how this very quickly becomes a darling stock. Now when I said

1:54:45 Yeah. Barnes and Noble was gonna launch Predator and beat Amazon. I was like, Okay. What do I mean by okay? This starts a pattern. It would be hubris of Jeff and Joy and McKenzie and everybody and Shell at Amazon to just say okay and not do anything about it, but this is Amazon. And they know This is a problem. They know they can beat them, but they have to go beat them and they know what the path is.

1:55:08 Jeff. Made in America. Is like his Bible. Yes. He knows the Walmart story. By the way, listeners, we weren't gonna do the Walmart. story, we actually were gonna do this as the first episode of the season, and we got into researching Amazon and realized how much

1:55:25 Jeff respected and borrowed from the Walmart strategy and where like I guess we gotta tell that story first. There are a couple moments coming up where he interacts with Walmart and he brings along his Copy his like scrawled in notes and marked up and dog eared copy of Made in America to like show These people who we're gonna talk about they're like No, like I Sam is my hero. I'm not just some geek. I understand what we're doing here. Yeah.

1:55:50 And so Jeff, because of this, because he's read Made in America He knows. That he can beat Barnes and Noble. But the way to do it Is through.

1:55:59 Distribution. By building native distribution logistics supply chain for e commerce, not for physical stores. And it is different enough that just like Walmart could build native Distribution. for their network of Walmart super centers. And that was very different than the Kmart coming out of Kresge distribution that they were piggybacking off of.

1:56:23 Jeff's like, we can do the same thing here, but we have to do it. And I know we need to do it, but I can't really do it. But I know some people who can. So

1:56:34 In early ninety seven. He enjoy together. I think according to Brad, it was very much a joint effort of both of them. Probably John Door was involved too. They start traveling. Debentonville. On recruiting trips.

1:56:47 Canvas and poach. Canvas and poach. And they They zero in. On a target. Rick Dalzell. Their number one draft pick. Rick.

1:56:58 Dalsell. And I think they had been courting him before the IPO, but he didn't end up joining until after. Yes. It was like a year long recruitment process. to get Rick to join. And at one point he actually commits to joining and then backs out. And he was really conflicted about this. He I mean he's super plugged in in the Bentonville community. He's an important part of Walmart. Not only was he deeply embedded in

1:57:20 Okay. Yeah. So Rick was Technically. The number two person.

1:57:26 In I T. At Walmart. And as we talked about last episode. You naively might hear that sentence and be like number two person in IT at Walmart, like Who's that? No. Walmart.

1:57:37 Was it Amazing technology company and especially distribution supply chain logistics. They're the best in the world. At this point they had been the largest computerized logistics

1:57:49 a distribution company in the world and operated their own private satellite network to communicate amongst all their stores and had been doing that for a dozen years. A very impressive backend technology. They were the first Big. corporation in America to adopt technology and say That is going to be like the heart of What we do.

1:58:09 And Rick was the lieutenant who implemented it all. He was the hands on guy doing it. So Jeff and Joy and John and the board, these early like If we can get this guy. He's the key. So They go through this year long recruitment process. Like I said At one point they convince Rick to join and then he calls him back and is like no, I'm not gonna do it. He calls them back

1:58:30 Because Lee Scott, Walmart CEO, the third CEO of Walmart in history Takes Rick aside when he hears this and he's like, Rick? You've got a future here. You could be A future CEO.

1:58:44 of Walmart. You're making a big mistake. A he says you're making a big mistake. And B he says which he's totally right on. He's like look We've studied these Amazon guys. Walmart is no Barnes and Noble. They know what's going on. He's like, We know how they're doing distribution over there. They're gonna hit a brick wall. when they get to any kind of scale, which clearly they're gonna get to this year, it's gonna all fall apart over there. You know that. You know how this works.

1:59:11 you would be committing career suicide. If you go take this job. Which that was the risk. I mean Pf.

1:59:18 Paid off. in a huge, huge way, largely because Rick was very successful at doing what needed to be done. But that is for sure the risk of making the jump. Eventually. Amazon.

1:59:30 Jeff and Joy and everybody. They convince Rick to make the jump. And so right before the IPO in early ninety seven, he joins And Jeff knows they're gonna win at this point. So Brad writes in the Everything Story. Bezos had predicted

1:59:45 that Barnes and Noble would have trouble seriously competing online. And in the end, he was right. The Regios were reluctant to lose money on a relatively small part of their business and didn't want to put their most resourceful employees behind an effort that would siphon sales away from the more profitable stores. On top of that. Their company's distribution operation was well entrenched and geared towards servicing physical stores by sending out large shipments of books to a certain number of locations. The shift from that to mailing small orders to individual customers was long, painful, and full of customer service errors. For Amazon.

2:00:22 That was just daily business. Hm. There we go. So Rick. He alone joining is like Cute. He also airlifts about a dozen executives out of to come join him. So when he finally does officially accept the offer.

2:00:37 Walmart's like, you're dead to us. And so he gets escorted out of his office by security, the whole thing, which In retrospect was a mistake by Walmart because that just makes Everybody more curious inside Walmart like dang Rick. He could have been CEO of this place and he just went to go be head of IT at This company and see I better go find out what they're doing. Like I wanna follow Rick. And at this point, Amazon is well underway from transforming up a culture of misfits and geeks who want to be able to ship rare books online to like MBA City. This is where they're getting experienced executives.

2:01:11 They're really turning on the recruiting engine from top business schools. And Walmart. And Walmart. There's sort of two different ways to look at Amazon. And I think on this show we focus a lot on the sort of business side of it, where there's the unbelievable cash flow dynamic that we'll talk about. There's the whole get the investors you ask for, there's the constant reinvesting in growth, but up to this point,

2:01:35 You know, when you listen to these interviews with Shell Capan or reading all the stories on Greg Linden's blog, who is an early engineer, or all the interviews Glenn Fleischman has given It really is about adapting technologies that were not really ready yet. being the first and biggest and being with misfits on the internet. There was a big exiting of the sort of ninety-four to ninety-seven crowd in ninety-eight and ninety-nine as Dalzell and his people and all the MBAs sort of come in to say, okay It's working and it's not just about

2:02:08 This quest for odd books. Yeah. I actually would put Dalzell on the Walmart crew. I think there are three key categories of people that were necessary for Amazon to succeed. They were the technologists.

2:02:24 shell in the early days and the freaks and geeks, but then that evolved into a world class technology organization over time. There were the MBAs that we're gonna talk about in a minute. The Andy Dassies, the Jason Kylars, the Harrison Millers, the Jeff Blackburns. And then there were the Walmart people. The Rick Dalzell, Jeff Wilkie didn't come from Walmart, but he's very much cut from that cloth. The backend retail Logistics distribution people. And you really need a world class. All three of those to make this work.

2:02:54 Yeah. So on the distribution and supply chain. front more than a dozen Walmart executives come over to Amazon. In late nineteen ninety eight, Walmart sues Amazon for trying to steal trade secrets. The case settles with no damages, but there was damage. It happened. That DNA came right out of Walmart and right into Amazon.

2:03:15 Yep. And to be fair, like we said. It's a different thing. than the Walmart supply chain that they're building. It's the Amazon supply chain.

2:03:23 Which They didn't realize enough of at first. There was all sorts of false starts in Amazon getting good at distribution because Even though they knew better, they sort of were copying the Walmart playbook and they were doing the classic Amazon thing. They were brute forcing their way through the maze, learning from mistakes, backing up, turning left, and going the other direction, but they needed to go bump into that wall to do it. Yep. So When Dalzell comes over and all the Walmart folks,

2:03:51 They had the warehouse in Seattle and They say like no no no you don't want a warehouse, you want a distribution center'cause a distribution center, that's The Walmart model that's Walmart with the first distribution centers, like you want something more sophisticated. So they go in 1998 from the one warehouse in Seattle. to six distribution centers, the Seattle Warehouse becomes one. Delaware, Nevada, Georgia, two in Kentucky. You notice they're going to all these states that are like close to big population states, but not in the states.

2:04:18 Yes. But then it actually was Wilkie later. Who said. No, we don't want distribution centers. We want fulfillment centers. And so that's what Amazon is today. And there is a fundamental difference of we're not distributing A bunch of goods to stores. We are fulfilling

2:04:34 And customer orders. To end customers. every single one uniquely and we need to optimize them to Make Every single order happened for the very first time it's ever happened. Totally. In a sort of unpredictable way. I mean predictable and mass, but not on an individual level.

2:04:51 For years and years nobody realized this, but what Amazon's building up on this side of the business. Is an enormous, if not the largest, part of their moat. Today Amazon has a hundred and eighty five fulfillment centers around the world. They have ninety-six airplanes on their own.

2:05:11 Airline. They have a maritime company. They have two hundred thousand delivery vans. They've got another hundred thousand electric delivery vans on order. I mean the company employs one point six million people, most of which do this. Yes. And

2:05:26 Here's the moat. From the viewpoint of the customer. All that is free. Jeff obviously wasn't envisioning that specifically, but like this is why they're gonna be Barnes and Noble, and this is why they're gonna be DBay and

2:05:39 This is eventually why they're gonna beat Walmart in E commerce. Yeah. Well tell us. About

2:05:47 Ebay. If you were to pitch me on both of these businesses and put on my venture capitalist hat and you told me that I could take this really asset heavy inventory business with an unbelievable amount of capex that needs to be built out with all these fulfillment centers with Amazon. Or I could run the high gross margin asset light business of eBay

2:06:09 Ninety nine times out of a hundred I'd want to invest in eBay. But Amazon. dominated eBay. So well how'd that play out? So

2:06:17 And the competition with eBay. The Barnes and Noble thing. Yeah, that was the first battle that Amazon wins, but it was obvious they were gonna win that. EBay, like this is a real fight. So At first They're different. eBay is auctions, it's beanie babies, it's Pez dispensers, which by the way, that whole legend of Pierre started eBay so his wife could collect Pez dispensers. That was a Pierre person made that up to humanize the story. That's not what happened. Auction web, not eBay.

2:06:46 So as all This is happening. You mentioned the MBAs. Jeff and Amazon start hiring Andy Jassy, Jason Kylar, Victoria Pickett, Harrison Miller, Jeff Blackburn, blah, blah, blah. All these people who are coming in, all these MBAs, they're all tasked with adding a new category to Amazon. Music and C Ds. That's what Jassy does. Kyler does DVDs, Victoria does box software, Harrison Miller does toys, Chris Payne does electronics, Jeff Blackburn.

2:07:12 leads B D and starts buying all these other internet companies. So pretty quickly, Amazon and eBay They're competing Much more head to head. Then

2:07:23 People originally thought. So eBay. Started as AuctionWeb in nineteen ninety five by Pierre Omidiar. Didn't turn into like a real Venture back company and change its name to eBay.

2:07:35 Until nineteen ninety seven, after Amazon was Already. Public. And then of course famously. Benchmark invests. Six point seven million.

2:07:44 And eBay. In the fall of nineteen ninety seven. Producing one of the greatest venture investments of all time. So that was Fall of ninety seven. I think they own like twenty five percent or something of you know fair assumption.

2:07:56 We'll go tell that whole history. Soon. But eBay goes public in September. of nineteen ninety eight. At a two billion dollar market cap. I mean, eBay was the winner. At this point in time, everyone just looked at it and was like, Oh, that's the best dot com business. And

2:08:13 Also think about that. Series A in ninety seven raising seven million dollars. two billion dollar market cap IPO in ninety eight. Yes. Come on. I remember thinking how insane it was when Snap went public after what was it, four years? Four years, yeah. This was an all time insane moment with eBay going public and Mania at an all time high. Oh they're legendary stories of administrative assistance at benchmark retiring. The little piece of the carry of the one investment in yeah. The market cap didn't stop it.

2:08:45 Two billion went. eBay went public. By the next year in nineteen ninety nine. They had a twenty five Billion dollar.

2:08:52 Market cap. That's a big company by today's standards and we have trillion dollar companies now. And it's effectively four years from Auction Web, but it's two years. From eBay. That's impressive.

2:09:03 Yeah. As All this is happening. In the summer. Of nineteen ninety eight.

2:09:10 Right before The EBay IPO but as Amazon and eBay are more like Wait a minute, we're kinda going in the same direction here. Meg Whitman.

2:09:21 And Pierre. Fly up to Seattle. Meg Whitman of Disney Strat Planning Fame. Disney. High margin media company.

2:09:30 Keep all this in mind. That's the DNA of Of Meg. They fly up to Seattle to meet with Bezos and Blackbird. Remember, Amazon's the public company at this point. Ebay's still this little startup that had raised the series A from benchmark. They're hot, but you know, they're still startup. Jeff and Jeff. take them on a tour of the Seattle Fulfillment Center. And Pierre's like, he's such a like engineer. He's like, Oh, this is super cool. You know, then they sit down to meet the two Jeffs make a kind of maybe not quite like the Barnes and Noble dinner, but they make a sort of oblique reference of, Well, maybe Amazon should

2:10:02 Acquire you. Supposedly, according to Brad, they sort of float like a six hundred million dollar number if such a thing were to Happen. Hm. So Meg and Pierre get back to Silicon Valley and supposedly.

2:10:15 According to Brad. Pierre's like wow. That was really cool. Man, that fulfillment center. They're building something very differentiated. Maybe we should think about that. And Meg supposedly uh says, I think this is from an interview with Pierre in the book. Meg says, Pierre, this is not a direct quote, I'm paraphrasing. Peter, warehouses are not Cool. We never want to operate.

2:10:36 Warehouses. You know what is cool? High margin Internet businesses. That's cool. You don't want to be mucking around with warehouses. Well, and this is the very, very, very starkest illustration of What's the best business model over the next few years? And what's the best business to be in long term.

2:10:59 Well the best business to be in long term period. Is delighting your customers more than they ever imagined. And the best business to be in, certainly for the next few years, maybe even the next decade, if you're eBay is a high margin true internet business.

2:11:14 But Bezos is thinking in decades. And he's thinking How are we possibly gonna be the best place to buy something on the internet a decade from now, unless it's extremely reliable shipping times, very short shipping times. We have it in stock, they're buying it from a vendor that they trust that is secure. All these things sort of require us to either be the merchant or at least be the ones who fulfill it and keep it in a distribution center or a fulfillment center. So They're both right on different timeframes. And my favorite

2:11:49 Yeah. is and this I think comes from that very first interview that I referenced earlier. I mean I've watched Every interview Bezos is given in prep for this, but that one has all the highlights in like three to four minutes, and you know, he's still got hair. So long term there is never any misalignment between customer interest and shareholder interest. So true. And that's such a dramatic statement because I think

2:12:14 A lot of people would argue with that. And he's thinking on an infinite time frame. What happens after this meeting? With Megan Pierre. I think really illustrates.

2:12:25 Just how special. Jeff. And Amazon as a company. Or Because He makes a mental and emotional leap that I I don't know many people could have made.

2:12:38 He both believes everything you just said. I've Red Made in America. I'm building out this advantage. It's gonna be my mode. I'm gonna delete customers. This is the way. And desperately wants to beat eBay at auctions. Well Desperately wants to beat eBay, but he's like And

2:12:53 eBay is also right. And this starts a journey, but Amazon today is that Amazing backend distribution, like we were just saying, you can get stuff from Amazon faster and better and cheaper than just about anywhere else on the internet. And certainly in aggregate

2:13:11 Of everything you can buy, Amazon is head and shoulders above anybody else. And You can buy from other people who are not Amazon.com on Amazon. And that is all thanks to that. Meeting. Yeah, I mean

2:13:24 This is again Amazon having to run into a wall, back up, try it again. So obviously they don't buy eBay. Obviously they naturally do have to do the next thing, which is even though Amazon is focused on the customer, they're also focused on their competition. Of course they are. Jeff has all these quotes about how the customers I think this is in the ninety eight letter, maybe the ninety nine let letter. We believe that our customers are very loyal. Up until the moment that there is a better way for them to solve their problems than buying from us. And so that's off the top of my head. It's not exact, but it's close.

2:13:56 And I think His realization is Okay, if eBay's grown really fast and there's a way to get something rarer or cheaper or something, we kinda have to be in business doing that too. So this is Amazon's first very expensive failed experiment with Amazon auctions. So after the meeting.

2:14:18 Jeff Bezos turns to Jeff Blackburn is like Auctions could be the future. We're gonna start a secret project to clone eBay within Amazon. It's almost like the book Predator with uh Barnes and Noble, except they're actually competent. And it's not like we're gonna like learn from eBay and apply it to our business, go for a different segment than eBay or like do auctions differently. We're gonna go directly at a eBay doing exactly what they're doing. Yes. Now. Make sense why this would be secret. It's also secret because Scott Cook, the founder of Intuit

2:14:45 Is on the board of both companies. So Amazon starts working on Amazon auctions. Literally. Exact clone of eBay. Now eBay Did not have

2:14:57 PayPal at this point in time. So paying on eBay was this huge source of friction and a huge advantage for Amazon. Amazon has your credit card, you know, blah, blah, blah. Amazon finds out that. Of course. Megan Pierre, they're not dumb at eBay. They know this is a problem. They're talking to startups about acquiring startups that could, you know, solve payments on eBay. Now, this is summer nineteen ninety-eight. There's no PayPal yet. Confinity, the first kind of you know, Kinenex.com. They didn't even get started until the end of ninety eight, like early ninety nine. Wow. Ebay is talking to a startup called accept.com.

2:15:31 And wants to acquire them to handle payments on eBay. Baso swoops in. And Amazon steals the deal. And acquires accept dot com. Mostly so that

2:15:42 Ebay doesn't get it. And they just went public, you know, Amazon's got all this cash from that. So they're feeling themselves and feeling like they can do stuff like this. Yeah, eBay can't do this yet. You know, Amazon's got highly valued liquid stock, all this cash, blah, blah, blah. If that had gone otherwise. I don't know about PayPal. Like there's probably no PayPal.

2:16:00 There might not be a PayPal mafia. Yeah, great point. Man, Silicon Valley like Totally. Turns on a knife point at this moment in time. Okay, so March ninety nine. Amazon launches, Amazon auctions.

2:16:12 clones eBay, competes with eBay and Shocker, you haven't heard of Amazon auctions. It's Flop. So here's an interesting comment on it. So Greg Linden writes on his blog, again, this early engineer who worked on personalization and auctions, a bunch of other stuff. So when the site launched, it was technically superior to eBay's faster, better search, and several new useful features. The inventory was reasonable, but not large. This is one of those things where

2:16:36 The flywheels was just already in motion. When you have the network effect of more buyers attracting more sellers and more sellers attracting more buyers like eBay had and they were a couple of years ahead, it was just already in full swing. And even if you have a more technically superior Interface. And the advantage of traffic on Amazon.com that they could send there. Like it it didn't matter. Yep. They didn't have the network effect. And Amazon wasn't really prioritizing it. So you go to a product detail page on Amazon. They had invented this pretty amazing thing that really pissed off all the booksellers, which was when you look at a product detail page, you could buy new and used.

2:17:11 They're like a same book. So we'll put'em both right there. And of course that pisses off the book publishers because they're like, Wait, our whole thing is that you want to go buy the new book and you can't buy a used one right next to the new one. The the used books are in this other distribution channel and Amazon's like We don't care. The customer can choose which they want from one singular unified product detail page, which flash way forward to market third party sellers. It's the same thing today. You're competing as a third party seller to be the one that gets the traffic from the product detail page when people click the buy button. So They weren't doing that with Amazon auctions yet. No, it was a separate tab, separate site.

2:17:50 auctions.Amazon.com. It was not getting Amazon's traffic. Yeah. Didn't have a network effect. Another reason people like eBay, man, they just Totally shrugged off Amazon as a competition. Beautiful business model. So their market cap continued to go nuts. Yep. Now

2:18:07 Jeff, so the acquired am accept dot com to keep it out of the hands of eBay. But they go start acquiring like a lot of companies. A lot of startups in this era. Partially, I think, to keep them from eBay and other people, partially'cause I don't know, everybody was drunk back then. And they were investing in a bunch of them as kind of hedges. They looked at pets.com and they thought, Oh, we're not gonna get into shipping dog food for a while. In fact, I think they had tried to ship some cat litter at the same shipping rates as everything else, and it was super expensive. That's an example that's referred to very often by early Amazon employees as sort of a failed distribution. Totally mispricing thing. But yeah, they sunk a bunch of money into pets.com, Cosmo. I think they owned like three percent of it or something at some point.

2:18:50 Totally. So The craziest of all of these acquisitions. Just from the story. is a company called Jungly.

2:18:59 Yes, which was referenced on the Walmart episode. Indeed. We're not gonna talk about what Jungly actually did. It was a comparison shopping site started by three Stanford computer science PhDs and a business guy from Netscape. What it was doesn't matter. That business guy from Netscape. His name was Ram Shri Ram. That might sound familiar to some folks. But probably not to most people.

2:19:19 So Amazon acquires this company for like I don't know, hundred and fifty, hundred and seventy five million dollars, something like that. They're in Palo Alto. But

2:19:28 Amazon's like, you can't work there anymore. We can't have a tax nexus in California. Remember, this is still in those days, you gotta move up to Seattle. So The jungly team like, all right, well, you just gave us a bunch of money. Okay, we'll move up to Seattle. They hate it. The acquisition doesn't work out. It's ill conceived from the get go. Within a few months they all quit and they move back to

2:19:47 Hello Alto. Which by the way, then they would go on to ultimately start the thing that would be acquired by Walmart, which became Walmart Labs, which became probably the second biggest reason that Walmart is a very real competitor in e commerce now, second only to Jet and Mark Lori. So They're back in Palo Alto. Rom?

2:20:07 The business guy from Netscape. I assume through his co founders, the Stanford C S PhDs. He gets hooked up. With Two other.

2:20:16 Stanford. Computer science. PhDs. Two guys named Larry Page and Sergey Brent. Mm-hmm.

2:20:22 Jungly gotten acquired, they made all this money, you know, and Sergey and Larry are like oh. We want to raise a little money for this thing that we're doing. Also, how crazy is it that we're nearly three hours into the story of Amazon? Amazon's already public. Yes. And we're talking about Larry and Sarah Gay.

2:20:40 at Stanford before Google's founded. So Like Sure, you guys seem promising. This whole back rub page rank thing. I get it. It's got potential.

2:20:51 Great. He and Mess. The first. Two hundred fifty thousand dollars. In Google. And he joins the board.

2:20:57 Of Google. Now a couple months go by. About six months, to be exact. Jeff and Rom kinda stay in touch and even though they left Amazon, they're friendly. Yeah. Jeff hears about. Google.

2:21:09 calls up Rom and he's like, Hey. I wanna come meet these guys. And Rom's like sure. Come on down to Silicon Valley. I'll host you all at my house. And was Jeff interested in search yet? Amazon got obsessed with search in that sort of A9 era of two thousand four. Do they have any seeds yet? I think this leads to that. Okay.

2:21:26 So Jeff and McKenzie. Fly down to Silicon Valley. They all go over to Ram's house. They have a big, you know, nice breakfast.

2:21:36 A lot of back slapping, Rom, Larry, Sergey, Jeff, McKenzie. After the breakfast. Larry and Sarge leave. Jeff takes Ram aside and he's like, Hey I want to put some money in these guys too. And Rom's like, dude, the seed closed six months ago, and like Kleiners, Sequoia, like they're circling about doing a series A, like Jeff's like, I don't care. Just like

2:21:56 I'm Jeff Bezos. Yes. That means nothing to me. I won in. And I want in on the same terms as you. Yeah. So Rom goes to bath for him, and he convinces Larry and Sergey to take another

2:22:12 two hundred and fifty thousand dollars of Jeff and McKenzie's personal money. At The seed. Price. Which was I couldn't figure out what it was, but the series A that would happen shortly thereafter of Google famously split between

2:22:28 John Dora Kleiner and Mike Moritz at Sequoia. was at a hundred million dollar post money valuation, which was insane for the Point in time. And Mike Moritz came in and told Doug Leone, as Doug told it on our interview with him. Even after making this investment, he's looking at Google and goes,

2:22:44 We've never paid so much for so little. Yes. Oh, I got that episode with Doug. Uh. Amazing. What a highlight.

2:22:52 Okay, so that's down at a hundred. So we can say like I'm gonna guess somewhere. Twenty million, twenty five. Oh no. I mean Rom led this. Ten? My best guess is ten or maybe even lower. post. So you think Rom got like a ten to twenty X from the series A? I think so. I don't know. Rom and Jeff.

2:23:10 We should say. And McKenzie. I think it is probably safe to say that Jeff and McKenzie owned at least one percent of Google. Personally. Probably even after dilution from the series A'cause they didn't raise another venture around. That's right. Google went public just on that series A. They did.

2:23:28 Google, one of the most immediately cash generative businesses of all time. My God. Well, they had to, you know, walk in the woods before they found the paid search business model and you know, all that. But like Oh my God. So Jeff has never commented, he's been asked, he's never commented on

2:23:43 Whether or not he and McKenzie Sold. Their Google Shares. But they wouldn't have even had a chance to sell before the IPO. So at a minimum he held to the IPO.

2:23:54 Like one plus percent of Google. probably held longer than that. Like I don't know. That's how Jeff and McKenzie got wealthy. So in two thousand and four, Google IPO'd for twenty three billion dollar market cap. Yep. So their shares would have been worth two hundred and thirty. Yeah. Million dollars. Quarter billion.

2:24:14 At IPO. Which was eighteen years ago. And since then, over the last eighteen years, Google has sixty five X from there. That was me laughing there, but you listeners, you should just imagine Jeff Bezos laughing there. Ha ha ha.

2:24:32 Yes. Mm. Oh man. So Yes, even if Bezos wasn't selling any Amazon shares for a while, he had plenty of capital to work with for doing things like investing in craol. Clocks and rocket companies and

2:24:48 Venture funds. Yeah. Benchmark. PSL. Which also I don't think it was the eBay fund. It couldn't have been the ebay fund, but yeah, then Bezos becomes a large personal investor in Benchmark in the future, of course, the main backer of eBay so It's also incestuous. Think about it this way, too. What if Jeff still owns a percent of Google?

2:25:09 Whether Google Cloud wins or whether AWS wins Especially now that Jeff's just a board member of Amazon. Scott Cook was a board member of Amazon and eBay. What is he on like seventeen percent? Uh Amazon today, something like that. Something like that. So he's only seventeen X more incentivized for Amazon to win than Google to win. We're making up numbers here. We're sort of s we're speculating quite a bit on what price he got in and everything. And he got access because the Amazon bought a company and then they all left, but he maintained the relationship. I mean, these things life is long.

2:25:39 Amazing. I feel like there's a lesson there and the lesson is Invest in Google? I think yeah, uh that's all I can take away too.

2:25:48 Back to Amazon. Despite this. unbelievable bountiful windfall for Jeff and McKenzie personally. Things are pretty bad. At Amazon at this point in time.

2:25:59 The dot com. Euphoria is starting to Wayne. Some cracks are starting to show. Barrens in the spring of nineteen ninety nine publishes the famous Amazon.bomb Article. Amazon dot bomb.

2:26:13 There were some analysts who were still very, very excited about Amazon at this time. A Morgan Stanley analyst, with the name that some people will definitely know from her Kleiner Perkins days and now Bond days, Mary Meeker at the time, just at Morgan Stanley as an analyst, wrote right around IPO time. that Amazon is the leading retailer merchandiser on the internet. She said. The valuation gives us heartburn of gargantuant proportion, but she did conclude, we do not want to miss this one. And She was right.

2:26:46 A lot of her career at this point would come from sort of trading on the professional capital that came from being extremely right about Amazon. Totally. But That doesn't change the dot com bubble starting to show cracks and then eventually. She would be out in the cold here by herself because

2:27:06 The Amazon dot bomb. Peace comes out. Amazon reports I think either Q two or Q three earnings in nineteen ninety nine and I mean it's the same story, but like Lots of revenue growth, hugely unprofitable. We we didn't say

2:27:20 Joy. And then her success. She Worked super hard for three years, totally burned out. Her successor, Warren Jensen, took over as CFO from Delta Airlines, is where he came from. Joy first and then and then Warren too. They orchestrate raising about two billion dollars in convertible debt on the debt markets, which totally saves Amazon's skin.

2:27:40 And was way more than they raised in the IPO. Way more. They only raised fifty five million. Yeah. Sometimes people are like, Oh Amazon, what a great example of Capital Light. They raised ten million dollars in venture and fifty five in their IPO and built Amazon like no no no. There is another two billion dollars. And they used it. And they used it. Amazon would have been Amazon.toast Had it not been for

2:28:04 That's it. So summer of nineteen ninety nine, the stock starts falling. The board? gets pretty worried about the company about

2:28:13 Jeff? I mean it's hard to remember this, but Yeah. This happened. The board asks Jeff To bring in a COO. to compliment him.

2:28:22 Yeah, it's so Painful to Read this and like go back that this happened. And They bring in Bill Campbell, the coach, the legendary Bill Campbell.

2:28:33 Who we should say he's legendary, he's everyone speaks very highly of him. He was brought in to Twitter. And then worked as a Pseudo nefarious agent on behalf of the board to oust the CEO. You gotta wonder what was going on here, too. No, it's not just Twitter. Like Bill, I think probably genuinely was amazing and

2:28:53 the testimony of so many people to him, even people like Scott Cook, who he came in and replaced. So it wasn't just Twitter, Apple with Steve Jobs, Google with, you know, Eric Schmidt into it with Scott Cook. It's amazing that the thing that he got reputation for was being a coach, when in fact the thing that he Really did repeatedly It was convinced the founders to move aside and bring in the adult supervision. Yes. There's a fact pattern here, for sure. Doesn't mean he probably wasn't amazing and like didn't help all those companies and you know, but Yeah, the Amazon board brings him into

2:29:27 Amazon and simultaneously asked Jeff to go find a COO. So Supposedly actually a leading candidate for the job was Jamie Diamond. If you can believe that. That's right. Isn't that crazy? What could have been?

2:29:39 They settle on Joe. Gally. who had been an executive at Blackendecker. And he had actually s signed To go take an executive role at Pepsi.

2:29:51 Running the Frito Lay division. What other COO transition to CEO of tech company came from Pepsi? John Scully. That will be John Scully. So there's a Scully situation going on here at Amazon in nineteen ninety nine. So Bezos does take this seriously. He reorgs, he has everyone report to a Black and Decker guy to Joe.

2:30:15 And You know, he says my only direct report is now Joe. And At the same time. He's also like

2:30:24 You look, you're CO, you're not CEO. And Joe's sort of under this impression, probably from talking to Bill Campbell, we don't know for sure, and probably from talking to other board members. I think I'm supposed to do CEO type stuff. And like I'm I think I'm supposed to like be the COO for a while and then move into this role and, you know, do it my way. We're gonna do it the way that we did it. At Black and Decker.

2:30:46 And from the world where I came from. And Amazon. rejects this. So

2:30:53 Joe starts running. Amazon sort of. He starts sort of trying to get people to start moving to his way of doing things and his style of leadership. By the way, while he's commuting back to the East Coast every single weekend, rather than being on the ground in Seattle. Oh man, that would that wasn't the worst offense. The Amazon executives just reject this like a bad organ transplant. Everything you need to know. About the culture clash here. Is that Joe

2:31:23 Old school executives. Who the way he did email was he had his secretary print it out and read it to him. And then he would tell her.

2:31:38 Or to respond. Yeah. Actually, that sounds pretty awesome. I would love that. I would love to do that. You definitely would. Yes. I would do that all day long, or actually for as little time as possible, as in often as possible, as rarely as possible. But yeah, that's not gonna work running. Amazon. So Joe's out.

2:32:00 Yep. He does though. Make One Absolutely incredible. lasting contribution to Amazon, which is

2:32:09 He was a key part of recruiting. Jeff Welkie. I think Jeff and everybody was too, but that absolves a lot of sense. And for listeners unfamiliar with Jeff Wilkie, what did Jeff go on to do with the company? Jeff basically.

2:32:22 Inherited and then expanded. Rick Dalzells. roll and then eventually when Bezos. started a step back and Jassy became CEO of AWS.

2:32:34 And Bezos was CEO of the whole company. Jassy's counterpart and CEO of Amazon retail was Jeff Welkie. So he's got a little bit of a legacy at Amazon, Joe does as he parts ways. Yep. And he would go back to the

2:32:47 world he came from, he became CO of the holding company that makes Hoover and Dirt Devil vacuums. And I think Did very well there. So Probably a lot of them on Amazon over the years. Probably sold a lot of them on Amazon. Yes. Yes, indeed. Alright, so Amazon's woes, though, are real. They now have a big debate to pay based on this big convertible bond offering.

2:33:10 And nineteen ninety nine, they're still growing at what is honestly an insane pace. It's not the amount that they were growing before. I think they're about tripling revenue, which to be clear, in ninety nine is like six hundred million to one point eight billion. Unbelievably impressive. But their stock price the previous year from Ninety eight to ninety nine had ten X'd. And so expectations are through the moon for this company. It's not just solid fundamentals that we're valuing it. The way people are valuing Amazon is

2:33:40 Sure, there's no net income or gap profitability coming out today, but they're growing so fast. They appear to have category leadership. And if the internet's really gonna be the thing that we think it all is, I just want to own a piece. And so this is of course how bubbles happen. Then bubbles, of course, pop. My gosh, we wouldn't know anything about this in recent history, would we? No, not at all. So by two thousand one it's becoming clear that they gotta pull back. And so in two thousand one they lay off thirteen hundred people. And

2:34:10 This It's almost like Amazon have been so dominant for so long today that it's hard to even think about the fact that I don't know how close to death they were, but they almost Well They weren't dominant, and that feels weird.

2:34:24 saying today, remembering a time where it wasn't always succeeding. I think they were pretty close to death. So After the whole golly. Incident. Let's call it an incident. And Jeff kinda

2:34:38 Reaffirms. Hey, I do want to be CEO here. I'm putting my hands back on the wheel. He changes the motto of the company from get big fast to quote, get our house in order. I think they also had T shirts made of of that. That reminds me a lot of uh what did Facebook change from? It was move fast and break things. It was like move fast with a stable infrastructure or something like that. That was so funny. Not quite the same. No. I don't know how related it was to the whole

2:35:08 Coach Campbell galley thing or It probably was more just about the competitive dynamic, but shortly after that. I don't know which side initiated it, but One side or the other or both came to Scott Cook and were like Dude, you can't be on both of these boards anymore.

2:35:24 And tellingly Scott chooses. eBay. And there's he actually has a quote to Brad in the Everything Store He says, Up until that point I had seen Jeff only at one speed, the go go speed of grow at all costs. I had not seen him drive toward profitability and efficiency.

2:35:42 Most execs, particularly first time CEOs who get good at one thing, can only dance what they know how to dance. Frankly I didn't think he could do it. And A everything about that is telling, but like

2:35:56 The whole world thinks the same thing, too. They don't think Amazon can do this. Yeah. Death though. Yeah, I think he always believed he could do this.

2:36:05 So he announces Uh internal company goal. Then announces to the whole company, part of the get our house in order mantra. That they will be profitable.

2:36:16 By the fourth quarter of two thousand one. So They start looking at Any possible way to increase cash flow. And necessity being the mother of invention here.

2:36:28 They start looking around like okay, what do we have? What can we do? We've got a pretty good e commerce website. A lot of people want to have e commerce websites. What if we start going to Other companies. Who wanna have good e commerce websites. And we offer to sell them our

2:36:43 website like our infrastructure. Almost like being Shopify. Yeah, this is like Shopify, not AWS. And they do it in a ludicrously high touch manner. Yeah. It's not like we're just gonna open up our platform. This whole obsession with interfaces and platforms and APIs that exist with Amazon today hasn't really happened yet. No. So they're like who can we basically do weird one off partnerships with to create some sort of co-branded website for them using our technology. and all of our people to sell the stuff that they have relationships with manufacturers on. And customers and uh

2:37:20 And that we can then just get paid like a software. V four. Yes. So they do this with Toys R Us. And then they do it with Borders. I remember the Borders branded Amazon. It was really weird.

2:37:31 I remember this. I would get Borders gift cards. And you could put them into The border site, but because it was also the same backend as Amazon, you could then use that on Amazon. I rem totally remember doing this. And it worked the other way direction, too. The clarity of vision on Amazon seems so clear in hindsight, but there's these weird things that happen along the way where you're like,

2:37:52 Oh no. They were just like pretty antithetical to what the drum beat of the culture and the strategy was. Like how is this strategic with everything that Bezos has been writing in his letters? Yeah. Wasn't, but they needed the money.

2:38:11 Yeah. So they do it. With target. They literally ran Target's website for years. Which Ominously they

2:38:19 Announced that deal. On September eleventh, two thousand one. So oof. Rough. They even Go pitch the idea to Walmart to do the same thing with Walmart. Walmart is uh they're like Yeah, no. Thanks, guys.

2:38:33 No. Nice track. Here's the super fun part. So Amazon. Is going around. Pitching all these other retailers.

2:38:44 Let us take over for you, you know, run your website, blah, blah, blah. eBay knows. They know Amazon's in a tight spot. They probably heard about Gali and Campbell and all this stuff.

2:38:57 In the fall of two thousand. Meg Whitman and Jeff Jordan. Fly up to Seattle. And they pitch Bezos.

2:39:04 On the opposite idea. Ebay Takes over. the failed Amazon auctions and all of third party sellings has it have become Z shops, which we'll talk about now On Amazon. Just let you mean we know how to do this.

2:39:18 You keep running Amazon.com, the retail. And will do. Third party selling. For you with eBay technology. It was uh like wow, oh my gosh.

2:39:29 You know the the Michael Jordan meme of like I took that personal Yes. I think from the last dance, um I think Jeff took that personal. Yes, agree. Yes, I think he took that.

2:39:40 Very personal. So he calls a meeting. Remember, they're just trying to like survive, get to profitability, generate cash flow. They're doing this crazy stuff with Target and Toys R Us. I mean at this point they've got over two billion of debt on the balance sheet. I think it actually increased from two thousand to two thousand one and two thousand one to it two thousand two. So they're like really just making the interest payments here and trying to reduce the debt load and produce some net income profitability, which still hasn't happened. Still hasn't happened. No, no. Which

2:40:14 It was intentional for the longest time, but now that they need to do it, they need to grow the muscle to do it. Yes. So Jeff calls an emergency meeting of at this point it was the S team, the senior leadership. It was the J team, the Jeff team. And then when Gali took over. And everybody reported to Joe, then it became the S team, the senior team.

2:40:36 Which it stayed, the S team. Which it stayed. That seems more appropriate than But Jeff team, but anyway. Uh he calls weekend emergency S Team Meeting at his house. to discuss third party selling on Amazon. Now I said Z shops. So auctions, I can't remember if that

2:40:52 It was still alive or not? They had tried Saying, okay, well, maybe auctions don't make sense on Amazon. But we still want to allow other people to sell on Amazon. What if we just do fixed price, you know, like a regular retail type listing?

2:41:07 So they started this thing called Z Shops. But again, it was a separate tab website, wasn't like right on the product page of Amazon.com. They weren't leveraging the strategic asset that they had, which was traffic and customer loyalty. And What they realize is in one way to look at the real key thing, and I think this is very true today.

2:41:25 That differentiates Amazon positively versus eBay. And pretty much everywhere else selling on the internet. Is they have an authoritative Product catalog. You know if you are on a product page for Amazon.com.

2:41:40 You know what that thing is that you're gonna buy. I mean they invented anybody who's ever r used against the API, like they have ASINs, A S I N. That's a unique Amazon identifying number for a product that They have an authoritative catalog on everything they sell. And anybody who's ever bought something on eBay. You don't really know what you're getting. Right.

2:41:59 It's almost like Amazon starting as a bookstore had the benefit of ISBN numbers. It's like they decided we're gonna create a proprietary ISBN system for the world. Yes. Yes, for all products. So They come up with this crazy idea.

2:42:12 In this meeting. And there's some backstory that leads to it, which is the on the product pages. They had links to Z Shop listings, and that was the only thing that kind of drove actual converting traffic. And they're like, what if We put listings from third party sellers. Oh yes. On our own

2:42:30 Product pages. That's what eBay wants to do. That's why eBay's interested in talking to us. What if we just do that and completely revamp how we think about Third party selling on it, but honestly.

2:42:41 Everything about the product page. And we call it Amazon. Marketplace. And so they launched this in a matter of Months.

2:42:49 In November of two thousand, they launch Marketplace first with books. This is like nuts. Yeah. People are. pissed at Amazon. But you're a category manager at Amazon.

2:43:00 Your competition, you know, Brad writes about this, just went from like Being outside the walls of Amazon.com. You just let all your competition Inside your walls, in the castle, on your product page. And I don't know exactly how it works. I think it's more sophisticated than this, but basically like if some third party seller is verifiably selling the same exact product

2:43:21 And they're doing it for a cheaper price, then the buy button doesn't come from Amazon. The buy button buys the competing vendors, you know, the third party sellers product. And so you as category manager. If you got a number next to your name, that doesn't accrue to your number. Nope. That goes to a totally different team within Amazon. But

2:43:41 Kinda just like Amazon. dot com originally. It turns out customers really like Competition, paying lower prices, being able to buy more stuff, getting more selection. They launch it. In November.

2:43:54 And Even though it launched in the middle of Q four. In Two thousand one. Which was a no no until this point. You basically don't launch anything going into the Christmas season. You're literally not allowed to push code up until this point in Amazon's history around that time.

2:44:08 It Accounts for Fifteen percent. of all customer orders on Amazon.com marketplace. Well today.

2:44:17 marketplace is over fifty percent. So over half of everything that is sold on Amazon.com is not sold by Amazon. I remember the annual letter in twenty eighteen when it eclipsed it and Jeff proudly proclaimed that the third party sellers are kicking our butt. We're very excited about that. Yeah, right. What a Jeff thing to say. This is when founder leadership becomes really important. They have an immediate organizational design problem where a whole bunch of people are incentivized and comped against their fiefdom. And what you've just done is you've created a brand new business strategy that

2:44:50 tells people that the greater good is more important than their fiefdom. And In order to rearrange everyone. Without Creating.

2:44:59 massive infighting and churn to march in this new strategic direction. It's pretty hard to do that as a non founder. I'm so in awe of Bezos doing this because he almost just got ousted out of his company. He's on thin ice. The company's on thin ice. And this could have blown up the company, too. I mean, this a different business model. All of the emotional incentive that I would imagine for somebody in this amount of pressure is like to the board, the shareholders, everything just be like Okay, I gotta come back. I gotta save. Can't rock the boat. We gotta you know cost cut, blah, blah, blah. And he's like, Nope, we're gonna like make this radical

2:45:34 Shift. In this dire moment, you're totally right. Not only is this something only a founder can do, It's only something that a very special founder would have. That

2:45:44 Confidence to do. Amazingly, it works. Jeff's crazy goal of the company is gonna hit profitability. Q four of two thousand one that he just like plucked out of thin air when he kinda came back after the golly. Incident. They do it. Marketplace is a big component of this. The website deals with Target and Toys R S are a big component of this.

2:46:04 In Q four. Of two thousand one. They do one point one billion of revenue. Fifty nine million of operating income. Thirty five million of pro forma.

2:46:16 Adjusted net income excluding Stock base comp and other, you know, non cash expenses, which Wall Street's like, blah, blah, blah. But They do five Million dollars.

2:46:29 Of honest God. You can touch it, taste it, take it home, put it in your bank account. Gap. Net income. For the fourth quarter.

2:46:39 of two thousand one. This is huge. They announced the stock jumps twenty five percent in one day. Which no other internet stocks were jumping. Up in That moment in time. I mean, people are licking their wounds after two thousand for

2:46:52 Three years, four years? Yeah. It was an a an amazing achievement. Amazon had seen big jumps before, like the Henry Blodgett thing during the dot com era where it was trading below a hundred and suddenly jump to like two fifty or something and uh all at once just on Henry Blodgett saying, I think it's gonna go to four hundred. Yeah. They were no stranger to massive fluctuations in their stock price, but you're right. This is one bright spot in a multi year dark period for tech.

2:47:19 This is post September eleventh. This is like today, you know, in the stock market. Like yeah, a year ago. Yeah, stocks jump twenty five percent of the day, like, you know, great, everybody's doing, you know. This is like everybody else is going down and we went up. Yep. And this is kind of the start of where you start to see, oh

2:47:37 Amazon might become bigger than eBay. eBay basically doesn't have a thriving comeback in the post dot com. Bubble burst. No. It would be a long journey, but

2:47:49 Amazon's stock price tripled in two thousand seven, while eBay fell by over fifty percent. And during that year for the first time since like eBay's IPO Amazon finally passed his eBay in market cap. Today Ebay's market cap. It is large. They've done a nice job.

2:48:08 It's twenty seven billion dollars even after the big drawdown that we've experienced. It's a little bit weird to look at NAT number because it comes, you know, it's got the divestiture of PayPal in it, it had the acquisition and then divestiture of Skype. So there's some wonkiness. Their post twenty fifteen has been pretty good. Yep. But Still, I mean, I think we can declare Amazon the winner here in the long run. Yes. I can't tell you the last time I bought something on eBay and

2:48:34 God, I'm afraid to look at my Amazon total. Okay. Stories we gotta tell about this kinda era. Of Amazon.

2:48:44 Before we talk about uh another era of Amazon on the next episode. So we talked about Google. As The years go by.

2:48:54 After the Dot com crash and Portal sort of go away and the browse motion on the internet becomes kind of inefficient because the internet's frickin' huge and growing really fast. Turns out search is really important. And so Amazon's looking at Google, they're like, God, they've got an unbelievable business. It's kind of a monopoly, the gross margins are incredible. Finding things on the internet seems really important. We should get into that too.

2:49:19 Yep. It's both an opportunity and a problem for us. We want to be the place where people find stuff to buy on the internet. Honestly, I mean I think this is drawing too broad of a brush, but I think Google killed eBay, right? You know, the best way to search eBay is Google. It's not eBay. And the issue with Amazon for a while was the best way to search Amazon was Google. Right. Deaf.

2:49:39 Of course through his very direct connection to Google. Uh he saw this problem Certainly before eBay, but you know, but before Lots and lots of people. Oh. He has a quote on Google from like the

2:49:51 Pretty early days of Amazon kinda dealing with this, and he says to folks at Amazon, Treat Google like a mountain. You can climb the mountain, but you can't move it. Use them, but don't make them smarter. As in like Don't make them smarter about searching our product catalog.

2:50:08 So For the first time. Knowing like What a strategic priority. Searches becoming on the internet and thus to Amazon. Mm-hmm.

2:50:17 Amazon breaks down. And starts a secret subsidiary in California. In Palo Alto. They do a whole bunch of legal gymnastics to like, oh, it's a separate subsidiary, it's not Amazon. It doesn't generate any revenue. But this is the beginning of the end. Like, you know, eventually after the financial crisis, a whole bunch of stuff happens and they have to just give in and

2:50:38 Say great, we've got operations, we're charging tax everywhere. I think it's a misunderstanding of Amazon to say they're They don't want to pay sales tax because they're being cheap. They view it as a competitive advantage where shoppers will shop with them because the items can be five to ten percent less because there's no sales tax on them, again, because it's technically putting the onus on the consumer. And they're like, well corporate income tax is a whole separate thing and you know No, this is about

2:51:03 attracting customers. We have our own methods of paying the smallest amount of that possible. But yeah, this is purely about beating competitors to get the customer spend. One hundred percent. After I graduated from college. And I was living on my own for the first time with my own Salary and expenses. You know, a light bulb went off on my head one day. I was like

2:51:22 I'm gonna buy everything on Amazon because I don't pay sales tax. Yeah. Fortunately now I'm in a place where that doesn't matter to me now. It's kinda like a Walmart episode. If saving five to ten percent on your groceries on your idol, like that matters a lot to a lot of people.

2:51:38 Totally. So Amazon, they see Google. They Start. A subsidiary in Palo Alto. Like

2:51:45 We can like try and not make Google smarter and play defense here. We gotta play offense too. We gotta improve our own search capabilities. So they start hiring search PhDs leaders. Had This subsidiary in Palo Alto that they call A9. Short four.

2:52:01 Algorithms. A plus nine letters. A algorithms. A U And like you said at first, they're like, Oh, we should start our own Separate search engine and compete with Google. Well, it turns out there's a network effect in search as well. Yeah.

2:52:15 Which is the more data you have on the more searches happening, the better searches you can return. So that's a fool's error and but There is actually one corner of the internet where Amazon has better Data on searches, then Google. And that is searches that happen on Amazon.com. Yeah.

2:52:33 'Cause as much as Google can index all of Amazon's product detail pages they don't have the data on what people are actually searching for on Amazon. The demand data, the intent data. And They don't see conversion, plus there's the review system, which we haven't talked about was completely

2:52:52 Genius huge to Amazon's success. Did you know Shell wrote that over a weekend in ninety six? The original reviews system. I know. Amazing. One of the first things on Amazon.com. But of course, those signals from the review system, the star ratings, the sentiment of the reviews themselves, that becomes a really important factor in waiting search, you know, and today, like My God, search on Amazon. Like why would you search for products anywhere else? They got Amazon's choice, you've got the rankings, you got the filtering, it's way better.

2:53:19 Yeah. This is the beginning. Of All that. And like we're saying, I think it's also the beginning of the end for eBay because

2:53:26 As Google gets better, Deep linking from Google into eBay becomes the best way to search The chaotic marketplace of eBay. And eBay's paying the Google tax on all that, you know, and Google's the strategic intermediary. Amazon is terrified of the same thing happening to them. And meanwhile, over in Google Labs, man, I loved when Google was a smaller company. I think it was a labs tab and you could click on all these weird little

2:53:51 experiments they were doing. There wasn't like Google X, Google Moonshot stuff. It was like Useful stuff. Where Google Images came out of and like Gmail and th those sort of things. Maps and yeah. Yeah. And run of them was called Frugal. It was F-R-O-O-G-L-E. And I I think it was like product search. And I think it was kind of what Google Shopping became. Dude, Frugal. I may be speaking out of turn without researching the full history, but

2:54:15 I used to use that all the time again as a broke post college student. Not bro I mean as an investment baker, but like I was making sixty K a year living in Manhattan. Money mattered. And I believe. Frugal was insanely popular. And I think kind of morphed it and shut it down for antitrust concerns. Oh, right. My understanding. Like I think it actually was like there was a lot of demand for that product.

2:54:37 Huh. I mean it was comparison shopping, I think, is ultimately what it What it was. So the other thing. And this is what just getting Amazon is so good at. We're gonna spend

2:54:47 A huge portion of the next episode talking about It's not just That they make search on Amazon better. And play defense against Google. They do that.

2:54:58 They also play offense. And it you know, first it was like, Oh, we're gonna make our own search engine and that was a bad idea. Well What is the business model of search? It's advertising. Advertising. And what do they realize? We can build an advertising business.

2:55:13 With search. On Amazon. Just absolutely. Brilliant. Any web platform of sufficient scale.

2:55:21 can layer on for free a second business of advertising because they just have the traffic and they can put stuff in front of people and they can prioritize it however they see fit. And I think Amazon's ad business I haven't done the research yet for next episode, but I think it's somewhere around forty billion dollars in revenue now. It is thirty billion dollar revenue run rate. Of Incredibly high. I mean, they don't break out the margins, but like it's so tads. It's basically a hundred percent margin business. Yes.

2:55:49 You already have those customers. There's no customer acquisition costs. You don't have to pay anyone out any amount of that revenue for any reason. You know, it's like a Facebook ad. It's the best gross margin business in history. The other incredibly impactful thing that comes out of A nine years.

2:56:07 And search and improving search on the M Amazon.com website. Is that really is one of the catalysts that pushes the company to transition from A monolith software architecture.

2:56:20 To microservices. Independent microservices. And that is amazing. For Amazon. Playing defense. And that is also amazing for

2:56:30 Providing Web services to Are there developers out there. Yes. Might be able to imagine that.

2:56:40 Are you leaving us there, David? I would leave you there. I would leave you there. But this is a very special episode and a very special company. We've got a coda.

2:56:51 And Are we getting into hardware? Is that where we're going here? I don't know. We've probably done it more than once, but in my mind the Canonical. Acquired episode coda.

2:57:03 Is the PlayStation? on the Sony episode. Oh yeah, where you thought, wow, look at all those seventy years of history. It feels like we're done. And then actually they create their most successful business unit. Yes. Regardless of how good we you and I did or didn't do on it, like just the story. Of Sony? is one of the most incredible of all time. Yes.

2:57:21 And then you you know you do it you're done. Then you're like and then The PlayStation. And then one engineer in a corner who barely has expressed written consent from management decides to go build something. Well, it's funny, you know. That story is AWS for Amazon. The story we're gonna tell.

2:57:39 Is not as impactful from a business standpoint, but the story is just as good. And that's The story of the Kindle. And I'm actually quite curious what the business impact is. I think it's they don't break it out, but I'm curious if you did any analysis at all and what does Kindle allow them to do that they otherwise might have lost market leadership on or something like that.

2:57:59 Well I didn't do any financial analysis, but As we'll talk about in the story. Similar to the defense against Google with search, It was defense against Apple.

2:58:11 And The iPad, the iPhone. The iPad. And today I I love Kindle. My Kindle is one of my favorite things. In the whole world, it's amazing.

2:58:20 But I think probably the way most people consume Most content on Kindle is apps on Yeah. So the Kindle story. This is one of those there were like five people in

2:58:32 The internet in Silicon Valley. Oh. I could not believe the people's names behind the original Kindle inception. All right, lay it on us. When I found this out and I texted you, I was just like, Oh my God. Okay. Do you know? I know you know'cause I we talked about it, but listeners.

2:58:50 I bet very few of you know. Who Inspired. The idea. For Jeff and Amazon to pursue the Kindle.

2:58:58 And let's give a little bit of hints. So when we say inspired They started an independent company doing Kindle like things, e reader things before one of the first E readers. Yes. The first successful E reader. But long before it would take off. It was not with E Inc, it was with a predecessor technology. It was with L C D. Which was a big problem.

2:59:18 With L C D. How else might you know them? They're the founders of something that their name is not associated with, but someone else's name is massively associated with. Well they would uh Take the money that they made from this company and roll it into another little company that they would then start after this.

2:59:38 In two thousand three called Tesla Motors. That's right. Martin Eberhard and Mark Tarponing. Inspired. Jeff Bezos and Amazon to build the Kindle.

2:59:51 Here's the story. So in nineteen ninety seven. Martin and Mark. We're working in Silicon Valley. Napster was happening.

3:00:02 the music industry was getting digitized and eviscerated and, you know, bought all the stuff, MP threes, MP three players, you know, it was Total of people, and lots of people. The two of them included, were like It's only a matter of time until Other than

3:00:18 Media categories. Go through the same thing. And Video is gonna take a while because bandwidth and file sizes of video is a lot and broadband isn't a thing yet for most people. But books are really obvious, right?

3:00:32 Smaller file sizes than MP3s. very easily digitizable. This should be a thing. Now what's holding back the industry? Like unlike MP3s where like it's pretty good experience. Downloading them from Napster, playing them on your computer. MP3 players are becoming a thing. There's no equivalent of an MP3 player for a book. You don't want to read a book on your computer. You're gonna read a book on a book. Mm-hmm.

3:00:55 So They develop. They, you know, go around. They like talk to a bunch of explore a bunch of technology and they're like. We can make the equivalent of an MP three player. For a book. An e reader.

3:01:05 So they start a company, they call it Nouveau Media, and they make The Rocket Book. If they make a prototype. But it's hardware. They need to like Bring it to market, they need capital, they need the largesse of Just like their future hardware startup Tesla, the largest of a wealthy person who might want to see this.

3:01:22 Happen. So who do they call? They fly up to Seattle and they meet with Jeff Basis. This is in

3:01:30 The bubble era. And uh Bezos is really interested. And I think Amazon's public at this point. Yes. Amazon's public. It just gone public. Jeff totally gets it.

3:01:40 He's like, I mean our business is selling books. We're an internet company. I see what's happening with Napster. This is happening at some point in some way. This is for sure happening at some point in some way. This is the first time I've seen this. This is the first real like I'm very interested. So they negotiate for three weeks And they

3:01:59 They want. Amazon to become, you know. Sell books. You need like Books to sell ebooks. You need relationships with publishers. They want Amazon to become the store or a store.

3:02:08 This is the sticking point A store for the Rocket Book. And Bezos also wants to do it. But he's like looking at the first time. If we're gonna do it, we want exclusivity. I don't want you going and doing the same deal with Barnes and Noble.

3:02:22 Or anybody else. Right. Why would we fund the development of this? Right. And all the customer acquisition for you if we're not gonna be the exclusive provider. So like any good entrepreneurs and They hear this, they're like, All right, well

3:02:36 Martin and and Mark, they fly to New York and they talk to The Ridgio Brothers. They're like, Hey, we're talking to Jeff. God, I love that these guys are back in the story. I know, they're back in the story. And Of course, Barnes and Noble wants to crush Amazon at this point. They're like, Great. We'll do the deal with you.

3:02:53 We don't need exclusivity, but we'll invest in the company. We'll bring Bertelsmann, the German media company, in as well. You'll get your publisher relationships, you'll get your store. We'll do this and we know Jeff won't do the deal. Eventually Cisco invests as well. In nineteen ninety nine, the device launches to the public and like It's too early but like Oprah makes it one of her ten favorite things for the year. Like it's

3:03:15 It's a hit. So Ultimately, Gem Star TV Guide. Pretty quickly after acquires the company for almost two hundred million dollars.

3:03:24 So Martin and and Mark, they get pretty wealthy and these guys are flush with some cash and You know. That literally leads to Tesla. Freaking crazy. Also like just wild that like

3:03:35 Yeah. Amazon and Bezos hadn't acquired accept.com, like Probably no PayPal, which means Elon doesn't have the money, which means interesting. Man, like the tangled web here is amazing. Amazing.

3:03:50 So Jeff. And Everhard. They kinda remain friends through all this and like just like all right, you know, no hard feelings. Like there's plenty of other stuff going on at Amazon.

3:04:01 And As the years progress. they kinda stay in touch and Jeff is always asking Martin, like Hey, when do you think the technology, you know, we're thinking about this. When do you think it might be ready?

3:04:15 Then in two thousand. Three. Apple. And Steve Jobs. Well, in two thousand one they launched iTunes and the iPod. Amazing, people love it. Okay, but it's Apple.

3:04:26 Tiny market share, you have to have a Mac to use iTunes, to use the iPod. Great for students, but Not changing the world here. Yes, not the apple we know of today. And of two thousand three. Oh, it was so fun going back and Remembering this.

3:04:41 They launch iTunes for Windows. That was such a huge moment for Apple. And Steve Jobs knew it. Like he totally freaking knew it. So Basus.

3:04:52 And a couple other folks. go down to meet with jobs after iTunes for Windows launches. 'Cause they're like, shoo, you know, like we sell a lot of CDs on Amazon. Right. And jobs is like, Yeah, you sell a lot of CDs on Amazon. Good luck with that. And By the way, like

3:05:09 We're not just thinking about C Ds and you know music here. So um There's now a new threat. Yeah. Not just any business within Amazon, but like the original

3:05:19 Core. Books is immediately what they're thinking about. Which is still like a huge part of their sales at this point, or at least media, books, CDs, D V Ds. That's a huge part of Amazon's business. Totally. So There's now some urgency in Amazon to

3:05:35 deal with this. So Jeff calls Martin back up. But they've already started Tesla at this point. And he's like, um Yeah, we gotta do this now. And uh Martin's like okay well The L C D screen that we used on the Rocket Book.

3:05:50 Had a whole bunch of problems with it. I talked to these guys at the MIT Media Lab about this technology they were developing called e Inc. And it wasn't quite ready yet, but you might want to go like Check them out and see if it's Ready now. And in particular, the L C D uses too much battery, it's bright, so it's not good for night reading necessarily.

3:06:11 You can't really read it in the sun. What do you want to with a book? You wanna take it to the beach, you wanna read it outside, you wanna read it in bed, all these things that L C D screens, especially at the time. Yeah.

3:06:23 So This is such a priority. This was after A9. So they already had the one subsidiary in Palo Alto. They set up a second subsidiary in Palo Alto.

3:06:34 Called Lab one twenty six. With the secret mission of Make an iPod like E reader device. And

3:06:44 I mean it took him a while. Years. I mean Two full years, and then they slip the release date by a full year. It was supposed to be out for one holiday season, didn't come out till the next. But

3:06:57 When it came out it was Earth shattering. Not only is it shocking that Amazon is doing hardware because that is not a thing that they've ever done before, and that's not what we expect out of them. And there's only a few big successful companies that make consumer computing hardware, that sort of thing. But it really was the introduction of e ink as a viable technology. People really hadn't seen it before in consumer devices.

3:07:20 I mean they were. I should go back and look at photos of the We'll link to some of the sources of That original Kindle that launched It took till two thousand seven.

3:07:29 It had that keyboard on it. Yeah. It had the keyboard. It had a wonky scroll wheel because Bezos was like, I've got a scroll wheel on my Blackberry and I want a scroll wheel on my Kindle. Oh yeah. Like he was constantly fighting with the design firm that they had hired to produce it and putting in his own beliefs about how it should be, even though they're the designers. And they would come back and they would say they would have him put on the business model and he's like Not only are you

3:07:55 You're gonna take my design advice and you're definitely not giving me Jeff Basic's business model advice. And that's the thing. The device nailed a couple things. E Inc technology. Actually wireless, which was a Bezos thing, like Because Wi Fi still wasn't quite everywhere. WhisperSync, I think was the name of the WhisperSync, yep.

3:08:14 There were obviously things wrong with it. Like the keyboard, the scroll wheel. But the device was good enough to Have a book like experience. And then on the business side. You can buy any book.

3:08:27 Ever made. Anywhere, any time. For ten dollars. And now it's just Unbelievable. It completely changed. The industry. Gosh, there's too much to get into on this episode, but that would be the seed of massive amounts of unrest and lawsuits.

3:08:44 in the entire book publishing industry involving Amazon, Apple, all the big publishers, allegations of collusion. This was the thing that violently shook the book industry. Like Amazon kind of did by launching and by aggregating so much of the power, but then the thing that really upended and and truly disrupted the industry was this We're launching a consumers at ten dollars. Which is funny, it wasn't piracy. It wasn't like the music industry. Right. It was ten dollars for an ebook. Yeah. So that I mean

3:09:14 The Kindle itself, incredible story, but then that leads to Fire tablets. Echoes. The lady who lives in your echo, fire TV, prime video, ring, eero, like all this stuff. And freaking audible. Oh my God, right after the Kindle launch, they buy Audible. Amazon buys Audible for three hundred million dollars. Today Audible has a forty plus percent market share.

3:09:40 Of audiobooks, which is a five billion dollar industry growing twenty five percent every year. I tweeted about this. This is gonna be one of my like most liked tweets ever. I cannot believe it. Like Audible would be a Ten billion dollar company on its own? More? I don't know. Crazy. Yeah, you're right. In some ways, the on its own thing is the caveat there, because so much of their demand comes from being on the product detail page of a book when you go to check out and me having the trust and everything that comes guaranteed from using my Amazon account for it. Alright, so

3:10:13 That's Audible. So we've got Kindle, we've got Audible. There's A lot more to talk about here before we get into AWS, but I think um Like I really want to dig into Prime, but let's save that for playbook,'cause I feel like that's gonna be a good place to hit

3:10:28 Sort of what's going on there. Great. All right listeners. Now is a great time to thank our longtime friend of the show, ServiceNow. If you are running a large enterprise, AI agents are likely spread across every team, and deploying them is uh no longer the hard part. Yeah. The hard part is knowing what permissions they have, what employees are using them for, or what decisions AI is making.

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3:12:07 Who's managing them all? So if you're trying to turn AI ambition into real business outcomes and make it work safely, securely, at scale, go check out service now.com slash acquired and tell them that Ben and David sent you. Well, let's talk about power. So of course this is Us referencing the Hamilton Helmer book, Seven Powers. And the core idea is really investigating what it is that enables a business to achieve persistent differential returns. or basically be more profitable than their closest competitor and do so sustainably. And the seven

3:12:39 options, the seven powers that Hamilton identifies are counter positioning, scale economies, switching costs, network economies, process power, branding, and cornered resource. And David, as I was preparing for this episode, again, I mentioned this earlier, but I tried to watch literally every Jeff Bezos talk, especially from the early days. And there's this amazing one that he gives at Stanford at GSB. literally the week that Amazon Prime first launched. Oh, so cool. And he's sort of talking about it as this brand new thing. He's like at seventy nine dollars a year, and he's observing this really fascinating thing about the business where Хіба стан кастомер і сперієнт.

3:13:20 from a variable cost into a fixed cost. And he's sort of describing what if you could shift all of that to a really, really big fixed cost, basically to get operating on it. And One example that he talks about is that they have this great feature and everybody's experienced this, I'm sure when you go to buy something on Amazon, there's a little banner that tells you you already bought this, if you already bought it. And while that may seem like it can diminish short term revenue, his view is it builds trust with the customer for the long term because you say, Oh, thanks, Amazon. Maybe I already have this in my house, or maybe there is a chance you wanted to buy the same thing and you just get that delightful customer experience, that reassurance that this is indeed the exact same ASIN or an uh Amazon identifier of a specific product that you are looking for.

3:14:05 Well, He points out, well, that this would cost us the exact same amount to build this thing that provides customer confidence, whether we had a million customers or 70 million customers. And what he's describing is the most perfect vivid example of scale economies where once they get all these customers and once they acquire them all to Prime, so they are all loyal, subscribed, guaranteed to shop here customers. then you can amoritise every new investment and every new feature across a massive customer base. So how could anyone build as good of an experience as you can because they have to fund it with revenue from fewer customers.

3:14:45 I'm not saying that Amazon only has this as one of the powers that enables them to achieve persistent differential returns versus competitors. But It was like Jeff was writing that part of the book as he was sort of giving the speech and it just sent alarm bells off in my ears. Uh That's awesome. Well

3:15:03 Maybe now actually is the right place to talk a little bit about Prime and this dynamic. Yes, so true. Amazon isn't necessarily the only company that this is true for. You could say similar things of Walmart, especially now that they have Walmart Plus.

3:15:19 You could vary Certainly. Say the same thing. Of another one of our favorite companies that we have not covered unacquired, that we have to now after these first two episodes of the season. That would be

3:15:33 Casco. Oh yeah. Seattle hometown heroes. So You mentioned prime. We skipped over this in uh History and facts, but I think let's talk about it a little bit here. Great. Jim Senegal and Jeff are buds. They're tight. Well

3:15:48 At least they were. And at least Jeff credits a particular lunch with Jim from teaching him a lot of lessons, in particular the one I think you're referencing, which is customer loyalty is the thing that matters. And in particular, because as we all know, Jeff is absolutely laser focused on not gross margin percentage, but the absolute dollar amount of margin dollars over a full customer lifetime that you can sort of get. Which is

3:16:16 Oh, such a lesson from Costco. And uh it was not a lunch. It was very famously a coffee. In the Starbucks of the Bellevue Barnes and Noble, which Jeff will go to great lengths at any point in time to talk about how he was doing business meetings in the early Amazon days. Literally in his competitors. Coffee shops. Not that he's, you know. competitor focused or anything. No, definitely not. Definitely. No. But yeah, no. So this coffee where they meet for the first time. Jim

3:16:47 From Costco is just like uh I've never met him, but he must just be such a mench. He's old school. He's got the sall price DNA, work for salt price, you know, new Sam Walton. His whole thing, he talks about this later. He's like the reporter asked him, I don't think it was Brad, I think it was somebody else. Like, you gave a lot of key information to Jeff Bezos, who you know, you became friends with, and then he certainly one of your biggest competitors. And you know, Jim's response is just like this is retail. Like you shop your competitors. Sam did this, I did this, we all did this. We all shamelessly steal. Good ideas.

3:17:23 Yeah. From each other. This is how it works. And Jim famously has said that some of his highest performing Costco's are across the parking lot from Sam's clubs. Lee Relishes competition. Yeah, so actually the purpose of the meeting was that Jeff wanted to pitch Jim on uh This was like early days when they were expanding the categories on Amazon. And there was a bunch of

3:17:43 Products that they couldn't get yet. They didn't have relationships with suppliers. So Jeff wanted to pitch Jim on Costco selling On Amazon for like the products that Amazon didn't carry yet. That didn't go too far. But yeah, Jim gives this master class on the Costco model. And it it sounds insane if you're not familiar with it from the outside, but then

3:18:06 makes total sense if you realize you're focused on gross margin dollars over the life of a customer, not percentage. So the Costco model Is They make essentially it's more complicated than this, but essentially they make Zero percent. Operating margin.

3:18:23 On their retail operations. They sell at such a low price. I think I looked into this when we were working on the Walmart episode, something like five to seven percent gross margin business. I think it's a little higher than that, but it is basically set that such that like When you Take out the cost of running.

3:18:41 Both the back end logistics and The warehouses themselves. They are making no profits on the Actual retail business. Yeah.

3:18:51 All of the profits of the company. Come from the same. The memberships, the annual memberships. So the merchandise just needs to provide you enough value to then renew your membership for the next year. Right. And

3:19:04 The beauty It perfectly plays on customer psychology. Ordinarily you'd be like, Why would anybody pay money for the right to shop at some point? You can just walk into a Walmart. You don't have to pay Sam any money to shop there. Well once you've Done that. Made that sunk cost If you then believe that you are gonna get the lowest prices absolutely anywhere.

3:19:28 in as a result of having that membership, you get this insane combination of like the sunk costs effect plus the endowment effect. And you become crazy loyal. You're like, I have paid the money for this membership. I need to get the return on the membership. And I feel like I'm part of this club. I have this guarantee that I'm gonna get This benefit that nobody else who aren't members get. I'm now gonna do all of my shopping. Oh.

3:19:54 Yeah, it's pretty amazing. You get these loyal customers that stay with you for a long time, spend tons of money. Not that you're making profit on that money, but that then helps drive the scale to k Prices even lower. It also means you don't have to advertise. Costco does basically no

3:20:10 traditional advertising because it's all word of mouth. Because the customers are so insanely loyal about their memberships. Yeah. Now, what Jeff Bezos chose to do here was a little bit different because I don't think he's running a break even retail business and just making money on Prime. I think he sort of realized One of the effects you were talking about, which is once you've made your deposit, your seventy nine dollars a year to Prime.

3:20:35 You're gonna keep shopping on Amazon. He almost flipped it and is like Oh, I wanna use that same psychology. But I I don't need to run a Yeah. I don't need to make zero dollars running the business and make everything on Prime.

3:20:48 And perspective that he could make money in both ways was Because the way that Prime came about was actually the legacy of a couple of other shipping programs they had tried.

3:21:02 Super Saver, right? Yep. Yep, exactly. If you spent enough, then you'd get free shipping, or if you were willing to wait for your goods for a while and get them batched up, you could get free shipping. And this idea was really somebody inside the company sort of pitching It was a engineer named Charlie Ward, I believe. Submitted it as an idea. And he's thinking about

3:21:22 We're getting better and better at fulfillment. What would we need to charge customers in order to guarantee two day shipping on everything they ordered, basically no matter what, really lean into that convenience part of the retail holy trinity of price, convenience, and selection. And so it was this really interesting dual collision path. Of Okay, how much do we have to charge people in order to give them two day shipping? And then this Jeff realization from Jim Senegal at Costco of Wait a minute, if we charge people anything, they'll actually be more loyal, which is the ultimate thing that we care about.

3:21:56 Yeah. Totally. And again demonstrates Jeff and everybody at Amazon. thinking through like what is the nature of their business, what is the nature of e commerce. In physical commerce.

3:22:07 Those dimensions of the holy trinity, or at least maybe the aspects of what matter of the retail holy trinity Are different. Convenience. is different in physical. Yeah, it's a little less convenient to shop at Costco versus Walmart of Yeah, maybe you gotta like reach up higher on the warehouse shelves. Shopping online, getting your stuff.

3:22:31 In two days or next day or same day. That's a Big difference than getting your stuff. Two weeks from now. Really important difference.

3:22:41 Yeah, totally. Now, all that said, even though we're saying, hey, you know, Amazon is not fully saying we just want to make a bunch of money on Prime, I think they do make over twenty billion dollars in revenue per year on just prime subscriptions. Wow. I'm pretty sure they lose money on just Prime if I'm thinking about my own habit. for the amount of stuff that I from Amazon, if I actually had to pay shipping, would I be paying more than$129 in shipping? Absolutely. And what about all that stuff that I watch on Prime Video? Absolutely. So th there's definitely an element to it where you're like, wow, yeah, it's worth over twenty billion to them in revenue, but I'd be fascinated to see the internal Amazon accounting on how they choose to justify the cost.

3:23:26 That twenty billion, you know, whether they're making any like actual Profits out of that are not debatable, but This is where it just ties so Tightly into The Amazon flywheel, which is another key piece we didn't discuss in history and facts, but comes from um

3:23:43 They do a management off site in two thousand one with Jim Collins, author of Good degree, where he writes about the flywheel. It was actually before good degree. Came out. Right. Didn't they get a little preview of it? Yeah, a little preview. But Because of Prime.

3:23:58 And this kind of guarantee to all these people who sign up for Prime that you're gonna get two day shipping. That kind of upfront funds. Amazon's investment in better distribution and logistics. Everything we talked about on the whole episode. And then like the more capital that they get to fund that and the more customers they get that are using that, the more leverage they get and the better they can

3:24:22 Perform and optimizing. Nobody else has their own airline with ninety six planes. Like Walmart doesn't have their own airline with ninety six planes. So they have more predictability, they have more loyalty, so they have longer customer lifetime, so they have more absolute margin dollars from purchases coming in, but a thing we haven't talked about, which is Another just amazing insight. Is the cash flow dynamic of this.

3:24:46 Amazon charges me$129 at the beginning of the year before I make any purchases on their website. And they get to do stuff with that cash. It is an incredible form of float on top of many other forms of float that they have going on in their business. Just to complete the flywheel. Amazon through having all of this leverage that we just talked about in their operation, this operating leverage. And float and all these wonderful things.

3:25:13 They can work on Charging even lower prices. providing even more vendor selection. And even better convenience, like all three on the holy trinity, they get better at that. That attracts.

3:25:25 More customers More Customers, then Attract more. sellers and suppliers on the platform. And then that allows Amazon to get more operating leverage.

3:25:39 And then the cycle just repeats itself over and over and over and drives itself Around many, many, many times a year. I think now I could be wrong on this. I believe Amazon's inventory turns per year. Or something like sixteen.

3:25:56 Insanely high. Probably not as high as like a Costco, but for the complexity of Amazon's operations and the breadth of items that are sold in the store to get that kind of inventory. And that's just the first party. I mean fifty seven percent of Amazon sales right now are from third party sellers. Where Amazon's just collecting margin dollars. And holding no inventory. So yes.

3:26:19 Scale economies. They got that one. Absolutely. I don't think that's the only one that they have. No. I think the Definitely have brand. No doubt in my mind that they have brand. Like the definition of

3:26:32 Brand power is You would Buy a commodity at a higher price from Brand with power over a brand that Doesn't have power. I absolutely do this.

3:26:42 One hundred percent. And Amazon exploits this. This is part of the legacy of search and all the algorithms in the company. Very smart pricing and dynamic pricing on the website, but Yeah, I'm sure I could buy stuff cheaper. Most things. But you don't look at then I'd get them on Amazon. But I don't even look because I'd have to wait two weeks or I'd have to go find it, or like I wouldn't have the Smooth customer experience. Like of course I'm just gonna go to Amazon.

3:27:08 And it used to be, so for a while, I remember my development over the course of being an Amazon customer here. So think like two thousand eight to twelve time frame when I was in college. I would comparison shop for sure. Amazon versus everything else. And I would do that and I would do that. And Amazon would win so consistently because they do the Walmart thing where they would go out and scrape every other site and create a bot and make sure that they could be the lowest price anywhere of of any reputable retailer. And so enough times that happened where I got conditioned to just stop looking because they were the lowest price anywhere. Then I think about five more years went by.

3:27:40 And whenever I would comparison shop, if I really spent ten or fifteen minutes, I could always find somewhere selling it cheaper But something was worse, to your point. I didn't recognize the brand name of the seller, and so there's a branding power there that's very clearly being demonstrated, or the shipping, or I wouldn't be confident that I could return it, or there's just all these little things about Amazon where then it became this Interesting explicit choice where I now know I probably could find this somewhere else cheaper, and I still don't comparison shop.

3:28:13 That is an incredible, incredible brand power that they've built. There's then a third hop of I don't even compare some shop anymore. Because it's not worth my time to do that.

3:28:24 Right. potentially marginally cheaper and still not pull the trigger. Again, this is a difference versus like when we were Broke post college students, but Yes.

3:28:35 You know, what are you gonna save on stuff? You're gonna you're gonna save ten bucks? Like you're gonna spend half an hour To save ten bucks. For a lot of people that makes a lot of sense, but like And then have potential headache. One out of every 10 things that I buy in that way from a merchant that is not Amazon, I will have some headache with. And so therefore, if you probability adjust the amount of dollars that I'm saving in terms of potential time cost later in headache,

3:28:58 It's just not worth it. Totally. Especially. I got a baby now, like I ain't got time for that. Like n hell no. Amazon. So that's scale economies. That's Branding

3:29:10 Network effect for sure, at this point. You know Originally Amazon didn't, but Because they adapted stole. Because Jeff Bezos took it personal. With third party sellers, you're talking about. With third party sellers. Yes, with marketplace, absolutely. More customers drives it being more attractive for the sellers to come on, which attracts more customers. There's that network economies. Interestingly, there are no supply to supply side or demand to demand side network economies.

3:29:36 Yeah, I think that's right. The fact that you're an Amazon customer and I'm a Amazon customer, I don't care. I don't benefit from that at all. And it's interesting they've never really leaned into that at all. Yeah, it's interesting. I mean, maybe well no the sk scale economies. I was gonna say maybe a little bit on the seller side because You know, more scale for Amazon lets them do fulfillment by Amazon and but that's scale economies. That's not network effects. But definitely that two sided network effects. And you see that power with You know, just run a couple Google searches and like

3:30:05 Lots of Amazon sellers are unhappy with Amazon. They got too much leverage. There's competition, blah, blah, blah. They go do their first party brands. They don't leave. Why don't they leave? Because You need that Amazon sale juice. Where else are you gonna sell that much online? Yep.

3:30:23 Yep. Absolutely. Do we think they have any others? Maybe some lightweight process power. Process power is always so hard to actually put your finger on that I hesitate to name it here. Switching costs? Eh, not really. I mean

3:30:37 I can buy this stuff on Walmart.com or We're not talking about AWS here. We're talking about Amazon retail. There's counter positioning in the era that we're talking about Barnes and Noble and subsequently Walmart, because those folks would have to invest so much and did, well Walmart did at least to completely reinvent the way that they do distribution and all their distribution centers to be fulfillment centers and actually go directly to consumers by not letting people shop in big stores and not having to have infrastructure for that Amazon counterposition against everyone whose cost structure was set up to do that.

3:31:11 We talked at the end of the Walmart episode about how Walmart is currently Closing down Sam's clubs and turning them into Online. Walmart.com fulfillment centers. That tells you everything you need to know right there. Yeah.

3:31:26 Yep, absolutely. And certainly counter position. versus Barnes and Noble. I mean the Bradstone quote we read earlier in the episode of you know, Barnes and Noble wasn't gonna go all on in on this because Their Distribution.

3:31:39 Network was not. Tuned. For e commerce. They would have had to redo it. And then to do that, they would have had to like majorly prioritize it within the company, put all their best executives on it, change the, you know, it would be less profitable for them. They would lose money in the short run versus the hugely profitable stores. Like it just all the incentives were not to do it.

3:31:59 Yeah. Yep, absolutely. Today I don't know that You can say they still have counter positioning. No, that was just a takeoff phase thing. Yeah.

3:32:09 I have been just frothing at the mouth to do playbook on this one. So All right, let's get into it. Right. Well I wanna open with a quote from the very first nineteen ninety seven letter to shareholders, which I always think it's fascinating. This is such a ubiquitous letter at this point that if you Google In incognito mode, nineteen ninety seven letter. This letter from Jeff Bezos comes up.

3:32:32 Also we gotta do a uh Shout out to Our friend and long time acquired community member. Preet Anand, who made a podcast feed reading The shareholder letters.

3:32:44 You're taking the words right out of my mouth. Thank you, Preet. I listened to him while I was doing some work in the yard yesterday. So The quote is and there's many great quotes in here that uh really highlight the idea that you get the shareholders that you ask for. When forced to choose between optimizing the appearance of our gap accounting and maximizing the present value of future cash flows,

3:33:07 Will take the cash flows. I thought this line by Joy Covey and Jeff is so incredibly prescient. that he really is focused on the absolute dollars of free cash flow metric. And I think there's this misconception that people have about Amazon that They're sort of trading off growth for margin percentage. And I don't think that's ever actually what was happening. People often look at startups today and they're like

3:33:33 Profitability or growth? I think the way that Jeff always thought about it was Well We care about free cash flow in the long run. Right, in the long run.

3:33:43 That is the way that every business is measured. And so the key words here are maximizing the present value of future cash flows, which necessitates Building a brand around your stock. Which I think. Elon is sort of the king of today because when you're talking about the present value of future cash flows, since future cash flows are unknown, you do have to kind of

3:34:06 Build religion. around your company today. If your goal is to really get investors on board with your long, long, long term vision. And Amazon

3:34:18 sort of got thrown in. with all these other dot com companies. When you sort of read that Barron's article, Amazon dot bomb. And a lot of those companies, Cosmo.com, you know, for no shipping, you could order a pack of gum to be delivered to your house and it would arrive in an hour. You're like, clearly they're losing money on this, and I'm not necessarily a loyal subscriber to this. Well, Amazon always was gross margin profitable. They always had solid unit economics, but they would choose to super aggressively reinvest

3:34:48 And As we were preparing for this episode, among the number of people we pinged, in addition to Brad Stone and some of the other folks that we were chatting with that were early. early Amazon or sort of around the company, we reached out to friend of the show, Michael Mobisin, to see if he had any materials from this time. And you had more than a spidey sense that he would have strong opinions about Amazon at this time. Our episode with Michael I think is what, like the seventh most Listened to acquired episode of all time. Yes. It's very widely listened to.

3:35:18 Yeah, which is amazing. He's your favorite investor's favorite investor. He's the ultimate finance professor. If you haven't listened to that, go listen to it. Yes. So he made this presentation at Amazon in 1999, really advocating for exactly the strategy that they were running and just starting to sort of articulate it and put it into a framework form. And we have the deck here. So one really fascinating observation he makes is that it's really about the weighted cost of capital, the WACC or WAC.

3:35:46 And you don't need to be a finance professor like Michael to understand this. So here's how it sort of works. Suppose you want to invest in building a new distribution center so you can either expand the reach of shipping goods in, say, a new country or Or decrease the ship time for existing customers. This is Bezos' sort of insight of how do I turn customer experience into a fixed cost. Well, let's say you have no cash in your bank account. Well, you have to raise capital. So either you can sell part of your company with an equity financing like their IPO to get it, or you could raise debt and pay some percent of interest, say 10% a year.

3:36:20 Which they did. Which they did that too, to the tune of what, close to two billion dollars. Two billion. So that capital has a cost to it. And the investments that you make in this distribution center need to outrun your cost to obtain that capital for it to be profitable. But let's say you have a pile of cash in your bank account that you got as profits from selling goods.

3:36:43 that cash is effectively free for you to use. So if you have a competitor who's financing the growth with debt, and you can do it purely with those profit dollars. Well, you can beat them in the long term. Even better. And we'll put the slide up on the video format here for Michael's presentation.

3:37:01 If you have all the dollars from selling goods, not just the margin dollars, And you don't have to pay your suppliers for like a month. after the customer bought it from you. Or two months or three months or four months. Yes. you can invest heavily into this new distribution center.

3:37:20 with many, many more dollars, not just the margin dollars. And as long as you're confident that that growth will continue and you'll have even more cash on hand at the date that you need to pay the supplier for the thing that you sold months ago that you now owe them for. Well that works. Really well. Yes. Oh boy. So Ben, you're saying it's almost like

3:37:42 Another large operation we may or may not have talked about. for ten hours on acquired Where they like You know right. insurance premiums and reinsurance premiums and write the policies and they get those premiums from those policies in.

3:37:59 And then they don't have to pay the money out until a disaster actually happens and they get to use all that money in between. You're saying it's like float. Yes. And Amazon today is a$1.5 trillion company that has not raised any material capital since that debt offering that they paid off in 2004 five-ish. They are financing the business entirely with float until of course we'll get to AWS and and now they can actually finance it a lot more with just

3:38:31 straight up operating income. Actually, though we should say I think strictly speaking, that is not a true statement. They have been issuing debt, but I think that is Not for financing the business. I think it's like a treasury capital management. Okay. All right, all right, all right, all right, fine. It's not like the debt they issued in the early days. Yes, very much not. But as you can see in putting this slide up,

3:38:54 Michael sort of cheekily. calls Amazon.com Cashflow.com as if it's really pioneering this new model where in the old school businesses something would enter your inventory, you'd pay the supplier three months after it enters your inventory, and then it has to sit on your shelf for a while. And then finally a customer buys your book and then the payment ends up being received. And so there's sort of a few months between when you have to pay your supplier and when you get paid. Whereas what Amazon's doing is completely flipping it on the head. The book can enter your inventory.

3:39:26 The customer buys the book. you then receive their payment pretty soon after that or immediately after that, just after some credit card days. And then you can have a month or two before you need to pay your supplier. So the internet business model and e commerce totally flips it on its head because of the completely different way that the distribution works and that inventory works. Yeah. Even Further.

3:39:52 adds depth of understanding to this point of the larger the scale of Amazon's operations in the flywheel. the more capital dollars that they're, you know, cash flow dollars that they're able to get out of it to continue. To fund building out the larger scale of their operations. It's this killer insight that cost of capital and having a negative cash conversion cycle are directly related.

3:40:18 Yes. Or I suppose inversely related. Yeah, you just step back and think about it, you're like Yeah, capital has a cost. But

3:40:26 Here. They're sort of getting paid. To use the capital. Right. It has a negative cost. It's amazing.

3:40:33 Well, and that's where prime is really this on steroids. Yes. I'm paying Amazon$129 at the beginning of the year and asking for zero in return. And in fact, I'm giving them my loyalty in addition to paying them, and they're gonna do interesting stuff with my cash in the meantime is really genius. All right, what else you had? Well, another one is from another early Bezos interview that I was watching where He had to do a lot of fighting of

3:40:56 stock analysts in the early days who were saying, Yeah, lipstick on a pig, you're just a retailer, and I don't understand how your cost structure is really any different. Sure, you sell it on the internet, but you're just a razor thin retailer. Why is this an interesting business? Right. What's the line that people always say whenever Wall Street becomes disillusioned with Amazon. They say it's a charity being run for the benefit of the American consumer. Yes. A lot of people are laughing all the way to the bank on the other side of that bet. So He makes this great point, which is

3:41:24 Okay, let's say we are just a retailer with a retail business model. Well, there's a few things that are pretty different. And A gigantic cost in the retailing business is your rent. And

3:41:37 If you are in a retail space, and it's funny when he's saying this, it's much less expensive than it is now in a prime place in a city. He cites it could be like seven dollars a foot for a great retail space. Oh you're killing me here. Whereas Thinking about San Francisco real estate. Whereas if you're running a warehouse somewhere where it really makes sense for a house to have a distribution center, it's like thirty cents a foot. Which is such such a valuable point. Stores have to store all of their inventory or a lot of their inventory in very expensive real estate. Amazon totally does not. Yeah, that is such a good point. That's such a good point. And I'd actually never heard this argument before doing this research. That's a fantastic point.

3:42:20 Even Walmart. Where Walmart stores are not in multi hundred dollar a square foot prime Prime funny choice of word. Primo urban real estate. It's still

3:42:34 a higher cost of real estate than where Amazon fulfillment centers are. Yeah. Absolutely. So it's one of these things where like

3:42:42 It was interesting reading all the bear cases on Amazon. There's plenty of little quips where you it would be fun to tweet them out and be like, This person was so freaking wrong. But a lot of the criticisms were reasonable. This particular one isn't reasonable, the one that that we just sort of push back on with the cost per square foot. There's another one that wasn't really reasonable, which was this is a money losing business just like all the other dot-coms, because They actually

3:43:07 were profitable if they weren't continuing to reinvest in growth, which would give them this unbelievably durable moat around consumer experience. The one that is always an interesting thought experiment to me is People would sort of ask, well what do you own when you own a share of Amazon?

3:43:25 Because Much like a lot of stocks over the last couple of years. The price in ninety eight, ninety nine was completely disconnected from the reality of the underlying fundamentals. And so you had a business.

3:43:38 that was growing massively. That was generating no gap Income. And was doing things like reinvesting the float

3:43:49 100% of the revenue dollars they were getting in. So they needed to keep growing. in order to ever pay their suppliers back. Like if the music ever stopped and they w didn't keep growing, this isn't just magical free money with no cost. The cost is if the party ends, you're screwed. It's musical chairs. Yes. And so the reason why Amazon wasn't totally screwed is because they were right in their bet that this was a gigantic market that they could basically grow into forever. And sure they had a couple of tough years and had to raise some debt capital to get through it, but the naysayers were right

3:44:26 If it wasn't a crazy high growth. business for three decades. It just so happened that Jeff was right about that. Are you saying he was right? About it being day one for the internet. I am saying that if it wasn't day one for the internet, it would have been a Ponzi scheme.

3:44:45 Let me put a finer point on that. It would have been like me going and opening up a credit card to pay off other credit cards that I owe debt on. That is the type of thing we are talking about with The float situation. This is a little bit of a sidebar here, but

3:44:59 Through the Probably two months at this point since we decided we were gonna do this episode that we've been researching. I've just kinda had in the back of my mind I'm like I wouldn't have even thought about this a couple years ago, but Magic of compounding acquired. Here we are. If by some miracle at some point

3:45:17 We get to interview Jeff. I think that's the biggest question I want to ask him. Is it still day one? Like You step back. Forget Amazon, let's just talk about the internet. What

3:45:29 You thought you might wanna do or the board, you know, or Coach Campbell thought you might want to do in Nineteen ninety nine, two thousand of like step back, pursue your other interests. You decided no wait, it's still day one here. Is it still day one now? Like That is a phenomenal, phenomenal question.

3:45:47 Okay. But to your point on that, is it still day one for the internet? Which I love this question in particular. Here is a quote from the nineteen ninety nine letter to shareholders. And the thing to note here is he's justifying why they're investing so much money in technology to reduce costs. Like just keeps reinvesting, plowing money back in. He ends with We still believe that some fifteen percent of retail commerce. may ultimately move online.

3:46:15 Ha. May, ultimately. Guess what e commerce penetration is right now. Fifteen percent. Fifteen percent. It went from like

3:46:26 twelve percent to like seventeen percent during COVID and is is falling a little bit right now and is hovering right around fifteen percent. So If what he says is uh we believe that it may move online to the tune of fifteen percent. Maybe it's no longer day one for the internet. It's a good question. Certainly not day one free commerce. I personally am definitely not ready to say it's day two, but I I'm just very curious, like what does Jeff genuinely think?

3:46:50 Well, these things are subject to definition too. How many days is it out of? Is this an innings situation? Is this a Three hundred and sixty five days. Is it God created the earth in seven days situations? Or you know, is out of seven. What's the denominator? The other thing that I keep thinking about is like, how could I possibly spend more money online? I'm not sure more of my spend or my time could move on the internet. And internet penetration is gotta be in like the ninety plus percent in America and like getting up there for the rest of the world too. So if you just look at like we're running out of hours in a day and we're running out of household spend to spend on things you could buy over the internet. So

3:47:27 I think really like this is the question, like harking back to what we talked about towards the beginning of the episode. You and I have fortunately in our lifetimes when we were kids, but in our professional careers, we have never experienced anything like Nineteen ninety two, ninety three, ninety four, ninety five, where Traffic on the internet was growing.

3:47:47 Two hundred and thirty thousand percent a year. Like we've never experienced that. We're still We're benefiting from the aftershocks of that. Still. Yeah. I think that's the question. Like where are we in the aftershocks of that? Or Is there going to be another

3:48:02 I mean I think everything. In our time that we've thought of as that as mobile cloud, web three, you know, VR, all like It's all still just the internet. Those are after shocks. That's not the event. Going back to this credit card game or Ponzi or Peter to pay Paul, I don't like this mental model of borrowing against something in the future.

3:48:25 like paying your suppliers in order to do interesting things with the dollars today. I've been giving that a little bit more thought since I sort of threw it out. I think the reason why it all worked out is that the internet ultimately provided a ton of consumer value. on an ongoing basis, even when the bubble burst.

3:48:44 If you look at Traffic. during two thousand, two thousand one, two thousand two. People kept adopting the internet. These tech stocks.

3:48:52 Equity investors sort of ran away from backing them because people got so ahead of their skis investing on clicks and not even Revenue, like clicks and eyeballs. let alone gross margin dollars and hopefully eventually free cash flow. But

3:49:08 The fact of the matter is, even though investors got scared, it provided an incredible amount of consumer value. And so the fact that people kept doing it meant that Amazon kept growing their customer base and the customer loyalty and the number of transactions. And so There was a there there. Yeah. And they could survive the bubble because ultimately more consumers kept getting more value so the party could keep going. over at cashflow.com. Yes.

3:49:38 It's interesting. I'm thinking back on My personal experience living during that time. You know, I'm curious for you, like Did you

3:49:47 have any awareness of The tech bubble. And or the tech bubble bursting. Right, right, right. But I remember September eleventh, but I don't remember that it came after a bubble bursting. Right. But you

3:50:01 Probably. Remember. your experience of the internet. And it growing. In your life, right?

3:50:10 For sure. It sort of grew With me growing up. So I remember like Oh, now I'm old enough to have a computer in my room and oh now I'm old enough for it to be on our Apple Talk network and old enough for it to be connected to the actual internet. So I can use things like AIM.

3:50:27 I always thought those things were like if I really think back at it like rites of passage for someone growing up, and I don't think I realized at the time These are becoming things exactly at the pace that I'm growing up. Yes, totally. Mm-hmm.

3:50:43 You know, it's so funny when you're younger, like now there's like no difference in our age. But like I think'cause I'm what, like four years, five years older than you. Four, I think, yeah. Four, I think, yeah. I was probably like just a little bit ahead, like I was aware of stuff going on. with stocks related to tech companies.

3:51:01 But Like I knew that was happening, but I didn't think about it in relation to what I was doing. But like, yeah, like I just think back of like The percentage of my time in Mental energy directed. At and on the internet.

3:51:15 Just grew and grew and grew exponentially during that time. Right. Turns out Having the entire world of information at your fingertips is unbelievably valuable. Yeah. And like it just permeated everything.

3:51:28 Yeah. Okay, I have more. No go for it. I've got two I wanna share, so Save me room for two. I will. So here's the thing we really didn't talk about.

3:51:38 But is very important to understand about Amazon. They were ludicrously. ludicrously private. They never broke AWS out as a segment. when it was they basically had to. They have always kept everything in this sort of just like gigantic amalgamation of a the fewer numbers we can report, the better. And so in their S1, they never said anything about any sort of cohorts or cost to acquire customer or lifetime value of an Amazon customer.

3:52:05 No one in the outside world, no 10Ks, no S1, nothing has ever said anything about that information. And Jeff just believes these famous Bezos charts where he's like, you know, announcing this cool thing for Alexa and he's like, this was the best year ever. And you just see an unlabel axis that's like, oh, it's upper and to the right or That has served them really well. They're able to do a lot of maneuvering versus competitors with their suppliers, with third party sellers, by just never really disclosing any key information. Yep. Same story with advertising as with AWS. At a certain point they're gonna have to Breakout advertising, you know, it's thirty, forty billion dollar run rate. business at this point. Yeah. But for a long time nobody really knew or understood.

3:52:49 What was happening inside Amazon with that. Yeah. You know, there's this other one. For listeners who are v watching on video, you can see that it's now dark out for David and I. And we took a break to go have dinner and then reconvene and

3:53:03 Slash put baby to bed. Yeah. I was thinking of myself over dinner. Man, like I don't know if we're doing a good job with this episode. It's not really a cohesive story.

3:53:13 And then I I think It kinda hit me that like That is the point. Amazon was doing so much stuff so fast. concurrently and learning from it.

3:53:24 Yeah it's kind of a brute force pathfinding algorithm. That has a bunch of concurrent stuff going on. I mean, it's unbelievably entrepreneurial. It is the most successful scale innovator.

3:53:38 in the world that has ever existed. The two pizza teams thing, which I'm sure many people are familiar with. Which I think Might have been a Rick Dalzelle. Innovation. Oh interesting.

3:53:49 The fact that for decades most of the best entrepreneurial and talent in Seattle just stayed at Amazon. Right, right, right. And the knock on Seattle for so many years was that, you know, thank God Amazon's a pretty big kind of bureaucratic company at this point, and people are leaving to start companies. Oh, the best people stayed. Look at Jassy. totally the biggest impediment to the Seattle startup ecosystem was the fact that Amazon facilitated entrepreneurship over and over and over again for people at all stages in their career with all levels of ambition. And is really, really impressive.

3:54:23 but doesn't really make for a clean story. And rather than sort of beating myself up over that mid episode here, I was like, I think that's actually the point. Let's do hardware. Let's do a subscription business. Let's buy a bunch of planes. I mean, they started the company and IPO'd within three years. So like everything that this company has ever done has been super fast and often concurrent. Yep. How did you phrase it? I think you texted me the surface area of this company is just Immense?

3:54:52 It's just ludicrous. Yes. It's so large. It's kind of impossible to cover. I actually made a list when I was sort of thinking about okay, is this maze thing the right analogy of things that failed and then they backed up and turned left and tried another thing instead and sort of this heat seeking brute force algorithm. It's incredible when you look at auctions, Z shops. We didn't even talk about the Sotheby's partnership where they were Oh yeah. Oh my gosh. Trying to do a borders style thing with Sotheby's. We didn't talk about the firephone. The firephone A9 search engine, which was just wildly underfunded relative to Google search engine, block view, which was the predecessor to what the Google figured out with huge investment to make Street View. Investing tens of millions of dollars in startups like homegrocer.com and pets dot com is just

3:55:39 over and over and over again, there's these huge failures. And yet It's the most successful company of our time. There's so many other companies where compare it to Elon Musk, for example, you look at SpaceX.

3:55:53 It worked. Tesla, it worked. PayPal. It worked. boring company. We don't know yet, but like seems like it could work. Neuralink. Jury's out, it's really early, but it's not a failure. He doesn't go start.

3:56:05 these things that are completely dead ends, the way that Amazon had did dozens and dozens and dozens of times. But Amazon is so damn good at learning. So there's this great quote again in the ninety seven letter, which is We will make bold rather than timid investment decisions where we see a sufficient probability of gaining market leadership advantages. Some of these investments will pay off, others will not. And we will have learned another valuable lesson in either case. And My big takeaway is

3:56:35 If you're gonna look at Amazon as a straight line. It was a philosophical straight line. It was a strategically squiggly line. But it was a tactically random set of dots that there was just a fact finding algorithm going to figure out. Man. I love that. That is such a good point.

3:56:54 But That was the strategy. Jeff says it in the shareholder letters all along. Yeah. Absolutely. Yeah.

3:57:03 All right, what do you got? Okay. So Mm. Two that I want to highlight. One.

3:57:09 Is um The opposite of What? Jeff talks about all the time of Or not competitor focused, we're customer focused, blah blah blah. Like Yeah, of course. They're customer focused. Yes. We've

3:57:20 clearly painted the picture that they care about customers, they're customer experience focused, customer long term customer loyalty is the most important thing, blah, blah, blah. Isn't it great that there's these jephisms that like you and I can shorthand because we're pretty sure that our audience knows them at this point because every interview he's ever done, he sort of says the same things. Yes. Oh so funny.

3:57:41 Jeff is also Such a part of the lineage of great Retail. Entrepreneurs. Starting Concurrently and before Sam Balton, but Salt Price.

3:57:52 Sam Walton. Jim Sinegal, Jeff Bezos. You shop your competitors and you take their best ideas and then you refine them and make them even Better. That's Sam Walton quote that I just loved from

3:58:06 you know, made in America of like Go Shop our competitors. Come back. Don't tell me what they're doing wrong. Tell me what they're doing right. They're doing right. Yeah. And

3:58:16 Amazon did the same thing. Like the eBay story. Doesn't Brad Stone have a way that he sort of frames when Amazon is Customer focused versus competitor focused. I think it's in his second book in Amazon Unbound. Ooh, yeah. It might be in Unbound. I always thought this was a good way to approach it, where if it's in a

3:58:36 emerging market, they're customer focused, because they can afford to be, especially when they're the market leader or they're out ahead. But when they're in a competitive market, like what grocery became, because when they were first starting all their grocery efforts, it was a very sort of we're the leaders in online grocery. Amazon fresh is this sort of crazy experiment and ultimately they sort of fell behind. You have to be very competitor focused when you're in a crowded market where you're behind. And so I think They like to be in markets where they have the luxury of being purely customer focused, but they aren't always that's not always the case. Yeah. And like in some sense it's a luxury. In some sense it's a luxury

3:59:16 To have great competitors. Because they've figured out good stuff, you know. Yeah. And Bezos didn't just steal from other retailers. The other thing about Jeff is he comes from a finance background, whereas a lot of the r classic retailers come from a merchandising background or an operations background. Well, and certainly internet entrepreneurs, very few Came from a finance background.

3:59:39 I mean, there's a lot of John Malone in here. When you sort of look at their tax strategy, the fact that they're generating all this free cash flow, but somehow never reporting a gap profit and they're never paying corporate income tax because they have no corporate income, and yet somehow they're a trillion and a half dollar company and they have started paying more taxes recently because they have started being profitable, blah, blah, blah. But for a long time They really were running kind of the T C I John Malone playbook of Try not to ever show your profitability. No. We gotta do that episode.

4:00:08 For sure. For sure. Okay, so that's my one of two. Two of two? Wh was what pushed us over the edge to do

4:00:17 This episode. Now Which is The period of time. Amazon got started.

4:00:25 A little on the early side before the tech. Yeah. benefited all throughout the tech bubble. And then got it. Hammered.

4:00:33 Arguably harder than Any other surviving internet stock. When the bubble burst and in the crash. And

4:00:43 It was during that kind of nuclear winter when Amazon, I mean leading up to it. The hard work was done from Two thousand To Two thousand seven.

4:00:58 Where they built out everything they gave them like the hugely wide motes that we've talked about on this whole episode. That was the time to build and Jeff was completely unafraid. To do so. Got it, just makes me think so much about like right now. Makes me think about

4:01:16 FTX, right? Amazon granted most of it was debt capital, but during the go go years, they sucked in billions of dollars of capital. And yeah, some of it was spent unwisely, but then When the crash came, they invested through it, they built through it, and distanced themselves by miles from their competitors.

4:01:36 Yeah, it's just like a huge lesson. Like obviously you gotta be smart, you gotta be right, you know, you gotta have managed your company in a way that you have access to capital during those times. But That's the best time to build moats. Yeah. Yeah, absolutely. How should we grade this one?

4:01:55 Yeah. Greeting. I think the best thing to do we talked before the episode about like Maybe we grade Amazon retail here and then we'll grade Amazon web services on the next one. But like you said, this is like a tangled octopus of a company. You can't

4:02:11 You know, we only got up to two thousand seven, two thousand eight in the history year. Right. I don't feel based on everything we've discussed in this episode qualified to assess Amazon retail as it is today. So I think we should scope it to the time period. We didn't talk about Zappos. We didn't talk about Cyprus dot com. We didn't talk about whole foods. Pill pack. I mean.

4:02:33 Echo, you know, all the we we mentioned it, but one medical. One medical. Although Echo to me s falls under AWS. But Oh that'll be fun to talk about. Yeah.

4:02:43 I mean clear it's Both. Right. So I think we should grade Amazon from Founding.

4:02:50 Until Just before the financial crisis. Okay. It's interesting. So If the company were to have

4:02:59 ended in two thousand and seven. I think they were doing about a billion dollars a year of operating income. Mm. Their market cap This is why it's very interesting to be grading on a timeframe with a company that's thinking in a much longer time frame. So if they're generating like a billion ish dollars of operating income.

4:03:18 And and I think their market cap at that point was something like thirty billion dollars. If you're a shareholder, they haven't really realize those future cash flows yet. So the sort of like pedantic way to look at it would be like Well, if the music stopped there, that would have been pretty bad. Yep. But of course it didn't. And of course

4:03:40 AWS would still come, their market cap would absolutely explode, a lot would sort of change. And they've turned on the ability, especially with AWS, to get very profitable in the future. So that's probably the wrong way to look at it. Like what if the company shut down? It's more about how do they execute to set themselves up for ultimately realizing all that value for shareholders. Humans are such funny creatures. The hedonic adaptation is Crazy. If you go back in time to two thousand seven, what did you say market cap was what, like thirty billion? Ish. That was a

4:04:12 Big company back then. Yeah. I mean, I remember when I started Adventure a couple of years later in twenty ten. You weren't playing for Exits in the like tens of billions of

4:04:23 Dollars. If you said like oh well I gotta underrate, you know, this investment, do I think what are the odds that this is gonna be worth? thirty billion dollars. Like people would be like, What are you talking about? Like laughing at like it's like No, we need like, you know, this to be worth a couple hundred million dollars. That's a huge win. Yeah. We just hadn't realized yet how big this stuff could get.

4:04:43 Which is in part why people needed to be more ownership sensitive, or certainly there were more funds obsessed with ownership than there are now. I still actually believe pretty strongly in in ownership, especially as a lead investor and why that's important in architecting a fund model. But at the time, if what you're playing for is three, four hundred million dollar outcomes, then like it's pretty important for your multi hundred million dollar fund to own like a quarter of that company. Yes. Yes. Certainly Tom was

4:05:10 very happy with their Amazon investment at at that point in time. So yeah, I mean I think we have to Give it an A. And especially, you know, as we talked about, like gosh, like Just Incredible execution through that time.

4:05:24 I do have sort of this fun stat from the IPO. If you had bought a hundred shares At the IPO, which I think did we say seventeen, eighteen. Market cap of four thirty eight. Yeah. Million. If you bought a hundred shares for call it eighteen hundred dollars of total investment, today you'd have two point six million dollars and you would have made fifteen hundred X. Yeah.

4:05:47 Which is bonkers. So then the question becomes should we grade Tom's investment in Amazon as of two thousand and seven? Oh I love that. Great A. Great A. Well Unless he sold in two thousand seven, in which case. Yeah. Yeah. Uh two thousand seven it was worth about the resolution's pretty low in the so it's somewhere between thirty and forty billion dollars. So let's say you're buying in at five million and it goes up to forty billion.

4:06:15 billion. You're pretty happy. That's a ten thousand X. Yeah. is crazy if you really start following the

4:06:23 The ripples out. Yeah, Seattle's whole startup ecosystem. Yeah, I mean, of course there was Microsoft before too, and so many great folks came out of Microsoft to build companies and still like Nick Rec room. But

4:06:36 Yeah. It's just a juggernaut. Yeah. I don't even know how to apply a letter greater than this than A plus. I mean the other thing is like surviving the dot com crash. Basically no one did. Google did. But Google was started like right at the tail end of it. Every other

4:06:53 retailer. I mean, and half of them were things that Amazon was invested in, but drugstore.com and pets dot com and all these that completely went under eBay survived its around, of course, but it didn't win, you know? Yeah. pretty unbelievable to make it through. that sort of three year absolute drought of the availability of capital. and a complete souring. I mean and you couldn't I PO

4:07:17 So You know, if you weren't already out like Amazon was, there's basically no chance that you were going to until I think Google finally IPO'd in two thousand four. Two thousand four. Yeah. And even then it was that wasn't like it opened the floodgates. Right. Yeah, we gotta we gotta go A plus X A plus Yeah, great. Yeah.

4:07:36 We'll do the whole thing on our next episode. I can't, you know, if I were to predict a grade for Amazon web services, I I would predict an A plus Wow, why even listen to the episode, David? I think it'll be worth listening to the episode. By the way, I've been saying two trillion this whole time. I finally just looked it up. Amazon was a one point nine trillion dollar company and today is a one trillion dollar company. It is crazy what has happened over the last two years. But they just reported.

4:08:04 Q to your earnings and uh The market liked it. So pop fifteen percent. I bet it's closer. By the time who knows? If we could predict the future, uh we wouldn't be fans of NZS. But by the time this comes out, probably fair to say ballpark one and a half. Trillion ish. Who knows? Yeah. Yeah, we'll see.

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4:09:17 So if you want to make learning your competitive advantage, whether you're building new AI experiences or just evolving your existing core product, go to statsig.com slash acquired to get started. All right, great episode. Should we do some quick carve outs? Let's do carve outs. What you got? So I have a carve out, and I can't remember if you recommended this to me privately or if it was a previous carve out of yours, and that's how I heard it, but I just listened to the Rick Rubin episode of the Lex Friedman podcast, and my God, is that a good interview? So good. Do you think it's a good interview at the beginning? And then like you get like 90 minutes in. And you're like, this is a really good interview. And I think that happens a lot on the Lex Friedman podcast.

4:09:58 Uh yeah. So good. Lex is such a good interviewer. Like his skill. As an interviewer. Is. Just

4:10:05 Top notch. There's a level of intimacy that he gets with people where it It's uncommon to have a level of intimacy. And I don't think it's because he previously knows them. I think it's because Everybody knows that's what you bring when you're on the Lex Friedman show. So yeah.

4:10:21 if it's anywhere in your sort of oh, I should listen to that some point soon, and especially if you're a music fan, and especially if you're a heartfelt music fan, like you're someone who really likes to feel and put yourself in the place of maybe the artist or something they were going through. There's just so much. I mean, in particular the way he goes into the The Johnny Cash. Sort of fine all the time. album of covers that he did.

4:10:46 And the um hurt by Trent Reznor. Yeah. Hurt. Yeah. Oh man. The number and breadth of like

4:10:57 Rick was Part of just sitting there producing for. Creating. Yeah, not even just in there, like creating with the air design. Uh.

4:11:07 It's like Forrest Gump in real life. What a legend. Yeah. All right, I was gonna do just one, but I actually I think it's trying to decide what to do. I I think it's appropriate to do a

4:11:16 Popoury a suite of different Types of media. Here. Given that that's Amazons.

4:11:24 DNA. I probably Potter consumed most of this through an Amazon service, one way, shape or form. Books. I have been reading a few books by Ursula Le Guin.

4:11:36 Very famous. American author. Great. Both sci fi work. And fantasy work. Both of which I really enjoy. Hm.

4:11:45 Sci fi, I read her I think probably best known sci-fi novel. It's called The Left Hand of Darkness. Excellent. book highly recommend. And they're kinda in that same vein of like I feel like it was written in the sixties, maybe fifties or sixties. I could be wrong on that, but

4:11:59 that era of type of sci fi. And it's very not it's a character driven sci fi. So less about like crazy technology and more about as a setting to Explore characters, great. And then I'm Just starting her earth sea. fantasy series which I had no idea. And now I'm like reading it to them like

4:12:19 Oh, and and some of the reviews on Amazon talk about This is probably part of the inspiration for Harry Potter. So super, super cool to go get that little bit of history. Harry Potter, by the way, broke a lot of Amazon's algorithms. I was listening to a couple interviews with early engineers who were saying like the you may also like or people who like this also like. Basically everyone liked Harry Potter. And so they would have to either special case it or tune some parameters to make it so it just wasn't always recommending Harry Potter with any other product because Any other product had a similarity if buyers with Harry Potter.

4:12:55 That's funny. It's like the Justin Bieber server at Twitter. Late nineties, early two thousands, yeah, like Cultural. Touchstones for the world. Yeah. Okay. Then music.

4:13:07 I Just today was re listening to my beautiful Dark Twisted Fantasy. Dissect. Yes. And then it reminded me I tweeted about this. I think that was your car value. Years ago.

4:13:21 Season two of Dissect, the Dissect Podcast. Oh. I mean the album is a master master work. And I didn't realize what a masterpiece the album was until listening to the podcast and then gained this just the appreciation you get. for Kanye as an artist and every single element musically and lyrically of every single song.

4:13:43 is just Next level. We joked about this, but I feel w we should do a Kanye episode at some point, you know, it'd be the the follow up to the Taylor Swift episode. Yeah, the the Jedi and the Sith. Yeah, exactly. My last piece of media.

4:14:00 is a throwback to Car of mine from not that long ago to Elden Ring. The video game I finally Beat it. Months later. If you're doing anything else and if you like have a baby, like you're talking months to beat this thing. Unreal.

4:14:17 Achievement of a game. Like so amazing. I gotta say though, I also tweeted about this. I was a little disappointed at the end. I think I felt like it lost. Steam. But like I I can totally forgive it because I mean this is like If every other game, you know, if old games, you know, were like running a like, you know, hundred meter dash and then like it got to the point where like The achievement of making a triple A game was like running a marathon.

4:14:39 This from software and Miyazaki who uh created it. This is like running an ultra marathon. The amount of work and content and just like incredibless that went into this game is on a scale that I like no other game has ever matched.

4:14:54 So Worth playing. Worth sinking months of your life into. If you have several months. Yeah, exactly. Uh, awesome. Listeners, thanks for going on the journey with us.

4:15:05 Man, I cannot wait to dive into AWS research. I try not to research two episodes at once because it's too hard to hold all this in our our heads concurrently. So I've been sort of resisting diving into the annual letters from O seven onward. and really trying to understand the the landscape of cloud today, but that's gonna be a great one. This was such a journey. We're only halfway there. There's more to come. Yeah.

4:15:29 Absolutely. After you finish this episode, come discuss it with all of us at Acquired Dot Fm slash Slack. Got a job board. If you're looking for the next move in your career, go to acquire.fm slash jobs. Big

4:15:42 change in all the things that we're calling to action for. I don't even know if that's the right calling you Toward action upon. How many weird prepositions can I throw? These closing calls to action. Merch. Holy crap. It's finally here. Amazon inspired us. Thanks, Jeff Bezos. Your contributions have been many, but you convincing us to start a store on the internet is perhaps your greatest yet. So thank you for that. You can go to acquired dot fm slash store and find some of the finest T shirts.

4:16:15 Hoodies. Crew neck sweatshirts. What else is there? Tanks and even onesies available. And we'd love your feedback as we consider expanding the store as well. And I don't think we have the infrastructure yet for third party sellers to come on and create their own acquired merch. But perhaps we'll explore that if we can get a a wide enough user base to amortize those fixed costs of making a great user experience for you all across. I gotta stop. I gotta end this. Check out the LP show. Uh you can find it in any podcast player. And uh with that, listeners, we will see you. Next time.

4:16:48 We'll see you next time. Who got the truth? Is it you, is it you, is it you Who got the truth now? Oh.

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