#282 Jeff Bezos Shareholder Letters

0:00 It's all about the long term. Jeff Bezos' first shareholder letter in nineteen ninety seven. This is day one for the internet, and if we execute well For Amazon. Today online commerce saves customers money.

0:11 And precious time. Tomorrow through personalization. Online commerce will accelerate the very process of discovery. Amazon uses the internet. To create real value for its customers.

0:22 And by doing so Hopes to create an enduring franchise. Even in established and large markets. We have a window of opportunity as larger players marshal the resources to pursue the online opportunity. And as customers.

0:36 New to purchasing online. Are receptive to forming new relationships. Our goal is to move quickly. To solidify. And extend our current position.

0:46 While we begin to pursue the online commerce opportunities in other areas. We see substantial opportunity in the large markets that we are targeting. This strategy is not without risk. It requires serious investment. And crisp execution.

1:03 Against established leaders. We believe that a fundamental measure of our success. will be the shareholder value we create over the long term. The stronger our market leadership The more powerful our economic model.

1:16 Market leadership can translate directly. Higher profitability. Greater capital velocity. and correspondingly stronger returns on investing capital.

1:27 We have investe and will continue to invest aggressively. to expand and leverage Our customer base. Brand. And infrastructure

1:36 As we move To establish An enduring franchise. There's that word again, where right in the beginning he's already said that we use the word enduring twice. Because of our emphasis on the long term. We may make decisions and weigh trade offs differently.

1:49 than some companies. We want to share with you our fundamental management and decision making approach so that you Our shareholders May confirm that it is consistent.

1:59 With your investment philosophy. We will continue. To focus relentlessly. On our customers. We will make bold.

2:08 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.

2:21 In either case. When forced to choose between optimizing the appearance of our gap accounting And maximizing the present value of future cash flows? We'll take the cash flows. We will work hard to spend wisely.

2:35 And maintain our lean culture. We understand The importance of of continually reinforcing A cost conscious culture.

2:45 We will obsess. Over customers. From the beginning, our focus has been on offering our customers compelling value. We set out to offer customers something they simply could not get. Any other way.

2:57 and began serving them with books. We brought them much more selection. than was possible in a physical store. and presented it in a useful, easy to search and easy to brow mat. In a store.

3:09 That's open three hundred and sixty five days a year. twenty four hours a day. We maintained a dogged focus. On improving the shopping experience. We dramatically lowered prices.

3:21 Further increasing customer value. Word of mouth remains the most powerful customer acquisition tool That we have. I take great pride in being part of this team. Setting the bar high in our approach to hiring has been

3:34 And will continue to be. The single most important element Of Amazon's success. It is not easy to work here. We are working to build something important.

3:44 Something that matters to our customers. Something that we can tell our grandchildren about. Such things aren't meant to be easy. We are still in the early stages of learning how to bring new value to our customers. Through internet commerce.

3:58 We know vastly more about online commerce Then when Amazon was founded. But we still have so much to learn. Though we are optimistic. We must remain

4:07 Vigilant And maintain a sense of urgency. That was an excerpt from Jeff Bezos' very first shareholder letter. So this is the third time that I've read Jeff Bezos' shareholder letters. I plan on rereading them many times in the future. The first time I made a podcast.

4:22 about his sharehold letters was all the way back on episode seventy one. And if you look at episode seventy one, the tagline the description for that episode. Actually from a fantastic uh business email newsletter called CB Insights. And they had a post about

4:37 uh Jeff's shareholder letters and I think they put it the best way. Like why would you wanna spend so much time Reading them and learning from them. And they said to read Bezos Sashero letters is to get a crash course in running a high growth internet business. From someone who mastered it. Before any of the playbooks were written.

4:54 And so before I go to the nineteen ninety eight shareholder letter which is all about obsessions. I just want to go over the notes. That I had from nineteen ninety seven just these things that I jotted down for myself. Because a main theme of the shareholder letters is a main theme of the history of uh the history of entrepreneurship, that fact that repetition Is persuasive.

5:12 Almost all of history's greatest founders they identified a handful of principles. that were important to them as they were building the business and they constantly repeated that decade after decade. And you're gonna see that as we go through Jeff shareholder letters. And it was so important that That nineteen ninety seven shareholder letter was attached.

5:28 to every single the end of every single other shareholder. It can be thought of as the founding document. For Amazon. And so some of the notes that I jot jotted down as I read that sharehold letter, you know, for the third or fourth time.

5:41 Uh, more innovation is ahead of us. It is still early. The opportunity if we execute well is enormous. We will move quickly. We will endure right from the very beginning.

5:52 Jeff's goal was Amazon was going to be a durable Long lasting company. Uh we will focus on cash flow. Once in a lifetime opportunities, which is what he considered building Amazon. Uh will be risky.

6:04 In fact, I've heard him talk in other um interviews that he gave himself at best a a thirty percent chance of success. He thought the likely outcome of Amazon would be complete failure. Uh customer obsession is our North Star.

6:18 It is what we will bet the company on. We will be bold. We'll we will have a frugal these are all my notes, keep in mind. We will have a frugal lean culture. That Sam Walton would approve of.

6:29 Just famous for reading and being heavily influenced by Sam Walton's autobiography. He'd have the executives inside Amazon read it, he'd hand out copies where he would actually go and highlight important parts and give it to people he was working with. I've read Sam's book multiple times. The last time I did a podcast on it was episode two thirty four. If you haven't uh listen to that yet. You probably want to listen to it after this. Uh so we'll have a frugal lean culture that Sam Walton would approve of.

6:50 This will be hard. all valuable things are and we will have to learn along the way. And so those are main themes that you're gonna see him repeat. over and over again, the note on the very first page of uh the nineteen ninety eight shareholder letter that I wrote myself is repetition is persuasive. This is day one. We must stay v vigilant. Uh we w we will act with a sense of urgency.

7:09 Because there's both risk and opportunities ahead. And we will have failure. So it is a he let's go over to the the shareholder letter. It is truly day one for the internet, and if we execute our business plan well, it remains day one for Amazon. We think the opportunities and risks ahead of us are even greater than those behind us. We will have to make many conscious and deliberate choices.

7:28 Some of which will be bold and unconventional. Hopefully some will turn out to be winners. Certainly some will turn out to be mistakes. Heads down focus on customers. helped us make substantial progress in nineteen ninety eight.

7:43 And so this nineteen ninety eight shareholder letter is all about what they're going to choose to be obsessed about. We intend to build the world's most customer centric company. But there is no rest for the weary. I constantly remind our employees to be afraid. To wake up every morning terrified.

7:59 Not of our competition. But of our customers. Our customers have made our business what it is. They're the ones with whom we have a relationship and they're the ones to whom we owe a great obligation. And we consider them to be loyal to us.

8:13 Right up until the second that someone else offers them a better service. We must be committed to constant improvement. Experimentation. And innovation in every initiative. We love to be pioneers.

8:25 It's in the DNA of the company. And it's a good thing too. Because we'll need that pioneering spirit to succeed. In fact When he talks about hey, we're gonna we're gonna experiment, we're gonna be pioneers, we're going to invent. If you read his very last shareholder. Uh letter.

8:40 Which I have a a a handful of highlights from. I'll get you later. But also you'll see uh in a bunch of i interviews how he describes himself He says, I am an inventor.

8:50 I didn't know that the first time I read the shareholder letter. So I think knowing how he thinks about himself. adds more context to why these things are important to him. We love to be pioneers. It's in the DNA of the company and it's a good thing too because we'll need that pioneering spirit to succeed. We're proud of the differentiation we've built through constant innovation. And relentless focus on customer experience.

9:11 I don't have the I don't think I have the Kindle version of this book. Maybe I do. But I would imagine if you search the word relentless, it's gonna pop up a bunch of times. In fact If you go to this day, if you go to relentless dot com, Jeff owns that that uh domain name and it points to Amazon. I would love to ask him the question.

9:30 If you could only have one word to describe you on your tombstone, what would it be? My guess is he would pick relentless. So then he's gonna get into how he thinks like what's the proper way to hire This section is work hard, have fun, make history. It would be impossible to produce results in an environment as dynamic as the internet without extraordinary people. Working to create a little bit of history isn't supposed to be easy.

9:51 Repet more repetition there, right? And well We're finding that things are as they're supposed to be. So he's saying it's obviously very difficult. Setting that bar high in our approach to hiring has been And will continue to be the single most important element.

10:04 of Amazon success that is a sentence It's very similar. He has a sentence very similar to that in the very first shareholder letter as well. During our hiring meetings, we ask people to consider three questions before making a decision. Number one, will do will you admire this person? For myself I've always tried hard To work with people

10:21 To work only with people I admire. And I encourage folks here to be just as demanding. Life is definitely too short to do otherwise. Number two, will this person raise the average level of effectiveness of the group That they're entering.

10:35 That's a great question. We wanna fight entropy. The bar has to continuously go up. And number three. Along what dimension

10:42 Might this person be a superstar. This was the most Like I was very surprised when I read this again. Um so he's talking about, you know, many people have some kind of unique skills or interest. and perspectives that actually enrich uh enrich the work environment for everybody else that they're working with.

10:57 And this just threw me for a loop. It's often something that's not even related to their jobs. One person at Amazon Is a national spelling beat champion. I suspect it doesn't help her. In her everyday work.

11:08 But it does make working here more fun. And then he goes back into this idea, hey, this g we have a gigantic, unbelievably valuable We found out you know trillions of dollars value. Uh uh uh potential opportunity in front of them. And it's supposed to be hard.

11:23 As we look forward, we believe that the overall e uh e commerce opportunity is enormous, although Amazon has established a strong leadership position. It is certain that competition will even further accelerate. oper so he's talking about what he wants. He wants operational excellence and high efficiency. And then another main idea he has is that you should

11:42 clearly articulate your philosophy so that you're the the right people can self select in, not only people that are working for you, but any shareholders or investors that you may attract. So he says the most important thing I could say in this letter was said in last year's letter. Which detailed our long term investment approach. Because we have so many new shareholders. We've appended last year's letter immediately.

12:01 Immediately after this year's. I invite you to please read the section titled It is all about the long term. You might want to read it twice. to make sure that we're the kind of company you want to be invested in.

12:12 As it says there, we do not claim It's the right philosophy. We just claim that it's ours. So nineteen ninety nine. This one's titled Building for the Long Term. And he starts right away, stay relentlessly focused on the customer. We can be uniquely positioned to serve new customers best and benefit as a result.

12:30 Our relentless focus on customers has worked. So he's just talking about he's recapping the year. This is also something he talks about. in his very last shareholder. The the reason that customers pay you, the reason they pay Amazon, the reason they pay any Business is because We and you create value for them.

12:47 And so that's why he preaches that's where your focus should be. This is very interesting. So It's like uh he's giving a talk at Stanford University. And he's asked the question like what do you own? If I'm a shareholder of Amazon, what do I own? At a recent event at Stanford University campus, a young woman came to the microphone and asked me a great question.

13:03 I have one hundred shares of Amazon. What do I think And so he's like, Oh, that's an interesting question. Here's his answer. You own a piece of the leading e commerce platform. We believe that we have reached a tipping point.

13:13 Where this platform now He's already describing His business As a platform. And when I went over so I had already read

13:22 I read through all the shareholder letters, right? And then before I sit down to record and to talk to you again. I reread all my highlights, right? So It hit me on that that the the rereading of this part. I'm like, Oh, if this is the no.

13:36 If you stop and think about it. It is a company that builds other companies. That is how he viewed Amazon. In fact, in the last show roller he talks about it's listen. All of our he names like the most valuable businesses.

13:47 uh that that they invented along the way in the l you know, the twenty or something years. Separating the very first character l letter to the last one. And he's like When we started nineteen eighty seven, we hadn't invented Prime, we didn't invent Marketplace, we didn't invent Alexa or AWS. There was no way we could have predicted they were the companies were going to invent, but he set up the company.

14:08 from the very beginning to create more companies as they go along and learn more. Cause listen to what he says here. We believe that we've reached a tipping point. Where this platform, Amazon, allows us to launch new e-commerce businesses faster with a higher quality of customer experience, a lower incremental cost. A higher chance of success and a faster path to scale and profitability. than any other company. Our vision is to use this platform to build earth's

14:30 most centric company. So that is an extremely important point. And it also relates to why I think you should feel confident investing time listening to Founders Podcast. Because all of history's greatest entrepreneurs did exactly what you're doing now. They're learning from the great people that came before them. This idea. This uh this blew my mind, right? This idea of hey, I'm gonna create the world the one that he's talking about right here in the show letter.

14:51 I'm our vision is to use this platform to build Earth's most customer centric company. He learned that idea from the founder of Sony, Akiamerita. I I I covered uh his autobiography, which is absolutely fantastic. I'll be back on founders one oh two if you haven't listened to it. Let me pull out another this is something I heard Jeff say in a uh a note I took on this conversation he had. And so um then then I left myself here is Jeff bases on what he learned from Akian Marita. And how it influenced the building of Amazon. Right after World War Two, Akiamarita, the guy who founded this is Jeff talking. Right after World War II, Ake Marita, the guy who founded Sony, made the mission for Sony that they were going to make Japan known for quality.

15:25 And you have to remember, this was at a time when Japan was known for cheap copycat products. And Marita didn't say we're gonna make Sony known for quality. He said we're gonna make Japan known for quality. This is the punchline. He chose a mission for Sony.

15:39 That was bigger than Sony. And when we talk about Earth's most customer centric company We have a similar idea in mind. We want other companies to look at Amazon and see us as a standard bearer. For obsessive focus on the customer.

15:56 As opposed to obsc obsessive focus. on the competitor. I love how all this stuff ties together. So let's go back to this. Our vision is to use this platform to build our most uh customer centric company, as it is probably clear. This platform affords an unusually large scale opportunity.

16:12 One that should be one that should prove very valuable for both customers and shareholders. If we can make the most of it. Despite the many risks and complexities, we are deeply committed to to doing so. And so if you read between the lines, what he's saying with that, again.

16:26 Another idea of his building a valuable company will be difficult. It is supposed to be difficult. And then he goes into his goals for next year, which at that time is would be the year two thousand. Get big fast is something he repeats over and over again. He says uh when you're on uh when you're on When you're in internet business, you can either be really, really small or really, really large. The internet kinda destroys the middle. So he says we will continue to invest heavily in introductions to new customers.

16:49 Though it's sometimes hard to imagine with all that has happened in the last five years, this remains day one for e commerce. And these are the early days of category formation where many customers are forming relationships for the first time. He was right about that. I go back all the time and and look when I um Like uh when I buy certain books or it's like when's the last time I read it, when's when I bought it.

17:09 You know, once I start ordering books on Amazon. He captured a custom for now what fifteen, seventeen years, however long it's been. So it's like they're forming new relationships for the first time. We should attract as many as many of these people as possible. And then if we just obsess over them and constantly provide value, they will be loyal to us. What is the lifetime value of somebody's been ordering uh not only books, but almost everything on Amazon for seventeen years. He was dead right about this.

17:32 So it says this remains day one for e-commerce and these are the early days of category quarter formation where many customers are forming relationships for the first time. We must work hard. to grow the number of customers who shop with us. On the very next page. No. He sees how everything connects and feeds into his overall plan for Amazon. There's this very famous thing you should uh uh very famous image. If you Google image search uh Amazon flywheel.

17:56 I think the visual gives a basic idea. This is not the exact same thing and his fli the flywheel has evolved over time, but you can see that's how he thinks naturally,'cause this is a very early days of the company. He's talking about this. So he talks about the importance of very high standards, he talks about over and over again. To us, operational excellence implies two things. Delivering continuous improvement and customer experience. And driving productivity, margin, efficiency and

18:17 Set velocity across all of our businesses. Often now this is cr this is where it all connects. This is very interesting. Often the very the best way to drive one of these, right, you just said hey We're gonna constantly continuously improve in customer experience, right? We're gonna drive productivity, increase margin, efficiency, and asset velocity across all of our businesses. Then This is where

18:36 how he connects all this t together for you and I. Often the very best way to drive one of these is to deliver the other. For instance, more efficient distribution yields faster delivery times, which in turn lowers contacts per order and customer service costs. These in turn improve customer experience and build brand. Which in turn decreases customer acquisition and retention costs. That is one of the most important paragraphs, I feel.

19:02 In all of the shareholder letters. Again, you can read them for free if you don't have the book that I'm holding in my hand. That is nineteen ninety nine. I will put that entire paragraph In the show notes, make sure you you get this uh shareholder letter and read this whole part. That is so important. Our whole company is highly focused on driving operational excellence. In each area of our business. In two thousand.

19:22 And then obviously moving forward. being world class in both customer experience and operations will allow us to grow faster and deliver even higher levels. And even though we're still in a very Beginning of the shareholders.

19:35 I think you see Jeff Bezos is unapologetically extreme. He sets an extremely high bar. He uses words over and over again, words like world class. Excellent.

19:46 Highly focused. If you listen to the episode on Steve Jobs. That I did last week. Jeff Vazos also reminds me of Vince Lombardi. There's an entire section in that book, which is absolutely fantastic about why. What Vince Lombardi and Steve Jobs

20:00 had in common And in that story, Vince is meeting Vince Barty's meeting with his new players. For the very first time and he's giving them the speech. And Lobardi was also unapologetically extreme, and he tells him I'm not remotely interested. In being just good.

20:15 So now we get into the pain part, the inevitable pain part of entrepreneurship. This is when Amazon stock drops by eighty percent. And you're gonna see Jeff does something extremely smart here. You and I talked about this a couple of weeks ago. I did that book uh What I learned.

20:31 Uh, before I sold to Warren Buffett, it's episode two seventy nine. And something that that his dad taught him. Was that you need to concern yourself only with the controllables. They were trying to build a diamond business during uh the depression they went through

20:44 you know, that company I think was like seventy nine years old by the time they sold to Warren Buffett. So they went through m multiple different financial panics. And his dad's like, Listen, we can't control the macro environment, all we can control All we should be focusing on, rather. is what we can actually control inside the actual business. So um I wrote um everyone else is is f was focused on the stock.

21:02 uh Jeff was focused on the internal metrics of his business. So he's like this is an a bizarre experience because yeah, the stock dropped by eighty percent, but the actual internal metrics of the company are improving. So it says ouch. It's been a brutal year for many in the capital markets and certainly for Amazon shareholders. As of this writing, the shares are down more than eighty percent from when I wrote you last year. Nevertheless, by almost any measure, Amazon the company

21:24 is in a strong position. Than at any time in the past. And he does something smart here where he starts out with all the mistakes. He's like, Listen, I said we're gonna be bold, we're gonna make bold investment decisions. We are not gonna make timid investment decisions. But bold bets.

21:37 can and will fail sometimes. That's completely expected. Uh, so they wind up losing a bunch of money on these other dot com startups. Many of you hear have heard me talk about the bold bets that we as a company have made and will continue to make. Our decision to invest in smaller e-commerce companies. Including living dot com. And pets.com.

21:53 Both of which shut down operations in two thousand. We lost a significant amount of money on both. But we're gonna see Jeff is learning. And I'm gonna tie this into another he gave a Ted talk on uh the internet's electricity metaphor. I took notes on it many, many years ago. I'll include it.

22:09 Uh the link down below, but check this out. he realized like oh this isn't the gold rush, that's the wrong metaphor for building an internet company. in the nine in the you know, mid to late nineties. So he's learning. We made these investments because

22:21 We knew we wouldn't ourselves be entering these particular categories any time soon. And we believe passionately In the land rush metaphor, the gold rush metaphor for the internet. Indeed, That metaphor was an extraordinary useful decision aid.

22:34 for several years starting in nineteen ninety four. But we now believe its usefulness. Largely faded. Over the last couple of years. In retrospect.

22:43 We significantly underestimated how much time would be available. to enter these categories. And so according to this, I first took notes on Jeff Bezos' TE Talk on the electricity metaphor for the web's future. All the way back in two thousand eighteen. I watched it again before I sat down to talk to you.

22:59 And in this talk he's like oh the the analogy between the internet Boom, and the gold rush. starts to diverge because in the gold rush, like there's a finite amount of gold that you can take out of the ground. But the internet gets bigger every day. And he says there's a much better analogy that allows you to be incredibly optimistic. So he is still incredibly optimistic when everybody else around him, the external world is saying, you know. All this is th this isn't gonna work out.

23:21 you are now valued eighty percent less in the last twelve months, even though your business is getting better, right? This uh Jeff this is Jeff talking. There's a much better analogy that allows you to be incredibly optimistic, and that analogy is the electric industry. And his comparison between the internet in the electric industry, this is my favorite paragraph. They are both thin Horizontal.

23:38 enabling layers that go across lots of different industries. It is not a specific thing. They both can be used as incredible means of transmitting. They they are both. They both are an incredible mien's. of communicating information flows.

23:52 And then just one final thing that may be more important than everything else in the talk. is comparing and contrasting your view on the industry that you're working in. With other people's view. At this time the external world is telling Jeff the gold rush the internet gold rush is over. And just like uh no.

24:10 We haven't even barely begun. He says we're in the nineteen oh eight hurley washing machine stage of the internet. You have to watch the video to understand that it was actually hilarious. This is the paragraph that just fires me up. If you will'cause I feel this way about podcasting. If you really do believe it's the very, very beginning, then you are incredibly optimistic.

24:28 I do think there is more innovation ahead of us. Than there is behind us. We are very Very early. And Jeff turned out to be dead right.

24:37 I would spend the eighteen minutes to watch the video. It's absolutely It's just fantastic. You see us thinking Uh, it's just the the Jeff Bezos of two thousand three, like He had no idea. How correct he was and the innovation and inventing that laid before him.

24:50 for the company that he was building. Absolutely m and he looks completely different, by the way, too. All right, so let's go back to this. Online selling relative to traditional retailing is a scale business. So this goes back to his main idea. Listen, if you're on the internet, you can be really small or really big. He obviously he's like, We're gonna be the the biggest. Only and this is why. Online selling relative to to traditional retailing is a scale business.

25:11 Characterized by high fixed cost and relatively low variable cost. This makes it difficult to be a medium sized e commerce company. So moving on to the two thousand one shareholder letter, we see this idea and we feel everything is connected. The note is simple to myself, repeat this loop.

25:29 Focus on cost improvement. So this is a very old idea. Something you and I have learned. History of entrepreneurship is full of people that just keep telling you, all the founders keep telling you over and over again. Watch your cost, watch your cost. The maximum that I always think of. I can't remember if it was he uh either Andrew Carnegie or his partner, Henry Clay Frick. Gentlemen, watch your costs. That is what they preached up and down their organizational structure. Watch your cost, watch your cost, watch your cost. Focus on cost improvement. This is Jeff telling you. Why is it so important?

25:55 Ma he brings up the the importance of frugality. And having a low cost structure over and over and over again. Focus on cost improvement makes it possible for us to afford to lower prices, which drives growth. Growth then spreads, fixed costs across more sales, reducing cost per unit, which makes possible more price reductions.

26:13 Customers like this. And it's good for shareholders. Please expect us to repeat this loop. Then he starts to summarize some of the gains and and growth they had. Gonna pull out one sentence because he says this is the single most important thing and it is probably what he repeats the most.

26:28 Most important, we stayed relentlessly focused on the customer. Then he jumps into the next paragraph. Obsess over customers. He does not He He does not care if you think he repeats himself. He does. And he does that intentionally. He is telling you.

26:43 With the frequency in which he He repeats these ideas. What is important to him? I love this. Obsess over customers. Uh, until July, Amazon had primarily been built on two pillars of customer experience. uh selection and convenience we added a third customer experience pillar

26:59 Relentlessly lowering prices. So now he's using that word again, relentlessly lowering prices. He's like, listen. We were able to improve the customer experience because we have more selection and it's more convenient if we just ship you uh what you want instead of you driving to the store waiting in line and everything else. Now where did he get the idea to relentlessly lower prices?

27:18 If you listen to episode one seventy nine, which is when I read Jeff's uh biography which is called The Everything Store. I think that was the second or third time I read it. You already know the story. This came as a result of one of the most important meetings that Jeff had. In his entire Life.

27:33 It is when Jim Sinagal the founder of Costco met with Jeff for coffee, if I remember correctly. Actually me for coffee. Inside like at a Starbucks inside of a Barnes and Noble. Which is funny'cause I was obviously one of Amazon's uh main competitors at the time.

27:47 And so I want to read a bunch of highlights from the Everything store. This is absolutely fantastic. I love the way Jim Sinagle thinks I wish uh so many people were like, Why haven't you done an episode on Costco? I can't there's no books on No biographies on Jim Sinegal, unfortunately. The day it it releases

28:03 I wish you'd write an autobiography. Is the day I make the podcast. So it says i it's just giving some background on the fact that they have a lot a lot alike. uh like Bezos Cinegal have rejected multiple acquisitions offers over the years, including one from Sam Walton. And Cynical liked to say he didn't have an exit strategy that he was building a company for the long term.

28:19 Bezos listened carefully and once again drew key lessons from a more experienced retail veteran. What are you and I doing at this exact same moment? It is exactly Exactly what Bezos did. He was obsessed. About studying and learning from people that came before him and in this case Jim Sinegal is way more successful and way more wealthier.

28:39 Obviously that's that's change now. than Bezos was at the time. Bezos listened carefully and once again drew key lessons. From a more experienced retail veteran. And what does Jeff do? He doesn't just oh that's that that's a nice deal. He takes that idea, he learns a new idea.

28:53 goes back to a company and relentlessly implements it. Cynical explained the classical model to Bezos. It was all about customer loyalty. There are some four thousand products in the average Costco warehouse. Uh, there are copious quantities of everything in there and it's all dirt cheap. Costco buys in bulk and marks up everything at a standard across the board, fourteen percent. Even when it could charge more. That's an idea that Bezos has.

29:14 He's beating them on selection. Uh convenience. And prices. When people say hey Yeah, we're beating him on on uh prices by such a large margin, let's increase it a little bit more. It's like no.

29:23 Synagogue goes into the fact that uh their most uh all their profit comes from the annual membership. It's gonna sound a lot like what Prime turns into, right? Uh Jim told him the membership fee is a one time pain paint. But it reinforced its but its value is reinforced every time customers walk in. And see a forty seven inch TV that's two hundred dollars cheaper than anywhere else.

29:42 And then Jim also realized how it all connects. Costco's low prices generated heavy sales volume, and the company then used its six significant size. To demand the best possible deals from suppliers. Thus raising its per unit gross profit dollars. You have to ask Jim, why are you educating a a potential competitor.

29:59 And Jim says because I benefited From people that came before me that gave me their ideas. A decade later and finally preparing to retire, Senegal remembers the conversation well. I think Jeff looked at it and thought that was something that he could apply to his business as well. He does not regret educating an entrepreneur who would evolve into a ferocious competitor. This is what Jim said.

30:16 I've always had the opinion Де висло. And then this is the result. Bezos took the lessons he learned during that coffee in 2001 and applied them with a vengeance. The Monday after the meeting with Cynigal, Bezos opened an S team, that's his executive team meeting.

30:33 By saying he was determined to make a change. The company's pricing strategy, he said, according to to several executives who were there was incoherent. Amazon preached low prices, but in some cases the prices were higher than competitors. Like Walmart and Costco Bezos said, Amazon should have everyday low prices. This is why if Amazon could stay competitive on price, it would win the day on unlimited selection. And on the convenience afforded to customers.

30:53 who didn't have to get in the car to go to a store and wait in line. That July as a result of the Cynigal meeting. Amazon announced It was cutting prices of books. Music and videos.

31:04 By twenty to thirty percent. And this is when they start identifying the flywheel, they start identifying the loop that has been mentioned. A few times in the Sharh letters so far. Lower prices led to more customer visits, more customers increased the volume of sales and attracted more commission paying third party sellers to the site. That allowed Amazon to get more out of fixed costs. Which he just referenced, right? It's like we are a large fixed cost business.

31:25 Online selling is a large excuse me, let me read it. I'm gonna go I had uh let me go back in the uh previous year. Online selling is a scale business characterized by by high fixed costs. And relatively low variable costs, right? He goes back to load.

31:40 Amazon to get more out of fixed costs like the fulfillment centers and the servers needed to run the website, this greater efficiency. Then enabled it. to lower prices further. feed any part of this flywheel they reasoned, that is Jeff and his executive team, right? This is their thinking behind this. And they were dead right about this.

31:57 Feed any part of this flywheel they reasoned. And it should accelerate the loop. And this is where it gets really crazy. If you believe The ideas that Jeff learned in that meeting with Jim Sinegal.

32:09 Helped Amazon survive and then grow. And you look at the difference between where Amazon was before the meeting and where it is as a result of the fact that it was able to survive for the next twenty years. Вот валю, вот здесь економік валю. Of those ideas. This is why studying the history of entrepreneurship is so valuable. It is exactly there's a line in poor Charlie Charlie's almanac.

32:33 The wit and wisdom of Charlie Munger that summarizes exactly what you and I are learning. And in poor Charlie's almanac, it says there are ideas worth billions. in a thirty dollar history book. That is how you and I know we're on the right track. I record this in a recording booth. I feel like kicking the door right now. This fills me up with so much energy because it's attainable for all of us. The collection of these ideas. Obviously the applic application execution. Is on us individually.

32:57 But it's crazy. How generous So many entrepreneurs are With letting us learn from their experience. It gets I gotta calm down. All right.

33:05 Going to two thousand two. Yeah, I love this. So the the At least in the book that I'm reading. Um They title all these and says what's good for customers is good for shareholders. I wrote Jeff repeats this over and over again. And he says, This is really interesting because I um

33:19 There's only one paragraph here. But a lot of what came to let me read the paragraph. I think reading the paragraph first and then telling you why I thought of Henry Ford. Let me just read it to you. Uh, one of our most exciting peculiarities is poorly understood. People see that we are determined to offer both world leading customer experience and the lowest possible prices. But to some

33:38 This dual goal. Seems paradoxical. So this is a year after talking to Cynigal He says, Hey, we're gonna do lowest prices possible and World leading customer experience.

33:50 The reason I think that popped to mind is because I just uh I just reread Henry Ford's autobiography. That's episode two sixty six. And you can look at in the uh the show notes of episode two sixty six. I said like you could distill Henry Ford's like his his philosophy on company building. Or what was important turned down to five words. Maximum service at minimum cost. And also in that autobiography, which is a very similar theme to what

34:13 Jeff saying that he's trying to do here. There's something also very similar to this philosophy with in Henry Henry Fort's autobiography, where he's like, Listen, I don't want to make a low quality, cheap product. I wanna make a high quality. Cheap product. Or maybe a better way to put that is like

34:26 I don't wanna make a low quality, inexpensive product. I wanna make a high quality Inexpensive product. And so now Jeff goes into more detail about hey Uh I learned this from Jim. We're gonna have everyday low prices. He goes back to the meeting, tells his S team, hey, we're gonna be just like Costco and Walmart.

34:41 'Cause if we can match the prices, these that we're gonna have everyday low prices. We can match'em on price, we're gonna beat'em on convenience and selection, right? And so look at the The amount of work they're willing to do to make sure they're actually matching

34:54 No. This goal where Bezos is saying, Hey We're gonna organize around this principle and we're gonna show with our actions that it's important to us. Our pricing objective is not to discount a small number of products for a limited period of time. But to offer low prices every day.

35:06 and apply them broadly across our entire product range. To illustrate this point. We rich we recently did a price comparison. Versus a major well known chain of book superstores. We did not hand put

35:18 A choice Uh choice group of books against Which we wanted to compare, right? So he says instead we we we use their published list of their one hundred best sellers for the year two thousand two. So then they say, Okay, you you put out this this is um your best selling

35:33 Books for the year. One hundred, we're gonna go to these stores, we're gonna buy all these books. We're gonna see how much it costs us to buy it at your store and then we're gonna do the same thing on Amazon. So it says we priced uh all one hundred titles by visiting their stores. It took us six hours in four of their different super stores to find all one hundred books on their list. So right there, it's like, Wait a minute, these are your best selling books, I had to go to four different bookstores just to get all hundred of them, right? Or you could just sit down in front of your computer and do this way faster.

35:54 Uh, when we added everything up we spent, we discovered that at their stores. These one hundred uh best selling books cost fifteen hundred and sixty one dollars. At Amazon. The same books cost one thousand one hundred ninety five. For a total savings of three hundred and sixty six dollars or twenty three percent.

36:11 Two thousand three is a really short letter. It's all about long term thinking and it really is talking about hey, you need to design Your customer experience. With their long term benefit. The long term benefit of the customer in mind. Not the money that you'll make in the short term.

36:25 And he's saying this is counterintuitive and rare and he gives a perfect example to illustrate Why it's so difficult to do that. As we design our customer experience, we do so with long term owners in mind. We are we empower customers to review products. So the the reviews, obviously everybody knows this now. This was relatively new at the time.

36:40 You could do a review. like you're going to Amazon to buy something and they on their own the sales page could be a bad review. Or you know, w uh like a bunch of bad reviews so you don't buy them. So it says we receive complaints from a few vendors basically wondering if we understood what business we're in. You make money when you sell things.

36:57 Why would you allow negative reviews on your website, they said. Speaking as a focus group of one, I know I've sometimes changed my mind before making purchases on Amazon. as a result of negative or lukewarm customer reviews. Though n this is this is so important. 'Cause it goes against I think human nature.

37:12 Though negative reviews cost us some sales in the short term. Helping customers make better purchases decisions. Ultimately pays off. For the company. And that it's so important because he feels there is no misalignment.

37:25 Between customer And shareholder interest. If you always take care of the customer, then the shareholders will be rewarded over the long term. He quotes Ben Graham a bunch in this book as well. Or not the book, in the shareholder letters. Uh on that timescale, the interests of shareholders and customers are aligned if you do this over a long period of time, right? Uh this year

37:42 uh the widely followed American customer satisfaction index. gave Amazon a score of eighty eight, which is the highest customer satisfaction score ever recorded. Any service. industry. uh a representative of the American customer satisfaction index.

37:57 Was quoted as saying If they go any higher They will get a nosebleed. And then Jeff says, We are working on that. Again. Unapologetically extreme. He's got ridiculously high standards.

38:07 He is already the best. Amazon already got the high score out of every any company. On this index ever. And he's like, Okay. I still want to be better.

38:15 Okay. So then he's got a shareholder letter. This is This part is incredible. It's all about Making decisions. Uh really on the need for good judgment and why data may actually lead you to make the wrong decision.

38:27 And this is also why he he talks about the importance of wandering. He says like the best decisions he's ever made in his life. were not math driven, they were like intuitive. uh taste or like Got. Based decisions.

38:38 He starts out, I'm gonna skip over the part where he's like, you know if If you have data, making decisions really easy. But usually when you're building a company And he says this later on. He's like, listen, if you wait for all the data, if you wait to get ninety percent sure, like you're just gonna move too slow. He's like, You're gonna have to get used to being really good. at making decisions.

38:55 uh with maybe seventy percent of the amount of data that you actually need. So he says not all of our important decisions can be made. In a math based way. Sometimes we have little or no historical data to guide us. And proactive experimentation

39:10 As a means to get data, right? And proactive experimentation is impossible, impractical. Are tantamount to a decision to proceed. The prime ingredient in these decisions is judgment. He uses that as an opening to describe like why is he s significantly lowering prices.

39:26 We have made a decision to continuously and significantly lower prices for customers year after year. This is an example of a very important decision. that cannot be made in a math based way. And so he explains. With rare exceptions, the volume increase in the short term is never enough to pay for the price decrease.

39:44 However, our quantitative understanding of elastic elasticity is is short term. We can estimate What a price reduction will do this week and this quarter. But we and this is the most important part, but we cannot numerically estimate the effect that consistently lowering prices

40:00 We'll have on our business over five Five years or ten years or more. Our judgment and he italicizes the word judgment. Our judgment. Is that relentlessly returning

40:12 Efficiency improvements. And scale economies to customers in the form of lower prices. creates a virtuous cycle that leads over the long term to a much larger dollar amount. Of free cash flow. And thereby

40:26 to a much more valuable Amazon. Any hints on why so few businesses get this correct. Math based decisions command wide agreement. Judgment based decisions.

40:37 Are rightly debated. And they're often controversial. We will start with the customer and work backwards. In our judgment there's that word again, in our judgment That is the best way to create shareholder value.

40:50 the next shareholder is goes into his thinking about hey Like how do you decide when to Like build new business. Like how do you decide what to go into? And really you could think about He he's gonna give us the he's asked the question, hey, Bezos, uh, when are you actually gonna go into open physical stores, right? This is in two thousand six.

41:09 And this goes back to I I would summarize this, he's like I have no interest in building an undifferentiated commodity business, which you and I just discussed in length. 'Cause I just read Peter Thiel's book, the main theme of zero to one is The fact that Undifferentiated commodity businesses don't make any money.

41:23 Explicitly says in that book, Don't Build One. That's uh episode two seventy eight if you haven't listened to it yet. I often get asked when are you gonna to go open physical stores? The potential size of a network of physical stores is exciting. Right. Physical world retailing is a cagey and ancient business.

41:40 That is already well served. And we don't have any ideas. For how to build a physico world store. Experience That's meaningfully differentiated for customers. Differentiation is something that

41:53 Bezos is obsessed with. One of the most interesting themes in his last shareholder letter is the fact that he feels differentiation of survival. And it's a con it's something you have to put a constant amount of energy into because the universe wants you to be typical. And so Jeff, you know, fifteen years ago said, Hey, I have no interest in building an undifferentiated commodity business. I'm not gonna jump into this. Use at large market, I can make a lot of money until I figure out a way to differentiate.

42:15 And fifteen years later he's still using the fact that hey, differentiation is survival. That's such a fantastic maxim. Still in the importance of uh uh differentiation and how he thinks about building new businesses. Uh, in some large companies, it might be difficult to grow new businesses from tiny seeds because of the patience and nurturing required. Amazon's culture is unusually supportive of small businesses. With big potential.

42:36 And I believe that's a source of our competitive advantage. Something else. I don't know if he ever explicitly uses this sentence, but this is definitely something he would agree with. Patients can be A competitive advantage. We have many people at our company who have watched multiple ten million dollar seeds. turn into billion dollar businesses.

42:53 that firsthand experience and the culture that has grown up around those successes. is a big part of why we can start businesses from scratch. The culture demands That these new businesses bi high potential. And that they be innovative and differentiated. There's that word again.

43:08 Uh so they had to be high potential. Innovative and differentiated, but it does not demand. That they be large on the day that they are born. And then this next section is on a team of missionaries. This is one of his main themes. He says listen, missionaries build Just they just build better products. They actually care for non financial reasons.

43:25 I'm reading this because this is also Very important to me. Reading is, you know, a lifelong passion of mine. It's maybe the most it is the most important hobby that I've ever developed and the longest running hobby. that I've had think about reading as forced meditation. I think books are the anecdotes of like shorter attention spans. I don't think

43:42 There's a better use of my time. um any form of media besides books and podcasts. I think that the combination of both Um just the amount like if you if in my own like life You may have experienced as well of like Everything I learned in college.

43:55 Is compared to like what I've learned from books and podcasts on my own is Less than one percent. I just think they're extremely important. I love the fact that he says that Amazon You know it started with books because They were

44:06 missionaries for reading. And then he just has better ideas. Like J when you hear Jeff's talk, he's constantly referencing the books that S Is learning from I just heard a talk.

44:16 One talk he gave I think it was like the David Rubenstein show or something like that. And he's already the rich at that point he was like the richest person, quote unquote, in the world. And he's referencing books, right? He has infinite Amount of resources. could hire anybody to give him one on one teaching, right? Or could learn from anybody in the world.

44:33 And yet he can still pick up a book that's twenty dollars and and that g that he finds valuable in his life. There's a reason he talks about this later on that um Anything that has precis he's talking about how hard it is to to improve the book. Uh, I wasn't gonna read this point, I just thought this was interesting, but it just came to mind anything that has persisted in roughly the same form and resists a change for five hundred years is unlikely to be approved easily. He's like you could never outbook the book. So

44:56 We humans co but the larger point here is really d the importance of reading, no matter Everybody has time, whether it's an audio book. Where there's you know, Kindle doesn't matter, physical book. They have to be part of your repertoire.

45:08 We humans co evolve with our tools, we change our tools, and then our tools change us. Writing invented thousands of years ago is a grand whopper of a tool. And I have no doubt that it changed this dramatically. Five hundred years ago, Gutenberg's invention, the printing press led to a significant step change in the cost of books. Physical books ushered in a new way of collaborating and learning. Lately network cool tools.

45:27 Like computers and cell phones. Uh have changed us too. They shifted us Towards Information snacking. And I would argue

45:35 Towards shorter attention spans. His whole point is like that why they were trying to make the Kindle this You should He's trying to get more people to read, right? To have a longer attention span. The best description of reading I ever heard was from

45:46 I think she's a librarian. I've mentioned this a few times and I can't remember uh I should write down her name and go find it again, but Uh she said reading is forced meditation. No one is gonna describe spending time on social media as forced meditation. If our tools make information snacking easier, we're gonna shift towards information shack snacking.

46:03 And away from long term reading. Kindle is purpose built for long form reading. We hope Kindle may gradually and incrementally move us over years into a world with longer attention spans of atten or with longer spans of attention. He's writing this in two thousand seven. There's no way that I think anybody's gonna argue that we have longer attention spans now. You know, many years later providing They would pr the Kindle would provide a counterbalance for the recent proliferation of info snacking tools because the info snacking tools are very dicted.

46:28 You know, very They they can be t short term pleasurable, but no one's gonna after you scroll through social media for an hour, you're not like, Oh, that was so great. as opposed to like if you read a really great book and spend an hour with just an amazing writer and an amazing mind. You you're energized from that, right? I realize my tone here. Like when I got done, I know this this is technically not a book, even though I'm reading it in a book for him, the shareholders like.

46:48 I was spoken with energy. I was like, I cannot believe. This is like a gift to the world, a gift to the future generations of entrepreneurs. That Jeff took the time you know, how much editing and writing went into and distilling all these experiences of twenty plush years of shareholders. Like

47:04 It is such It's a miracle. And it's not just for the the information, the valuable knowledge and wisdom that he transfers to you and I. It's the hours put into sitting there and really thinking about what he's saying and not thinking about anything else. It's just absolutely fantastic. I realize my tone here tends towards the missionary. I guess my tone does too.

47:20 And I can assure you it's heartfelt. I'm glad about that. Because missionaries make Or shooting missionaries build. Better products.

47:28 Moving to the next year, this is all about working backwards. Why he's talking about why working backwards from the customer needs will actually make you a more skilled operator over time. This was very interesting. Um,'cause I like how he'll introduce a topic, introduce an idea. He'll repeat it, but he repeats it in different ways and then he builds on it. So you have a deeper understanding over time. This is very very well written and very clear. Thinking.

47:50 In these letters. In this turbulent global economy, he's writing this after the great financial crisis in 2008, our fundamental approach remains the same. We will stay heads down, focus on the long term, and obsessed over customers. Long term thinking levers our existing abilities and lets us do new things we couldn't otherwise contemplate. It supports the failure in iteration required for invention. And it frees us to pioneer In unexplored spaces. Seek instant gratification. Or the elusive promise of it.

48:17 And chances are you will find a crowd there ahead of you. Long term or this is Excellent. Long term orientation interacts well. with customer obsess obsession. If we can identify a customer need

48:30 And if we can further develop conviction that the need is meaningful and durable. Our approach permits us to work patiently for multiple years. To avoid. Multiple years to deliver. A solution.

48:41 Working backward from customer needs can be can be contrasted with a skills forward approach Where existing skills and competencies are used to drive business opportunities. So I'm gonna pause right there. Why is the note saying, Hey?

48:56 You work backwards from the customer's needs. This is actually gonna force you. It will make you a more skilled business operator over time. If we have to work back we start with the what's best for the customer, we might not have those skills.

49:08 To build the thing. That's irrelevant. We will go out and learn them. Anything most businesses say They use what he's calling a skills forward approach. Being this is a skill set I have now.

49:17 Let's see what opportunities I can pursue. He's like, No, let's ask backwards, dude. Uh, with a skills forward approach, uh, where skills and competencies are used to drive business opportunities. The skills forward approach says we're really good at X. What else can we do with X? If you use that exclusively.

49:32 the n the company employing it will never be driven to develop fresh skills. Eventually. The existing skills will become outmoded. Working backward from customers.

49:44 Ne customer needs. Often demands. That we acquire new competencies and exercise new muscles. Never mind how uncomfortable An awkward feeling

49:54 Those first steps might be. Working backwards from the cut this is me talking now, or me writing to myself. Working backwards from the customers' needs will make you a more skilled business operator over time. This is also fantastic. Goes back to the importance of regality, the importance of always of not allowing waste to permeate throughout your company.

50:14 The importance of having a low cost structure. The customer experience path we've chosen requires us to have an efficient cost structure. The good news for shareholders. is that we see much opportunity for improvement in that regard. So there's a story, I'm gonna interrupt my own story. Another book.

50:28 Where it talked about Jeff's crazy because you would tell him uh something bad about his business and he would get excited. And this is why. Because he he sees that problems are just opportunities and workflows. So he's like hey we're customer experience path we have to have an efficient cost structure. The good news for share for share owners

50:45 Is that we see much opportunity for improvement in that regard, saying, Hey We know we can we can lower costs. We can have a more efficient cost structure. Everywhere we look, we find what experienced Japanese manufacturers would call Mura. Are waste. So

50:58 Everywhere we look. We find waste. I find this incredibly energizing. I see it as potential. Years and years of variable and fixed productivity gains. And more efficient, higher velocity.

51:10 and flexible capital expenditures. He's got a footnote here. This is absolutely fantastic. at a fulfillment center recently. One of our Kazan experts Ask me. I'm in favor of a clean fulfillment center.

51:23 But why are you cleaning? Why don't you eliminate the source of dirt? And Jeff says I felt like the karate kid. And that term in case you didn't know I had to look it up myself. It's Kazan most likely pronouncing it.

51:36 Incorrectly, maybe Kaisen. It is a Japanese term meaning change for the better. Or continuous approv improv. One of my favorite sentences from Uh zero to one.

51:46 the book you and I just talked about on episode two seventy eight a few weeks ago. is going to relate to exactly what Jeff is saying here. This is uh two thousand nine shareholder letter. He says the financial results for two thousand nine reflect the cumulative efforts of fifty years of customer experience improvements That's the end of Jeff's sentence. This is the beginning of Peter's

52:07 If you focus on near term growth above all else, You miss the most important question. You should be asking. Well, this business still be around a decade from

52:18 Skipping ahead by a year or two. He's talking about the the fact that Amazon, it will be a place of invention. We will build new businesses, innovative businesses that no one else has done before. He calls it the power of invention. really I just uh w when I there's only a few sentences I pulled out from this entire year. One of it he talks about he starts talking about AWS, Amazon Web Services, which is now this gigantic, you know, who knows how much the the the

52:42 The business would be worth If it was actually outside of Amazon. It's very uh valuable. I think in the last uh I think the last year hole he talks about like the growth of AWS specifically. I think it was like something I forgot that how fast I grew up and now it's up to like fift billion dollars a year or whatever it was when he wrote that letter.

52:57 This is the main point. The value of Amazon web services is undeniable, meaning from the customer's perspective. The value is undeniable. I think about this in my terms, so uh known enough myself is a good question to ask yourself. Is the value my product provides Undeniable. And then he's just got a fantastic quote. He's talking about all these other businesses that they're inventing on behalf of the customer.

53:18 I love this. The most radical and transformative of inventions. Or often those that empower others, and he italicized that others to unleash their I tell size that too creativity to produce their dreams. I'm gonna read that without me interrupting.

53:32 The most radical and transformative of inventions are often those that empower others to unleash their creativity. to pursue their dreams. Moving ahead, he's got A entire shareholders letter.

53:43 dedicated to the importance of being internally driven. Now This section was fantastic. I added some highlights uh from the previous time that I read it. What I don't remember though, and I looked for it. Um, I put This Is Wild. It reminds me of Charlie Monger on Costco being against human nature.

54:00 My guess is the fact that they could improve are increased prices and they don't, but I couldn't find that anywhere in my notes, so I'm not entirely sure what I was referencing there. So it says our energy at Amazon comes from the desire to impress customers rather than the zeal to best our competitors. One advantage, perhaps a somewhat one. Of a customer driven focus.

54:18 Is that it aids a certain type of proactivity. When we're at our best, we don't wait for external pressures. We are internally driven to improve our services. adding benef benefits and features before we have to. We lower prices and increase value for customers before we have to. We invent

54:33 Before we have to. These investments are motivated by customer focus rather than by reaction to competition. And so he gives an example of this. Well he says we built an automated system that looked for occasions when we've provided a customer experience. That is not up to our standards.

54:47 And those systems then proactively refund customers. One industry observer recently received an automated email from us that said, We notice that you experience poor video playback. While watching the following rental on Amazon video on demand. Casablanca.

55:02 We are sorry for the inconvenience and have issued you a refund for the following amount. Two dollars and ninety nine cents. We hope to see you again soon. Surprised by the proactive refund, he ended up writing about the experience. Amazon noticed that I experienced poor video playback.

55:16 And they decided to give me a refund because of that. Wow. Talk about putting customers first. And this is his main point. Doing it proactively.

55:25 Із морксиф. But it also surprises, delights, and earns trust. And a few years later, uh at the beginning of the two thousand fourteen Shareholder letter. He gives The characteristics that he looks for in businesses that he wants to keep forever.

55:41 A dreamy business offering has at least four characteristics. Customers love it. It can grow to a very large size. It has strong returns on capital. And it's durable in time.

55:51 With the potential to endure for decades. When you find one of these Get married. We are now happily wed to what I believe are three such life partners. Marketplace.

56:02 Prime And AWS. And so those are just three more big winners, but a lot of that is like you have to do a lot of experimentation. And the reason you need to do that is because the big winners pay for many experiments. It does not matter If it took them a hundred failed experiments.

56:17 To get These three giant businesses. So he talks a lot about why You have to be bold in the world of business. And I just wrote right above the section, this is so important to remember.

56:27 Outsized returns often come from betting against conventional wisdom. And conventional wisdom is usually right. Given a ten percent chance of a one hundred times payoff. You should take that bet every time. But you're still gonna be wrong nine times out of ten.

56:41 We all know that if you swing for the fences You're gonna strike out a lot. But you're also going to hit some home runs. The difference between baseball and business, however Is that baseball has a truncated outcome distribution.

56:54 When you swing. No matter how well you connect with the ball. The most returns you can get is four. In business every once in a while. When you step up to the plate

57:03 You can score one thousand runs. This long tail distribution of returns is why it's important to be bold. Big winners. Pay for so many experiments. So then he dedicates one of his shareholder letters, one year of shareholder letters to the f this idea of fending off day two.

57:20 And so it says, uh, Jeff, what does day two look like? That's the question I got at our most recent all hands meeting. I've been reminding people that it's day one for a couple of decades. I work in an Amazon building named Day One. And when I move buildings, I took the name with me.

57:34 I spend time thinking about this topic. This is his answer. Day two is stasis. Followed by irrelevance. Followed by extruciating painful decline.

57:44 Followed by death. And that is why it's always day one. And so he goes into more detail about this. To be sure, this kind of decline would happen in in an in extreme slow motion. An established company might harvest day two for decades. But the final result would still come.

57:59 I'm interested in the question. How do you fend off day two? What are the techniques and tactics? How do you keep the vitality of day one even inside a large organization? Such a question cannot have a simple answer.

58:11 So he's gonna give us a few ideas. I think he's got four different um ideas here. Uh, cannot have a simple answer. There will be many elements, multiple paths, and many traps. I don't know the whole answer, but I know bits of it. Here's a starter pack of essentials. uh for day one defense and he puts this into four categories customer obsession

58:29 A sceptical view of proxies. The eager adoption of external trends. and high velocity decision making. So the first one true customer s obsession. You and I have talked about it a bunch today. I don't have to go into more detail.

58:42 This one was interesting. Resist proxies. As companies get larger and more complex, there's a tendency to manage to proxies. This comes in many shapes and sizes. And it's dangerous and subtle.

58:53 A common example. is process. As proxy. Good process. Serves you so you can serve customers.

59:01 But if you're not watchful The process becomes the thing. The process becomes the proxy. For the result you want. It's not that rare he's talking about in large organizations.

59:11 It's not that rare to hear a junior leader defend a bad outcome with something like well, we followed the process. A more experienced leader. We'll use it as an opportunity to investigate. And improve the process. So

59:24 Resist proxies, the third one. Embrace external trends. This one was surprising. But then I understood. what he meant. And just think about like th th the uh the very beginning of Amazon was Jeff ex uh uh embracing an external trend, that external trend being the internet, right? The growth of the internet at the very beginning.

59:41 The outside world can push you into day two if you won't or can't embrace powerful trend trends quickly. If you fight them. You're probably fighting the future. Embrace them. And you have a tailwind.

59:53 We're in the middle of an obvious one right now. Machine learning. and artificial intelligence. And then his final piece of advice on this is that you have to be capable of making high Velocity decisions.

1:00:04 Day two companies make high quality decisions. But they make high quality decisions slowly. You have to somehow make high quality High velocity decisions. And so he says Amazon is determined to keep our decision making velocity high.

1:00:18 Speed matters in business. And so this is a main theme he's repeated over and over again, not only in Charlotte letters, but also in in um in the different books and different talks. And he uses this metaphor over and over again. about the fact that there is one way doors and two way doors when making decisions. And if a decision is easily reversible, the two way door is what he calls it, you should be doing those very fast. There are and he says like most of the decisions that you're gonna make as you're building your business

1:00:41 I mean, once in a while you have to have There's a one way door, it's like if I make decision I can't go back. So it's like you better really think and slow down and make sure you're making those decisions. Correctly, but he says the common mistake is that As companies age, they treat two way doors as one way doors. So he says

1:00:58 Uh never use a one size fits all decision making process. Many decisions are reversible. And he says they're two way doors. Then he continues, most decisions should probably be made with somewhere around seventy percent of the information that you wish you had. If you wait for ninety percent in most cases. You're probably being too slow.

1:01:16 Plus either way. You need to get good at quickly recognizing and correcting bad decisions. If you're good at course correcting Being wrong. maybe less costly than you think.

1:01:27 Whereas being slow is going to be expensive for sure. And the next shareholder letter is all about how to build a culture of high standards. Um he says high standards are contagious. Another way to

1:01:38 think about this is what Steve Jobs would repeat over and over again that you should be a be a yardstick for quality that some people are not used to an environment where excellence is actually expected. Uh, so Jeff says, I believe high standards are teachable. People are pretty good at learning high stand standards simply through exposure. High standards are contagious.

1:01:55 Bring a new person onto a high standard team. And they'll quickly adapt. The opposite, this is so important, right? So High standards are contagious, so are low standards.

1:02:04 And he says that by saying the opposite is also true. He also doesn't believe that high standards are universal. They're domain specific and you have to learn how to apply hand high standards. in multiple different domains. I believe high standards are domain specific and that you have to learn high standards separately.

1:02:21 In every arena of interest. Understanding this point is important. Because it keeps you humble. You can consider yourself a person of high standards in general. And still have dehabilitating blind spots.

1:02:32 There can be whole arenas. Where you may not even know that your standards are low or non existent. And certainly not world class. It is critical to be open to that likelihood. And he's got this great quote later on that I wanna put put into this section before we move on.

1:02:47 Leaders have relentlessly high standards. Many people may think these standards are unreasonably high. So this next section actually threw me for a loop. This is just absolutely incredible thinking. And it's that you're gonna have to fix Unrealistic beliefs on scope

1:03:03 And so he talks about hey Uh we have a friend. She's like really, really good. She could do like a perfect free standing handstand. And she was telling Jeff that she even hired a handstand coach and he's like, I can't believe there's such a thing like Why would you need a coach for that?

1:03:17 And the coach gave her so in the very first lesson gave her some really good advice. And it's about Understanding a realistic scope. Most people we said think that they if they work hard, they should be able to master a handstand in about two weeks. The reality is that it takes about six months of daily practice.

1:03:32 If you think you should be able to do it in two weeks, you're just gonna end up quitting. Unrealistic beliefs on scope. Are often hidden. And undiscussed. Will kill

1:03:43 High standards. And so he applies this in his business. He says, Listen Amazon culture is famous for having these six page narratives. They will not do PowerPoint. Instead before meeting You have to write out like what

1:03:54 The ideas or what you're thinking should pet an unbelievable you should put way more time than you think you should in these preparing these documents. 'Cause you're taking up so much time and having a meeting in the first place, right? So it says we don't do PowerPoint at Amazon. Uh and we write n uh narratively structured six page memos.

1:04:11 We silently read one at the beginning of each meeting in a kind of study hall. And so he talks about the quality of these memos varies widely. And so they realized like what is the main Like why are we finding If there is a bad memo, what is the likely cause? And he realized it's it's

1:04:27 says when a memo isn't great, it's not the writer's inability to recognize the high standard. But instead a wrong expectation on scope. This is very fascinating. They mistakenly believe a high standard six page memo can be written in one or two days. Or even a few hours. When really it might take a week or more.

1:04:45 They're trying to perfect a handstand in just two weeks. And we're not coaching them right. The great memos are written and re read. Share with colleagues who are asked to improve the work. Set aside for a couple days.

1:04:58 And then edit it again. With a fresh mind. They simply cannot be done in a day or two. The key point here Is that you can improve results

1:05:07 of teaching scope. That a great memo probably Should take a week or more. So then Jeff starts writing about

1:05:15 His idea of the importance of wandering. Um, he not only writes about it in shareholders letters, but he also talks about it in in public speeches. Often actually in business. You do know where you're going.

1:05:27 And when you do, you can be efficient. You can put in a place you can put in place a plan and execute. In contrast wandering in business is not efficient. So this is what I was referencing earlier, where he says Multiple times that the the best uh

1:05:39 Like all their best ideas. The most opportunities came from wandering. Uh, in contrast, wandering in business is not efficient. But it's also not random. It's guided by hunch.

1:05:49 Got. Intuition, curiosity, and powered by a deep conviction That the prize for customers is big enough that it's worth being a little messy. And tangential. To find our way there.

1:05:59 Wandering is an essential counterbalance to efficiency. You need to employ both. The outside discoveries. The nonlinear ones. Are like are highly likely

1:06:10 to require wandering. And so he gives us the uh this example. AWS. As a whole Is an example.

1:06:18 No one asked for AWS. No one. Turns out the world was in fact ready and hungry for an offering like AWS. But didn't know it. We had a hunch.

1:06:27 Followed our curiosity. Took the necessary financial risks. And began building Reworking. Experimenting.

1:06:35 And iterating countless times As we proceeded. And so he combines this idea of the importance of wandering with Another idea that's related to it that th that your failures need to scale too as your business scales. So he's gonna use the example of Echo for this.

1:06:50 As a company grows, everything needs to scale, including the size of your failed experiments. If the size of your failures isn't growing, you're not going to be inventing at a size that can actually move the needle. And so his point is like Amazon side. Amazon size We're gonna have to

1:07:04 Occasionally have multi billion dollar failures. Uh so is this kind of large scale risk taking is part of the service we as a large company can provide to our customers and to society. The good news for shareholders Is that

1:07:16 A single big winning bet. can more than cover the cost of many losers. And so he talks about how disastrous the firephone was. They lost a bunch of money. But it also led them

1:07:26 In part to developing Echo. Development of the firephone and echo was started around the same time. While the fire phone was a failure. We were able to take our learnings and as well as our developers And accelerate our efforts building echo in Alexa.

1:07:40 No customer was asking for echo. This was definitely us wandering. Mark your research doesn't help. If you'd gone to a customer in two thousand thirteen and said, Would you like a black always on cylinder in your kitchen about the size of a Pringles Pringles can? That you can talk to and ask questions.

1:07:54 It also turns on your lights and plays music. I guarantee you. They would have looked at you strangely and said No thank you. And then he says since that first generation Echo customers have purchased more than one hundred million.

1:08:06 They've sold a couple hundred million. Uh, I just searched for this earlier. to see if I get the updated numbers and I think the the biggest number I saw was like two or three hundred million of these things they've they've sold so far. And finally we've reached his last shareholder letter. I just want to pull out one piece of advice that Jeff has for you and I.

1:08:22 That I thought was absolutely excellent. Differentiation is survival. And the universe wants you to be typical. In what ways does the world pull at you? In an attempt to make you normal.

1:08:35 How much work does it take to maintain your distinctiveness? To keep alive the thing or the things That make you special. We all know that distinctiveness Originality.

1:08:45 is valuable. What I'm asking you to do is embrace how much energy it takes To maintain that distinctiveness. The world wants you to be typical.

1:08:56 In a thousand ways. It pulls at you. Don't let that happen. And that is where I'll leave it for the full story. Highly recommend Reading

1:09:05 Jeff shareholder letters for yourself and rereading them throughout your career. I will leave a link on it's on Amazon's website. Um Amazon.com for slash IR. I'll leave a link below. You can read it for free. If you want them in book form and you want to use the book that I use for this, it's called Invent and Wonder. Oh, they collected writings of Jeff Bezos. I will also leave a link below if you buy the book, you'll be supporting the podcast at the same time.

1:09:27 That is two hundred and eighty. Two books down. One thousand ago. And I'll talk to you again. I wanna give you a quick update to the founders membership program. I was calling it Founders Daily. I just changed the name to Founders Premium because I added an additional benefit. I'm gonna start doing

1:09:42 AMA Ask Me Anything episodes. You can subscribe. There's a link down below in the show notes and your podcast player. You can also find the link. at founders podcast dot com. And once you subscribe, you'll get immediate access to the private podcast feed. So far, I've done about sixty of these little miniature episodes where I give you one idea from one of His greatest founders every day. But now after you subscribe, you'll see the ability that says Ask Me Anything.

1:10:05 You can submit a question and then as soon as I get enough questions, I'm going to record an AMA episode where I actually answer those questions. And so the way I think about founders premium is it's my attempt to go even deeper. I want to take the lessons that you and I are learning. on founders and reinforce them through these short daily ideas. And then the longer Ask Me Anything episodes. So if that sounds like something you'd be interested in, check out the link below, and you can also go to founderspodcast.com.

What you see above is a preview of the first minutes. One unlock costs 10 credits and covers this episode forever: full segment and word-level timestamps on this page, plus .txt, .srt, .vtt and word-level JSON downloads, as many times as you like.