The Numbers in Jeff Bezos’s Head – by Daniel McGinn

On a Friday afternoon in 2004, Amazon manager Vijay Ravindran received an unusual invitation—to a Saturday morning meeting with Jeff Bezos at the boathouse adjoining the CEO’s lakefront home. When the attendees arrived, Bezos told them he’d received an employee suggestion that Amazon supplement its existing shipping policy—free shipping on orders over $25—with a new offer. Customers would pay an annual fee for free shipping on most products, regardless of order size. “Jeff was extremely energetic—he felt this was an opportunity to build something that was going to be very important,” Ravindran recalls. Hence the urgent weekend meeting at the lake.

The proposal sparked hushed concerns and consternation. Amazon’s finance team worried that waiving shipping charges would gut margins. “There were people who thought it was an extremely bad idea—the spreadsheets uniformly painted pictures of losses,” Ravindran says. Bezos ignored the objections, convinced that the offer would spur more orders. That intuition proved correct just weeks later, when the program, Prime, launched. Customers who’d previously made a few purchases a year were suddenly ordering multiple times a month. “Instead of looking to protect the current business, Jeff saw the upside,” says Ravindran, now chief digital officer at Graham Holdings. “It was the most impressive display of business leadership I’ve seen in my career.” Today tens of millions of customers pay $99 a year for Prime, which generates more than $1 billion in membership fees and incalculable incremental sales.

He’s invented a new philosophy for running a business. Even as Amazon grows, he’s reinvesting to make it even bigger.

Disregard for orthodox approaches is not unusual for Bezos. Amazon’s culture famously forbids the use of PowerPoint, for instance. But the frequency with which he rejects spreadsheet-driven decision making has probably played a larger role in Amazon’s growth. With 132,000 employees and $75 billion in annual revenue, Amazon is a 20-year-old corporation that routinely posts losses. (Its operating loss may top $800 million in the third quarter.) Unlike Apple, which boasts precisely how many iPhones it’s selling, Amazon steadfastly refuses to give Wall Street basic data, such as how many Kindles it has sold—an opaqueness that even Bezos fans say hurts the stock price. Like every CEO, Bezos talks about managing for the long term—but he walks the talk, shrugging off investor concerns even as Amazon’s stock dropped from a high of $407 in January 2014 to $307 in August. Over the long haul, however, there’s no disputing his ability to generate shareholder returns: The company’s stock performance since its 1997 initial public offering has been so strong that its share price could have dropped to $250, and Bezos would still rank as HBR’s best-performing CEO.

He and his team have achieved that feat by sticking steadfastly—even boringly—to a few key principles (outlined in his 1997 shareholder letter, which he still sends to investors every year). Instead of focusing on competitors or technology shifts, they continually invest in getting a little bit better. In their core retail business, they grind out incremental improvements in delivery speed and product offerings while chipping away at prices. As Amazon continues to move into completely new industries—it’s now a serious player in cloud computing, online video, e-readers, and other devices—some see a company that’s pioneering a new model. “In some ways he’s invented a new philosophy for running a business,” says Brad Stone, author of The Everything Store, a best-selling Bezos biography. “Even as Amazon grows, he’s focused on reinvesting to make it even bigger—and because that means it shows no profits, he avoids paying dividends or corporate taxes.”

While Amazon is younger than Walmart or Apple, its creation story is becoming equally familiar. After graduating from Princeton with a computer science degree in 1986, Bezos spent eight years on Wall Street. In 1994 he and his wife, MacKenzie—a Princeton grad and his former coworker—left New York for Seattle, setting up shop in their garage. Jeff and a few employees began building a website that would sell books. Amazon went live in July 1995 and, in its first month, sold books to customers in 50 states and in 45 countries. It quickly expanded into CDs and other goods.

His willingness to go through the valley of death and come out the other side makes Wall Street give him the benefit of the doubt.

While consumers gravitated to Amazon, some investors remained skeptical. Henry Blodget, then a Merrill Lynch analyst, recalls an investor conference in the late 1990s at which Bezos patiently explained why Amazon allowed customers to return huge flat-screen TVs for a full refund with no questions asked—a costly policy meant to drive customer satisfaction. “Almost no one understood the potential for the company, its business model, and its stock,” says Blodget, who rose to fame for his seemingly outlandish 1998 prediction that Amazon shares, which were trading around $200, would hit $400—which they did, three weeks later. (Blodget now runs Business Insider, a website in which Bezos is an investor.)

Today Amazon is so successful that people often assume it has enjoyed a linear rise—like a dominant sports team cruising, as expected, to the championship. But for several years, Wall Street questioned Amazon’s viability. “At analyst conferences during the early 2000s, I saw fund managers openly laughing at him,” recalls Marc Andreessen, the entrepreneur-turned-venture-capitalist. “They’d say, ‘That guy is nuts, and that company is going to go bankrupt.’ That’s one of the things I really admire about him, and it’s what I talk to our founders about. It’s very easy to say you want to be Jeff Bezos today. It’s a lot harder to be Jeff Bezos during that ‘valley of death’ period. It was his willingness to go through that valley and to come out the other side that makes Wall Street give him the benefit of the doubt. A lot of people would have given up, but he didn’t. That’s what I admire most about his story.”

The other big misconception: that Bezos doesn’t care about profitability. By all accounts Amazon’s mature businesses (such as online retail) are profitable; it’s his deep investments in new businesses that create accounting losses, which he regards as a false measure of performance. “He’s really focused on cash flow and what kind of return on invested capital is being created,” says Warren Jenson, Amazon’s chief financial officer from 1999 to 2002. Bill Miller, a fund manager at Legg Mason who has held shares in Amazon since it went public, says Bezos shows deep understanding of the point Clay Christensen made in his recent HBR article “The Capitalist’s Dilemma,” which argued that most managers focus on the wrong financial metrics. “Jeff really takes theory seriously—he started out wanting to be a theoretical physicist,” Miller says. “In terms of financial theory, he’s trying to get away from the behavioral problems that afflict other companies” that try to maximize the wrong numbers. Other Bezos watchers go even further: At a time when many large companies (most notably Apple) are hoarding idle cash, shouldn’t we be lauding Amazon’s ability to continually find entirely new industries to reinvest and innovate in, rather than criticizing the losses driven by those outlays?

Bezos is unperturbed by criticisms of his financial management. He says he’s always been transparent about Amazon’s focus on long-term cash flow (instead of net profit). “As far as investors go, our job is to be superclear about our approach, and then investors get to self-select,” he says. He insists Amazon discloses far more data about its business than is legally required and is silent only about numbers that could help competitors.

Some criticism goes beyond his financial theories, however. Like Walmart, Amazon has been condemned for upending the economics of industries in ways that destroy competitors and vaporize jobs. Since 2007, when its Kindle ignited the e-book business, Amazon has been at war with publishers for using its leverage to price e-books at discount levels. Over the past two years the company has drawn fire for its treatment of distribution-center workers and the hyperaggressive steps taken to weaken rival e-commerce players such as Zappos and Diapers.com. (It eventually acquired both.) Bezos’s personal management style, which by some reports can be abusive and demeaning, has also been reproached. But Stone believes Bezos has mellowed with age. “In fairness, a lot of the examples in the book of him behaving that way are older ones, and I think he’s gotten better over time,” Stone says.

Even critics admit that Bezos has an unusually ambitious imagination—one likely to have an impact far beyond online retailing. He founded Blue Origin, a company experimenting with space travel, and last year purchased the Washington Post, where he spends one day a month in hopes of finding a viable financial model for journalism. And at Amazon, his strategy of making bold moves into adjacent industries could become a model for other managers. Scott Cook, the Intuit founder and former Amazon director, compares Amazon to companies such as P&G (which invented brand management) and Toyota (which invented lean manufacturing). “I think Amazon is one of those—what they’re doing is inventing better ways for companies to operate,” Cook says.

That spirit could continue for some time. Bezos is 50—about the same age Bill Gates was when he retired from Microsoft to pursue philanthropy at the Gates Foundation, whose offices are visible from the roof deck at Amazon’s headquarters. But Bezos seems unlikely to make that kind of transition. “I’ve never gotten any vibe off of him that he wants to do anything else,” says Andreessen. “He’s monomaniacally focused on Amazon. My sense is he’s going to be running it another 30 years—and shareholders will be lucky if he does.”

Jeff Bezos in His Own Words

In early August Amazon’s founder and CEO spoke with HBR’s Adi Ignatius and Daniel McGinn at the company’s Seattle headquarters. Here are edited excerpts from that conversation:

HBR: How do you balance the long term versus the short term when thinking about innovation?

Bezos: I bet 70% of the invention we do focuses on slightly improving a process. That incremental invention is a huge part of what makes Amazon tick. There’s a second kind of invention, which is more clean-sheet and larger scale—things like the Kindle or Amazon Web Services. We have a culture that supports the risk taking and time frames required for that.

Your stock has taken some hits this year. Does that affect the way you manage?

Amazon’s stock has always been somewhat volatile. Even though we have significant revenues, we invest in so many new initiatives that in some ways we’re still a start-up. Volatility is part and parcel of being a start-up.

You say you focus on customers, not competitors. But how do you react to Google’s teaming up with Barnes & Noble to offer same-day delivery?

You can’t insulate yourself from competition by being customer-obsessed. But if that obsession leads to invention on behalf of customers, it helps you stay ahead.

You’re now making your own big investments in same-day delivery. How do you know customers want it?

In our retail business, there are three big ideas: Low prices, vast selection, and fast, reliable delivery. We continually work on all three. We don’t know what technologies might be invented or who our competitors will be, so it’s hard to build strategies around those uncertainties. But I do know that 10 years from now, nobody is going to say, “I love Amazon, but I wish the prices were a little higher.” It’s the same thing with fast delivery.

Has the backlash over your dispute with Hachette about e-book pricing surprised you?

The publishing industry changes very slowly. The paperback, which was developed before World War II, was the last radical invention before the e-book. All the arguments that the literary establishment made against paperbacks—they’re devaluing books, publishers are not going to be able to invest in literature—are being made about e-books, too. Today we know the arguments about paperbacks were wrong, and they’re equally wrong about e-books. It will take a while for the incumbents to come to terms with e-books, but we’re determined to get e-books to be less expensive.

What other CEOs do you admire?

I’m a huge fan of Jamie Dimon, Jeff Immelt, and Bob Iger. They all have deep keels. They have conviction around certain business ideas. Warren Buffett is another one. They can’t be blown around, and I think that’s pretty rare.

 

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