I Read 23 Years Worth of Jeff Bezos’ Amazon Shareholder Letters — Here’s What I Learned
In the early nineties, very few people had heard of the internet. Jeff Bezos happened to be one of them.
Bezos saw that the internet was growing at around 2300% a year and decided that he wanted to come up with a business idea to ride that wave. He made a list of products to sell online and, soon, settled upon books.
Bezos first named his online bookstore Cadabra, as in abracadabra. And it was only after three months, that he changed it to Amazon, after the earth’s biggest river, and therefore, the earth’s biggest selection. While the company stands true to its name today, it was a very long road to get there. In the early days, it took Bezos more than 50 meetings to raise $1 million from investors, and over the course of those meetings, the most common question was, “What’s the internet?”
Today Amazon’s market cap is close to $1.7 trillion. And Jeff Bezos, who was just recently overtaken by Elon Musk, remained at the top of the world’s richest list for the last three years in a row.
But the title of the “world’s richest man” isn’t as valuable to Bezos, who prefers to be known as an inventor or entrepreneur. And he’s right. The soon-to-be-stepping-down CEO of Amazon is one of the finest entrepreneurs the world has ever seen. Jeff Bezos has forever changed how we shop, transforming (and disrupting) multiple industries along the way.
Over the last few years, I’ve read and re-read every single one of Bezos’s twenty-three annual letters to Amazon shareholders. And apart from providing us with a brief history of Amazon, these letters offer great insight into the mastermind operating behind the vast internet enterprise.
Here’s a summary with key takeaways from each one of these letters.
1997: Long-term leadership against short-term profitability
With online bookselling, Amazon identified a unique opportunity and began offering customers a far greater selection of titles than a physical store, “and presented it in a useful, easy-to-search, and easy-to-browse format in a store open 365 days a year, twenty-four hours a day.”
Amazon went public in 1997, soon followed by Bezos’s first-ever letter, which is a true reflection of his now-famous Day-1 mentality — a principle widely adopted by the entrepreneurial community to always carry the same fervor and passion for a business venture as in its earliest days.
“The web was, and still is, the World Wide Wait.”
With his focus set on the long-term horizon, here’s how Bezos has always made decisions and weighed trade-offs differently than most other business leaders:
- A relentless focus on customers.
- Prioritizing growth (scale) and long-term market leadership, and long-term profitability, against short-term profitability. Amazon wanted to solidify its market leadership amid many large entrants and tough competition from the likes of bookselling giant Barnes & Nobles.
- Hiring and retaining versatile and talented employees and weighting their compensation toward stock options over cash so that they must think like, and therefore must actually be, an owner with “skin in the game.”
Like a true visionary, Bezos was prescient in his business predictions starting from its inception: “Today, online commerce saves customers money and time. Tomorrow, through personalization, it will accelerate the very process of discovery.”
Jeff Bezos Swallowed Our Economy Whole
The Amazon founder shrewdly steps down at the peak of his company’s power
1998: The 3 criteria to consider when hiring
According to Bezos, setting the bar high when hiring is the single most important element of Amazon’s success. During their hiring meetings, he instructs managers to consider these three questions:
- Will you admire this person? The people you admire are those you can learn from.
- Will this person raise the average level of effectiveness of the group they are entering? The bar has to continuously go up.
- Along what dimension might this person be a superstar? Most people have unique skills that enrich the work environment for everyone else.
1999: It’s good enough today, but it can get so much better
“The current online shopping experience is the worst it will ever be. It’s good enough today to attract 17 million customers, but it will get so much better,” wrote Bezos. With his eyes set on long-term success and business domination, Bezos was resolute in building a never-settle culture at Amazon. (See Day 1 ethos above).
After adding discounted music to its online retail offerings in 1998, Amazon undertook a slew of major initiatives in 1999, including zShops, now known as Marketplace, a platform enabling third-party sellers, and the “1-Click” payments solution that revolutionized e-commerce checkout.
2000: A company that wants to punch above its weight
Bezos’s letter for the year starts with a one-word sentence: “Ouch.”
Although Amazon was one of the very few internet companies to survive the dot-com crash, its stock plummeted from a peak of $116, at the pinnacle of the internet bubble, down to $6.
To explain the turbulence of the stock market crash, Bezos borrows a quote from investor Benjamin Graham, who once said, “In the short term, the stock market is a voting machine; in the long term, it’s a weighing machine.”
And Amazon, as Bezos notes in his letter to shareholders, is “a company that wants to be weighed.”
In another letter, he adds, “We don’t celebrate a 10% increase in the stock price like we celebrate excellent customer experience. We aren’t 10% smarter when that happens and conversely aren’t 10% dumber when the stock goes the other way. We want to be weighed, and we’re always working to build a heavier company.”
Why Dot-Com Disaster Kozmo Never Became Instacart
An investigation two decades later
2001: Eliminate mistakes and errors at their root
With features such as “Look Inside the Book,” a free program that allows authors and publishers to promote their books, Bezos highlights Amazon’s bid to forever improve upon the customer experience while incentivizing merchants and small businesses to thrive within its ecosystem.
“Many investors are effectively short-term tenants, turning their portfolios so quickly they are really just renting the stocks that they temporarily own.”
Bezos adds, “One of the most important things we’ve done to improve convenience and experience for customers also happens to be a huge driver of variable cost productivity: eliminating mistakes and errors at their root.” Because when you implement root fixes you’re not only fixing a problem for one customer, you’re fixing it for every customer. “Eliminating the root causes of errors saves us money and saves customers time,” says Bezos.
2002: What’s good for customers is good for shareholders
As an example, Bezos insists upon continuously lowering prices in a bid to beat the competition and win customers. The increased sales over the long run, in turn, drives profits, which is best for shareholders.
2003: Long-term investing takes true ownership
“I know of a couple who rented out their house, and the family who moved in nailed their Christmas tree to the hardwood floors instead of using a tree stand. Expedient, I suppose, and admittedly these were particularly bad tenants, but no owner would be so short-sighted. Owners are different from tenants. And long-term thinking is both a requirement and an outcome of true ownership.
“Similarly, many investors are effectively short-term tenants, turning their portfolios so quickly they are really just renting the stocks that they temporarily own,” Bezos adds, making his business case to remain bullish on the long-term vision, once again.
In 2003, at an executive retreat at Bezos’s house, the initial seeds would be planted for Amazon Web Services (AWS), the company’s web-hosting business. Originally invented to help Amazon scratch its own itch, it soon became obvious that every company was going to want it. Currently, AWS dominates cloud hosting and is now the largest profit generator for the company. Commenting upon its success years later, Bezos wrote about what he considers a business miracle, “We faced no like-minded competition for seven years. When you pioneer, if you’re lucky, you get a two-year head start. Nobody gets a seven-year head start, and so that was unbelievable.”
2004: Cash-flow is king
“Cash flows do the best job of explaining a company’s stock price over the long term. Amazon has a cash-generative operating cycle because it turns its inventory quickly, collecting payments from customers way before payments are due to suppliers,” writes Bezos.
Free cash flow is how Amazon keeps getting bigger despite its low profits, year after year. For helpful context, here’s an excerpt from Vox that explains how “tiny profits” compound over time:
“Free cash flow is a bit like profit, except it doesn’t assume that Amazon has to pay for everything in the same time frame it sells it. And thanks to how Amazon’s payment cycle works, it usually gets money for selling an item long before it has to pay for that item. For example, it takes Walmart on average nearly three days to receive payment for goods after it paid its suppliers, while Amazon on average receives payment about 18 days before it paid its suppliers.”
2005: A willingness to make bold decisions
Bezos proposes two types of decisions businesses have to face regularly:
- Math-based decisions: Decisions that can be made with data where “there is a right answer or a wrong answer, a better answer or a worse answer and math tells us which is which. These decisions still require us to make some assumptions and judgments, but the heavy lifting is done by the math.”
- Judgment-based decisions: “Though data, analysis, and math play a role, the prime ingredient in these decisions is judgment. Where there is little or no historical data to guide us and proactive experimentation is impossible, impractical, or tantamount to a decision to proceed.”
Bezos argues that “Any institution unwilling to endure controversy must limit itself to decisions of the first type. But doing so would not only limit controversy — it would also significantly limit innovation and long-term value creation.” He recommends businesses to “combine their strong quantitative and analytical culture with a willingness to make bold decisions.”
Continuing on the theme of boldness, 2005 is also the year in which Amazon Prime was born. It all began when a junior software engineer at Amazon came up with the idea to offer customers an “all-you-can-eat buffet of fast, free shipping.” By 2018, Amazon would become the second-largest paid membership program, second only to Netflix, and it remains one of Amazon’s most valuable, and brand-visible, assets today.
2006: Plant seeds that will grow into meaningful new businesses
Bezos recommends reviewing the following checklist before investing in a new business:
- The new opportunity can generate expected returns on capital.
- It can grow to a significant scale.
- The market’s currently underserved.
- You have the capabilities needed to bring strong customer-facing differentiation to the marketplace.
Bezos uses the above-mentioned factors to explain why Amazon has so far resisted opening physical stores.
He says, “The potential size of a network of physical stores is exciting. However, we don’t know how to do it with low capital and high returns; physical-world retailing is a cagey and ancient business that’s already well served, and we don’t have any ideas for how to build a physical world store experience that’s meaningfully differentiated for customers.”
“When you do see us enter new businesses, it’s because we believe the above tests have been passed,” he adds.
Not until 2015 will Amazon open its first physical bookstore. It will later acquire Whole Foods in a bid to enter into grocery retail and also open cashier-less Amazon Go convenience stores.
2007: Missionaries build better products
On November 19, 2007, Amazon introduced its Kindle e-reader to the world and practically redefined how we consume books.
“We began with a long-term vision: every book, ever printed, in any language, all available in less than sixty seconds. We started by setting ourselves the admittedly audacious goal of improving upon the physical book. We did not choose that goal lightly. Anything that has persisted in roughly the same form and resisted change for five hundred years is unlikely to be improved easily,” admits Bezos.
According to Bezos, as an inventor, you’re either a mercenary or a missionary. The mercenaries try to flip their stock. Whereas missionaries love their product, their customers, and are trying to build a great service. Paradoxically, he says, “it’s usually the missionaries who make more money.” A product like Kindle can only arrive out of a sheer passion for building something you truly believe in.
“Start with customers and work backward. Listen to customers, but don’t just listen to customers — also invent on their behalf.”
“Kindle is purpose-built for long-form reading. We hope Kindle and its successors may gradually and incrementally move us over years into a world with longer spans of attention, providing a counterbalance to the recent proliferation of info-snacking tools. I realize my tone here tends toward the missionary, and I can assure you it’s heartfelt. It’s also not unique to me but is shared by a large group of folks here. I’m glad about that because missionaries build better products.”
Bezos was also quick to admit that innovation doesn’t wait for anyone. So if you don’t execute well, and swiftly, the opportunity will be seized by others.
Confessions of a Kindle Convert
Physical books made me a writer, but ebooks made me a daring reader
2008: Champion a company’s long-termism
“Seek instant gratification — or the elusive promise of it — and chances are you’ll find a crowd there ahead of you,” writes Bezos. On the other hand, long-term thinking:
- Levers our existing abilities.
- Allows us to do new things we couldn’t otherwise contemplate.
- Supports the failure and iteration required for invention.
- And frees us to pioneer in unexplored spaces.
In this year Amazon acquires Audible, now a leader in the audiobooks market.
2009: Listen to customers, but also invent on their behalf
Bezos defines Amazon’s fundamental approach as, “Start with customers and work backward. Listen to customers, but don’t just listen to customers — also invent on their behalf.”
Although what he didn’t mention in the letter is a now obvious, and infamous retort, “If you can’t beat them, buy them,” with Amazon’s acquisition of online shoe behemoth Zappos, an early e-commerce retailer that Amazon was having a hard time catching up with.
2010: Invent new approaches
Invention is the fundamental tool to evolve and improve every aspect of the customer experience. “While many of our systems are based on the latest in computer science research, this often hasn’t been sufficient: our architects and engineers have had to advance research in directions that no academic had yet taken. Many of the problems we face have no textbook solutions, and so we — happily — invent new approaches,” writes Bezos.
Corporate milestone: In July 2010 Amazon announces that in the three years since Kindle was launched, e-book sales have overtaken physical books.
2011: The most radical inventions are those that empower others to pursue their dreams
“Even well-meaning gatekeepers slow innovation,” begins Bezos, before he emphasizes the self-service nature of the various Amazon platforms including Amazon Web Services, Marketplace, and Kindle Direct Publishing. “When a platform is self-service, even the improbable ideas can get tried, and many of those ideas do work, and society is the beneficiary of that diversity.”
2012: Prioritize customer obsession rather than chasing after competitors
One advantage of a customer-driven focus, according to Bezos, “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 benefits and features, before we have to. We lower prices and increase value for customers before we have to. We invent before we have to.”
“These investments are motivated by customer focus rather than by reaction to competition. We think this approach earns more trust with customers and drives rapid improvements in customer experience — importantly — even in those areas where we are already the leader,” he adds.
2013: Pay to quit
Once a year, Amazon literally offers to pay its associates to quit. Although, the headline on the offer is “Please Don’t Take This Offer.” “The goal is to encourage folks to take a moment and think about what they really want. In the long run, an employee staying somewhere they don’t want to be isn’t healthy for the employee or the company,” explains Bezos.
In 2013, Bezos buys The Washington Post newspaper from the Graham family for $250 million in cash.
2014: When you land on a dream business opportunity, don’t just “swipe right” — get married
According to Bezos, “a dreamy business offering” has at least four characteristics:
- Customers love it.
- It can grow to a very large size.
- It offers strong returns on capital.
- It’s durable in time — with the potential to endure for decades.
In 2014, Amazon introduces Fire TV and unveils its first Echo smart speaker to select customers.
2015: Big winners pay for many experiments
This was the year Amazon introduced its first and last smartphone, the Fire phone. As the phone turned out to be a major flop, Bezos talks about the importance of failure.
“Given a 10% chance of a 100X payoff, you should take that bet every time, which is usually right. Given a 10% chance of a 100X payoff, you should take that bet every time. But you’re still going to be wrong nine times out of ten,” writes Bezos.
“Day 2 is stasis. Followed by irrelevance. Followed by excruciating, painful decline. Followed by death.”
With an entrepreneur’s zeal, he adds, “We want to be a large company that’s also an invention machine. We want to combine the extraordinary customer-serving capabilities that are enabled by size with the speed of movement, nimbleness, and risk-acceptance mentality normally associated with entrepreneurial start-ups.”
Amazon also acquires the video game streaming site Twitch this year. And the Echo becomes widely available, just in time for the holidays, and to the annoyance of many participating in corporate America’s Secret Santa gift exchanges.
2016: It’s always Day 1
“Day 2 is stasis. Followed by irrelevance. Followed by excruciating, painful decline. Followed by death,” says Bezos. Here’s how to fend off Day 2 by asking yourself some simple questions:
- Are you delighting customers?
- Are you falling prey to proxies, or do they serve you? Do you own the process or does the process own you?
- Are the world’s trends tailwinds for you?
- And have you settled only for decision quality, or are you mindful of decision velocity, too?
Bezos expands upon how to make high-quality, high-velocity decisions:
- So what if you’re wrong? Some decisions are irreversible and these must be made slowly, with great deliberation. But most decisions are reversible, where it’s easy to course correct. It’s important to identify which is which and not use a one-size-fits-all approach.
- Most decisions should be made with around 70% of the information you wish you had. If you wait for 90%, you’re being slow. If you’re good at course correcting, being wrong is less costly than being slow.
- Disagree and commit. Bezos explains, “If you have conviction in a particular direction even though there’s no consensus, it’s helpful to say, “Look, I know we disagree on this, but will you gamble with me on it? Disagree and commit?” By the time you’re at this point, no one can know the answer for sure, and you’ll probably get a quick yes.”
- “Sometimes teams have different objectives and fundamentally different views. They are not aligned. No amount of discussion, no number of meetings will resolve that deep misalignment.,” writes Bezos. So it’s better to recognize misalignment issues early and escalate them immediately.
2017: Yesterday’s “wow” quickly becomes today’s “ordinary”
Amazon has more or less stayed ahead of ever-increasing customer demands and expectations. And, according to Bezos, high standards are the reason.
Bezos believes setting high standards are teachable and contagious, and that they are domain-specific, meaning you have to learn high standards separately in every arena of interest. To achieve high standards:
- You have to be able to recognize what good looks like.
- You must have realistic expectations for how hard it should be, or how much work it will take, to achieve that result — the scope.
Recognition and scope, according to Bezos, are the two most important rules to deliver high standards.
Leaders have relentlessly high standards — many people may think these standards are unreasonably high. – Amazon Leadership Principles
For example, PowerPoint presentations are not a thing at Amazon. Instead, employees write, and pitch, narratively structured six-page memos. And according to Bezos,
- Great memos are written and re-written.
- Shared with colleagues who are asked to improve the work.
- Set aside for a couple of days.
- And then edited again with a fresh mind.
“Often, 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: they mistakenly believe a high-standards, 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! They’re trying to perfect a handstand in just two weeks, and we’re not coaching them right,” says Bezos.
“The point is that you can improve results through the simple act of teaching scope — that a great memo probably should take a week or more,” he adds.
In 2017, Amazon acquires the grocery chain Whole Foods.
2018: The path to success is anything but straight
Sometimes in business, you know where you’re going and you can be efficient in getting there. But the outsized “nonlinear” discoveries are likely to require wandering, guided by intuition or curiosity, and it’s worth being a little messy and tangential to find your way there.
“The outsized “nonlinear” discoveries require wandering.”
“If you had gone to a customer in 2013 and said, “Would you like a black, always-on cylinder in your kitchen about the size of a Pringles can that you can talk to and ask questions, that also turns on your lights and plays music?” I guarantee you they’d have looked at you strangely and said, “No, thank you.” No customer was asking for Echo,” explains Bezos.
“This was definitely us wandering,” he says.
2019: It remains Day 1
Written in April 2020, at a time the world took a hard hit from the coronavirus pandemic, Bezos explains Amazon’s role to combat the pandemic, as well as in meeting growing demand, as now more than ever consumers depend on its services to deliver goods to their homes.
If Jeff Bezos Was Smart, He’d Get Ahead of the Worker Revolution
Instead of trying to colonize space, Jeff Bezos could reward workers on the pandemic’s front lines
Bezos signs off with a quote from Theodor Seuss Geisel, who said, “When something bad happens you have three choices. You can either let it define you, let it destroy you, or you can let it strengthen you.”
Bezos reiterates that “even in these circumstances, it remains Day 1.”
You can find all of Bezos’s letters to shareholders by following this link.