The Everything Store: Jeff Bezos and the Age of Amazon (15 page)

Yet the dot-com collapse took a heavy toll inside the company. Employees had agreed to work tirelessly and sacrifice holidays with their families in exchange for the possibility of fantastic wealth. The cratering stock price cleaved the company in two. Employees who had joined early were still fabulously rich (though they were also exhausted). Many who had joined more recently held stock options that were now worthless.

Even top managers grew disillusioned. Three senior executives recall meeting privately in a conference room that year to write a list of all of Bezos’s successes and failures on a whiteboard. The latter column included Auctions, zShops, the investments in other dot-coms, and most of Amazon’s acquisitions. It was far longer than the first column, which at that time appeared to be limited to books, music, and DVDs. The future of the new toys, tools, and electronics categories was still in question.

But through it all, Bezos never showed anxiety or appeared to worry about the wild swings in public sentiment. “We were all running around the halls with our hair on fire thinking,
What are we going to do?
” says Mark Britto, a senior vice president. But not Jeff. “I have never seen anyone so calm in the eye of a storm. Ice water runs through his veins,” Britto says.

In the span of the next two turbulent years, Bezos redefined Amazon for the rapidly changing times. During this period, he met with two retailing legends who would focus his attention on the power of everyday low prices. He would start to think differently about conventional advertising and look for a way to mitigate the costs and inconveniences of shipping products through the mail. He would also show what was becoming a characteristic volatility, lashing out at executives who failed to meet his improbably high standards. The Amazon we know today, with all of its attributes and idiosyncrasies, is in many ways a product of the obstacles Bezos and Amazon navigated during the dot-com crash, a response to the widespread lack of faith in the company and its leadership.

In the midst of all this, Bezos burned out many of his top executives and saw a dramatic exodus from the company. But Amazon
escaped the downdraft that sucked hundreds of other similarly overcapitalized dot-coms and telecoms to their deaths. He proved a lot of people wrong.

“Up until that point, I had seen Jeff only at one speed, the go-go speed of grow at all costs. I had not seen him drive toward profitability and efficiency,” says Scott Cook, the Intuit founder and an Amazon board member during that time. “Most execs, particularly first-time CEOs who get good at one thing, can only dance what they know how to dance.

“Frankly, I didn’t think he could do it.”

In June of 2000, with Amazon’s stock price headed downward along with the rest of the NASDAQ, Bezos first heard the name Ravi Suria. A native of Madras, India, and the son of a schoolteacher, Suria came to the United States to attend the University of Toledo and earned an MBA from the school of business at Tulane University. At the start of 2000, he was a new and unknown twenty-eight-year-old convertible-bond analyst at the investment bank Lehman Brothers, working in a small office on the fourteenth floor of the World Financial Center.
¹
By the end of that year, he was one of the most frequently mentioned analysts on Wall Street and the unlikely nemesis of Jeff Bezos and Amazon.

For the first five years of his career, at Paine Webber and then at Lehman, Suria wrote about esoteric subjects like the overcapitalization of telecommunications companies and biotechnology firms. After raising its third high-profile round of debt and losing Joe Galli, its chief operating officer, Amazon demanded Suria’s attention. Working from Amazon’s latest quarterly earnings release, Suria analyzed the heavy losses of the previous holiday season and concluded that the company was in trouble, and in a widely disseminated research report, he predicted doom.

“From a bond perspective, we find the credit extremely weak and deteriorating,” he wrote in what would be the first of several scathing reports on Amazon over the next eight months. Suria said that investors should avoid Amazon debt at all costs and that the
company had shown an “exceedingly high degree of ineptitude” in areas like distribution. The haymaker was this: “We believe that the company will run out of cash within the next four quarters, unless it manages to pull another financing rabbit out of its rather magical hat.”

The prediction generated sensational headlines around the world (
New York Post:
“Analyst Finally Tells the Truth about Dot-Coms”
²
). Already freaked by the market’s initial decline, investors dropped Amazon, and its stock fell by another 20 percent.

Inside Amazon, Suria’s report hit a nerve. Bill Curry, Amazon’s chief publicist at the time, called the report “hogwash.” Bezos expanded on that assessment when he spoke to the
Washington Post,
saying that it was “pure unadulterated hogwash.”
³

Suria’s analysis was, in the narrowest sense and with the benefit of hindsight, incorrect. With the additional capital from the bond raise in Europe, Amazon had nearly a billion dollars in cash and securities, enough to cover all of its outstanding accounts with suppliers. Moreover, the company’s negative-working-capital model would continue to generate cash from sales to fund its operations. Amazon was also well along in the process of cutting costs.

The real danger for Amazon was that the Lehman report might turn into a self-fulfilling prophecy. If Suria’s predictions spooked suppliers into going on the equivalent of a bank run and demanding immediate payment from Amazon for their products, Amazon’s expenses might rise. If Suria frightened customers and they turned away from Amazon because they believed, from the ubiquitous news coverage, that the Internet was only a fad, Amazon’s revenue growth could go down. Then it really could be in trouble. In other words, the danger for Amazon was that in their wrongness, Suria and other Wall Street bears might prove themselves right. “The most anxiety-inducing thing about it was that the risk was a function of the perception and not the reality,” says Russ Grandinetti, Amazon’s treasurer at the time.

Which is why Amazon’s damage-control response was unusually emphatic. In early summer, Jenson and Grandinetti crisscrossed the
United States and Europe, meeting with big suppliers and giving presentations on the financial health of the company. “Even the facts were guilty until proven innocent for a short period of time,” Grandinetti says.

In one trip, Grandinetti and Jenson flew to Nashville to reassure the board of Ingram that Amazon was on sound financial footing. “Look, we believe in you guys. We like what you’re doing,” John Ingram, its president, told the Amazon executives while his mother, Martha Ingram, the company’s chairman, looked on. “But if you go down, we go down. If we’re wrong about you, it’s not ‘oh, shucks.’ We have such a concentration of our receivables from Amazon that we will be in trouble too.”

With Amazon’s reputation and brand getting battered in the media, Bezos began a charm offensive. Suddenly, he was everywhere—on CNBC, in interviews with print journalists, talking to investors—asserting that Suria was incorrect and that Amazon’s fundamentals were fine. At the time, I was the Silicon Valley reporter for
Newsweek
magazine, and I spoke to both Bezos and Jenson that summer. “The biggest message here is, his cash flow prediction is wrong. It’s just completely wrong,” Bezos told me in the first of our dozen or so conversations over the next decade.

In the transcript of that interview, Bezos seemed, even a decade later, to be full of confidence and conviction, and he was already a steady recycler of tidy Jeffisms. He reaffirmed his commitment to building a lasting company, learning from his mistakes, and developing a brand associated not with books or media but with the “abstract concept of starting with the customer and working backward.”

But when Bezos addressed Suria’s predictions, his comments seemed defensive. “First of all, for anybody who has followed Amazon.com for any length of time, we’ve all seen this movie before,” he said, interjecting cavalcades of laughter between his answers. “I know we live in a period where long term is ten minutes [laugh] but if you take any historical perspective whatsoever… I mean, let me ask you this question. How much do you think our stock is up over
the last three years? The stock is up by a factor of twenty! So this is normal. I always say about Amazon.com we don’t seek controversy, but we certainly find it [laugh].”

In fact, times were not normal. The challenge from Suria and the dot-com collapse had changed the financial climate, and Bezos knew it. A few weeks later, Jenson and Bezos sat down to scrutinize Amazon’s balance sheet. They came to the conclusion that even if the company showed reasonable growth, its fixed costs—the distribution centers and salary rolls—were simply too big. They would have to cut even more. Bezos announced in an internal memo that Amazon was “putting a stake in the ground” and would be profitable by the fourth quarter of 2001.
⁴
Jenson said that the company “tried to be realistic about what revenues were going to be and everyone was given a target on expenses.”

But the company couldn’t catch a break in the press. When Amazon announced this goal publicly later in the year, it was subject to a new round of criticism for specifying that it would measure profitability using the pro forma accounting standard—which ignored certain expenses, like the costs of issuing stock options—instead of more conventional accounting methods.

For the next eight months, Ravi Suria continued to pummel Amazon with negative reports. His research became a litmus test for people’s view of the dawning new Internet age. Those who believed in the promise of the Web and who had bet their livelihoods on it were likely to be skeptical of Suria’s negative perspective. But those who felt that the coming wave of changes threatened their businesses, their sense of the natural order, even their identities, were likely to embrace the sentiments of Suria and like-minded analysts and believe that Amazon.com was nothing more than a crazy dream precariously built on an irrationally exuberant stock market.

Perhaps that is why hyperrational Bezos grew so obsessed with the mild-mannered, bespectacled New York analyst. To Bezos, Suria represented a strain of illogical thinking that had infected the broader market: the notion that the Internet revolution and all of
the brash reinvention that accompanied it would just go away. According to colleagues from the time, Bezos frequently invoked Suria’s analyses in meetings. An executive in the finance group used Suria’s name to coin a term for a significant mathematical error of a million dollars or more; Bezos loved it and started using it himself.

The word was
milliravi.

It is the ambition of every technology company to be worth more than the sum of its parts. It inevitably seeks to offer a set of tools that other companies can use to reach their customers. It wants to become, in the parlance of the industry, a platform.

At the time, Microsoft was the archetype for such a strategy. Software makers tailored their products to run on the ubiquitous Windows operating system. Then Apple’s iOS operating system for phones and tablets became a foundation for mobile developers to reach users. Over the years, companies like Intel, Cisco, IBM, and even AT&T built platforms and then reaped the rewards of that advantageous position.

So it was only natural that as early as 1997, executives at Amazon were thinking about how to become a platform and augment the e-commerce efforts of other retailers. Amazon Auctions was the first such attempt, followed by zShops, the service that allowed small retailers to set up their own stores on Amazon.com. Both efforts failed in the face of eBay’s insurmountable popularity with mom-and-pop merchants. Nevertheless, by 2000, according to an internal company memo, Bezos was telling colleagues that by the time Amazon got to $200 billion in annual sales, he wanted revenues to be split evenly between sales from products it sold itself and commissions that it collected from other sellers who used Amazon.com.

Ironically, it was the industrywide overreach of 1999 that finally sent Amazon down the path of becoming a platform. Toys “R” Us, though it had taken a $60 million investment from SoftBank and the private equity firm Mobius Equity Partners to create the Internet subsidiary ToysRUs.com, stumbled badly during the 1999
holidays. The offline retailer suffered a raft of negative publicity from frequent outages of its website and late shipments of orders, which in some cases missed Christmas altogether. The company ended up paying a $350,000 fine to the Federal Trade Commission for failing to fulfill its promises to customers. Amazon, meanwhile, had to write off $39 million in the unsold toy inventory that Bezos had so fervently vowed he would personally drive to the local dump.

One night after the holidays, ToysRUs.com chief financial officer Jon Foster cold-called Bezos in his office, and the Amazon CEO picked up the phone. Foster suggested joining forces; the online retailer could provide the critical infrastructure, and the offline retailer would bring the product expertise and relationships with suppliers like Hasbro. Bezos suggested the Toys “R” Us execs meet with Harrison Miller, the category manager of the toy business. The companies held a preliminary meeting in Seattle, but at that point Amazon saw little reason to collaborate with a key competitor.

The next spring, Miller and Amazon’s operations team studied the problems of stocking and shipping toys and concluded that achieving profitability in the category would require sales of nearly $1 billion. The biggest challenge was selecting and acquiring just the right selection of toys—precisely the kind of thing Toys “R” Us did well.

A few weeks later, Miller and Mark Britto, who ran Amazon’s business-development group, met with ToysRUs.com executives in a tiny conference room at Chicago’s O’Hare International Airport and began formal negotiations to combine their toy-selling efforts. “It was dawning on us how brutal it was to pick Barbies and Digimons, and it was dawning on them how expensive it would be to build a world-class e-commerce infrastructure,” Miller says.