The Everything Store: Jeff Bezos and the Age of Amazon (11 page)

The Walmart transplants created plenty of uncomfortable friction. The Amazon employees were in their twenties and early thirties and full of Bezos-programmed bravado about doing everything differently. The folks from Bentonville were considerably older, in their forties and fifties, and had little patience for the brash youngsters. One notoriously caustic émigré from Walmart, Tom Sharpe, took over as vice president of merchandising and lasted a little more than a year. Birtwistle, the Harvard MBA, remembers a preliminary conversation with Sharpe that went like this.

Sharpe: “What’s your name again?”

Birtwistle: “It’s Brian Birtwistle.”

Sharpe: “Well, listen, Buttwistle, the grown-ups are here now. We are here to make this thing run like a real business.”

The Walmart transplants created another problem. As part of the Drugstore.com build-out, Bezos and Doerr recruited a Walmart engineer named Kal Raman, and he also began cherry-picking his former colleagues from Bentonville. That was the last straw. Walmart sued Amazon, Kleiner, and Drugstore.com in the Arkansas state court, alleging that they were trying to steal trade secrets. John Doerr joked that he could no longer safely travel to the state.

The case was a symbolic shot across the bow and was ultimately
settled with no damages. But it brought the bubbling tensions between the reigning retail champion and the brash online upstart into the open. Some people were unhappy about this. Rick Dalzell’s wife, Kathryn, was upset that her new community was now at war with her old one. Dalzell happened to mention that to Bezos, and soon after, Bezos and MacKenzie stopped by Dalzell’s home with flowers and a copy of Sam Walton’s autobiography,
Sam Walton: Made in America.

Bezos had imbibed Walton’s book thoroughly and wove the Walmart founder’s credo about frugality and a “bias for action” into the cultural fabric of Amazon. In the copy he brought to Kathryn Dalzell, he had underlined one particular passage in which Walton described borrowing the best ideas of his competitors. Bezos’s point was that every company in retail stands on the shoulders of the giants that came before it. The book clearly resonated with Amazon’s founder. On the last page, a section completed a few weeks before his death, Walton wrote:

Could a Wal-Mart-type story still occur in this day and age? My answer is of course it could happen again. Somewhere out there right now there’s someone—probably hundreds of thousands of someones—with good enough ideas to go all the way. It will be done again, over and over, providing that someone wants it badly enough to do what it takes to get there. It’s all a matter of attitude and the capacity to constantly study and question the management of the business.

Jeff Bezos embodied the qualities Sam Walton wrote about. He was constitutionally unwilling to watch Amazon succumb to any kind of institutional torpor, and he generated a nonstop flood of ideas on how to improve the experience of the website, make it more compelling for customers, and keep it one step ahead of rivals.

In early 1998, Bezos was closely involved with a department called Personalization and Community, which was geared toward
helping customers discover books, music, and movies they might find interesting. That May, he surveyed what was then Amazon’s Hot 100 bestseller list and had an epiphany—why not rank everything on the site, not just the top sellers? “I thought, ‘Hey, why do we stop at a hundred? This is the Internet! Not some newspaper bestseller list. We can have a list that goes on and on,’ ” he told the
Washington Post.
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The notion was not only to create a new kind of taxonomy of popularity but also to give authors, artists, and publishers a better idea of how they were doing—and to cater to some of their more neurotic impulses. “Bezos knew sales rank would be like a drug to authors,” says Greg Linden, an early Amazon engineer. “He insisted that it change whenever a new order came in.”

That was not a trivial challenge. Amazon’s overloaded servers were already stretched to the limit, and its Oracle database software was not designed to handle the increasing loads generated by the swelling audience of the Web. Engineers ended up fudging it, taking snapshots of sales data and pushing new rankings to the website every few minutes. The service, called Amazon Sales Rank, was introduced in June to the consternation of not only authors, who began compulsively checking their rankings at all hours of the day and night, but also their spouses and more than a few wary editors and publishers. “I understand how addictive it can be, but maybe they could spend their time more productively, like, maybe, writing a new book,” veteran editor John Sterling said.
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Around that same time, Amazon filed for a patent on what it called its 1-Click ordering process. The system stemmed from a lunch Bezos had with Shel Kaphan and interface engineer Peri Hartman back in 1997, during which he declared that he wanted to make it as easy as possible for customers to buy things on the site. Hartman, a computer science graduate from the University of Washington, devised a system that preloaded a customer’s credit card information and preferred shipping address and then offered the opportunity to execute a purchase with a single press of a button when he or she ordered a product.

By reducing the friction of online buying even marginally, Amazon could reap additional millions in revenue while simultaneously digging a protective moat around its business and hobbling its rivals. The company’s nineteen-page patent application for the system, entitled “Method and System for Placing a Purchase Order Via a Communications Network,” was approved in the fall of 1999. Amazon trademarked the name 1-Click, and a multiyear debate over the wisdom of legally protecting basic business tools began.

Critics charged that the idea behind 1-Click was rudimentary and that its approval by the U.S. patent office was a symptom of lazy bureaucracy and a broken patent process. Bezos didn’t altogether disagree—intellectually, he was an advocate for patent reform—but he was determined to exploit the status quo for any possible advantage. He sued Barnes & Noble for infringing on the patent in late 1999 and won a preliminary ruling that forced the bookseller to add an extra step to its checkout process. Amazon licensed the patent to Apple in 2000 for an undisclosed sum and tried to use it, ineffectively, to gain some leverage over a rising and worrisome rival that first showed up on Amazon’s radar in mid-1998: eBay.

Jeff Blackburn, the former Dartmouth football player who later would become Amazon’s chief of business development, saw eBay coming before almost anyone else at Amazon. The Silicon Valley startup, founded in 1995 as a site called AuctionWeb, made $5.7 million in 1997, $47.4 million in 1998, and $224.7 million in 1999. Blackburn realized that it was growing rapidly, and, even more unsettling—and unlike Amazon—it was profitable. The company had the perfect business model: it took a commission on each sale but had none of the costs of storing inventory and mailing packages. Sellers posted their own products on the site, auctioned them off to the highest bidder, and handled shipping to the customers themselves. The site had started with collectibles like Beanie Babies and baseball cards but it was well on its way to intercepting Bezos’s dream of unlimited selection and stealing the mantle of the everything store.

In the summer of 1998, Bezos invited eBay’s Iranian American founder, Pierre Omidyar, and its CEO, Meg Whitman, a former Disney executive, to Seattle; eBay had just filed to go public when the two executive teams, whose fates would be intertwined for a decade, met for the first time. Bezos gave the eBay team a tour of the Dawson Street distribution center. Omidyar recalls being impressed by the automation in the facility and startled by the piercings and tattoos of the workers. “I thought it was all very cool,” Omidyar says. Later Whitman told him, “Pierre, get over it. This is horrible. The last thing we’d ever want to do is manage warehouses like this.”

During the meeting, the executives discussed different ways of working together. Omidyar and Whitman suggested putting eBay links on Amazon when a customer searched for products it didn’t carry, such as Beanie Babies, and they offered to do the same on eBay for the books of popular authors like Tom Wolfe. Bezos suggested the possibility of Amazon investing in eBay. The eBay executives came away with an impression that Bezos was offering to buy eBay for around $600 million—roughly the market capitalization it was pursuing in its IPO, though later Jeff Blackburn didn’t recall that any formal proposals were made. In the end, though, it didn’t matter; the eBay execs believed that they were pioneering a new type of virtual commerce where supply and demand met to identify the perfect price for any product. They were also put off by Bezos’s startling laugh. The venture capitalists backing eBay asked around and heard that one did not work
with
Jeff Bezos; one worked
for
him.

Bezos had not immediately viewed eBay as a direct threat. But as eBay’s sales and profits grew, he worried that customers might see eBay as the natural starting point for an online shopping trip. Though Bezos often claimed that Amazon considered itself “a customer-focused company, not a competitor-focused company,”
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eBay anxiety spread. Employees exposed to a steady barrage of new economy hokum in newspapers and magazines worried not only that eBay had a better business but that fixed-price retailing itself might become a relic of the past.

Late that year, Bezos initiated a secret auctions project in a sequestered space on the second floor of the Columbia Building, dubbing the effort EBS, for Earth’s Biggest Selection (or alternatively, employees joked, for eBay by spring). Bezos did not tell other employees or his directors, particularly since Scott Cook, the founder of Intuit, was on both the Amazon and eBay boards. Joel Spiegel, who led the effort with Jeff Blackburn, had a mandate to replicate eBay in three months.

Bezos was confident he could beat eBay, particularly since well-capitalized Amazon could afford to charge a lower listing fee to sellers and offer free fraud insurance. Foreseeing the need to marry auctions with a seamless way for buyers and sellers to exchange money, he paid $175 million to acquire the six-month-old payment firm Accept.com, which had not yet introduced an actual service but was already in the process of finalizing a deal with eBay when Bezos swooped in.

Bezos went skiing in Aspen that winter with Cook and Doerr and finally told them what was coming. “He said, ‘We’re going to win, so you probably want to consider whether to stay on the eBay board,’ ” says Cook. “He thought it would be the only natural outcome.” Cook said he wanted to wait and see how things played out.

Amazon Auctions launched in March 1999, and though it got off to a slow start, Bezos quickly doubled down. He acquired a company to broadcast auctions live on the Web and signed a deal with the storied auction house Sotheby’s to focus on high-end products. But the effort went nowhere. Customers could reach Amazon Auctions only by clicking on a separate tab on the Amazon home page, and it looked like a dingy leftovers bin to people who were accustomed to using Amazon to shop in the traditional way, with predictable prices for each item.

The high-tech community was getting a lesson in the dynamics of network effects—products or services become increasingly valuable as more people use them. In online marketplaces, the network effect was pervasive; sellers stuck around for access to a critical mass of buyers, and vice versa. In the auctions category, eBay already had
an insurmountable advantage. Amazon’s executives remember this significant failure as painful but strangely uplifting. “Those days in the nineties were the most intense, fun time I ever had at the company,” Blackburn says. “We had an insanely talented group of people trying to figure out how to launch a superior auctions site. In the end the network effect mattered. You could say we were naïve, but we built a great product.”

Bezos didn’t take the defeat personally. He later cast the mistake as the first step in a series of important experiments to bring third-party sellers onto Amazon. Auctions would evolve into something called zShops, a platform for sellers that allowed them to operate their own fixed-price stores on Amazon.com (zShops, incidentally, was almost called Jeff’s Club, à la Walmart’s Sam’s Club). Regardless, it went nowhere as well. For now, at least, the Web’s small sellers were wedded to eBay.

Perhaps the most avid user of Amazon’s auction site was Bezos himself, who began to collect various scientific and historical curiosities. Most memorably, he purchased the skeleton of an Ice Age cave bear, complete with an accompanying penis bone, for $40,000. After the company’s headquarters moved yet again over the summer, out of the deteriorating Columbia Building and into the Pacific Medical Center building, a 1930s-era art-deco hospital that sat on a hill overlooking the I-5 freeway, Bezos displayed the skeleton in the lobby. Next to it was a sign that read PLEASE DON’T FEED THE BEAR.

Bears—the stock-market kind, pessimists who believe security prices are due to fall—would play no part in what happened next. On December 15, 1998, Oppenheimer analyst Henry Blodget made what became one of the most infamous predictions of the decade, projecting that Amazon’s stock price—already riding the wave of dot-com hysteria into the $200s—would hit $400 per share over the next twelve months. The forecast became a self-fulfilling prophecy and signaled the onset of mass delusion. It sent Amazon stock $46 dollars higher that first day alone, and the stock hit the $400 mark just three weeks later (after two subsequent stock splits, it peaked at
$107). Nudged along by the breathless reports and rhetoric emanating from Wall Street and the press, investors were beginning to lose their minds.

Bezos claimed he was impervious to the hype, but as the dot-com frenzy intensified, he used the unique climate to hasten Amazon’s growth. If there was to be a great Internet landgrab, he reasoned, Amazon should rush to carve out the biggest parcel of territory. “We don’t view ourselves as a bookstore or a music store,” he said that year. “We want to be the place for someone to find and discover anything they want to buy.”
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