The Everything Store: Jeff Bezos and the Age of Amazon (36 page)

Amazon knew quite well that publishers would absolutely hate the $9.99 price. The $9.99 e-books were considerably more appealing to some customers than the more expensive hardcovers, the industry’s most profitable format, and the pricing pulled the rug out from under traditional retailers, particularly independent booksellers, who would suddenly find their shelves stocked with what some
book buyers might soon view as overly expensive relics. Everyone had watched this precise dynamic play out in music, with disastrous consequences for physical retailers.

So Amazon decided not to let publishers know about the planned $9.99 price, lest they object. This was easily rationalized; retailers have no obligation to tell their suppliers how they plan to price products, and doing so could theoretically raise the specter of vertical price fixing and attract the attention of antitrust authorities. Still, Amazon had approached publishers as a partner, and now it was deliberately withholding a key piece of information. “We were instructed not to talk about pricing strategy,” Jeff Steele says. “We knew that if we priced e-books too low, they would fear it would devalue their product. So we just said pricing had not yet been decided.”

Oblivious to the pricing plans, publishers slowly came aboard, digitizing larger parts of their catalog. By the fall of 2007, Amazon had ninety thousand books in the Kindle library, tantalizingly close to Bezos’s goal. Kindle owners would have the equivalent of a Barnes & Noble bookstore at their fingertips.

When Bezos finally stopped delaying and set the launch of the first Kindle, executives from all the major book publishers flocked to the press conference. They had been bruised and battered by Amazon over the past few years but they came together as an industry to take a cautious step toward what promised to be the inevitable future of the written word—a future with a major surprise waiting for them.

On November 19, 2007, Jeff Bezos stepped onto a stage at the W Hotel in lower Manhattan to introduce the Kindle. He spoke to an audience of a hundred or so journalists and publishing executives, a relatively small crowd compared to the reverential throngs who gathered for the product rollouts of Apple. Wearing a blue sport coat and khakis, Bezos stated that Amazon’s new device was the successor to the five-hundred-and-fifty-year-old invention of
blacksmith Johannes Gutenberg, the movable-type printing press. “Why are books the last bastion of analog?” Bezos asked that day. “The question is, can you improve upon something as highly evolved and as well suited to its task as the book, and if so, how?”

The original Kindle, priced at $399, was clearly the product of all the compromises and anxieties that had gone into its labored three-year development. It was meant to disappear in the reader’s hands, yet it sported a wedge-shaped body with a jumble of angular buttons, an attempt to make a bold design statement while allowing for the easy entry of text. Bezos wanted a device that did one thing extremely well. But the former Palm engineers at Lab126 had watched the PalmPilot get overtaken by more versatile gadgets, so at the last moment they packed the Kindle with other features, like a Web browser and an MP3 player, which were quarantined in an unusual “experimental” section of the device.

In retrospect, the first Kindle provided an exultant answer to Bezos’s question. In many respects, it was superior to its analog predecessor, the physical book. It weighed ten ounces and could carry two hundred titles. The E Ink screen was easy on the eyes. Whispernet, the name Amazon gave to the Kindle’s free 3G cellular network, allowed readers to painlessly download books in a flash. “I think the reason Kindle succeeded while others failed is that we were obsessive, not about trying to build the sexiest gadget in the world, but rather [about building] something that actually fulfilled what people wanted,” says Russ Grandinetti, a faithful Jeff Bot who later joined the Kindle team.

Competitors were caught flat-footed by the success of the Kindle. A few weeks before the W Hotel event, I wrote about the forthcoming launch for the
New York Times
and spoke to Stephen Riggio, then the CEO of Barnes & Noble. Riggio and his brother were still bruised from their early foray into e-reading with the Rocketbook and felt that customers had flatly rejected the idea of e-books. “The physical value of the book is something that cannot be replicated in digital form,” Riggio told me. “People love to collect books and to
have them in their home and on their shelves. I would say it could never be identically replicated because of the value of books as physical objects in consumers’ minds.”
¹³

Riggio had heard the rumors about the forthcoming Kindle but doubted Amazon’s prospects. “Certainly there’s an opportunity to get back into the business but we think it’s small at this moment and probably will be small for the next couple of years,” he said. “When the market is there, we’ll be there.”

It was an enormous tactical blunder. Barnes & Noble would have to scamper to meet Amazon’s challenge in the e-book market. It would follow a very similar blueprint, setting up a development office in Northern California as Amazon had done with Lab126. Ironically, to design the device, the retailer hired Robert Brunner, the former Apple designer who had left Pentagram to start his own agency, Ammunition. Brunner and his employees had battled with Bezos over putting a keyboard on the Kindle, so, perhaps not surprisingly, the new B&N device—dubbed the Nook—would leave out the keyboard in favor of a separate touch-based control pad, and its advertising would sport the tagline “Books don’t have buttons.”

The Kindle wasn’t an overnight success, of course, but an avalanche of publicity and its prominent placement at the top of the Amazon website ensured that the company would quickly run through its stock of devices. Steve Kessel had studied the introductions of similar consumer electronics like the iPod and placed a conservative first order of twenty-five thousand units. The original batch sold out in hours. Amazon then discovered that the development of the Kindle had gone on for so long, one of its Taiwanese suppliers had discontinued a key component in the wireless module. The company spent months getting a replacement. When a new batch of Kindles arrived the following fall, Bezos appeared on Oprah Winfrey’s talk show, and that blew out the supply once again. “When we originally made the first manufacturing capacity for the Kindle one, we thought we were being very optimistic,” Bezos said. “It was just bad planning.”
¹⁴

The shortage led to some internal friction. Even after the device
sold out, Bezos wanted to promote it heavily on the Amazon home page to continue educating customers and building the brand. Jeff Wilke, now head of North American retail, thought it was irresponsible to feature a product that wasn’t available, and also a waste of Amazon’s most precious real estate. Angry e-mails over the issue one day turned into a heated conversation in Bezos’s office. “We were both passionate and within five minutes we were both mad,” says Wilke, who later conceded that Bezos was right and the short-term pain had been worth it to build the Kindle franchise. Bezos won the argument, of course, but Wilke convinced him to at least make it clearer on the site that Amazon did not actually have any Kindles on hand.

Just as Clayton Christensen had predicted in
The Innovator’s Dilemma,
technological innovation caused wrenching pain to the company and the broader industry. No one was feeling it more than the book publishers. Amazon had spent much of the last two years cajoling and threatening them to embrace its new digital format. But in all those conversations, the company had clearly withheld a crucial detail that Bezos divulged seventeen minutes into the forty-minute launch speech. “
New York Times
bestsellers and new releases are only nine dollars and ninety-nine cents,” Bezos said almost halfway through his presentation at the W Hotel.

Among the gathered publishing execs at the Kindle press conference, there was confusion. Was the $9.99 price a promotional discount for the launch? Was it only for bestsellers? Even after the event, Amazon executives told their publishing counterparts they didn’t know or couldn’t say. Soon it was clear to the bookselling industry that the flat price was not transitory at all—Amazon was pushing it as a new standard. Bezos went on a media tour after the Kindle event, appearing on programs like
The Charlie Rose Show,
trumpeting the $9.99 price for new releases and bestsellers and making a persuasive case for change in the book business. “It is not written anywhere that books shall forever be printed on dead trees,” he told Rose.

Finally the grim reality sank in, and publishing executives kicked
themselves for their own gullibility. “It left an incredibly bad taste in our mouths, that they would slip that one by us after hammering us for months and months with their goddamn lists,” says one executive of a major publishing house. “I don’t think they were doing the wrong thing, but I think the way they handled it was wrong. It was just one more nail in the coffin that no one realized was being closed over [us], even while we were engaged every single day in a conversation about it.”

“I think we were absolutely naïve in agreeing to supply those files without any caveats around them,” says another executive at a big-six publisher, one of the six trade houses with the largest market shares. “If I could rewrite history I would have said, ‘Thanks so much, I love the idea of the Kindle, but let’s have an agreement that says you will not sell below the cost.’ I feel like I was asleep at the tiller.”

The new low price for top-selling e-books changed everything. It tilted the playing field in the direction of digital, putting additional pressure on physical retailers, threatening independent bookstores, and giving Amazon even more market power. The publishers had seen over many years what Amazon did with this kind of additional leverage. It exacted more concessions and passed the savings on to customers in the form of lower prices and shipping discounts, which helped it amass even greater market share—and more negotiating leverage. All this would take a few years to sink in, but it became widely understood when the Kindle started gaining real momentum with the introduction of the Kindle 2 in early 2009. The gazelles were wounded, the cheetah was on the loose, and the subsequent high-profile business and legal dramas would shake the book industry to its foundation.

Amazon had grown from a beleaguered dot-com survivor battered by the vicissitudes in the stock market into a diversified company whose products and principles had an impact on local communities, national economies, and the marketplace of ideas. Like all powerful companies, it would now be subject to ongoing scrutiny of its corporate character, a perpetual test of not only how
well it served its customers but also how well it treated all of the parties drafted into its whirling ecosystem, including employees, partners, and governments. The development of Fiona set the stage for this new phase in Amazon’s history and revealed the company as relentlessly innovative and disruptive, as well as calculating and ruthless. Amazon’s behavior was a manifestation of Bezos’s own competitive personality and boundless intellect, writ large on the business landscape.

PART III

Missionary or Mercenary?

CHAPTER 9

Liftoff!

The fulfillment center dubbed Phoenix 3 on the east side of Arizona’s largest city assaults the senses. It’s the physical manifestation of the everything store, a vision that most Amazon customers could never even imagine and will never behold: a 605,000-square-foot temple to the twin gods of efficiency and selection. Products are neatly arranged but seemingly randomly stowed on shelves. Star Wars action figures sit next to sleeping bags; bagel chips next to Xbox video games. In one high-risk-valuables area, monitored by overhead video cameras, a single Impulse Jack Rabbit sex toy is wedged between a Rosetta Stone Spanish CD and an iPod Nano. Amazon stocks dissimilar products next to one another to minimize the possibility of employees selecting the wrong item, but that seems unlikely to happen. Every product, shelving unit, forklift, roller cart, and employee badge has a bar code, and invisible algorithms calculate the most efficient paths for workers through the facility.

The aisles of Phoenix 3 are a bustling hive of activity, yet the cavernous space feels quiet. The prevailing sounds come from 102 humming rooftop air conditioners and a chorus of beeping electric carts. One employee manages to project his voice through this
acoustic dead zone. Terry Jones, an inbound support associate making twelve dollars an hour, pushes a cart through aisles with towering stacks of products on each side and shouts his arrival in honeyed tones to everyone in his way: “Cart coming through. Yu-up! Watch yourself, please!”

Jones says he is making his time at Amazon “joyful and fun” while complying with the company’s rigorous safety rules. And those same warnings could have been shouted to the world’s retailers in 2007: Amazon was coming for them.

Wall Street analysts first began to notice changes in the company’s financial numbers early that year. Amazon’s sales were accelerating while third-party sellers were reporting a surge of activity on the site and a corresponding decrease on rival platforms like eBay. Curiously, Amazon’s inventory levels were growing too. The company was keeping more merchandise in places like Phoenix 3, as if it confidently expected customers to start buying more.

Scott Devitt, then an analyst for the investment bank Stifel Nicolaus, spotted these shifts earlier than most and upgraded the stock from hold to buy in January 2007.
¹
He changed his rating on the same day a Merrill Lynch adviser offered the far more conventional analysis that Amazon’s margins were hopeless and that it could not make any money. “I was laughed out of portfolio managers’ offices,” Devitt says. “People were ripping apart every component of my investment thesis. At that point, they thought Amazon was some kind of nonprofit scam.”