The Everything Store: Jeff Bezos and the Age of Amazon (41 page)

Then the seemingly arbitrary partitions in the company’s corporate structure became even more important. Traveling employees working for Amazon’s North American retail organization were
told to say they worked for a company called Amazon Services, not Amazon.com, and to carry business cards to that effect. According to one document, they were instructed to say, “I’m with Amazon Services, the operator of the www.amazon.com website and provider of e-commerce solutions and services, and I’m here to gather information about the latest industry developments and trends,” if they were ever queried by the media regarding their attendance at a trade show.

Color-coded maps were widely distributed to employees at headquarters in Seattle. Travel to green states like Michigan was okay, but orange states like California required special clearance so that the legal department could track the cumulative number of days Amazon employees spent there. Travel to red states, like Texas, New Jersey, and Massachusetts, required employees to complete an intensive seventeen-item questionnaire about the trip that was designed to determine whether they would make the company vulnerable to sales-tax collection efforts (number 16: “Will you be holding a raffle?”). Amazon lawyers then either nixed the trip altogether or obtained a private letter ruling from that state spelling out its specific treatment of that particular situation.

There was little internal discussion by management on whether it was right or wrong or if it was affecting morale among employees, according to senior employees at the time. It was just strategy, a way to preserve a significant tax advantage that enabled the company to offer comparatively low prices. “The economic outlook for many states is bleak,” read one early 2010 internal tax memo to employees that was filed in the Vadim Tsypin case record. “As a result, states are pursuing taxpayers more aggressively than before. Amazon’s recent public experiences with New York and Texas provide timely and pertinent examples of the heightened risk. That’s why our attention to nexus-related issues are more important than ever.”
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That same year, 2010, fully alerted to the urgency of combating the Amazon threat, Walmart, Target, Best Buy, Home Depot, and Sears put aside their traditional enmities to join forces in an unusual
coalition.
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They jointly backed a new organization called the Alliance for Main Street Fairness, which shrouded itself in populist language and—somehow managing to conceal the dripping irony—touted the importance of preserving the vitality of small mom-and-pop retailers. The organization employed a team of well-financed lobbyists who set up a sophisticated website and ran print and television ads around the country. The CEOs of all these big retailers monitored the campaign closely. Mike Duke, Walmart’s CEO, requested frequent briefings on the sales-tax fight, according to two lobbyists involved in the battle.

Amazon fought the sales-tax expansion aggressively, soliciting cooperation from politicians by deploying both carrot and stick in the area where they might feel it most—jobs. In Texas in 2011, the legislature passed a bill that would force online retailers with distribution facilities in the state to collect sales tax, and Amazon threatened to close its fulfillment center outside Dallas, fire hundreds of local workers, and scrap plans to build other facilities in the state. Texas governor Rick Perry promptly vetoed the bill. In South Carolina, Amazon won an exemption on a new law by using the same threats, and it agreed to send customers e-mails helpfully reminding them they were supposed to pay sales tax on their own. In Tennessee, legislators agreed to delay a bill when Amazon offered to build three new fulfillment centers in the state.

During these skirmishes, Bezos advocated for a federal bill that simplified the sales tax code and imposed it over the entire e-commerce industry. (This had the advantage of being a highly unlikely scenario, considering the political deadlock gripping Washington, DC, at the time.) “If I say to customers, ‘We’re not required to collect sales tax, the Constitution is crystal clear that states cannot force out-of-state retailers to collect sales tax and cannot interfere in interstate commerce, but we’re going to do it voluntarily anyway,’ that isn’t tenable,” Bezos told me in a 2011 interview. “Customers would rightly protest. The way this has to work is you either have to amend the Constitution or you have to pass federal legislation.”

The fight came to a dramatic head in 2012. Amazon surrendered
in Texas, South Carolina, Pennsylvania, and Tennessee, negotiating accommodations that allowed it to stay tax-free for a few more years in exchange for putting new fulfillment centers in each state. In California, the most populous state, where the company apparently thought it could stave off the inevitable, Amazon girded itself for a fight. After the state legislature passed its sales-tax bill, Amazon engineered a campaign to overturn the law with a ballot measure and spent $5.25 million gathering signatures and running radio advertisements. Observers projected the company would have to spend over $50 million to see the fight through to the end.
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It quickly became evident that such a battle would be expensive, bitterly contested—and vicious. The Alliance for Main Street Fairness carpet-bombed the state with anti-Amazon advertisements, and editorial writers and bloggers largely sided with the big-box chains. “Amazon’s attempt to avoid sales tax is one more sad example of the short-term thinking that rules American business,” blogged Web evangelist Tim O’Reilly, knowing just how to push the buttons of Bezos, who prided himself on long-term thinking.
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Inside Amazon, it was increasingly clear that the company was being fitted for the black hat of the bad guy. At the same time, Amazon was preparing to confront Apple in the high-stakes tablet market with the Kindle Fire. Colleagues insisted to Bezos that Amazon could not afford to see its brand tarnished at such a critical juncture.

So that fall, Amazon reversed course and reached an agreement with California: the company would drop its ballot measure in exchange for one more tax-free Christmas season, and it promised to build new fulfillment centers outside San Francisco and Los Angeles.
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Soon after, Paul Misener testified before the Senate Commerce Science and Transportation Committee and reiterated Amazon’s support for a federal bill—as did Amazon’s unlikely new bedfellows in the sales-tax battle, Best Buy, Target, and Walmart. Now eBay, another combatant in the sales-tax wars, stood alone in trying to protect its smallest merchants, like the stay-at-home mother bringing in extra money by selling handmade mosaics. It advocated that the law should not apply to businesses with fewer
than fifty employees or less than $10 million in annual sales, though most of the proposed national sales-tax bills put the exemption at less than $1 million. As of this writing, a national sales-tax-collection bill has not yet passed both houses of Congress.

Amazon was losing a sizable advantage, but Bezos, ever the farsighted chess player, was compensating by cultivating new ones. Amazon’s new fulfillment centers would be close to large cities, allowing for the possibility of next-day or same-day delivery and the wider rollout of its grocery business, Amazon Fresh. Amazon also expanded its test of Amazon Lockers—large, orange locked cabinets placed in supermarkets, drugstores, and chains like Radio Shack that customers could have their Amazon packages shipped to if they liked.

As the era of tax-free online purchases was ending in many states, the true architect of Amazon’s tax strategy and chief of its eighty-person tax department, an attorney named Robert Comfort, stepped out of the shadows. Comfort, a Princeton alumnus who joined Amazon in 2000, had spent more than a decade employing every trick in the book, and inventing many new ones, to minimize the company’s tax burden. He created its controversial tax structure in Europe, funneling sales through entities in Luxembourg, which has a famously low tax rate. In 2012, this arcane tax structure nearly collapsed amid a wave of populist European anger directed at Amazon and other U.S. companies, including Google, who were trying to minimize their overseas tax burden.

Comfort announced his retirement and left Amazon in early 2012, just as the taxman was catching up with the company. (He has since taken a new job—a titular position as Seattle’s honorary consul for the Grand Duchy of Luxembourg.)

And for the first time in its history, Amazon would have to fight its offline rivals on a level playing field.

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There is a clandestine group inside Amazon with a name seemingly drawn from a James Bond film: Competitive Intelligence. The
group, which since 2007 has operated within the finance department under longtime executives Tim Stone and Jason Warnick, buys large volumes of products from competitors and measures the quality and speed of their services. Its mandate is to investigate whether any rival is doing a better job than Amazon and then present the data to a committee that usually includes Bezos, Jeff Wilke, and Diego Piacentini, who ensure that the company addresses any emerging threat and catches up quickly.

In the late 2000s, Competitive Intelligence began tracking a rival with a difficult to pronounce name and a strong rapport with female shoppers. Quidsi (
quid si
is Latin for “what if”) was a New Jersey company known for its website Diapers.com. Grammar-school friends Marc Lore and Vinit Bharara founded the startup in 2005 to allow sleep-deprived caregivers to painlessly schedule recurring shipments of vital supplies. By 2008, the company had expanded into selling all of the necessary survival gear for new parents, including baby wipes, infant formula, clothes, and strollers.

Dragging screaming children to the store is a well-known parental hassle, but Amazon didn’t start selling diapers until a year after Diapers.com, and neither Walmart.com nor Target.com was investing significantly in the category. Back when the dark clouds of the dot-com bust still hung over the e-commerce industry, retailers felt that they wouldn’t make any money shipping big, bulky, low-margin products like jumbo packs of Huggies Snug and Dry to people’s front doors.

Lore and Bharara made it work by customizing their distribution system for baby gear. Quidsi’s fulfillment centers, designed by former Boeing operations manager Scott Hilton, used software to match every order with the smallest possible shipping box (there were twenty-three sizes available), minimizing excess weight and thus reducing the per-order shipping cost. (Amazon, which had to match box sizes to a much larger selection of products, was not as adept at this.) Quidsi selected warehouses outside major population centers to take advantage of inexpensive ground-shipping rates and was able to promise free overnight shipping in two-thirds of
the country. The Quidsi founders studied Amazon closely and idolized Jeff Bezos, referring to him in private conversation as “sensei.”
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Moms got hooked on the seemingly magical appearance of diapers on their doorsteps and enthusiastically told friends about Diapers.com. Several venture-capital firms, including Accel Partners, a backer of Facebook, bought into the possibility that Lore and Bharara had identified a weakness in Amazon’s armor, and they pumped over $50 million into the company. Around this time, Jeff Bezos and his business-development team, as well as Amazon’s counterparts at Walmart, started to pay attention.

Executives and official representatives from Amazon, Quidsi, and Walmart have all declined to discuss the ensuing scuffle in detail. Jeff Blackburn, Amazon’s mergers and acquisitions chief, said Quidsi was similar to Zappos, a “stubbornly independent company building an extremely flexible franchise.” He also said that everything Amazon subsequently did in the diapers market was planned beforehand and was unrelated to competing with Quidsi.

The story that follows has been pieced together from the recollections of insiders at all three companies. They spoke anonymously and with a significant amount of trepidation, given the strength of Amazon’s and Walmart’s strict nondisclosure agreements and the possibility of legal consequences for them for speaking publically about it.

In 2009, Blackburn ominously informed the Quidsi cofounders over an introductory lunch that the e-commerce giant was getting ready to invest in the category and that the startup should think seriously about selling to Amazon. Lore and Bharara replied that they wanted to remain private and build an independent company. Blackburn told the Quidsi founders that they should call him if they ever reconsidered.

Soon after, Quidsi noticed Amazon dropping prices up to 30 percent on diapers and other baby products. As an experiment, Quidsi execs manipulated their prices and then watched as Amazon’s website changed its prices accordingly. Amazon’s famous pricing bots were lasered in on Diapers.com.

Quidsi fared well under Amazon’s assault, at least at first. It didn’t try to match Amazon’s low prices but capitalized on the strength of its brand and continued to reap the benefits of strong word of mouth. It also used its trusting relationship with customers and its expertise in fulfillment to open two new websites, Soap.com for home goods and BeautyBar.com for makeup. But after a while, the heated competition began to take a toll on the company. Quidsi had grown from nothing to $300 million in annual sales in just a few years, but with Amazon focusing on the category, revenue growth started to slow. Investors were reluctant to furnish Quidsi with additional capital, and the company was not yet mature enough for an IPO. For the first time, Lore and Bharara had to think about selling.

At around this point, Walmart was looking for ways to make up the ground they’d lost to Amazon, and the retailer was shaking up its online division. Walmart vice chairman Eduardo Castro-Wright took over Walmart.com, and one of his first calls was to Marc Lore at Diapers.com to initiate acquisition talks. Lore said that Quidsi wanted a chance to get “Zappos money”—$900 million, which included bonuses spread out over many years tied to performance goals. Walmart agreed in principle and started due diligence. Mike Duke, Walmart’s CEO, even visited a Diapers.com fulfillment center in New Jersey. However, the subsequent formal offer from Bentonville was well under the requested amount.