My Secret to the Success of Amazon? Being OK With Spectacular Failure.

I left a successful career at a hedge fund to found Amazon. Here’s why my gamble paid off.
jeff-bezos-amazon-invent-and-wander
Jeff Bezos
Expert Contributor
July 27, 2021
Updated: August 9, 2021
jeff-bezos-amazon-invent-and-wander
Jeff Bezos
Expert Contributor
July 27, 2021
Updated: August 9, 2021

In 1994 very, very few people had heard of the internet. It was used at that time mostly by scientists and physicists. We used it a little bit at [the hedge fund] D. E. Shaw for some things but not much, and I came across the fact that the web — the World Wide Web — was growing at something like 2,300 percent a year. Anything growing that fast, even if it’s baseline usage today is tiny, is going to be big. I concluded that I should come up with a business idea based on the internet and then let the internet grow around it and keep working to improve it.

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From Hedge Fund to Online Book Store

So I made a list of products I might sell online. I started ranking them, and I picked books because books are super unusual in one respect: There are more items in the book category than in any other category. There are three million different books in print around the world at any given time. The biggest bookstores only had 150,000 titles. So the founding idea of Amazon was to build a universal selection of books in print. That’s what I did: I hired a small team, and we built the software. I moved to Seattle because the largest book warehouse in the world at that time was nearby in a town called Roseberg, Oregon, and also because of the recruiting pool available from Microsoft.

When I told my boss, David Shaw, that I was going to do this thing, I went on a long walk with him in Central Park, and he said finally, after a lot of listening: “You know what, Jeff, this is a really good idea. I think you’re onto a good idea here, but this would be a better idea for somebody who didn’t already have a good job.” That actually made so much sense to me, and he convinced me to think about it for two days before making a final decision. It was one of those decisions that I made with my heart and not my head, not wanting to pass up a great opportunity. When I’m 80, I want to have minimized the number of regrets that I have in my life, and most of our regrets are acts of omission, things we didn’t try, the path untraveled. Those are the things that haunt us.

At first I had to go deliver the books to the post office myself. I don’t still deliver, but I was doing that for years. In the first month I was packing boxes on my hands and knees on the hard cement floors. I said to the person kneeling next to me, “You know, we need kneepads because this is killing my knees,” and he said, “What we need are packing tables” — the most brilliant idea I’d ever heard. The next day I went and bought packing tables and doubled our productivity.

I thought to myself, “We can sell anything this way.”

The name Amazon comes from Earth’s biggest river, a reference to “Earth’s biggest selection.”

After books we started selling music and then videos. Then I got smart and emailed a thousand randomly selected customers and asked them, besides the things we already sold, what would they like to see us sell. And that answer came back incredibly long-tailed. They answered the question with whatever they were looking for at that moment. So I remember one of the answers was “I wish you sold windshield wiper blades because I really need windshield wiper blades.” I thought to myself, “We can sell anything this way.” So then we launched electronics and toys and, over time, many other categories.

At the pinnacle of the internet bubble our stock peaked somewhere around $113, and then after the internet bubble burst, in less than a year our stock went down to $6. My annual shareholder letter for 2000 starts with a one-word sentence: “Ouch.” That whole period is very interesting because the stock is not the company, and the company is not the stock, and so, as I watched the stock fall from $113 to $6, I was also watching all of our internal business metrics — number of customers, profit per unit, defects — everything you can imagine.

Every single thing about the business was getting better and fast. And so, as the stock price was going the wrong way, everything inside the company was going the right way, and we didn’t need to go back to the capital markets. We already had the money we needed, so we just needed to continue to progress.

We’ve made mistakes, doozies ... but the big winners pay for thousands of failed experiments.

During that era I was on television with Tom Brokaw. He pulled together half a dozen internet entrepreneurs from that era and was interviewing all of us. Tom turned to me and said, “Mr. Bezos, can you even spell profit?” And I said, “Sure, P-R-O-P-H-E-T.”

People always accused us of selling dollar bills for 90 cents, and I said, “Look, anybody can do that and grow revenues.” That’s not what we were doing. We always had positive gross margins. It’s a fixed-cost business, and so I could see from the internal metrics that, at a certain volume level, we would cover our fixed costs, and the company would be profitable.

Enjoying This Excerpt? Buy Jeff’s Book!Invent and Wander: The Collected Writings of Jeff Bezos

 

The Idea for Prime

Most of the inventing we do at Amazon goes like this: Somebody has an idea, other people improve the idea, other people come up with objections for why it can never work, and then we solve those objections. It’s a very fun process. We were always wondering what a loyalty program could be, and then a junior software engineer came up with the idea that we could offer people a kind of all-you-can-eat buffet of fast, free shipping. When the finance team modeled that idea, the results were horrifying. Shipping is expensive, but customers love free shipping.

You have to use heart and intuition. There has to be risk taking. You have to have instinct. All the good decisions have to be made that way. You do it with a group. You do it with great humility because, by the way, getting it wrong isn’t that bad. That’s the other thing. We’ve made mistakes, doozies like the Fire Phone and many other things that just didn’t work out. I won’t list all of our failed experiments, but the big winners pay for thousands of failed experiments.

Did I really say as many prawns as you can eat?

So we tried Prime, and it was very expensive at the beginning. It cost us a lot of money because what happens when you offer a free all-you-can-eat buffet? Who shows up to the buffet first? The heavy eaters. It’s scary. It’s like, oh my god, did I really say as many prawns as you can eat? And so that is what happened, but we could see the trend lines. We could see all kinds of customers were coming, and they appreciated that service.

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Launching Amazon Web Services

We worked on Amazon Web Services behind the scenes for a long time, then finally launched it. AWS has become a very large company by reinventing the way companies buy computation. Traditionally, if you were a company and needed computation, you would build a data center, and you’d fill that data center with servers, and you’d have to upgrade the operating systems of those servers and keep everything running, and so on. None of that added any value to what the business was doing. It was kind of a price-of-admission, undifferentiated heavy lifting.

At Amazon we were doing just that: building data centers for ourselves. We saw it was a tremendous waste of effort between our applications engineers and our networking engineers, the ones who run the data centers, because they were having lots of meetings on all these non-value-added tasks. We said, “Look, what we can do is develop a set of hardened application program interfaces — APIs — that allow these two groups, the applications engineers and the networking engineers, to have roadmap meetings instead of these fine-grained meetings.” We wanted to build in a service-oriented architecture, where all of our services were available in hardened APIs that were well documented enough that anybody could use them.

When you pioneer, if you’re lucky, you get a two-year head start. Nobody gets a seven-year head start.

As soon as we hatched that plan for ourselves, it became immediately obvious that every company in the world was going to want this. What really surprised us was that thousands of developers flocked to these APIs without much promotion or fanfare from Amazon. And then a business miracle that never happens — the greatest piece of business luck in the history of business, so far as I know. We faced no like-minded competition for seven years. It’s unbelievable.

When I launched Amazon.com in 1995, Barnes & Noble then launched Barnesandnoble.com and entered the market two years later in 1997. Two years later is very typical if you invent something new. We launched Kindle; Barnes & Noble launched Nook two years later. We launched Echo; Google launched Google Home two years later. 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.

I think that the big, established enterprise software companies did not see Amazon as a credible enterprise software company, so we had this long runway to build this incredible, feature-rich product and service that is just so far ahead, and the team doesn’t let up.

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Competition and Innovation

Zero-sum games are unbelievably rare. Sporting events are zero-sum games. Two teams enter an arena. One’s going to win; one’s going to lose. Elections are zero-sum games. One candidate is going to win; one candidate is going to lose. In business, however, several competitors can do well. That’s very normal. The most important thing for doing well against competition — in business and also, I think, with military adversaries — is to be both robust and nimble. And it is scale. So it’s great to be in the U.S. military because you’re big. Scale is a gigantic advantage because it gives you robustness. You can take a punch. But it’s also good if you can dodge a punch. And that’s the nimbleness. And as you get bigger, you grow more robust.

If we build a new fulfillment center and it’s a disaster, that’s just bad execution. That’s not good failure. But when we are developing a new product or service or experimenting in some way, and it doesn’t work, that’s OK. That’s great failure.

The most important factor for nimbleness is decision-making speed. The second-most important factor is being willing to be experimental. You have to be willing to take risks. You have to be willing to fail, and people don’t like failure. I always point out that there are two different kinds of failure. There’s experimental failure — that’s the kind of failure you should be happy with. And there’s operational failure.

jeff-bezos-amazon-invent-and-wander
Image: Harvard Business Review Press.

We’ve built hundreds of fulfillment centers at Amazon over the years, and we know how to do that. If we build a new fulfillment center and it’s a disaster, that’s just bad execution. That’s not good failure. But when we are developing a new product or service or experimenting in some way, and it doesn’t work, that’s OK. That’s great failure. And you need to distinguish between those two types of failure and really be seeking invention and innovation.

To sustain it you need the right people; you need innovative people. Innovative people will flee an organization if they can’t make decisions and take risks. You might recruit them initially, but they won’t stay long. Builders like to build. A lot of this stuff is very simple, really. It’s just hard to do. And the other thing about competition is that you do not want to play on a level playing field. This is why you need innovation.

A level playing field is great for Monday night football. We have for decades enjoyed an unlevel playing field in areas like space and technology. I’m very nervous that this is changing rapidly. The only way to stay ahead and to keep that unlevel playing field, which is what you certainly want, is to innovate.

When it comes to competition, being one of the best is not good enough.

In the space domain we are facing adversaries who are going to innovate. So that’s the real issue. If you’re facing adversaries who are not good at innovating, then you don’t have to be that good at innovating.

When it comes to competition, being one of the best is not good enough. Do you really want to plan for a future in which you might have to fight with somebody who is just as good as you are? I wouldn’t.

Before You Go...Could You Kill a Robot Dinosaur?

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Reprinted by permission of Harvard Business Review Press. Excerpted from Invent and Wander: The Collected Writings of Jeff BezosInvent and Wander is co-published by PublicAffairs, an imprint of Perseus Books, and Harvard Business Review Press. Copyright 2021 Jeffrey P. Bezos. All rights reserved.

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