How did Amazon succeed? Tell you how Bezos built Amazon

We often say that most people cannot change the influence of their original family in their lifetime. Children of poor people often remain poor because their parents do not attach enough importance to education and are unable to provide their children with more resources. Although we say that the United States always gives people the "American Dream", in the United States, most people are unable to change their social class. We see that many entrepreneurs and super-rich people often come from well-off middle-class families. Whether it is Buffett, Munger, Bill Gates, or Zuckerberg. The big investment banks on Wall Street and some big hedge funds all have "Jewish" blood. Lehman, Goldman, and Cohen are all Jewish surnames.

Amazon founder Jeff Bezos actually has a Cuban surname. Jeff Bezos' birthday is January 12, 1964 (now 54 years old). He was born in Albuquerque, a city in central New Mexico, USA. Bezos' mother Jacklyn Gise became pregnant with Jeffrey Jorgensen, who later became Bezos, when she was 16 years old. Bezos' biological father, Ted Jorgensen, worked in a retail store, earning $1.25 an hour and had a problem with alcohol, so his mother and biological father divorced when Bezos was 17 months old. In 1968, Jacqueline married her second husband, Cuban immigrant Miguel Bezos, with four-year-old Bezos. Miguel adopted Bezos, and he changed from Jeffrey Jorgensen to Jeffrey Bezos.

If life is a game of "ladder climbing", then Bezos started at the bottom of the ladder. He had no money, no resources. Both his stepfather and mother loved him deeply, but were unable to provide him with more social resources. Bezos' subsequent experience was similar to that of all the lucky kids from poor families. After graduating from high school with all A's, he was admitted to Princeton University in advance. My major at that time was computer and electrical engineering. Before starting his own business, Bezos was senior vice president of DE Shaw, a quantitative hedge fund on Wall Street, where he worked for four years. When he was about to leave, he walked around Central Park several times with his boss. What Bezos saw at the time was that the Internet was entering a period of explosive growth. Of course, at the beginning of his business, no one could have imagined that Bezos would eventually dominate the American e-commerce Internet and even become the richest man in the world!

As an entrepreneur, the biggest inspiration Bezos gives us is his Day One thinking. Establishing correct or even mature thinking and values ​​at a relatively early age is often the biggest gap between ordinary people and great individuals. We see that those outstanding people have sorted out very correct values ​​at a very early stage and have been sticking to them. In investment, the greatest individual investor, Buffett, established the concept of value investing at a very young age, and did not pursue short-term profits as his investment goal. With the leverage of time, Buffett has become the most successful individual in the global investment community and the wealthiest individual. On the first day of starting his business, Bezos had a " Day One " mindset (or value system). Many entrepreneurs tend to lose themselves after they succeed in their business. “Don’t forget your original intention” is really important. At the beginning of each year's company's financial report, Bezos puts the vision he established when Amazon went public on its first day in 1997:

We want to share our most fundamental decision-making and management basis with you so that all shareholders can confirm whether it is consistent with your investment philosophy.

• Relentlessly focused on the customer.

• Focus on being a long-term market leader rather than short-term profitability or market reaction.

• Constantly evaluate investment projects, eliminate those with poor returns, and keep only the best performing ones.

• We have learned a valuable lesson from investing boldly in projects that will allow us to gain market leadership advantages. Some projects may succeed, while others may not.

• If faced with a choice between optimizing the balance sheet and maximizing future cash flows, we choose the latter.

• When we make bold choices, we share with you the steps in our strategic thinking so that you can evaluate whether this is a rational long-term investment.

• Striving to maintain a lean culture, we understand the importance of cost savings, especially in an industry where net losses are very likely to occur.

• We continue to recruit generalists and geniuses, and measure their competitiveness with equity rather than cash. We understand the importance of talent and must make them feel like owners.

We dare not say that all of the above are correct investment views, but this is us.

Many people like to name their headquarters building after their company. For example, Apple Building, Google Building, XX Bank Building and so on. The name of Amazon’s headquarters is exactly Day One Tower! The company's value is to never forget its original intention. Bezos hopes that the team will always work with an entrepreneurial spirit. Amazon is always in the beginning stage. When a reporter interviewed Buffett last year, he asked him who was the best entrepreneur he had seen in his decades of investment career and economic cycles. Buffett said a name without hesitation: Jeff Bezos.

Amazon initially sold books online. There were two reasons for this. The first was that books in the United States were very expensive, with any given book costing more than $40. The other reason was that books were completely standard commodities, and buying them online and offline was the same. In the first few years, Amazon's competitor was Barnes & Noble, the largest bookstore chain in the United States. Basically, the products on Amazon's website at that time were books, music and videos, and the content was basically the same as that provided by bookstores. At that time, Amazon was not the largest e-commerce company in the United States, but another company called eBay. In 1997, Amazon went public with a market value of $400 million. It was at the peak of the Internet bubble, and Amazon also became a big bull stock in the first PC Internet bubble. The company's revenue increased 104 times from US$16 million in 1996 to over US$2.7 billion in 1999. Correspondingly, the stock price increased 50 times. During the same period, the Nasdaq index rose 9 times and the Morgan Stanley High-Tech Index rose 18 times. Amazon was also the favorite stock of Jack Grubman, the star Internet analyst at Salomon Brothers at the time.

Of course, after March 2000, the Internet bubble began to collapse, and many stocks also fell by more than 90% at that time. Amazon was not spared either, with its stock price falling from a high of $113 to $6 in 2002, a drop of more than 95%! For many entrepreneurs, a stock price plunge of this magnitude is unacceptable and will deal a devastating blow to their self-confidence. However, Amazon's founder Bezos was not affected at all. Even at the darkest moment of the stock price, Bezos was still looking for innovations to improve social efficiency. The vast majority of star stocks never recovered after the PC Internet bubble burst. Even the leading stocks AOL and Yahoo faded out of people's sight, only Amazon and Priceline survived and achieved astonishing returns.

After the bursting of the Internet bubble, although Amazon watched its stock price fall every day, it made a series of innovations, laying the foundation for its subsequent second rise. For example, in November 2000, Amazon launched the Marketplace service, transforming itself from an online bookstore into a full-platform e-commerce company and starting direct competition with Ebay. In 2003, the company finally made its first profit. Amazon also did something remarkable that year. It means signing contracts with a group of publishers. Amazon then began publishing e-books with its own copyright. From a profit perspective, the company's costs have been significantly reduced (it has changed from a bookstore replacement role to a publisher replacement role). In February 2005, Amazon launched its now-huge Prime membership service. At that time, Prime members could only enjoy 2-day free delivery. However, as Amazon's territory continues to expand, Prime members can not only enjoy basic free express delivery services, but also watch a large amount of video content. After the acquisition of Whole Foods, Prime members can also enjoy the new retail free door-to-door delivery service. In 2006, Amazon also launched the AWS cloud service business, which later had a huge impact on the company.

Of course, if we look at Amazon's stock price at the time, it was range-bound throughout 2003 to 2007. These innovations will bring huge cash flow to the company in the future, but the capital market did not see truly convincing innovations until the Kindle e-book reader was launched in 2007. The launch of Kindle allowed Amazon to realize a business model that combines software and hardware. Software is the soul of its content, and hardware is the carrier and channel. Today, this model has been developed by many companies such as Apple and Xiaomi. Before Amazon launched Kindle, e-books from various brands had already been available. At that time, Sony's eBook reader was priced at only US$300, and Panasonic's full-color e-book reader was priced at only US$340. But why was Amazon's Kindle so successful as soon as it was launched? We can also see Amazon’s “original ability” in innovation from this. First of all, other readers at the time required a personal computer to be connected to the Internet in order to download books and music content, and then transfer them to the e-book via a USB port. The Kindle itself can download content directly, cutting off the umbilical cord between e-books and computers. At that time, Amazon already had more than 88,000 e-books available for download. The rich content coupled with innovative hardware products eliminated all competitors once it was launched. At the same time, Amazon's old rival Barnes & Noble also launched its own e-reader, the Nook. However, without any software content to support it, Nook was doomed to fail from its birth. After a brief period of glory, its sales soon fell far below expectations. Like many people who stood against Bezos, he left the stage of history as a loser.

Regarding Amazon's internal culture, executives who are close to Bezos all say that this is still a company where one person has the final say. Bezos is even defined as a tyrant by many internally. He once told his employees, I don’t pay you to oppose my opinions. Many of the company's major decisions are made by Bezos alone. When he sets the direction, he often looks at three aspects: 1) The originality of the strategy. Amazon’s strategy is not a “me too” one. I just follow others’ lead; 2) economies of scale. If successful, it must be a big business, not a small business; 3) Super high return on investment. Even by Silicon Valley standards, the return on this is high enough.

The Internet has a strong network effect. The larger a company is, the more users will use its products, and the better its products will be. The most typical example is social software, including and Facebook, which have this feature. Amazon's network effect comes from its ability to innovate. The bigger the company becomes, the more innovative it becomes, and the faster it disrupts traditional industries. Before 2010, Amazon was already a great company and was included in almost all business school textbooks. From an online bookstore to an e-commerce platform, it combines software and hardware. Amazon's earliest competitor was Barnes & Noble, and later its competitor was retail giant Walmart. However, after 2010, Amazon began to accelerate its innovation. The previously deployed AWS, Prime membership services, advertising services, and the new retail model that was subsequently promoted have all begun to explode across the board. We can also see from the figure below that Bezos' personal wealth also accelerated after 2010.

Today, Amazon seems to be omnipotent. In the retail industry, Amazon has eaten up a large amount of traditional retail in the past decade. In the decade from 2006 to 2016, the market value of traditional retail companies shrank significantly. Sears department store plummeted 96%, JC Penny fell 86%, Macy's was halved, and Walmart also fell 1%. And all of this lost market value fell on Amazon. At the beginning, retail department stores, which had the lowest competitive barriers, began to plummet. They not only faced the impact of specialty stores, but also faced Amazon's e-commerce with lower prices and better experience. The so-called Big Box Department Stores in the United States have become a thing of the past. Of course, this is only data from 2016. I didn’t expect that Amazon would become even more powerful two years later. Today, Amazon's market value is more than three times that of Walmart, more than four times that of Home Depot, 50 times that of the US retail discount store Dollar Tree, and 10 times that of the membership-based supermarket Costco. During this period, a large number of retailers will be put out of business by Amazon.

Amazon's AWS has also become the cloud computing service with the largest market share in the world. AWS has extremely high gross profit margins and contributes almost the vast majority of Amazon's operating profits. It has also contributed nearly $300 billion to Amazon's market value. Today, cloud services are the fastest growing business in the global technology industry. We have analyzed with you before that the resurgence of Microsoft and the 7-fold increase of Adobe both came from their transformation to cloud services. The global leader in cloud services is Amazon. It currently accounts for 44% of the global cloud service market share, far exceeding Microsoft's 7% and Alibaba's 3%. These high-traffic platforms can only provide cloud services, big data, and artificial intelligence algorithms if they can obtain large amounts of user data and traffic. After all, these are businesses that require high investment. Other tool-type Internet companies simply cannot continue to provide cloud services because they have no data.

Amazon’s omnipotence is also reflected in today’s “new retail”. For example, Amazon acquired Whole Foods in the hope of bringing e-commerce offline while using Amazon's powerful logistics system. As the leader of boutique supermarkets, Whole Foods attempts to establish a positioning in consumers' minds: health = organic food = Whole Foods. It had already done this before being acquired by Amazon. However, the high price still scares away many users, and it also faces competition from large supermarkets (Sam's Club, Coscto). After being acquired by Amazon, Whole Foods has gained a clear competitive advantage, and its home delivery service is very cost-effective for Prime members. Amazon has also begun to use boutique supermarkets as an entry point, hoping to subvert traditional retail. Of course, Amazon is also preparing to disrupt a larger industry: medical e-commerce. Medical e-commerce is currently monopolized by several large pharmacies, represented by CVS. But the entire healthcare service accounts for 18% of the US GDP and is a huge market.

Great companies always live in the future. When Amazon achieves a good quarterly or annual report, there are always people who want to congratulate Bezos. Bezos’ answer was that the seeds for this financial report had actually been planted three years ago, or even earlier. And today, I will work hard for the performance of the year. Bezos has become the world's richest man and his company is successful enough. But Bezos is still fighting on the front line and still living in Day One. He brainstorms with his colleagues every week and feels lost if he doesn't have any good ideas. There have been different Chinese companies that have been labeled “China’s Amazon.” The earliest one was Dangdang, but today it seems that Dangdang and Amazon are completely different products. Dangdang was Amazon’s earliest online bookstore, but it does not have Amazon’s soul at all, nor does it have enough new innovations. Instead, it sticks to its own small piece of land.

When we look at a company, the most important thing is to look at its soul. Amazon is a company that always lives in the future. But this kind of life in the future does not mean burning investors' money every day and making mistakes through trial and error. All of Amazon’s innovations are based on long-term cash flow returns, which is the essence of value investing. Bezos himself once said in a shareholder letter: Why don't we focus first on earnings per share growth like most people do? The answer is simple. Profits cannot be directly converted into cash flow. The value of a stock is the value of future cash flows, not just the present value of future profits. "The figure below shows Amazon's free cash flow data from 2006 to 2015. We can see that Amazon's free cash flow has increased significantly.

Many people's perception of Amazon is still based on its long-term unprofitability. In fact, the value of free cash flow created by Amazon has been growing continuously. In the past few years, with the rapid growth of high-gross-profit revenues such as advertising revenue, AWS revenue, and Prime membership revenue, free cash flow has also made a new leap! So back to Bezos, his greatness is not just about innovation, not just about remembering his original intention, but also about constantly creating value for investors through innovation!