From Jeffy’s Online Books to everything from A to Z, Amazon.com is an empire amongst empires. Bezos created something remarkable.

Dave Young:

Welcome to the Empire Builders Podcast, teaching business owners the not-so-secret techniques that took famous businesses from mom-and-pop to major brands.

Stephen Semple is a marketing consultant, story collector, and storyteller. I’m Stephen’s sidekick and business partner, Dave Young. Before we get into today’s episode, a word from our sponsor, which is… Well, it’s us, but we’re highlighting ads we’ve written and produced for our clients. So here’s one of those.

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Dave Young:

Ding-dong. Okay. Well, I was making noises there as we started. Welcome to the Empire Builders Podcast. Dave Young here alongside Stephen Semple, and we’re talking about empires. I mean, businesses that started tiny and grew into behemoths, in this case, and often… Well, every time what we do is we let the countdown to the recording start, and then Stephen whispers in my ear today’s topic, and we see if I recognize it. Maybe perhaps I’ve heard of them. And today, he just said one word, Amazon. And I’m like, “Is that a river?” I mean, that’s what we all said back in the day when Jeff Bezos started it-

Stephen Semple:

Yes.

Dave Young:

… was, “Really, you named it after a river in South America? What are you thinking? What’s wrong with you?” But I guess he proved them wrong.

Stephen Semple:

What you’re going to discover, wasn’t actually the first name.

Dave Young:

Oh, cool. They started with a different name and then switched to Amazon.

Stephen Semple:

Jeffy’s Online Books?

Dave Young:

Well, and here’s the thing. We’re 200-and-some-odd episodes in, and we’ve managed to hold off not covering Amazon.

That’s a good point. Yeah.

Stephen Semple:

And I resisted myself, because basically everything that’s to be said about Amazon has probably been said, but I did come across a couple of interesting little tidbits that we’re going to focus on-

Dave Young:

Oh, cool.

Stephen Semple:

… that I hope gives a little bit different picture to Amazon than the other things, people. Look, Amazon is a massive success, has changed the way the world is, was unbelievably innovative and forward-thinking. And today, Amazon does like 8,000 orders a minute.

Dave Young:

A minute?

Stephen Semple:

A minute.

Dave Young:

Unbelievable.

Stephen Semple:

Crazy, isn’t it?

Dave Young:

Mm-hmm.

Stephen Semple:

And Jeff Bezos is one of the richest men in the world, and Amazon is just a monster out there. But here’s the thing that’s also really interesting. Jeff Bezos did not come from technology or retail. And how often have we seen this over and over and over again, that these businesses are built by people from outside the industry? That is like 9 out of 10, or probably even more like 99 out of 100.

He was an investment guy that was working in the early ’90s on Wall Street. That’s what he was doing. And he was making big bucks doing research in the technology space. So he was working in the space, but he wasn’t a tech guy or a retail guy. And he comes across this report about growth in the internet space. And he literally… It boggles his mind. He’s working away in Wall Street, comes across this report, and it says, the space is growing at 2300%. And he literally, as the story goes, picks up the phone, calls the analyst, and said, “There’s a typo here.” And they were like, “No, this is how it’s growing.” And he was like, “Oh my God.”

Now, let’s think about this for a moment, because it’s easy to forget this. 1989 is when the first online transaction on the World Wide Web happened.

Dave Young:

I wouldn’t have thought it was even that long ago, but yeah.

Stephen Semple:

Yeah, yeah, but it was, like, one-

Dave Young:

Yeah. It’s ancient history now, but…

Stephen Semple:

We forget, we forget how much the growth is. And if you really want to go back, probably the best documentation of the growth we’ve had is episode 227 on AOL. Because AOL was really a driver of internet growth. It really was. It was really one of the pioneers that took people online. So to be looking at these things in the early ’90s and go, “Hey, I see growth in online retail,” that’s really forward-thinking. I’ve got to give Bezos credit. Not a lot of people were thinking that way.

So he looks at this growth and he says, “There’s got to be potential to do a business in this space.” And that’s where he starts off. We’ve got to do a business in this space. So he does brainstorming ideas with his wife at the time, McKinsey, and they look at investment sites, they look at advice sites, but he decides it needs to be a store, because people shop every day. Everyone. It’s mass-

Dave Young:

An online store, yeah.

Stephen Semple:

It’s mass, it’s something we do all the time, it’s habitual, and he doesn’t want to do something that’s a niche. And it has no boundaries, and ideally you could remove a lot of the friction in shopping. But he realizes he can’t start that way. This is the other part where I thought he was brilliant. His vision was always online store, but he knew you can’t start as an online store. You can’t become known for being an online store. It’s too big. You need to pick one thing.

Dave Young:

But he had that vision long before he started selling books.

Stephen Semple:

The goal was to sell everything.

Dave Young:

Everything.

Stephen Semple:

But he knew that’s not where you start. And this is what I find interesting. It’s amazing how many startups I talk about have these massive visions, and it’s too big. You can have that massive vision, but you got to still start with something smaller. And that starting something smaller doesn’t limit you. Jeff Bezos has proven that.

So he steps back in this point. He’s trying to figure out, “Well, what’s the one thing I want to do?” And he ordered a book called Cyberdreams by Asimov, and it took two weeks to arrive and arrived damaged. And the ordering process was a bit of a pain in the neck. And he went, “You know what? There’s an opportunity to do better here.” And at the time, the book business is very fragmented. There’s two big players, Barnes & Noble, and Borders. But they combined are only 25% of book sales. So still, most book sales are being done by little retailers.

So it’s dominated by all sorts of little players, and they don’t do a good job of shipping books. So he says, “There’s the opportunity. Books is the opportunity.” He quits Wall Street where he is making like a million bucks a year, moves to Seattle to start the business, and he moves to Seattle because University of Washington at the time has got basically the top computer engineering school, Microsoft is there, so there’s lots of good engineers available.

Dave Young:

Gotcha.

Stephen Semple:

Hires a programmer, Shel Kaphan. And the first name of the company was not Amazon. It was Cadabra, as in-

Dave Young:

Cadabra. Abra.

Stephen Semple:

As in “Abracadabra, your book arrives.”

Dave Young:

Yeah.

Stephen Semple:

Name didn’t work well. People thought it was…

Dave Young:

Magic supplies, or-

Stephen Semple:

No. Well, they actually mistake it, Cadabra for cadaver.

Dave Young:

Yeah, that’s not good either, now that I think about it.

Stephen Semple:

So they needed a new name, and they had very much still the phone book mentality. Remember how everybody wanted to be listed first in the phone book?

Dave Young:

Sure. You start with an A.

Stephen Semple:

So you start with an A, and the first name that kind of came along that they thought they could do anything with was Amazon. Okay, yeah. You know, it’s [inaudible 00:08:32] a river, all this other stuff. So they just went, “Sure, let’s do Amazon. We can make that work.”

Dave Young:

Well, and the smart thing is he picked a… unless I’m wrong, he picked one word as the name.

Stephen Semple:

Yes.

Dave Young:

It wasn’t Amazon Booksellers.

Stephen Semple:

No, Amazon.

Dave Young:

Amazon Online Booksellers.

Stephen Semple:

Right, because he still had the vision —

Dave Young:

That’s limiting. Yeah.

Stephen Semple:

Right, because he still had the vision, “I’m going to do more than this, but I need to start with one thing.” So Amazon.

Dave Young:

So that vision dictates you find a name that is big enough to handle the vision.

Stephen Semple:

Yes. World’s biggest river, right? So it’s June 16th, 1995, Amazon goes live. They wanted to make it simple and easy to order books, and what would happen is they will get the sale, then they turn around and buy the book from the wholesaler, repackage the book, and ship it out to you. So they basically had no inventory.

Dave Young:

I was going to say, you could test the whole idea by just setting up your office near a brick and mortar bookstore and walking over and buying the book.

Stephen Semple:

Instead, they were buying the wholesale.

Dave Young:

Drop it in the mail. But they’re buying from wholesale, so there’s a little profit in it for them. That’s good.

Stephen Semple:

Yep. So the book would come in, they would repack it, ship it to the customer. So really, at first they had no physical inventory, but they had a list of a million books. They could basically sell any book that they could get from a wholesaler. And Amazon rolls out with this claim. They have the Earth’s biggest bookstore, which is really crazy. Any book store could claim that, because they all had access to the same million books. But I also love… There was a little bit of an unusual wording here.

Dave Young:

Stay tuned. We’re going to wrap up this story and tell you how to apply this lesson to your business right after this.

[Using Stories To Sell Ad]

Dave Young:

Let’s pick up our story where we left off, and trust me, you haven’t missed a thing.

Stephen Semple:

I also love, there was a little bit of an unusual wording here, because you sort of expect it to be the world’s biggest bookstore, rather than the Earth’s biggest bookstore.

Dave Young:

Oh yeah, that’s a good point. Yeah.

Stephen Semple:

Right? And I think that really, again, the slightly unusual wording that fit but doesn’t fit sort of makes things stand out a little bit more. The first week, they do 13,000 in sales. Everybody’s working, boxing books, including Bezos in the early days, and they’re struggling to keep up. Like, it’s working. Then they get a call from Yahoo. So remember, at the time, Yahoo is the monster. Mid-’90s, Yahoo is the leading search engine by a country mile. And Yahoo had this thing that they would do. Each week, they would feature the hottest websites on their landing page. And they give Amazon a call and they say, “Hey, would you like to be featured?” Now, they’re struggling to keep up. Bezos says, “Yep. Keep the pedal to the metal.” So Amazon’s already behind in orders, but they go for it, because the whole idea is get big fast.

In a month, they’ve got orders from all 50 states, 25 countries, but they don’t have the infrastructure to keep up, and they’re operating at a loss and growing. So in 1996, they arrange for $8 million investment and they start hiring and updating infrastructure. Now, this point, they get the attention of Barnes & Noble. Remember, Barnes & Noble is the biggest retailer at this time. The CEO meets with them, and he’s known as being kind of a bit of a ruthless guy. He tells Jeff that Barnes & Noble is going to launch their site and it’s going to kill them. So the alternative is sell to Barnes & Noble. Barnes & Noble basically says, “Bezos, we’re going to bury you.” Bezos says, “No.”

But here’s where Bezos is smart. Basically, Barnes & Noble tipped their hand. So in May, 1997, Barnes & Noble launches their site, and it’s not bad, and it’s getting better, but the heads-up made Bezos realize he needed the capital to compete. So he had also arranged to go public. So when Barnes & Noble launched their site, Bezos went public, literally same month, May, ’97. And he raises $54 million. But what he realizes, to win, he now needs to stock inventory and do it quicker than Barnes & Noble. So he starts building warehouses. Then, what is the next natural thing to add to books? Movies, and music. Remember?

Dave Young:

Yeah, I’m just…

Stephen Semple:

Right, because movies were DVD, and music was CDs, right? Nice, natural add-on.

Dave Young:

And you’ve already got people competing in that space.

Stephen Semple:

Yes.

Dave Young:

You’ve got places that are selling CDs and shipping you movies, like Netflix.

Stephen Semple:

Yeah.

Dave Young:

Yeah.

Stephen Semple:

So it’s 1999, and he grows from 610 million to 1.6 billion, 170% growth with the addition of that. Now, here’s the problem. The dot-com bubble bursts, and lots of businesses fail. Investors are switching their focus away from growth. You know how there was that whole thing, burn rate, burn rate, burn rate, doesn’t matter, you don’t need to be profitable. Now all of a sudden, you got to be profitable. And Amazon’s still losing money. And Bezos is told by the board that he needs to make money, he needs to raise prices. This is what the board says. “Dude, you’re raising prices.” What does Bezos do? Announces he’s lowering prices across the board by 30% on everything. He stands against the board, because he says, “This is my opportunity to crush the competition and win.”

It’s really interesting, the Monday Morning Memo this week, from Roy H. Williams. So we need to note, it’s October 6th, so any listeners should go back, mondaymorningmemo.com, October 6th. Read that because it’s really interesting what Roy wrote this morning. It’s write down this whole idea, that when things slow down, this is when the little guy can crush the big guys.

Dave Young:

The big guy, yeah.

Stephen Semple:

This is what he did. Bezos stood against the board, board, said, “Raise prices,” Bezos said, “No, this is my opportunity to put the foot down, put the hammer down, and win.” And that’s what he did. And guess what? Not only that, few quarters after doing that, they hit profitability for the first time, because they exploded the transactions. They killed their competitors in that moment.

So I think the parts that came across interesting for me that I wanted to talk about when it comes to Amazon is this whole idea of he knew he wanted to do something big, but he knew he couldn’t start large. So he spent a lot of time thinking about what’s the natural thing for me to start with? And he looked for something that was fragmented, then it’s easy to go in, that was not being done well, but was already a fairly regular purchase, so he did books. And then in terms of the expansion, what’s something that has very similar characteristics to books? Movies, music.

Dave Young:

That people are already accustomed to purchasing online.

Stephen Semple:

Correct.

Dave Young:

And startup people will talk about the minimum viable product, or minimum viable service, right?

Stephen Semple:

Yes.

Dave Young:

And that’s sort of this.

Stephen Semple:

It is sort of, because he did it with no inventory.

Dave Young:

Sort of, but it’s not quite, though.

Stephen Semple:

Not quite.

Dave Young:

Because he wasn’t trying to make the minimum viable product or service. He was trying to find the entry path to something much, much bigger.

Stephen Semple:

Correct.

Dave Young:

When you have this idea for a business that, oh, we’re going to sell this thing online, or we’re going to do this service, and you just… When you think about minimum viable product, you’re forced to think small, and I think in some cases the risk is that you trim back that big vision.

Stephen Semple:

Yeah. He managed to hold-

Dave Young:

And you lose it.

Stephen Semple:

So there’s two areas where Bezos really showed his brilliance. And look, he’s shown his brilliance in so many different things. There’s whole books that have been written around his philosophies and whatnot. But these were the two that I thought have not been talked about before that I think we can all learn from as entrepreneurs, is he managed to hold those two ideas in his head, the long-term vision and the short-term thing he needed to do to get started. And he didn’t have the one limit the other. One, he was very clear, this one is the pathway to the other. But he was also okay to be known initially as a bookseller. He was fine with that. But he was able to hold those two contradictory ideas in his head and not sacrifice one for the other. And I think you’re right. A lot of people struggle with that, and he was brilliant at that.

Dave Young:

He was focused on it.

Stephen Semple:

He never lost sight of it.

Dave Young:

That’s a really good take on Amazon. I love this one.

Stephen Semple:

The other part is, and I think it’s particularly relevant for where we are today, is because there’s a lot of talk of consumer confidence slipping and things along that lines, is that he stood against his board. His board was like, “Okay, the tune of the day is we got to get profitable. You have to raise prices.” And what he knew is if he raised prices, this idea wasn’t going to work. And look, I’m not normally one saying, “Go lower prices. Go lower prices. Go lower prices.” But strategically, here’s what he knew at this point. His competitors were failing, his competitors were not making money, and his competitors had no more access to capital. This was the opportunity to destroy his online competitors.

Dave Young:

Yeah.

Stephen Semple:

The final nail… This is my opportunity to put my foot on their throat and win. Normally, a lowering a prices is not going to do that, but strategically in that moment, strategically in that moment, it was going to crush the competition.

Dave Young:

And he didn’t change the vision of the company to always be the low-cost supplier, right? It’s, like, that’s changed now.

Stephen Semple:

Right. Yes.

Dave Young:

You may find it for less on Amazon, but you may not. He didn’t make it as a strategy of focus on the company. Again, he made it as strategic decision for competition reasons.

Stephen Semple:

Correct.

Dave Young:

Which is what Walmart did, right?

Stephen Semple:

Correct.

Dave Young:

It’s just a similar story that’s not in the brick-and-mortar space. I love hearing this story.

Stephen Semple:

Yeah. And he took advantage of the moment. He saw that there’s this moment where this will work. There’s this moment in time where this will work, and I’m going to take advantage of this moment.

Dave Young:

And he became incredibly rich.

Stephen Semple:

Yes.

Dave Young:

Still is. And here’s, to me, the happy ending, okay? When he got divorced, his ex-wife got half of it, half of… I don’t know, half of Amazon, but half of all the money, at least, and she’s been given it away to charities and helping all kinds of people, not buying yachts.

Stephen Semple:

And look, and he didn’t fight it. He recognized her role.

Dave Young:

Yeah, yeah. Oh, sure.

Stephen Semple:

He recognized her role.

Dave Young:

No, [inaudible 00:19:52] full credit for that.

Stephen Semple:

It was not one of these drawn-out-in-court battles, because we didn’t hear anything about it.

Dave Young:

Yeah, and-

Stephen Semple:

So he did the right thing.

Dave Young:

Yeah, I think so. And she’s doing a great thing.

Stephen Semple:

Yes.

Dave Young:

Right? She’s clearly thought, well, yeah, “I can help a lot of people , still live a fantastic life.”

Stephen Semple:

I’d been resisting doing Amazon, although I felt like it’s hard to have a podcast like this and not talk about Amazon.

Dave Young:

It is.

Stephen Semple:

But I wanted to find a couple of things that I think just were a little bit different take, and a couple of things that we can really take away as business owners. And I like to call it the thin edge of the wedge strategy. What’s that starting point which you identified, that then you can pivot to the larger thing. And also, in the tough times, that’s your opportunity to become the leader.

Dave Young:

Okay. Well, that’s it for the giant, Amazon.

Stephen Semple:

Yep.

Dave Young:

You’re talking about an empire.

Stephen Semple:

Yeah.

Dave Young:

Next week, as marketers, we’ll be back to talking about the Apple 1984 commercial. No, we won’t. Thank you, Stephen.

Stephen Semple:

Thanks, David.

Dave Young:

Thanks for listening to the podcast. Please share us, subscribe on your favorite podcast app, and leave us a big, fat, juicy five-star rating and review at Apple Podcasts. And if you’d like to schedule your own 90-minute empire-building session, you can do it at empirebuildingprogram.com.