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Season 11, Episode 2

Limited Partner Episode

August 16, 2022
August 16, 2022

The Complete History & Strategy of

Amazon. No company has impacted the internet — and all of modern life — more than this one. We’ve waited seven years to do this episode, and are so, so excited to finally dive into every nook and cranny of this legendary company. And of course because we’re Acquired and this is Amazon, we couldn’t contain it all to just one episode… even a 4+ hour one! So today we focus on the retail business, and we’ll have another full episode on AWS coming soon. And because all great series are trilogies, to fully understand Amazon we highly recommend starting first with our previous episode on Walmart, which truly is the giant’s shoulder that Jeff Bezos stood upon. Let’s go!!

**Big News**
We've got merch! Check it out at !


  • Thank you to our presenting sponsor for all of Season 11, Fundrise! If you’re considering raising a growth round of capital in the next year, you should definitely explore raising some of it with the Fundrise Innovation Fund. Just email, and tell them Ben & David sent you. And if you’re an individual looking for exposure to private growth-stage technology companies, you can invest in the Innovation Fund here.
  • Thank you as well to Pilot and NZS Capital! You can register for the NZS Talkback here.

The Playbook:

1. 📈🔥When you witness a once-in-a-decade (or century!) anomaly, run toward it

In 1994, Jeff realized that traffic on the internet grew at 2300x the previous year(!)

We can’t think of ANYTHING that’s growing that fast today. He realized the rarity of that tailwind, quit his job, and didn’t waste any time before starting Amazon

2. 👴 Do what you’ll regret the least when you’re 80

Even though Jeff was the heir-apparent at D. E. Shaw, the decision to quit was “easy” compared to the opportunity cost of not starting Amazon

Using his now-famous “regret-minimization framework,” Jeff knew that the bigger risk for him was STAYING in his great job

3. 🎯 Have a big vision, but start focused 

But where to focus?

Jeff selected books analytically: they are easy to ship, you can get most from just a couple distributors, but there was also meaningful long-tail demand that bookstores (even large ones) didn’t keep in stock. The internet had infinite shelf space!

Which leads us to…

4. ✨ Leverage new paradigms only to do the previously impossible

Most new tech platforms are actually WORSE at doing the old thing. But they unlock totally new use-cases… like a store that could have 3M+ books! Barnes & Noble stocked just ~100k.

5. 📅🧠 Think in decades & invest in customer experience

Amazon famously showed no profits for 20 years. Jeff knew that investing in growth and customer experience today could lead to profitability (and a huge moat) decades down the road

One of my favorite Bezos quotes is “Long term, there was never any misalignment between customer interest and shareholder interest”

6. 🎰🎲 Make bold bets - failures teach

From the failed zShops & Auctions to the Fire Phone, Amazon hit a lot of deadends

But Amazon is a learning machine. From Jeff’s 1997 letter:

“We will make bold rather than timid investments decisions where we see sufficient probability of gaining market leadership advantages. Some of these investments will pay off. Others will not, and we will have learned a valuable lesson in either case”

7. 💸 Cash Rules Everything Around Me

If you have cash sitting around, you can invest much more aggressively than your competitors

Since Amazon’s customers paid up-front and Amazon didn’t have to pay suppliers for month(s), they could invest the cash in the meantime. They leaned into this HARD, building more fulfillment centers to grow and improve customer experience

Which… would have been a problem if they ever stopped growing. But more customers kept flocking, basically forever. Turns out the internet became a pretty big place :)


Carve Outs:

‍Note: Acquired hosts and guests may hold assets discussed in this episode. This podcast is not investment advice, and is intended for informational and entertainment purposes only. You should do your own research and make your own independent decisions when considering any financial transactions.

We finally did it. After five years and over 100 episodes, we decided to formalize the answer to Acquired’s most frequently asked question: “what are the best acquisitions of all time?” Here it is: The Acquired Top Ten. You can listen to the full episode (above, which includes honorable mentions), or read our quick blog post below.

Note: we ranked the list by our estimate of absolute dollar return to the acquirer. We could have used ROI multiple or annualized return, but we decided the ultimate yardstick of success should be the absolute dollar amount added to the parent company’s enterprise value. Afterall, you can’t eat IRR! For more on our methodology, please see the notes at the end of this post. And for all our trademark Acquired editorial and discussion tune in to the full episode above!

10. Marvel

Purchase Price: $4.2 billion, 2009

Estimated Current Contribution to Market Cap: $20.5 billion

Absolute Dollar Return: $16.3 billion

Back in 2009, Marvel Studios was recently formed, most of its movie rights were leased out, and the prevailing wisdom was that Marvel was just some old comic book IP company that only nerds cared about. Since then, Marvel Cinematic Universe films have grossed $22.5b in total box office receipts (including the single biggest movie of all-time), for an average of $2.2b annually. Disney earns about two dollars in parks and merchandise revenue for every one dollar earned from films (discussed on our Disney, Plus episode). Therefore we estimate Marvel generates about $6.75b in annual revenue for Disney, or nearly 10% of all the company’s revenue. Not bad for a set of nerdy comic book franchises…

Season 1, Episode 26
LP Show
August 16, 2022

9. Google Maps (Where2, Keyhole, ZipDash)

Total Purchase Price: $70 million (estimated), 2004

Estimated Current Contribution to Market Cap: $16.9 billion

Absolute Dollar Return: $16.8 billion

Morgan Stanley estimated that Google Maps generated $2.95b in revenue in 2019. Although that’s small compared to Google’s overall revenue of $160b+, it still accounts for over $16b in market cap by our calculations. Ironically the majority of Maps’ usage (and presumably revenue) comes from mobile, which grew out of by far the smallest of the 3 acquisitions, ZipDash. Tiny yet mighty!

Google Maps
Season 5, Episode 3
LP Show
August 16, 2022


Total Purchase Price: $188 million (by ABC), 1984

Estimated Current Contribution to Market Cap: $31.2 billion

Absolute Dollar Return: $31.0 billion

ABC’s 1984 acquisition of ESPN is heavyweight champion and still undisputed G.O.A.T. of media acquisitions.With an estimated $10.3B in 2018 revenue, ESPN’s value has compounded annually within ABC/Disney at >15% for an astounding THIRTY-FIVE YEARS. Single-handedly responsible for one of the greatest business model innovations in history with the advent of cable carriage fees, ESPN proves Albert Einstein’s famous statement that “Compound interest is the eighth wonder of the world.”

Season 4, Episode 1
LP Show
August 16, 2022

7. PayPal

Total Purchase Price: $1.5 billion, 2002

Value Realized at Spinoff: $47.1 billion

Absolute Dollar Return: $45.6 billion

Who would have thought facilitating payments for Beanie Baby trades could be so lucrative? The only acquisition on our list whose value we can precisely measure, eBay spun off PayPal into a stand-alone public company in July 2015. Its value at the time? A cool 31x what eBay paid in 2002.

Season 1, Episode 11
LP Show
August 16, 2022


Total Purchase Price: $135 million, 2005

Estimated Current Contribution to Market Cap: $49.9 billion

Absolute Dollar Return: $49.8 billion

Remember the Priceline Negotiator? Boy did he get himself a screaming deal on this one. This purchase might have ranked even higher if Booking Holdings’ stock (Priceline even renamed the whole company after this acquisition!) weren’t down ~20% due to COVID-19 fears when we did the analysis. We also took a conservative approach, using only the (massive) $10.8b in annual revenue from the company’s “Agency Revenues” segment as’s contribution — there is likely more revenue in other segments that’s also attributable to, though we can’t be sure how much. (with Jetsetter & Room 77 CEO Drew Patterson)
Season 1, Episode 41
LP Show
August 16, 2022

5. NeXT

Total Purchase Price: $429 million, 1997

Estimated Current Contribution to Market Cap: $63.0 billion

Absolute Dollar Return: $62.6 billion

How do you put a value on Steve Jobs? Turns out we didn’t have to! NeXTSTEP, NeXT’s operating system, underpins all of Apple’s modern operating systems today: MacOS, iOS, WatchOS, and beyond. Literally every dollar of Apple’s $260b in annual revenue comes from NeXT roots, and from Steve wiping the product slate clean upon his return. With the acquisition being necessary but not sufficient to create Apple’s $1.4 trillion market cap today, we conservatively attributed 5% of Apple to this purchase.

Season 1, Episode 23
LP Show
August 16, 2022

4. Android

Total Purchase Price: $50 million, 2005

Estimated Current Contribution to Market Cap: $72 billion

Absolute Dollar Return: $72 billion

Speaking of operating system acquisitions, NeXT was great, but on a pure value basis Android beats it. We took Google Play Store revenues (where Google’s 30% cut is worth about $7.7b) and added the dollar amount we estimate Google saves in Traffic Acquisition Costs by owning default search on Android ($4.8b), to reach an estimated annual revenue contribution to Google of $12.5b from the diminutive robot OS. Android also takes the award for largest ROI multiple: >1400x. Yep, you can’t eat IRR, but that’s a figure VCs only dream of.

Season 1, Episode 20
LP Show
August 16, 2022

3. YouTube

Total Purchase Price: $1.65 billion, 2006

Estimated Current Contribution to Market Cap: $86.2 billion

Absolute Dollar Return: $84.5 billion

We admit it, we screwed up on our first episode covering YouTube: there’s no way this deal was a “C”.  With Google recently reporting YouTube revenues for the first time ($15b — almost 10% of Google’s revenue!), it’s clear this acquisition was a juggernaut. It’s past-time for an Acquired revisit.

That said, while YouTube as the world’s second-highest-traffic search engine (second-only to their parent company!) grosses $15b, much of that revenue (over 50%?) gets paid out to creators, and YouTube’s hosting and bandwidth costs are significant. But we’ll leave the debate over the division’s profitability to the podcast.

Season 1, Episode 7
LP Show
August 16, 2022

2. DoubleClick

Total Purchase Price: $3.1 billion, 2007

Estimated Current Contribution to Market Cap: $126.4 billion

Absolute Dollar Return: $123.3 billion

A dark horse rides into second place! The only acquisition on this list not-yet covered on Acquired (to be remedied very soon), this deal was far, far more important than most people realize. Effectively extending Google’s advertising reach from just its own properties to the entire internet, DoubleClick and its associated products generated over $20b in revenue within Google last year. Given what we now know about the nature of competition in internet advertising services, it’s unlikely governments and antitrust authorities would allow another deal like this again, much like #1 on our list...

1. Instagram

Purchase Price: $1 billion, 2012

Estimated Current Contribution to Market Cap: $153 billion

Absolute Dollar Return: $152 billion

Source: SportsNation

When it comes to G.O.A.T. status, if ESPN is M&A’s Lebron, Insta is its MJ. No offense to ESPN/Lebron, but we’ll probably never see another acquisition that’s so unquestionably dominant across every dimension of the M&A game as Facebook’s 2012 purchase of Instagram. Reported by Bloomberg to be doing $20B of revenue annually now within Facebook (up from ~$0 just eight years ago), Instagram takes the Acquired crown by a mile. And unlike YouTube, Facebook keeps nearly all of that $20b for itself! At risk of stretching the MJ analogy too far, given the circumstances at the time of the deal — Facebook’s “missing” of mobile and existential questions surrounding its ill-fated IPO — buying Instagram was Facebook’s equivalent of Jordan’s Game 6. Whether this deal was ultimately good or bad for the world at-large is another question, but there’s no doubt Instagram goes down in history as the greatest acquisition of all-time.

Season 1, Episode 2
LP Show
August 16, 2022

The Acquired Top Ten data, in full.

Methodology and Notes:

  • In order to count for our list, acquisitions must be at least a majority stake in the target company (otherwise it’s just an investment). Naspers’ investment in Tencent and Softbank/Yahoo’s investment in Alibaba are disqualified for this reason.
  • We considered all historical acquisitions — not just technology companies — but may have overlooked some in areas that we know less well. If you have any examples you think we missed ping us on Slack or email at:
  • We used revenue multiples to estimate the current value of the acquired company, multiplying its current estimated revenue by the market cap-to-revenue multiple of the parent company’s stock. We recognize this analysis is flawed (cashflow/profit multiples are better, at least for mature companies), but given the opacity of most companies’ business unit reporting, this was the only way to apply a consistent and straightforward approach to each deal.
  • All underlying assumptions are based on public financial disclosures unless stated otherwise. If we made an assumption not disclosed by the parent company, we linked to the source of the reported assumption.
  • This ranking represents a point in time in history, March 2, 2020. It is obviously subject to change going forward from both future and past acquisition performance, as well as fluctuating stock prices.
  • We have five honorable mentions that didn’t make our Top Ten list. Tune into the full episode to hear them!


  • Thanks to Silicon Valley Bank for being our banner sponsor for Acquired Season 6. You can learn more about SVB here:
  • Thank you as well to Wilson Sonsini - You can learn more about WSGR at:

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Transcript: (disclaimer: may contain unintentionally confusing, inaccurate and/or amusing transcription errors)

David: Hey, Acquired listeners. In the time between when we recorded this episode and now when we're releasing it, longtime Amazon board member and Madrona Venture Group founder, Tom Alberg, sadly passed away. We wanted to—instead of our usual funny, cold opener here—take a moment and dedicate this episode to Tom.

Ben: Tom had such a huge impact on David's and my careers. Tom also had such a huge impact on Seattle and really the whole technology ecosystem, helping to build the law firm, Perkins Coie, and the telecommunications firms, Western Wireless and McCaw Cellular, that really make up a large part of the infrastructure we all use for our phones today.

We also were lucky enough to have Tom on Acquired, and it was really wonderful getting to spend the time in person with him four or five years ago now, David?

David: Yeah. Tom was the longest-serving Amazon board member other than Jeff himself, I believe 23 years. He was the lead independent director and had a huge impact on the company and of course on us.

Ben: We'll all remember Tom. He gave back in so many wonderful ways. This episode is dedicated to you, Tom Alberg. Thank you.

Welcome to Season 11, Episode 2 of Acquired, the podcast about great technology companies and the stories and playbooks behind them. I'm Ben Gilbert, and I am the co-founder and managing director of Seattle-based Pioneer Square Labs and our venture fund, PSL Ventures.

David: And I'm David Rosenthal, and I'm an angel investor based in San Francisco.

Ben: And we are your hosts. Our story today is probably the single most interesting business of the past 30 years. For the longest time, David and I resisted doing an Amazon episode because it almost felt like a trope or that we needed to do something maybe more unexpected.

We've tackled bits and pieces like our interview with former board member Tom Alberg in the Amazon IPO episode, the episode with Alfred Lin on Zappos, and of course, by referencing Bezos, his famous 2009 speech about outsourcing anything that does not make your beer taste better over and over and over again. But we decided that no self-respecting technology business historians like ourselves could skip over this incredible, tumultuous, death-defying, and ultimately very, very successful story.

Today, we'll be tackling, the website that sells books and now everything else on the World Wide Web. As you know, Amazon is also one of the rare companies that built a completely separate and dominant business in Amazon Web Services. We'll save that for our next episode.

This story is for longtime students of Amazon and newcomers alike. While you may be familiar with Jeff's flywheel diagram, the famed door-desks, or the Barron's article from the dot-com bust headlined Amazon.bomb, I can tell you from staring at my mountain of notes that there are some details in here that I certainly didn't know and you may not have known either.

David: It's just such a good story, too. I'm so glad we did Walmart first. We almost didn't because it just perfectly sets the stage for Amazon.

Ben: Oh, yeah. The big thing that we're doing today is we're going to try and answer the question, how did Amazon succeed to such an incredible degree that it has where so many of its dot-com siblings burst into flames?

First, we have some big, big news here at Acquired world HQ. After seven years of beating back requests, we are finally launching a merch store. We've been holding on to this bit for a while because we can think of no better episode to launch our Internet storefront than here on the Amazon episode.

We're partnering with what I think is the single highest quality merchandise platform on the Internet, Cotton Bureau. They make really nice stuff that I have tons of in my closet. We're launching with men's and women's T-shirts, sweatshirts, tanks, and even onesies. If you like David, have a little one at home.

If you decide to be first in this first wave of people to sport the fashionable Acquired merch, you should tweet at us @acquiredfm, and we will retweet some of our favorites. The link is in the show notes, or you can go to

For our presenting sponsor this episode, we have a company that we're very excited about, Fundrise. On the Walmart episode, they broke some news right here on Acquired about a fascinating new product called the Fundrise Innovation Fund. This enables their customers to not only invest in real estate on the platform, but also now private, late-stage growth tech companies.

This is obviously interesting because that's not an asset class that retail investors previously had access to. You had to wait until the IPO, and now they've democratized that and opened the asset class to lots and lots of people just like they funded Fundrise itself.

David: It is also great news for founders as well because retail capital is a great source of capital if you're a late-stage private company.

Ben: We're back here today with Ben Miller, the CEO and co-founder of Fundrise. Ben, can you share some more info for listeners on the Innovation Fund?

Miller: Thanks for having me, guys. It's no wonder you guys like our story because in building Fundrise, we unintentionally created an alternative to venture capital which everybody has a love-hate relationship with.

In 2012, we invented the idea of raising money for real estate on the Internet. Within a few years, we had 150 copycats, 150 different companies trying to do what we were doing with a billion dollars of venture funding.

Then, roll forward eight years to now, and all of those companies basically went out of business. What happened? Do we have a lot better strategy? Do we have better execution? I'm saying the main reason is that they were venture-funded, and we weren't. The venture funds ran their standard playbook and basically ran those companies out of business. We're a little provocative here.

We took a totally different path. We didn't think we wanted to raise traditional venture money. We spent many years trying to figure out how we could do something that's different.

One of our innovations is regulatory innovation. We worked with the SEC on a lot of new ideas. We figured out a way to raise money from the public but stay private. Since then, Fundrise has raised $155 million from the public but stayed as a private company, so we figured out a way to do it, and we did it at scale.

The Innovation is a hybrid of being public and private. It's more passive, more aligned, and lower cost because we don't have the 20% carried interest that we have to pay to venture funds.

Ben: Ben, what are the terms for investors on this fund?

Miller: Fundrise doesn't take a carried interest. It's just a 1.85% asset management fee per year, which is much less than the 2% and 20% of a typical venture fund. We basically became one of the biggest real estate investors in the world. We're today, by deployment, probably top 20 in the world. We wondered basically, okay, we're doing real estate, what's next? Could we do it for other private tech companies?

We went back to the SEC, spent a couple of years with them, figured out how to do it, and are launching the Fundrise Innovation Fund which is a registered fund that raises money from the public but invests in private tech companies. It's going to be available to all US investors. Anybody in the US can invest in it at $10 minimum. It's totally democratizing access. The hope is basically we get to disrupt venture capital the way we disrupted real estate private equity.

We're launching the Fundrise Innovation Fund at the bottom of the economic cycle. My experience is you can't disrupt the financial sector except in a downturn.

Ben: Fascinating.

Miller: It's a crossover fund, so we will own public and private tech. If you go public, we're not going to sell all your shares. We basically are a much more long-term investor because of the structure of the fund.

I think it's the future of venture capital. We're the first direct-to-consumer VC that allows the public to invest into private tech companies, but we won't be the last. This is a megatrend. I'm going to bet that within five years, the likes of Andreessen Horowitz and Sequoia will also launch funds just like this.

Ben: Fascinating. Listeners, if you are considering a growth round of capital and you're an entrepreneur thinking in the next year, I'm going to raise a round, you should definitely explore raising some of it with the Fundrise Innovation Fund. Just shoot an email to If you're an individual looking for exposure to growth-stage tech companies, especially in this new climate we are in, you can go to Our huge thanks to Fundrise.

After you finish this episode, go check out the LP Show by searching Acquired LP Show in the podcast player of your choice. Our next episode will be an interview with Austin Federa who many, many of you know from the Acquired Slack where he's been a member since 2016.

Austin is at the Solana Foundation, very deep in the world of Web3 and crypto. He gave us a great primer on the world of Web3 today, so check that out. If you want early access, it's already live for paid Acquired LPS at

All right, without any further ado, David, onto our story. Listeners, this show is not investment advice. David and I may have investments and certainly have investments in the companies we discussed this time. Do your own research. This is for entertainment purposes only.

David: Oh man, Amazon was not only my idea dinner pick at The Arena show but has been my favorite company, stock, and number one position in my portfolio for more than 10 years now, I think. It's an incredible company.

Ben: I had some conversation with you in maybe 2014 about how you basically owned Amazon stock by owning Seattle real estate, and you were doubly long Amazon with your very concentrated holdings in the company and owning your house in Seattle.

David: The only time I've ever sold any meaningful amount was to buy our first Seattle house because I needed the capital for the down payment. I figured I was essentially getting tracking stock on Amazon.

All right, we start in a very fun place today which is the end of the most recent Acquired episode on Walmart. I realized I could have sworn that we said this on the episode, but I went back and I read the transcript. We didn't.

You tweeted about it, but at the end of Made in America, in 1992, literally as he lays dying, Sam Walton writes at the end of the biography, "Could a Walmart-type story still occur in this day and age? Of course, somewhere out there right now, there’s someone with good enough ideas to go all the way, providing that someone wants it badly enough to do what it takes."

Ben: Such a good quote. He was writing that in 1992 while Jeff Bezos was ideating on what ideas could work on the Internet while working at D. E. Shaw. Oh my God, if he only knew.

David: It was like the prophets speaking. He was describing reality in history as it was happening, and he had no idea. Amazing. Speaking of books, we have a big thank you that we owe to Brad Stone and The Everything Store.

Brad is just the best. We've done episodes with Brad in the past. The Everything Store is the canonical history of the first 20 years of Amazon. We actually talked to Brad the other week when we were preparing for this.

Ben: We had to. It was both a question of, okay, with 10 years or whatever it's been of history, what else would you want to say that wasn't in The Everything Store, and also give us some context around it.

David: No doubt in my mind it is one of the best business books written of the last 20 years or of the 2000s for sure.

Ben: It's a thriller, yeah.

David: Brad actually said this when we were talking to him. He's like, there are two reasons to write a business book. One is that it's a thriller. The other is it's a how-to manual. The Everything Store is both of those.

All right, we jump from 1992 in Bentonville, Arkansas to Albuquerque, New Mexico on January 12th, 1964 where one Jeffery Preston Jorgensen is born. Many people listening—especially if you've read Brad's book—know this story, but it's pretty amazing.

When young Jeffrey's mother became pregnant, she was 16. His father, Ted Jorgensen, was 18. They went to the same high school in Albuquerque, and they were dating at the time. It turns out their fathers actually worked together. This is part of the story. There was a very specific reason why both of their families lived in Albuquerque, and that is because both of their fathers worked together at Sandia National Laboratories.

Ben: For folks who don't know, that laboratory was established, I think, because it played a huge part in the development of nuclear programs developed for the United States.

David: Los Alamos, New Mexico, which I think is an hour-and-a-half north of Albuquerque is where the Manhattan Project happened. That's where the atomic bomb was developed. Quite a while after World War II, the government split the US nuclear program into research—and that was Los Alamos and a bunch of other labs around the country—and then actual management of the weapons. There's nuclear research, nuclear energy, and nuclear weapons.

Sandia is the organization developed by the government—and it's actually a private operation now—that manages nuclear weapons. Both Jeff Bezos' biological grandfathers work there together, and Jeff's mom, Jackie, her dad was named Lawrence Preston Gise. He went by Pop Gise. He actually not only worked at Sandia. He was the head of Sandia. He ran the US nuclear weapons program. Before that, he was one of the original members of DARPA. It encourages the development of the ARPANET, the Internet, and the DARPA Challenge. Obviously, that was much after his time, but, man, you can't make this stuff up. That's crazy.

Their kids managed to get pregnant in high school. Ted and Jackie decide to get married before the baby's born, which they do. The marriage doesn't last though. It's not really set up for success here. When Jeff is about 18 months old, they end up getting divorced. Jackie, Jeff's mom, takes the baby and moves back in with her parents because she's still only 18 or 19 years old at this point.

Eventually, a couple of years later, when Jeff is four, Jackie remarries and moves in with her new husband who is a petroleum engineer for Exxon. Her new husband's name is Miguel Angel Bezos Pérez. Today, he goes by Mike Bezos, Jeff Bezos' adopted father. His story is incredible and actually touches our stories in a very small way.

Mike is from Cuba. He was a student at an elite private high school in Cuba when the revolution happened and Castro took over. His parents were able to get him out and send him to Miami.

Ben: Wasn't there some exfiltration program through the church for gifted youngsters?

David: Mike was part of this. He gets shipped to Miami, doesn't know anybody in America, and doesn't speak English. He ends up—from Miami—getting shipped to Wilmington, Delaware where he lives in a group home. He attends Salesianum High School.

That probably doesn't mean anything to you because you didn't do high school in Bloomington like I did. But I played sports against Sales growing up.

This is so awesome. He and Jackie last year just gave a $12 million donation to Salesianum which I think might be the largest single donation to a Catholic high school in America.

Ben: Wow, Mike and Jackie must have really made some smart investment decisions at some point in their life to be able to make that kind of investment.

David: We will get into it.

Ben: David, how does every single episode have some tie to Southeast Pennsylvania or Delaware?

David: I know.

Ben: I think we're picking favorites here.

David: We totally are. Mike is super smart. He quickly learns English. By the next year, when he graduates from Salesianum, he ends up getting a full scholarship to go to the University of Albuquerque to study engineering. While he's there, he pays his living expenses and is working his way through college by working at a local bank where he meets Jackie. They fall in love, they get married, and Mike adopts Jeff as his adopted son. They go on to have two more children. When Mike graduates, he gets the job with Exxon. He would end up working his whole career at Exxon.

Ben: And becoming a pretty senior executive, right?

David: Very senior executive, so he had some capital to invest a few years later which we will get into. They moved the family to Houston. (a) Mike's story is just amazing, (b) Bezos grew up. His dad worked for Exxon, Standard Oil. There's the connection.

Ben: Right, and grew up in Houston around the space program. We're not going to get into Blue Origin on this episode, but I think the last time we would have talked about Jeff's space routes would have been, I think, on the Virgin Galactic episode. We were talking about the development of the X Prize and SEDS, the college organization for students for the exploration and development of space, something like that. But basically, this college space club, Jeff was the head of that club, the president of the one, and maybe the founder of it at Princeton. There's this very clear throughline from spending time during his childhood in Houston through that and obviously Blue Origin.

David: I didn't think about that. Definitely, Pop Gise, his grandfather, has a big influence on Jeff—which we'll talk about in one sec—and introduces him to science fiction and space because he was involved in all that at DARPA, but I didn't think about that yet. Jeff grew up in Houston during the Apollo era. This was the heyday of NASA. Super cool.

Jeff goes to a Montessori Preschool in Houston, and he gets put into a new program for gifted young students in the Houston elementary school system. This is crazy. At the time, there was a woman named Julie Ray who was writing a book about this whole new concept of gifted streams in elementary school education. Houston is one of the leading school systems that's doing this.

She goes to the administration and she's like, hey, is there a student that I could shadow and see how gifted education is working? They're like, we have exactly the student for you, Jeffrey Bezos.

Ben: There are a number of ways we could highlight how special Jeff was even as a very, very young child, but this is a pretty darn good one. He was the student chosen for the person writing the book on this type of special program in the school selected for special gifted programs. He was one of one of one. He would go on to be valedictorian of many things in his life, but here's the first proxy for that.

David: It's super cool. There's a quote in the book. He has a pseudonym. He's "Tim" in the book.

Ben: To protect the identity of a child who can't yet pick if they want publicity, right?

David: Totally. He's in elementary school. There's this quote in there where Julie, the author, asks Tim's (Jeff's) teacher what grade level he's performing at. He must be in second or third grade at this point. The teacher says, I really can't say, except that there is probably no limit to what he can do given a little guidance.

Ben: Foreshadowing.

David: Right around the time when the family moves to Houston, Pop retires from Sandia, and he and Jeff's grandmother move back to a big ranch in West Texas. By big ranch, I mean a 24,000-acre ranch in West Texas that is 100 miles from the nearest retail outlet. Starting at this point—Jeff's four when this happens—Jeff spends every summer on the ranch living with his grandparents 100 miles from the nearest store, and he's just hanging out with his grandparents.

Ben: That's pretty formative, and in a number of ways. One of which is that his grandpa is remote, so you can't go by anything and you need to be unbelievably self-sufficient, but what an interesting playground for the mind being around his hyper-intelligent grandfather and having just nothing but time and space.

David: Brad writes about this in the book and Jeff talks about this, too. I think this is one of the most formative experiences of the person that becomes Jeff Bezos because for the months that he's there every summer, they have to do everything. They build their own tools. They perform their own veterinary work. There's a story about performing surgery on one of the bird dogs' tails. It's crazy. They're rebuilding farm equipment when it breaks.

Ben: We went 250 episodes without a bird dog and we're now coming up with two episodes in a row that mention bird dogs.

David: I know. Clearly, there's a connection here.

Ben: Yes, great retailers growing up around bird dogs.

David: But like you said, Ben, it's not like he's just doing manual labor out in the countryside. He's doing it with this guy who ran the nuclear weapons program for America.

Ben: Man, it's so hard to do a podcast about Amazon and Jeff Bezos now because the company and Jeff as a person are a symbol for so many different things to so many different people. Of course, I follow Jeff on Instagram and you see him in his cowboy boots with the Blue Origin rocket.

I remember when I first saw those before really understanding his past, I was like, that's disingenuous. Tech billionaire guy throws on his cowboy boots and heads to West Texas, and he's acting like I'm one of the locals, but that’s what he grew up doing on the farm.

David: Yeah. The ranch in Van Horn, Texas where the old Blue Origins operations are based. That's why it's in West Texas.

Ben: And there's a lot of space, a pretty good place to launch rockets.

David: There is literally space to launch. When Jeff's a teenager in high school, Exxon moves his dad to Florida, first to Pensacola and then to Miami. This is a cool little cap for this episode of Mike's story. He comes back to Miami all these years later as this big-time executive at Exxon, which I think was the largest company in America at that point in time. He literally steps off the plane in Miami and has nothing, and now he brings his family back to Miami with so much. It's so cool.

Jeff, as you said, graduates high school as valedictorian and like all great, talented high school graduates, goes on to Princeton. I'm biased, of course. A few of his fellow Princetonians while he's in college—

Ben: Is that really how you say it?

David: Yes, I'm a Princetonian, or a tiger if we're being less pretentious here. A couple of his fellow tigers, while Jeff is studying computer science at Princeton—Brooke Shields, Michelle Obama, and Jeff Wilkie—are also there at the same time. I don't think they were friends. Jeff was a couple of years behind, but they were there at the same time.

When Jeff graduates from college in 1986, he does not go into finance right away. He goes and works for a startup. He works for this company called Fitel which had been founded by a couple of Columbia computer science professors and was developing very, very early network technology for high-speed trading applications. I don't know if it was exactly like today. All this stuff is co-located in data centers with the NASDAQ and the New York Stock Exchange, but they're kind of a precursor to that.

He does that for two years. Then, in 1988, he's like, all right, I'm working for this startup, building infrastructure for this, and then a completely new discipline of finance of quantitative trading in finance, those guys are customers, are actually making a lot more money. Maybe I should go work for them.

Ben: But it is a great experience at that point in time. Being around early networked computing was pretty beneficial to give him not just the basic understanding of how it works but also what all the numbers mean. When I'm watching bits and bytes fly back and forth, I'm looking at packet counts, what hardware can support, what bandwidth, and what are the practical implications so that you can feel the types of applications you could build using infrastructure of the day.

David: The reason we're spending so much time on Jeff's early years and now, we're going to spend a lot of time on this chapter is totally like one of those Steve Jobs things. You can't connect the dots looking forward, but when you look back through Jeff's past—Joy Covey who we'll talk about actually has this quote that she gives to Brad Stone—it's a straight line from birth to Jeff Bezos today. It makes total sense.

Ben: It's really hard to cover Amazon as a business without it being a Jeff Bezos biography because in so many ways, Amazon isn't an extension of Jeff Bezos' brain. It really is a company made in his image. That's the case for a lot of these types of people.

If you look at Apple, that was very much the case for Steve Jobs. Also, by the way, an adopted son of immigrants. I've always just found that interesting. In some ways, I'm thinking, okay, cool. Let's get to the Amazon story. But even though it's called Amazon, at least for a very long time—call it its first decade—it really is just Jeff Bezos at scale.

David: Probably arguably for longer than that until recent times. In 1988, he leaves Fitel (the startup) and he goes to work actually in banking. I believe, almost surely, I don't know for sure, but I can't imagine he's not doing quantitative trading in finance. He's a technical guy. He's a computer science graduate. He had been working in this network operations for early stage quant finance. That's probably what he's doing.

He goes to the investment bank, Bankers Trust, which then through a series of mergers, as always happens on Wall Street, becomes part of Deutsche Bank. Deutsche Bank's going to come back up later in the episode. He's worked at startups and in computer science. He's got this entrepreneurial bug.

On the side, he becomes friends with a guy named Halsey Minor. Listeners, probably a bunch of bells going off. They almost start a startup together at this point in time. The idea was it was going to be a financial newsletter idea, but they become buddies. That doesn't work out, but Halsey, right around this time after that, goes on to start CNET.

Ben: It's crazy. The Internet was so freaking small then. Also, if you were to squint and describe CNET at a really high level, it's distributing the written word over this budding World Wide Web, which is what Amazon did. Ultimately, it distributed them through an abstraction layer where you print the words on paper first and then you ship the paper, but they would go on to start businesses riding the same wave.

David: Yup. I think they remain friends certainly for a while, if not still to this day.

Ben: Bezos does always chuckle at that where people would say, wait, you're starting this business that's meant to take advantage of this new piece of technology. The new piece of technology is particularly good at distributing hypertext over a globally available network. The way that you're doing that is specifically not by putting the text in the browser which can read the hypertext directly onto a screen. He does always chuckle about that.

But it is funny. To this day, you still can't really search for books. If you google search something, you're going to get websites. You're not going to get books. Despite Amazon, Google, and everyone trying, the book publishers have very physically DRMed these books such that you cannot search them in a very digitally native Internet way.

David: Yeah, it's funny even today. In 1990, Jeff gets a fateful call from a headhunter—Jeff's happy where he is, he was thinking about starting this startup—and convinces Jeff to go interview at a new financial firm that has been started just a couple of years earlier called D. E. Shaw. Jeff unexpectedly, completely falls in love in many ways at D. E. Shaw.

Some history on D. E. Shaw for folks that don't know—I didn't know a lot of this—the founder, David E. Shaw, was a Stanford computer science PhD from the '80s who then went on to become a computer science professor at Columbia University, I assume with some of the professors who went on to go found Fitel that Jeff originally worked for. He's a serious academic. He's actually back in academia now. He won the Gordon Bell Prize.

Ben: David Shaw is back in academia?

David: Yeah. Not at an institution, but he's a member of the National Academy of Engineering and the National Academy of Sciences. He's the real deal. His stepfather, when he was growing up, was a finance professor at UCLA, so he'd always been interested in finance but had studied computer science and was an academic.

In 1986, he left Columbia to join Morgan Stanley and then started D. E. Shaw in 1988. I think his model for this was Jim Simons who, in 1982, started Renaissance Technologies (RenTech). I bet actually a lot of people listening don't know. I just said that name and a lot of people are like, oh, what's that? What are these guys talking about?

Ben: It won't hit you as, oh, right, the firm that consistently produces the greatest returns of all time, but they're not taking any more capital, so you can't get your capital in.

David: Dude, RenTech and Simons are unreal. I'm pretty sure they are the best-performing investors of all time, full stop, period. We didn't do an episode on RenTech.

Ben: If we can get any information. The interesting thing about RenTech is that it's like a fortress.

David: Supposedly, the core Medallion Fund which is now all private capital of RenTech employees and Simon himself—there are no outside investors—averaged a 66.1% annual return from 1988–2018. Thirty years at 66% compounding. Nobody's ever beaten that.

Ben: We may need to go regrade our Berkshire Hathaway episode.

David: Yes, seriously. But that was the inspiration for D. E. Shaw. D. E. Shaw has not performed that well, but hedge funds today that people can actually invest in D. E. Shaw and a couple of others are the legacy of that.

Ben: Right. While this was the business model of D. E. Shaw being a quant hedge fund, they always resisted the idea that that's what defined them. They very much thought of themselves as this group of creative artisans who invest in businesses, started businesses, came up with new ideas, and viewed the world through different lenses. Sure, this is how they make money, but D. E. Shaw & Co. was so much more than that.

David: Totally. I think this is what Jeff falls in love with about the firm and David. Jeff joins, rises through the ranks super quickly, becomes the fourth Senior Vice-President at the firm—the highest level below David—and I assume, by far, the youngest. He's in his mid- to late-20s at this point. He is the future, the rising star at D. E. Shaw. He and David become super close.

Now, there are not a lot written about this, which you'll maybe see why in a second, but they were very close. I got to imagine that David saw himself as a mentor to Jeff. Jeff loves it there. He's involved in recruiting and bringing in all these super smart people of all disciplines into D. E. Shaw.

The MO was we just want to find the smartest people in the world. It doesn't matter if they know nothing about business and finance. It's like Bridgewater today. It is the inheritor of this. Just bring them in here and we'll figure out stuff for them to do.

A bunch of people who become really key early Amazon employees—Jeff Holden—I believe Bezos is involved in recruiting.

Ben: Who would later, of course, join Amazon right around two years after its founding.

David: Amazing how that happens.

Ben: Conspicuously close to two years exactly after Jeff left D. E. Shaw.

David: Yeah. Maybe there's a non-compete or something. Nicholas Lovejoy and another Princeton grad joined the firm, MacKenzie Scott Tuttle. That's what we were referring to of Jeff falling in love at D. E. Shaw in more ways than one. Jeff and MacKenzie would get married. I think technically, MacKenzie was the first Amazon employee.

Ben: Yes, it's interesting. I don't know technically in terms of literally, was she the first person to become a W-2 employee, but certainly, she was already doing work, particularly in accounting, working with legal, and setting up the operations of the business before Jeff hired Shel Kaphan who was the first engineer, the first full-time hire other than he and MacKenzie.

David: Yup. MacKenzie was definitely an employee doing work on the business. Within D. E. Shaw, like you said, they're this quant trading firm—that's how they make their money—but they view themselves as being entrepreneurial, starting these other businesses, and doing stuff.

David has Jeff working on a bunch of this stuff. The first project he leads is building out what they call the third market business. It was an idea to create a separate market from the exchanges where retail investors could trade without paying. At that time, you're paying a lot in commissions to your brokerage house. It's super cool.

Ben: By the way, this feels like it's probably the predecessor to dark pools. If they're making transactions off the exchange, then batch shipping them to exchanges to get lower fees, and that is the financial world that we live in today where lots of transactions happen off the exchange, then that's the predecessor to payment for order flow. They were the early days of all this stuff.

David: Robinhood, Citadel, and all that. They definitely were because at the same time, the Internet is so early. We're in early, mosaic Netscape days, 1992–1993. But David and Jeff, given their backgrounds, and David, having done his PhD at Stanford, know all these people that are starting the Internet.

Ben: And even Bezos himself. When he was (I think) in college, he had used the Internet when it was fully just command-prompt based and there was no GUI. It was just the very basic protocols, a Unix command terminal, and maybe Telnet was around at that point.

David: There was no World Wide Web. David and Jeff get really excited about this, and David reassigns Jeff as one of the most senior people in the firm. The two of them are going to work together to come up with business plans that they're going to start Internet opportunities within D. E. Shaw.

I think the first one that they do is an online retail brokerage for financial trading like E-Trade. It was a competitor to E-Trade. I don't know for sure, but I'm wondering if that may be the third market business that Jeff was working on that might have transformed into this because it makes so much more sense over the Internet.

Ben: Yeah, I totally agree. They also started Juno which became reasonably successful. I remember seeing commercials and getting CDs for it. That was early email.

David: Juno was one of the first free email services on the web. Then, they merged with NetZero and became an ISP and an email provider. It was started by Jeff and David within D. E. Shaw, both of these.

That's what they're doing during these years. I think Jeff's main job is the two of them would meet every week, they would brainstorm ideas, Jeff would then go off for the rest of the weekend to research the feasibility of the ideas, work on them with employees within D. E. Shaw, and then they'd launch them. They did this with a couple of businesses.

Ben: They were the only ones doing this. It's interesting how there were other people who observed the Internet. It was like, okay, cool. This is clearly the next technology wave. We had the PC. What do we do with this thing? Microsoft is one that comes to mind.

This is the Rich Barton story with Expedia. That was a division of Microsoft looking at the Internet potential businesses and saying, how do we start them?

Of course, I think longtime listeners will know that the way Expedia ended up happening is Rich basically said, hey, this online travel agency thing needs to happen. If we keep it in Microsoft too long, it's going to kill it. Let’s get it out brokering that deal.

D. E. Shaw, I think, was actually before Microsoft in realizing, okay, the Internet is going to be huge in a handful of years, but the thing that led to the dot-com mania was people realizing all at once that oh my God, the tidal wave is coming.

David: They were ahead of the pack, though. There were not many folks that were recognizing this at this point in time. They've done the online trading thing, the E-Trade competitor. That ended up getting acquired by Merrill Lynch. They did Juno, and they're brainstorming all these other ideas. One day, they come up with an idea that they both get pretty excited about. As Brad writes about in the book, the name for the idea is The Everything Store.

Ben: Which ends up being a pretty great name for a book.

David: The concept was, in one way,, exactly. But there was also a pretty fundamental difference in the idea at this point in time. The idea was that you could use the Internet to build a whole new intermediary layer between consumers and manufacturers that would bypass traditional retailers. The discounters, Walmart, Kmart, Sears, and all that physical stuff, you're just going to cut them all out, and this beautiful Internet business is going to be just the algorithmic matchmaker between customers that want to buy stuff and manufacturers who make stuff. That's what Amazon is.

Ben: There's definitely this, well, the Internet is going to change so much that factories will just be able to sell to consumers online. It's rounding away all the messy middle that we talked about on our episode with Jeremy from Vitalik of you've got the manufacturers, you've got the product designers, you've got the distributors, you've got the brand, you've ultimately got retail, and maybe you can own two parts of that, but you're probably not going to own all of it. It was this very low-res picture of the way that the retail landscape worked.

David: This totally reeks of a 1999-era MBA business plan. It's like, I'm going to drop out of HBS. I've got this startup idea and a business plan. I'm going to get it funded. To their credit, they were a few years ahead of this and nobody knew at the time. Nobody actually knew how the Internet was going to play out.

This seemed maybe plausible. If it would work, it would be beautiful. You wouldn't have to actually do anything. You just sit in the middle and take a tax on transactions. The idea was that the manufacturers would dropship orders directly to customers.

Ben: Right out of their factory, which is totally a core competency.

David: Yeah, totally. That's going to work.

Ben: But importantly, while Jeff is still at D. E. Shaw and regularly doing this ideating, he starts to dive really deep into what categories could make sense for this as a starting place.

David: Yes, the two of them are both very excited about this as they should be.

Ben: Commerce, a pretty big market, huh?

David: Yeah, it turns out. Retail in America, other than US real estate, may be the biggest market in the world?

Ben: Yeah. Auto, I think, and maybe food.

David: Like you said, Ben, they quickly realize, okay, if we're going to do this. You can't just start with The Everything Store. You need to pick one category, build that, build the consumer brand, the website, and the traffic, and then you can add categories over time on top of that.

Jeff goes off during his weekly research activities. In his researches, he decides that books are the ideal category for a few reasons. One, they are perfect commodities. A paperback copy of book X is a paperback copy of book X. It doesn't matter where you bought it and how you bought it. To the customer experience, it's basically the same thing.

Two, there are only two major actual distributors of physical books in America. There are many publishers, but distributors who actually have the inventory of the books are Ingram and Baker & Taylor.

Ben: Do you know where Ingram is located?

David: Oregon, right?

Ben: Yup, Roseburg, Oregon, a convenient one-day drive or less half-day drive from Seattle.

David: Although Jeff was not thinking about that at the time.

Ben: No, not yet. That'd be the next step.

David: It's actually pretty easy to enter this market because all you need to do is establish accounts with Ingram and Baker & Taylor, and then you get the vast majority of the market for commercial books. You have access to the inventory.

Ben: Yup. There are a few other things, too. Books are great because when you compare them with music, there are six different record labels that you'd have to get each of them on board. They can't consider music because obviously, shipping books and shipping CDs is a pretty comparable experience from a weight perspective, packing perspective, and all that. To the extent that it's going to be shipping to people, you have to just look at the industry dynamics of each of those because just like books, CDs are perfect copies, perfect commodities.

David: On many dimensions, they're better than books—lighter weight to ship, standardized packaging, et cetera.

Ben: Yes. But with books—unlike where music that we talked about in our Taylor Swift episode, there are six labels—there are 4200 book publishers. While you can very quickly get the whole catalog of the two distributors, if you end up actually negotiating with publishers, there are a lot of individual publishers. All these small publishers actually do matter because there are 3 million different books that are active and in print worldwide, and the long tail matters. It's not just that everyone wants to listen to Taylor Swift in books. There are lots of rare or out-of-print books that people totally want.

David: The genres, and there are niches.

Ben: The status quo is going to Barnes & Noble, special ordering something, and paying a bunch of extra money for that so it can arrive in a month.

David: I think David and Jeff considered music and CDs as well. I suspect this is probably the reason they decided to go with books. Actually, Brad quotes Jeff in The Everything Store, "With that huge diversity of products—3 million books in print—you could build a store online that simply could not exist in any other way. You could build a true superstore with exhaustive selection and customer value selection."

Borders and Barnes & Noble say they're book superstores, but I think they only stocked 80,000 or so titles, which is a lot, but it's not 3 million.

Ben: It's not the infinite shelf space of the Internet. Also worth noting, Barnes & Noble and Borders each only had less than 12% of the retail market each, so it's not like there was somebody who already had 80% market share that you had to go fight. You ostensibly could reasonably quickly become Barnes & Noble or Borders scale.

David, you said something important there which is that only with the Internet could you really build this true superstore. Bezos keys on this very quickly in the very first interview that he gave which we'll link to in the sources. It was actually at a conference in Seattle. Someone just interviewed him right outside the conference. I think people have probably seen this video or screenshots of this video. It's worth watching the whole few minutes because it's unbelievably prescient.

He basically points out that if you can do something in the old paradigm, you should. When there's a new paradigm like the Internet, you basically want to find things that you could not do any other way in order to really exploit the power of the new paradigm.

David: Oh, that's such a great playbook theme that we can highlight here. I'm thinking about Web3. It's so obvious. You can build stuff in Web3 that you can do in Web2. That's fine, but really, you want to find the stuff that you can't do otherwise.

Ben: Right. Don't create the banner ad, slap it on the Internet, and be like, see, it's like a magazine but on the Internet. Invent the feed format.

David: Totally. That's so good. I hadn't seen that interview. That's awesome.

Jeff, like we've been saying, just keeps getting more and more excited about this the more he digs in. He and a couple of other employees at D. E. Shaw start researching competition because there were other online bookstores at this point in time. There was, and a few local physical bookstores around the country had started up ecommerce Internet storefronts. You could buy a book from XYZ local bookshop around the country and have them ship it to you.

They started experimenting with the competition and they realized that nobody got the whole catalog, so to speak, the infinite selection. It's still all in this old-school physical paradigm like, yeah, we'll put up an ecommerce storefront and we'll put up a website, but we're just selling our inventory out of what we got in the back here.

Ben: And importantly, it was basically all static. The notion of a web server was a very new thing. There were HTML pages and you could put those up on a server so that somebody using a browser could hit it and get that static page back, but this notion of code executes when you hit a URL to dynamically generate a page really wasn't happening yet, so all you can ever do is fetch the static sites. It just relied on whatever bookstore put up that page to make sure it was updated with what's actually in the store.

David: Yeah. Jeff is like, this is a big idea. There is a window to go do this right now. Somebody's going to figure this out.

Ben: Do you know the stat on Internet growth?

David: Yes. He gets it wrong, right?

Ben: I think the stat is that as Jeff looked at two different research reports and basically approximated the middle, what he was analyzing was basically the amount of traffic.

David: Yup. The number of web packets sent over the year of 1993.

Ben: It grew 2300% in that single year.

David: No, this is the error that Brad writes about in the book. It grew 2300X from January 1st, 1993 to January 1st, 1994.

Ben: Wait, he was off by 100X?

David: Yes, which is 230,000%.

Ben: What? Somehow, I missed that.

David: Yeah. He would later quote in speeches that he read this report, and he saw the traffic was growing by 2300%. It jolted him out of his complacency and realized this idea is huge. I got to go do this on my own.

Ben: Holy crap. I was going to make the point of if you see anything growing 2300%, you should start a business on top of it, but I didn't realize that I was with the outdated stat.

David: There's a minimum threshold at which you should stop doing whatever you're doing if you see something like this, and go do that. That threshold is below 2300%, but if you see something that's growing 230,000% in one year, you really got to quit your job and go do this.

Ben: It is crazy. Being in a venture, we looked for, oh, what's the next technology wave? What's the next paradigm? Is it Web3? Is it some form of VR or AR?

David: You and I have never seen this in our professional lifetimes.

Ben: We have never witnessed this, no.

David: We have never seen anything within an order of magnitude of this.

Ben: Mobile didn't happen this quickly. There was no single year in mobile that was nearly as fast as the rapidity of Internet adoption. A lot of us in venture and in startup land right now are starting businesses and investing in businesses that are innovating around the edges and innovating on stuff that's pretty mature. There's nothing that is the fish in a barrel opportunity of suddenly, everyone appeared over there using garbage tools and all we have to do is make a pretty good tool, and everyone's already on the thing.

David: I think we should just pause the episode right now and highlight that everything comes from this. All we are doing now is capitalizing on the ripple effects or the aftershocks of this giant earthquake of which we will probably never see another one in our lifetimes. The Internet is it. It's all the Internet. This is the beginning. Everything now is still just derivative of the Internet.

Ben: The idea that suddenly, everyone is networked together and can obtain any information very quickly. There wasn't even really an interaction model yet. It was just about obtaining information. There were GET requests, but there weren't POST requests.

I don't know if that's technically true, but one reasonable way to think about it is you could load any web page, but there weren't a whole lot of forums you could type things into to send information back to those companies or those servers.

David: In Jeff's head and lived experience, this is all happening at once. He's been working on this Internet stuff and there's this new idea that they're working on that he's probably more excited about than any of the other ideas. He reads these reports, the ultimate of his complacency. He's like, dang, I've got this really cushy job here at D. E. Shaw, but I might need to leave this and go do this on my own.

What happens next is open for debate. Jeff wrestles with this decision for a little bit. He and MacKenzie just got married. They love their life, they love D. E. Shaw, and they love living in New York. Jeff really is the heir apparent to take over D. E. Shaw.

Actually, like I'd said, just a few years later in 2001, David retires, goes back to computer science research, and leaves the firm in the hands of other people. It's very reasonable that could have been Jeff if he hadn't left.

Ben: Absolutely.

David: Jeff calls up his parents. He calls up Mike and Jackie. He's like, what should I do? They're like, oh, you should stay at D. E. Shaw.

Ben: Of course. It's very successful, you get a great salary, and you're well thought of in your industry.

David: How many 28-year-old or 30-year-olds have the success and opportunity that you do? Not many. They suggest thinking about what to do.

Later, he comes up with this framework for making the decision that he calls the regret minimization framework. It really is such a beautiful way to think about big life decisions like this. I've used it. It's really great.

Ben: Absolutely. Me too.

David: The framework, for people who don't know, is when I'm 80 years old, I'm looking back on my life, and I look back at this fork in the road here, which path am I going to regret the least? What will cause the least amount of regret when I am 80, I'm looking back, and I'm like, oh, I made that decision. Do I regret it more or less than what the alternative would have been?

When you look at it that way, the answer is just brain-dead obvious. When he's 80 looking back and he's like, well, I could have built Amazon, but I stayed at D. E. Shaw, that's going to be some serious regret.

Ben: He's just an entrepreneur. It ultimately wasn't really a choice because he wasn't going to take over this thing and be a manager of someone else's vision. That's wholly on Bezos.

David: Which is funny too. I've actually been coming to think that I've used the regret minimization framework to make decisions. I was thinking about this while preparing for the episode. I would have made all those decisions anyway. It was just a justification. People are going to do what is in their blood to do, I think. You're so right, this was in his blood. He was going to do this.

He goes to tell David that he's going to leave. He's going to build The Everything Store on his own.

Ben: Yeah, not only am I going to leave to be an entrepreneur to capitalize on the Internet. I'm going to do the exact thing that we've been the most excited about that I've been working on on your dime.

David: Yes. This is where the legend is. David's like, let's go for a walk. They go off from the skyscraper office in Midtown Manhattan, go for a walk through Central Park for two or three hours, and talk through it all.

David supposedly says to Jeff, look, you got a future here. I very much want you to stay and build this within D. E. Shaw. I will compensate you appropriately. It will be worth your time. But I also understand the entrepreneurial impulse. I left Morgan Stanley to start D. E. Shaw. I get it. I've been in your shoes. If you leave and do this on your own, I'll regret it, but you have my blessing.

That's the legend of how it went. Whether that actually is what happened, I genuinely don't know, but it's a very nice legend. Let's put it that way.

Ben: You're suggesting that it could be a little bit more adversarial or that there could be a little bit of ill will of, hey, I thought you were working on this under the umbrella of D. E. Shaw.

David: Jeff goes to raise money for Amazon.

Ben: He doesn't raise it from David.

David: Right. That would be an obvious source of capital.

Ben: And it's not like Jeff magically had a check waiting for him. Jeff ended up taking the better part of a year to raise a measly $1 million over 60 meetings ultimately from 22 different investors to sell 20% of the company in order to raise that first $1 million. If it was an option for him to call David and shortcut that, you would think he would have.

David: At the end of the day, none of this matters because I am 100% convinced. There is no doubt in my mind nor do I think should there be in anybody's that had Jeff stayed at D. E. Shaw, there would be no Amazon. Regardless of it being worth Jeff's time or compensation, this is the beauty of venture capital and the American entrepreneurial system. Usually, building things that are great is hard, and usually, when things are hard, if you are just an employee making a salary and somebody else owns the company—

Ben: You don't have the level of maniacal progress that Amazon did in its early days.

David: Certainly did. We're going to talk about it. The idea was completely flawed. The business plan was worthless because lots of people had that business plan, and it was completely unrealistic.

Ben: It is interesting thinking about who the Internet appealed to at this moment. It appealed to Jeff or it was on Jeff's radar because Jeff is a nerd. He has a CS background. He was really into Star Trek. He loved obscure novels. He loved storytelling. The Internet appealed to technical librarians at this point in history. That's probably the best way to describe the cult following that bootstrapped the original network of the Internet. It was academics and people who loved libraries and programming.

David: It was also the legacy of the counterculture movement which had died down and morphed into this out in California.

Ben: For sure. This is the thing that put it on Jeff's radar. It's also the thing that really defined who would be willing to join Jeff on this crazy adventure. It wasn't that he was going in recruiting right away the very best and brightest out of the top institutions with the shiniest resumes and who could really do anything. It was people whose hearts burned for I want to make it easier for the world to consume knowledge. I want to make it easier to find rare out-of-print books. That was the seed of the original culture of the people who were attracted to Amazon both as customers and employees.

David: Which was not D. E. Shaw. I think this is also another reason why Jeff really struggled with it because he loved D. E. Shaw. He met his wife there. He loved those people. Eventually, that DNA would come into Amazon, but yeah, let's talk about Shel Kaphan and the first non-MacKenzie employee of Amazon.

Ben: To move the story along, he decides he's doing this. He decides, okay, I need to incorporate the company. He picks a few candidate cities that he could operate the business in because Manhattan is not a wonderful place to be running a bootstrapped startup at the time.

David: By this point in time, I think he had finally figured out that shoot, I might actually have to take delivery of some of these books, and shipping them back out to customers in midtown Manhattan is not a great place for that.

Ben: Right. He starts narrowing it down. There are three cities on the list. Seattle is obviously one of them as a candidate city in part because of its proximity to Roseburg, Oregon. I believe the second candidate city was Boulder. Anyway, they ended up deciding on Seattle. Of course, part of it is that proximity reason. The other part is related to the tax environment of Washington State. As folks know, there is no state income tax in Washington State much like in Florida or Texas.

David: But you would think, given Jeff's history, Florida or Texas would make more sense.

Ben: Right. But there's another big one, too.

David: There are two more big ones.

Ben: One of them is access to technical talent. Microsoft was just absolutely in its heyday. Jeff respected what Bill Gates and crew had built and thought, you know what, opening up a business right next to Microsoft, if I'm going to be attracting programmers, seems like a good idea. What's the fourth?

David: The fourth, you have to rewind a little bit to the recruiting of Shel. Shel, Jeff got introduced to actually through a D. E. Shaw colleague. Shel was an engineer-programmer who lived in Santa Cruz, California and has worked for a bunch of early Silicon Valley startups including Stewart Brand and the Whole Earth Catalog.

Ben: Yeah, absolutely.

David: At the Whole Earth Truck Store in Menlo Park.

Ben: Which is a rare books retailer, right?

David: It was counterculture. It was curiosities that Stewart thought were cool and would be in the Whole Earth Catalog, and then they sold them out of the back of a truck in Menlo Park.

Ben: It's perfect. For listeners who are like Whole Earth Catalog and Stewart Brand, what are you talking about? There's one other element of tech history which will quickly jolt you out of your seat and go, oh, that's what we're talking about here. Steve Jobs who is widely attributed to the "Stay Hungry, Stay Foolish," when he originally invoked that, was citing Stewart Brand. It was printed on the inside cover of the Whole Earth Catalog.

David: It was at the last issue. When they stopped publishing, the iconic photo of the Earth as seen from outer space and then said "Stay Hungry, Stay Foolish" was a total inspiration for Steve Jobs.

Shel was working there.

Ben: Which is so cool, because then, Stewart gets woven into the Amazon story in this way, of course. But then Bezos also has reverence for the Whole Earth Catalog and gets to spend time with Stewart Brand and a bunch of those folks down the line, too.

David: Yup. They work on The Clock of the Long Now, the 10,000-year clock.

Ben: Which was an investment from Bezos Expeditions. I think it was one of the earliest projects that he backed when he became individually wealthy.

David: How did Jeff become individually wealthy? It wasn't necessarily from selling his Amazon shares. We'll get to that. You are not going to believe it when we tell that story.

Ben: How Jeff Bezos became a billionaire, and it had nothing to do with

David: That would be the clickbait if we were a YouTube-native podcast. That would be the title of the episode.

Ben: In fact, maybe we'll clip this into a segment and put it on the Acquired Stories Channel.

David: Maybe do a photo shoot of us in a crazy pose. Like oh my God, no title card.

Ben: YouTubers, man. All right, Jeff gets introduced to Shel.

David: Shel is part of this deep legacy of everything—Silicon Valley, startups, and what becomes of the Internet. I believe the original intention was Jeff and MacKenzie were going to move out to Santa Cruz and were going to build Amazon in Silicon Valley. Why wouldn't you? Maybe it's a little farther to Oregon than Ingram's but not that much farther. It's fine.

I didn't realize how recent this had happened at the same time. In 1992, the Supreme Court ruled on a decision that retail companies do not have to collect sales tax in states where they don't have a physical presence or operations. It doesn't mean that customers don't have to pay sales tax when they buy items from a retailer that is not physically located in their state.

Ben: It means that the burden is on the customer instead of the retailer which, of course, every individual is going out and saying, what purchases did I make last year that I should be paying sales tax on that may not have been charged to me?

David: Oh my God, it's like crypto taxes.

Ben: Yeah. People will pay taxes if it's easy. They won't if it's hard.

David: Jeff finds out and reads about this. He's like, oh, no, we cannot base this company in California. Not New York, not Texas, probably not Florida. What is the Venn diagram of close to a book distributor, has access to technical talent, and enough technical people I can hire but not so much that I'm cutting out a huge swath of my market? Seattle is the obvious choice.

Ben: Which you wouldn't pick today because of this self-perpetuating thing. Because of Amazon and the ecosystem that they and Microsoft would jointly create here, Seattle's population has been going crazy, especially with people with unbelievably high disposable income. You would not want to—in this day and age—execute this strategy and make that decision about Washington state. But Jeff Bezos hadn't created Amazon yet, therefore, it was a perfect place.

David: Actually, I could resonate with this my own personal story. Jeff had zero connection to Seattle. He didn't know anybody. I was exactly the same way when I came to Seattle.

Ben: Dude, it was the place where you got a VC job offer and you were like, I want to be a VC.

David: It's the land of opportunity, and it was the land of opportunity for Jeff Bezos. The legend is that he and MacKenzie are driving across the country, they realize this, they veer hard to the right in Texas, and instead of going west to California, they go northwest to Seattle.

Ben: Meanwhile, I think they've been on the phone with a lawyer incorporating the business while they've been driving out. That's the whole thing about the name. That's probably a story worth telling.

David: Definitely, the veering to the right while driving didn't happen, but it's a good story.

Ben: I think the thing that did happen while MacKenzie is driving and Jeff is working on the drive out is Jeff's on the phone with a lawyer. He's like, incorporate the business. I want it to be called Cadabra.

David: Like, oh, it's magic. I can get whatever I want.

Ben: Anything I want whenever I want. Jeff's like, yeah, Cadabra. He's like, Cadaver? That was the first sign of, this may not be the best name. He would have a series of other potentially bad names too,

David: Which still goes to Amazon.

Ben: It redirects to Amazon.

David: Supposedly, he and MacKenzie both really liked This may be completely false, so don't hold me to this, but I wonder if that's a little subtle dig at D. E. Shaw of, I'm going to go be a relentless entrepreneur. I wouldn't be relentless if I were in a cushy skyscraper in Manhattan.

Ben: It's not a very customer-centric name.

David: No, it's definitely not.

Ben: It's very much like I'm going to come at you, competitors.

David: That's what I wonder. Where did that come from?

Ben: Yeah. You would use it to describe Jeff's personality, but it's an odd name for the business.

David: Definitely. Eventually, friends convinced them that Relentless sounds sinister. The story goes that Jeff starts looking in the dictionary at A words. I don't know if he was specifically looking at A words. If so, he was very smart because A names are names starting with the letter A.

Ben: He actually was because sites like Yahoo, portal sites, and directory sites list it alphabetically.

David: Totally. We've been such a beneficiary of this at Acquired. This is our secret sauce.

Ben: [...] the last vestige of the old Internet.

David: Totally, because things are listed alphabetically what we will talk about, Yahoo. He's looking at A names. He's going through the list, and he sees Amazon. Perfect. Earth's largest river, earth's largest selection on, A–Z, how could it be any more perfect?

Ben: It's so perfect.

David: They just need one more thing. They've hired Shel at this point. He's moving up to Seattle. They rent a house in Bellevue, famously. You actually biked by it the other day, right?

Ben: I did. I was in the neighborhood. I was listening to a great podcast on the Internet History Podcast with a friend of the show, Brian McCullough. He was interviewing Shel about the house that Jeff and MacKenzie lived in. They have the garage retrofitted to be Amazon's first office. Shel is programming sitting in that garage. I looked at it—it's a few blocks from me—and I was like, I got to ride by.

David: When you texted me the photo, I was so, so jealous.

Ben: Which felt wrong. Someone lives there and all that, but it is a historical landmark in the world.

David: You didn't go knock on the door. I think that's fine. They just need one more thing which is capital. Jeff and MacKenzie then create a D. E. Shaw. They put in $95,000 to start. Shel himself puts in $5000.

This takes me back to the Walmart episode. It's so smart, having your employees actually invest dollars in the business. Jeff's parents, Mike and Jackie, put in another $100,000. They have $200,000. That's enough.

They hire a couple more engineers to work with Shel and start building out the site. Jeff goes and starts working on relationships with Ingram and Baker & Taylor. MacKenzie's doing all the bookkeeping and is the first CFO of the company.

Jeff—this is fun—also echoes off Sam Walton. Did you read about this, how he goes down and takes a course in bookselling down in Portland?

Ben: Yes. That was awesome. At the National Bookseller or Book Retailers Association, right?

David: Totally. So smart. I assume that's how he starts to build relationships in the industry and get Baker & Taylor and Ingram to take him seriously. It's so great.

Ben: Yup. It's worth pointing out at this point. We glazed over it. All right, Shel gets hired, and he starts programming. There's a very interesting set of technology choices that are made here, and Shel turns out to be the perfect hire.

Jeff got very lucky. I don't think Amazon would exist today if it weren't for Shel. I think that's a widely acknowledged thing among the early team including Jeff, but there's not really a spec.

Jeff, I think, coded up the first HTML web page himself. That’s the white one with the A and the Amazon river running through it that predates the logo, but when he starts describing it to Shel, Shel is pretty much like, okay, cool. I know what to build. It's going to be a store. There are not a lot of these yet, but it's a website where you can buy stuff online, great. And he just starts coding.

There are a couple of interesting things here, one of which is the technology choice of databases. Do you know what database they would eventually choose to standardize on because Shel was not a database guy before this?

David: I'm tempted to say the Oracle.

Ben: Definitely Oracle. It was a bake-off between two, and Shel basically was like, okay, cool. What database software am I going to procure? The choices were Sybase and Oracle. Sybase did not return Shel's call, so he chose Oracle.

David: Talk about foreshadowing here. If you are an enterprise technology company, you ignore startups at your own peril.

Ben: Absolutely. I love that story. There are a couple of other interesting things here. Anybody who's been a PM or an engineer working on an engineer or PM team, a business guy, or tech guy team all knows this feeling.

Remember, the Internet at this point is very, very pathetic. It's just not the Internet as you think about it today in terms of speed, graphics, interface, trust, or anything, especially trust around credit cards. People were not yet comfortable entering credit cards on the Internet. In fact, more people were comfortable entering credit cards via email even though it was no more secure.

They actually got more people emailing them their credit card information. They had a way in which you could do stuff like, enter just five digits of your credit card, call us, and then we would get the rest of it from you and match it up with the five you had entered on your order.

But Jeff tells Shel, hey, people are going to want to access this store via two different methods. One of them is the web, which is, of course, up-and-coming, and the other of which is email, which people seem to trust a lot. Build two storefronts. One that's accessible via email and one that's accessible via web.

Shel just ignores the email thing. He's like, I'm in this technology a lot. I don't think it's going to be an email-based store. It's a good thing that he started with the web. By the time they had gotten that stood up, it was clear that Jeff had lost interest in the email-based store, but it was almost like a posterist-type approach where they're like, what if you could browse and buy from your email? That's how crappy the web was. It wasn't clear that that was a better form factor than email.

David: In Brad's book, I get the sense that that's very typical of the early-Jeff management style. We got to go do this. Some of them are like, you actually got to do it, and then somebody's like, well, if I ignore this for a little while, we're going to do the right thing here.

Ben: It also became clear in listening to a lot of these interviews with early engineers that they use the words front-end engineer and back-end engineer differently than we do today. Today when we say front-end and back-end, it means front-end being client-side, JavaScript, typically stuff that executes in your browser, which of course did not really work or exist then, and back-end meant server-side.

What was clear at Amazon in the early days was front-end meant consumer-facing and back-end meant warehouse-facing technology. It was basically all server-side. In fact, there weren't even cookies yet. Shel had to basically invent this way for users to maintain favorited items or a shopping cart without leaving a cookie.

How do you do that without cookies or sessions? He invented this really insane engine, basically a rendering engine, called Obidos, which if anybody knows their South American geography...

David: It's a tributary to the Amazon, right?

Ben: Yeah. For people who remember browsing Amazon in the early days, you'd go to

David: I definitely didn't do this. This is awesome.

Ben: It was a part of the URLs. What Obidos did was it could append IDs to the URL and pass them through so that the back-end, as we know it in today's parlance of the server, could match up, oh, this customer just added this other thing to their cart, and so dynamically generate a new web page for them that includes that other thing in their cart. Or what would go on to be included you may also like, or similar products, or recommended personalized products.

David: So cool.

Ben: This was the very first thing that allowed Amazon to be like a dynamic web application without the use of cookies, and it was just passing these IDs through the URL. It was all this Obidos dynamic web serving engine that Shel built.

David: I love it. That's so cool. You're so right. He was the right guy for the job. This was a grizzled veteran of building software systems that could work on the Internet. There were not many people who could do that at that point in time.

Ben: No. In fact, in job postings, I think Bezos put things like experience with websites would be a bonus but not required. There weren't web developers, because there weren't web applications. You would think about it, like, hey, I need someone who can write some C-code and then figure out the glue to make it so that that interfaces with the HTML that gets generated. But that was all brand new at the time.

David: Amazing. Shel and the early team of engineers that they bring on working together get a beta bill pretty fast.

Ben: Really fast.

David: It was summer of 1994 when Jeff and MacKenzie left D. E. Shaw, and then it takes a few months to figure all this stuff out in the garage in Bellevue. In April of 1995, they shipped a beta version of the site. They sent out a link to friends and family, like, try it out. You can buy any book you want.

Shel's friend, John Wainwright makes the first purchase on April 3rd, 1995, a book called Fluid Concepts and Creative Analogies by Douglas Hofstadter. Doug Hofstadter is awesome. He wrote Godel, Escher, Bach. It's super cool. It's all about the nature of consciousness and a carve out for another day. It's super cool and very apt, geeky, first purchase on

Ben: Again, illustrating the types of people who are interested in Amazon and the movement at the time were.

David: Yup. Then shortly after that, July 16th, 1995, they launched the site to the public. I totally understand now what Marc Andreessen was saying when he was like, I freaking missed it. I guess Marc was part of starting this wave, so he was talking about the previous wave. But me now, looking back, I'm like, we freaking missed it, Ben. I have FOMO.

Ben: You have FOMO. Yeah.

David: This would never happen today. They launched it and people came. People loved it. It freaking worked immediately.

Ben: Yeah, and it went very quickly from a thing that obscure nerds wanted, to this has a good enough user experience where regular people are using it quickly and deriving real value. It's not just like it had growth rates of a bunch of bots interacting with each other, and therefore the volume looks high.

These are very real people who are one or two clicks out from the early adopters, solving real problems that they had before, and everybody telling their friends. In fact, I think there's a stat. The entire first year after the public launch, they spent zero marketing dollars. It was all word of mouth and inbound media inquiries, because what they were doing was so novel and so useful to the mass market consumer.

David: Oh, inbound media inquiries. Okay, so they launched it. In the first two weeks, they do $25,000 in revenue. They're just people telling their friends. You can't do that today, $25,000 in revenue in two weeks. If you launch something today, nobody's going to use it.

They get an inbound media inquiry two weeks after they launch it from David Filo and Jerry Yang, saying, hey, we heard about your site, Amazon, it looks pretty cool. Do you mind if we feature it on our homepage?

Ben: And Jeff's like, wait a minute, your homepage, I think a lot of people go to that.

David: That was the brand new, at that point, literally brand new, David and Jerry, of course, had started their Guide to the Web when they were Stanford grad students the year before in 1994. They had just incorporated and raised money from Sequoia Capital, turned it into an actual business, and created Yahoo only in March of 1995.

Ben: Wow.

David: It's all happening all at once. Got to assume it was the first place to buy books featured on the front page with the letter A on

Ben: Growth hack.

David: Apparently, they get the email.

Ben: Had they raised their seed round, their million dollar angel round yet?

David: No. All that context you had on Shel, oh, this makes so much more sense now. I thought he was just being conservative, but he knows what he's doing. They get the email and they're all talking about what to do. And Shel's like, guys, I don't think we're ready for this. I don't think we can handle what's about to happen here.

Ben: Because he's only been at startups that didn't really work.

David: Yes.

Ben: He made stuff functional. He was thinking of a certain scale, but he wasn't thinking like millions scale.

David: Of course, Jeff being Jeff is like, damn the torpedoes. Full speed ahead. We're doing this. We're going to say yes to Yahoo. They did it within the next two weeks. We're just four weeks after launch here. They have sold books to people in all 50 states in the country and 45 countries around the world. By the end of those two weeks, they are doing $20,000 in sales a week

Ben: On books. These things cost like $20 or $30 each.

David: And people don't read books. Yeah, there's Barnes & Noble, but people don't read books. They made all their money on DVDs and CDs. Nobody reads books. We—I mean you, me, and the Acquired community—read books, but we're a vast minority.

Ben: Most Americans read one book a year. I think that's the mode of number of books per year per person.

David: Totally. That first half year that the site was live to the public, they did half a million dollars in revenue in six months with the $200,000 and friends and family funding.

Ben: The initial insight is a pretty perfect product/market fit right out of the gate. It's one of these situations. It's like an Uber or a Twitter where you have this idea, then you put it up, and then that's exactly the thing that people want.

David: I'm sure there will come an age again like this in some way, shape, or form, but I can't stress enough. This does not happen today. I'm feeling the FOMO.

Ben: The question is, David, would you have recognized it?

David: That's the thing.

Ben: We all have to be intellectually honest with ourselves. Would we be hanging out in these circles with these people and truly believing like they did, not in 1996 that the Internet was going to be a thing, in 1993 that the Internet was going to be a thing?

David: Yup. We sorted this a little bit not intentionally with podcasting, I think, in Acquired. A little bit, we got a similar type wave.

Ben: Honestly, now judging by what you and I were doing a few years later, I do actually think we would have had the personality characteristics and the interests if we were not young children at this time to be caught up in all this. In some ways, I'm feeling the massive FOMO of like, God, if I was just born 5 or 10 years earlier.

David: This is who we are, and I imagine many of our listeners are, too.

Ben: I imagine if you're listening to three-hour podcasts, then you're the type of person who wanted to buy an obscure book from someone on the Internet or you had to call on your credit card number.

David: The infrastructure is just completely falling apart.

Ben: One thing they did do right in the infrastructure, though, because by the way, very quickly, they became Oracle's largest ever instance by traffic. The Oracle people were like, oh, my God, we can't help you. No one else is seeing this many reads or writes per second, so let us make a new version for you.

One thing that was very clear is that Shel and the team were building things at a very low level of abstraction. They were building everything in basically a click off from Assembly. Most of the stuff was in C, some of it was in Perl, but they're not really writing in high-level languages or using high-level frameworks.

Even though the technology at the time sucked—there was no bandwidth, compute was really, really, really hard to come by—you had to be unbelievable efficient as you're starting to roll out things like—and I know we'll get to this—reviews and the collaborative filtering stuff where it was like, you may also like people who bought this also bought.

The algorithms mattered a lot, but the environments that you were writing them in, the low-level languages were really important. They basically can take advantage of these early Internet technologies before the bandwidth and compute was really ready for most people to develop applications for them.

David: Totally right. I guess I meant technology, to some extent, the tech in infrastructure. I meant more like the garage. Here's the kicker of why this never would have worked within D. E. Shaw. It's super clear you can't do drop shipping. Amazon's got to handle the logistics themselves to make this work.

Ben: And the way they were doing that was not to take inventory at the time. They were ordering retail first from other bookstores, then reselling it, and just eating the margin as the proof of concept. But then they were moving to this world where they would just order from the distributor as soon as they got an order. It was taking, obviously, forever to actually get that to the customer.

David: The distributors had minimum order sizes. They were ordering big boxes of stuff come into the garage.

Ben: Do you know the hack? Let's say they ordered a popular book, where pretty quickly you could get to 8 out of 10. Let's say the minimum order size was 10. They'd wait to get two more.

David: I think it was 10.

Ben: Yeah, and they could place an order with the distributor. The hack was if it's an obscure book and they know we're never going to get to 10, they would take that one book and they would order nine of a book that they knew was not in stock, the system would let them make the order since 10 books could be shipped out, and then of course, they would get the rejection of, hey, this book’s out of stock. That was their hack to make it so the distributors would actually send them the one copy of the one book that they wanted.

David: The sales levels we're talking about, there are a lot of boxes coming and going out of the garage.

Ben: Yes.

David: Quickly, they get a warehouse in SoDo, in the industrial neighborhood down by the kingdom at that point in time. They start staffing it up with temp workers. Famously, they tell the staffing agency to "send us your freaks."

Ben: Which made it through to print in an article, and of course, that was the clickbait thing that everyone anchored on.

David: This was the era of grunge in Seattle. All these grunge club musicians are working in Amazon warehouses after their gigs. It's super cool.

Famously, Nic Lovejoy from D. E. Shaw, comes up with the idea of packing tables. This becomes Amazon lore. First, they literally just reassembled and did shipping just on their hands and knees on the floor. It was like, we should get some tables to do this up above the floor.

Ben: Yeah. On the send-us-your-freaks thing, there's this great interview with Jane Slade that Brian McCullough did, where she's the one who gave the quote in that interview about send-us-your-freaks. She said that because the temp agency was sending them all these people that were basically professionals. They would expect to use modern tools.

On Amazon, the low level software thing wasn't just for their infrastructure. They expected their customer service people to use Unix terminals and write commands, so that it would send right in. They're like, where's my order? Everything's on the command line. Jade's using that to try to articulate to the temp agency. Here's the profile of a person that we need because all these people are useless to us if they expect a bunch of very good tools to do their job.

David: I didn't know that context. That's awesome. What's cool here is these are quaint stories, but this is the beginning of the competitive advantage and the moat that Amazon starts to build. We're going to talk about eBay in a minute here. It's just like the Walmart story in fighting against Kmart and other people.

Amazon is now building a native logistics supply chain and distribution for ecommerce that they are going to own and operate, that literally nobody else in the world is doing this. Not Walmart, not Kmart, not Barnes & Noble. They all have their own incredible logistics systems, but they're tuned for, I've got this book superstore that has 80,000 titles, and I've got thousands of them across the country. Amazon's building distribution for, I have millions of customers across the world.

Ben: And basically, no two orders are the same. I always need to put a unique brand new combination of books into a box every single time. That is a totally different combinatorial problem to solve than the Walmart thing of, hey, we need to make sure that a truck goes from this distribution center to this store once a day with about this stuff and maybe there can be a little variance. It's completely new.

Amazon needed to fail completely, invent something new tailored to their use case, and then suddenly be the industry leader for the way you do that thing on the Internet. Packing tables is such a great first paradigm of, oh, our warehouses will need these, but other distribution centers in the Walmart land and that old school world don't. That would just happen 10,000 times again, compound, and compound, and compound.

David: There are big differences between the Walmart supply chain, and the Barnes & Noble supply chain, and Amazon, but eBay sure as hell isn't building packing tables. They need some more money to capitalize all this. Jeff goes out to raise that first seed round. We did the whole episode with Tom Alberg back in the early Acquired days. Tom is just the best.

Ben: Tom is the best. I re-listened to that episode and I was thinking like, oh, it's going to be terrible because this was very early in Acquired. It's so not. It's very listenable, and most of that is because Tom was an unbelievable guest. He's kind and he also is so earnest, but lived the whole thing. He was an early check in Amazon in that $1 million on $5 million post money round and stayed the course with Jeff all the way through the late 2010s as a board member.

David: Yeah, longest serving board member in Amazon history other than Jeff. It's so cool. They raised that $1 million round from a bunch of local business folks in Seattle of which Tom is one and one of the most involved in the company.

Ben: Nick Hanauer, a bunch of local business folks here.

David: In 1996, remember they did half a million in revenue for the half year of 1995 that they're alive. They did $15.7 million in revenue in 1996. They have a tiger by the tail here. You would have to be accelerating so much to go from whatever the run rate was in December of 1995.

Ben: They about 15X'd in their first year, but they 15X'd off a base of 500,000. It's not off of nothing.

David: Yeah, they didn't go from 5-100 or something like that.

Ben: When I'm looking at SaaS companies, I'm like, oh, my God, you quadrupled? That's nearly unheard of. Good companies triple.

David: And then you look at it and it's like you went from $20,000 ARR to $100,000 ARR.

Ben: Right, and this is yeah, wow, $500,000 in six months to $15.7 million the following year. Okay, that's 1996.

David: That's 1996. As this rise is happening, obviously, more and more people start paying attention. Go listen to the whole episode. Tom tells the story on our episode with him. I'll just quote from Tom here. "I come home one night after work at like 6:00 PM or something and my wife says, do you know some guy named John Doerr? I said, well, actually I do. She said, well, he calls every 15 minutes and keeps saying he needs to talk to you now." And then Tom says, "It was one of John's great strengths, which is his persistence. It tells you something about how to sell yourself and show your interest." Of course, that is the legendary John Doerr of Kleiner Perkins.

Ben: It's been many years and there are lots of names of key folks at Sequoia, NetBenchmark, and Andreessen Horowitz, that we think of as, wow, these incredible venture capitalists. John Doerr was pretty widely known to be the greatest of all time at this point in history.

David: He was like all of today's all stars in venture capital within the industry and among founders. If you aggregate all of those all stars into one single person, that would have been John Doerr at that point in time. This shows you how much clout John had.

Hey, just the hustle, the persistence. Even though he was the legendary John Doerr, he's calling Tom every 15 minutes, calling Tom's wife, to get a lead on the deal. Amazon ends up choosing Kleiner to lead their Series A, $8 million at a $60 million post money valuation.

Ben: I think they were competing against General Atlantic.

David: Many firms, including General Atlantic, which was the first runner up. There was some structure to the deal. The Kleiner term sheet was clean. I don't remember exactly what the structure was, but Tom refers to this on our episode. They were a New York firm—General Atlantic—but they were offering double the valuation, close to double, I think.

Amazon and Jeff went with John and Kleiner, because they were John and Kleiner. There's a fun little sidebar of John winning the deal, and this is his playbook at the time. Great, I'm going to be involved, but I got this green associate who I'm going to put on your board, and it's going to be great. VCs still do this today.

Jeff wasn't too happy about this, so he goes to talk to Tom like, what should I do about this? They brainstormed and they came up with an idea. Jeff calls John back and he's like, I'm really sorry. I really wanted to work with Kleiner Perkins then, but I guess we're going to be going with General Atlantic. If you're not going to join my board, that was really the appeal for me.

Ben: And John's like, I don't have the bandwidth. I'm on too many other boards right now. He's got Netscape.

David: Netscape, Compaq, Sun Microsystems, Intuit. This is before Google. We will definitely talk about Google in a minute, but he's a little busy.

Ben: Nothing to sneeze at.

David: But this was such a hot deal. Jeff was so persuasive that John made time. I think he's probably glad that he made time to join the board. There is this money from Kleiner. Jeff does two things.

Ben: And this was $7 million?

David: $8 million.

Ben: So far, in the lifetime of the company, he raised $9 million.

David: A little more than $9 million because there were the friends and family money, the Bezos family as a whole.

Ben: $9.2 million?

David: It was actually more like $9.4 million because the Bezos family as a whole, not just Jeff's parents, Jackie and Mike, but also his siblings put a little more money in before the Kleiner round. That was what we were alluding to at the beginning of the show of, gosh, man, Mike and Jackie, they must have done some good investing.

Ben: Which is funny because that's Bezos's siblings having some of the greatest investment returns of all time. It proves venture capital is access, access, access.

David: I cannot wait to talk about how Jeff Bezos and McKenzie got wealthy. We got to wait just a little bit longer. We got to wait a little longer.

Ben: All right.

David: Jeff does two things after he raises the round from Kleiner. I didn't write down the quote, but somebody who was involved in the company at that point said something like, Jeff viewed this stamp of imprimatur from Kleiner and John Doerr as a shot of steroids into himself and the company.

Ben: It’s really emboldened his vision. He used this as someone waving the flag of like, go, go go. You should feel free to have a much, much more ambitious plan now.

David: I don't think Jeff's the kind of person who ever felt like he needed permission. But to the extent, he did feel like he needed permission or that the right thing to do was to get big fast, which is one thing that he does. He makes that the motto.

Ben: Which literally became the motto, which printed on t-shirts at the company holiday party. Yeah.

David: Get big, fast. Yup. The Kleiner round and John joining the board was absolutely that for him. He also makes a critical hire, which is the first official professional CFO into the company, Joy Covey, to come on at this time.

Ben: Who originally had zero interest. This is another person who is unbelievably accomplished, really brilliant, curious, but she lives in California, she's not going to move to Seattle. She's only marginally interested, but Jeff and she meets, and she's completely turned around. She's like, oh, my God, I have to work with this guy. And oh, my God, this is the best business model of all time.

David: I'm sure John had something to do with this. My understanding from the history is that one of John's real superpowers was recruiting. It was winning deals, obviously, but helping companies recruit, too.

Joy's story is just amazing. She dropped out of high school and then ended up becoming a CPA. She took the CPA exam in California and got (I think) the second highest score in the history of the exam, and ended up going on to both Harvard Business School and Harvard Law School. She dropped out of high school. Her life was going in one direction. There are so many people like that involved in Amazon that are just these incredible stories of perseverance.

Ben: As a lot of folks know, we're talking about Joy in the past tense, because she sadly passed away in 2013 in a bicycle accident. A car hit her, so absolutely tragic. A brilliant, kind person who the world lost too early. Just to keep going on Joy a little bit, we're going to talk about the Amazon letter, which many of you have read, that original 1997 letter to shareholders, which she wrote with Jeff.

Of course, as we talk about Amazon, really the playbook of how they got big, we'll talk a lot about them reinvesting every single dollar of profit they had to plow it back in to grow the business. That is, of course, attributable to Jeff, but is in large part of Joy Covey invention, too. She was really the co-architect of that strategy.

David: She spent a lot of time with Brad as he was writing The Everything Store. She wrote him this email right before she had the accident and tragically passed away. Brad publishes the whole thing at the end of the book, and I'll just quote from it here.

Joyce telling Brad, "I think about the early days and the level of clarity, vision, potential, and values that Jeff brought. Then I look at Amazon today," this was in 2013, "and reflect on some conversations I have had with him in the intervening years. It is easy to draw a straight line from the vision he had back then to the Amazon of today. There were a few little wobbles and detours in places, but really I don't know any other company that has created such a juggernaut that is so consistent with the original ideas of the founder. It's almost like he fired an arrow and then followed that arc. I think Jeff is one of the most capable and effective founders ever, and I think the Amazon Juggernaut is still in its early stages."

Ben: Which she would have been right about in 2013.

David: Oh, my God. We're not going to get to 2013 in this episode, but that was a crazy thing to say in 2013. Amazon was a $120 billion market cap company when she said that. Not many people would have said that.

Ben: Amazon is just this incredible Rorschach test. There is a way to look at it where he shot an arrow and then followed the arrow straight. There's another way to look at it, which is they tried way more things that did not work than ones that did but were unbelievable at learning from the mistakes and quickly following them.

The only thing that Amazon launched that had perfect product/market fit right away was It was the original idea, and then everything else was a brute force algorithm for finding your way through a maze, where it's just like, try this pathway, oh, crap, nope. backup, backup, backup, backup, refine, turn. The Amazon brute forced their way to success a lot and just finding out where all the doors were by trying all of them.

David: Yup. That is a great way to put it.

Ben: It is worth highlighting at this period of time, this 94-97, this pre going public time. Even though they had the imprimatur, as you put it, David, of Kleiner Perkins, even though they were located in Seattle near Microsoft, even though they had this product/market fit and unbelievable 15X year over year growth in revenue dollars, not like usage revenue, and customer retention was increasing like every single metric of the business was like, oh, my God, oh, my God, oh, my God, the Internet is going crazy.

A bookstore actually doesn't look like an interesting thing on the Internet to most engineers. They actually had a recruiting problem, where talented engineers who were like, oh, my God, this is a really interesting next generation technology that I want to build on, are much more interested in working at other companies who are building web applications. Things like search engines. Even things like you mentioned, eBay, that we'll get to here in a second. In many ways, that’s a much harder computational problem of building a good experience and back-end system for facilitating a real time auction.

David: Marketplace, yeah.

Ben: And countdowns. The online bookstore thing seems boring, so it's remarkably hard for them to recruit.

David: There are a couple of great Eric Schmidt quotes in The Everything Store. Eric Schmidt, of course, the former CEO of Google. This is so good. They're begrudging backhanded compliments to Amazon and Jeff, but one of them is talking about AWS. It was like, oh, the book guys figured out computer science. Of course, we're telling this story like, Jeff freaking new computer science back in the...

Ben: And he was fighting that narrative from day one. He wanted it to be a technology company. Everyone was like, you're a retailer, and even one click down, you're a book retailer. He's like, we are a technology company, and he willed them being a technology company into existence. I don't think anybody now is like, oh, they're a retailer or oh, they are any specific category of retailer. They're like, yeah, they're a dominant technology firm.

David: Now he probably wishes that people were like, oh, don't worry about Amazon.

Okay, back to the story. Joy joins right at the end of 1996, right after the Kleiner round. Jeff, definitely because he wanted to do it and is consistent with get big fast, maybe it was also this test for his new high potential CFO, like, I'm going to see what she's really made of. He's like, we're going to go public now.

Tom talked about this, too, in our interview with him. Part of it was when the capital markets were opened. The revenue growth was insane, the dot-com mania is just starting to heat up. strength leads to strength, and all of that. Jeff also thought that it would be a great marketing event for the company, and he was totally right. The amount of coverage they got in mainstream media.

Even though John Doerr joined the board, an average person didn't give a crap about John Doerr, venture capital, or startups. It was not like today. John Doerr was a legend in Silicon Valley, but that was a very small place. Amazon needed to appeal to millions of people of all types all over the country and the world.

Ben: And it turned out they did get something right in this notion of longtail books. There are very few people who want one particular book in the longtail, but most people want something in the longtail. Their product/market fit originally came from, we can get you special order books quickly and easily. Your user experience and buying them will be basically the same as buying a Harry Potter book, a best seller.

David: This gets alluded to in The Everything Store. A function of that was appealing to mainstream America was buying stuff that you wouldn't necessarily want to walk into a store and order yourself in person from your neighbors.

Ben: Like every new technology.

David: Like every new technology, let's just leave it at that.

Ben: Yes. The other thing to point out about them identifying books is there's this seminal Wall Street Journal piece about the company in 1996 that drives a lot of traffic. It's like the Yahoo event on steroids. They have this really interesting stat, which is in 1995, the web attracted more than 100,000 retailers, which I would not have guessed that happened until Shopify. Apparently, that happened in 1995.

With some spending more than a million dollars each on eye-popping sites, yet worldwide retail sales on the web amounted to just $324 million last year, which averages out to slightly more than 3000 in sales per retailer. Amazon nailed a category and an operational model, where they were able to be the one dominant ecommerce site. This predates, this predates, eBay. They were almost the earliest. They were of the first wave and just nailed it on a bunch of vectors.

There's this great quote from Jane Slade, "There were no grown ups that could help us." Every time they would bring in a vendor for customer service software, database software, or anything, the implementation reps will just look at all the numbers and be like, what? Our software actually can't help you. They had to build a lot of this stuff in-house because they were basically the only successful, big retailer of this scale using the Internet.

David: Like we learned on the Walmart episode. If the infrastructure off the shelf for what you need to do to make your beer doesn't exist and you want to make your beer taste better, you have to build your own infrastructure.

Ben: For sure. This is probably a good time, David, before we dive into the IPO roadshow to tell us about something else that can help you make your beer taste better by taking the stuff that doesn't make your beer taste better off your plate,

David: Ben, perfect tee up. I love it.

Ben: You like how I moved it?

David: I do. We should say on this episode and our next one too, backed by Bezos expeditions, Jeff Bezos himself, and of course, many other great venture capital firms like Sequoia Capital, Index, and others.

Pilot, as many folks now know, one of our absolute favorite companies on Acquired, set up and operate the entire financial stack that you need as a startup and growing company. That's finance, accounting, tax, even higher level Joy Covey, like CFO services, investor reporting, strategic planning, all of which otherwise, you would hire an old school accounting firm or go try and recruit a Joy Covey to do.

In today's startup world, unlike Amazon back in the day, all of this stuff is standardized. It does not make your beer taste better. You just need to be the best in class. You need to access and you need it done. Pilot does that for you.

Ben: Of course, you might be thinking, well, my stuff is too specialized. I need someone in-house. I need a firm of people to help me. Pilot has recognized this and they say, look, we're a product and we have people that you work with. They're a combination of human powered and product powered.

Of course the product is not just login and you get some nicer UX on your bookkeeping software. It is fully integrated with whatever fancy financial stack they're using because the founders started it pretty recently in this era.

David: And they're technologists themselves. This is not their first company. They sold their last company to Dropbox. The other thing that's completely changed for most companies and startups now versus the Amazon days is there is a whole sea of technology providers that you need to use as a company that impact your finances—the Stripes, the Plaids, the Modern Treasurys.

All of these companies that you build your product on and your revenue on, all have APIs. An old school accounting firm is not going to connect directly to your stripe API, but Pilot of course does. They take literally all of the headache of finance and accounting off your plate. Pilot, this is their beer. They integrate with Stripe, Brex, Gusto, Shopify, Square, et cetera, everything. They all make it work seamlessly with your books and your financial reporting.

Go on over to or click the link in the show notes. Make your life way easier as a founder, get back to focusing on what makes your beer taste better, and eliminate the pain of tax prep and bookkeeping from your company for good. Thanks to the founders who we've referred to—Waseem, Jessica, and Jeff—all good buddies and Acquired friends.

Acquired listeners, if you use that link, you will get 20% off your first six months of service. So many of the companies I invest in now and work with use Pilot. I highly recommend them.

Ben: Thanks, Pilot.

David: Okay, Joy joins at the end of 1996. Jeff's like, we're going to go public now. In the spring of 1997, they filed to go public with lead underwriters, not Goldman Sachs, not Morgan Stanley, Deutsche Bank and some might say it's uber bankers, Frank Quattrone and Bill Gurley leading the IPO. It's so cool.

We asked Tom on the Amazon IPO episode that we did, why did Jeff and Amazon choose Deutsche Bank over the gold plated, never get fired for choosing Goldman Sachs or Morgan Stanley? Tom's answer was, well, if you knew Quattrone and Gurley, you would know that the answer is Quattrone and Gurley.

Ben: Yes. Of course, Frank Quattrone has gone on to do a bunch of very impressive deals at Catalyst and Bill Gurley became future Bill Gurley. Yes, but this is in his banking career.

David: Now, when they filed to go public but before they actually did go public, just like Jeff was envisioning, this attracts a lot of attention. That's mostly a good thing.

Ben: He's correct on the marketing exercise. This is a big way to legitimize them to consumers. It enables many more people to feel comfortable typing their credit card on the Internet, things like that.

David: Everything like that. Also, this other thing, ultimately, is a good thing, too, but not at the time. It attracts the attention of the Riggio brothers, who are the founders and CEO and chairman of Barnes & Noble. They knew about Amazon, but they're like, whatever, Amazon, Internet, we don't need to worry about that. All of a sudden, this little company in Seattle has filed to go public.

Ben: And is claiming to be earth's largest bookstore.

David: And they’re like, that doesn't sound right to us. I just think of Borders. Barnes & Noble is great, but Borders was the big thing. But now we know from the Walmart episode, Borders was out of the game. Kmart had acquired them, the founders had moved on, Louis Borders had moved on to start a Webvan. It's so great.

Ben: Isn't that crazy?

David: Barnes & Noble was the juggernaut. The Riggio brothers, when Amazon filed for an IPO, fly out to Seattle. They scheduled a dinner with Jeff. Jeff brings along Tom. Tom, in addition to being just a wonderful human, great advice, mentor to both of us, he was a lawyer earlier in his career. He was like a very high profile corporate lawyer. He's got the right set of skills to bring to this dinner.

The Riggio brothers, their father, was a New York City cab driver and a semi-professional boxer who twice defeated Rocky Graziano. Len, the lead of the two of them, I think the older brother, technically did go to NYU. Let's just say they went to the University of Hard Knocks. Their way of doing business is very different.

Also, we got to talk about this. I don't think you have any idea. Do you know, just like we talked about last episode about the whole crazy Borders, Kmart, Webvan, Kiva came out of Webvan, which of course, Amazon acquired and this...

Ben: Right, Kiva Robotics.

David: Yup, incredible history. Do you know what the Riggio brothers spun out of Barnes & Noble? I'm not talking about the Nook or You're never going to guess this.

Ben: No.

David: It actually makes sense. GameStop.

Ben: No way. Really?

David: I'm dead serious. It was actually Software Etc.

Ben: I got to look at the stock price of both of these.

David: Gamestop is the merger of Software Etc, which spun out of Barnes & Noble and Babbage's software. Remember Babbage's back in the day?

Ben: Sounds vaguely familiar.

David: They were a video game and computer software retailer. Yeah, GameStop, freaking GameStop.

Ben: Oh, my God. Okay, what do you think Barnes & Noble Education Inc is from a market cap perspective today?

David: Maybe $500 million?

Ben: $143 million.

David: Okay, what's GameStop today?

Ben: $10.3 billion.

David: Yeah.

Ben: Built purely from an intrinsic value model that I have here in front of me.

David: Stonks, baby.

Ben: I assume Barnes & Noble Education Inc is Barnes & Noble, the big company. BNED is their ticker.

David: I think there might have been a bankruptcy there. I'm not sure.

Ben: Yeah, that makes sense. I don't think you end up cratering this far without some recapitalisation or something happening.

David: Speaking of Barnes & Noble cratering, this dinner didn't help. These two tough New York guys, they're like, where you came from, business of nerd out in Seattle? Go listen to our episode with Tom. His personality is not blustery, brash New Yorker. I'm sure the Riggios came to this dinner and they were just like, we're going to freaking crush these geeks. Oh, boy, did they not? So they go home after the dinner.

Ben: The dinner was like a soft we-want-to-buy-you, or was the dinner a soft we're-going-to-run-you-out-of-business?

David: It was both. It was, hey, we've heard about you. You know we're Barnes & Noble, right? We've been thinking about doing the Internet. We're going to do it. We could buy you and you could be our internet thing or we could crush you. I think that's how the dinner went.

Ben: By the way, the 1996 Wall Street Journal piece that did wake the world up to this, was titled Wall Street Whiz Finds Niche Selling Books on the Internet. I always think back on the Wall Street whiz for Jeff Bezos.

David: Actually, what the Riggio brothers are saying, this is what everybody thinks when Amazon does go public. It's not a great IPO. On May 15th 1997, they raised $54 million at a $438 million market cap, and then they trade down on day one.

Ben: It was like $17 a share that they went public at, and then I think they traded down on day one. They would eventually trade all the way down to like $5 a share in the dot-com bust.

David: It would rock it back up. They went through the wave and then the fall. The head of Forrester Research, the big research firm, write a note about Amazon and the industry.

Ben: Called Amazon.toast.

David: They titled it Amazon.toast, and it's not because of eBay, it's not because of blah-blah-blah, it's not because of the dot-com crash. It's because they think Barnes & Noble is going to kill them. Oh, boy.

What were the Riggio brothers doing? They went back home to New York and they did two things. They launched a new project, a new initiative within the company with the code name Book Predator.

Ben: In case there was any confusion.

David: In case there's any confusion about what the intent of this is, and that they're going to kill Amazon with the new The other thing they do is sue Amazon. They conveniently for them (or inconveniently for Amazon) announced the lawsuit three days before the IPO prices, hence the Amazon.toast memo. They sued them for, Ben, what you said of Amazon claiming to have earth's largest selection of books. I think the suit is like, well, you don't have a store, you can't go select the books.

Ben: That's so pedantic and annoying.

David: Like I said, the IPO happens. It's not great. The stock trades off. But a couple of weeks later, Amazon does their first quarterly financial reporting as a public company. They report Q2 1997 earnings of $28 million. Remember, they only did $15.7 million the whole year before. They did $28 million that quarter.

Ben: Unbelievable.

David: Wall Street reverses course, the stock takes off. For the full year of 1997, they do just a hair under $150 million in revenue. That's 10X the year before.

Ben: Oh, my God. 10X-ing on that base, especially right when you're going public. This is the stuff that makes investors go nuts. You can see how this very quickly becomes a darling stock.

David: When I said that Barnes & Noble was going to launch Book Predator and beat Amazon, I was like, okay. What do I mean by okay? This starts a pattern. It would be hubris of Jeff, Joy, MacKenzie and everybody, and Shel at Amazon to just say okay and not do anything about it. But this is Amazon, and they know this is a problem. They know they can beat them, but they have to go beat them, and they know what the path is. Jeff, Made in America is like his Bible. Yes. He knows the Walmart story.

Ben: By the way, listeners, we weren't going to do the Walmart story. We actually were going to do this as the first episode of the season. We got into researching Amazon and realized how much Jeff respected and borrowed from the Walmart strategy. We're like, I guess we got to tell that story first.

David: There are a couple moments coming up where he interacts with Walmart. He brings along his copy, his scrawled in notes, marked up, and dog-eared copy of Made in America, to show these people who we're going to talk about. They're like, no, Sam is my hero. I'm not just some geek. I understand what we're doing here.

Jeff, because of this, because he's read Made in America, he knows that he can be Barnes & Noble, but the way to do it is through distribution by building native distribution logistics supply chain for ecommerce not for physical stores. It is different enough that just like Walmart could build native distribution for their network of Walmart Supercenters. That was very different than the Kmart coming out of Kresge distribution that they were piggybacking off of.

Jeff's like, we can do the same thing here, but we have to do it. I know we need to do it, but I can't really do it, but I know some people who can.

In early 1997, he and Joy, together—I think, according to Brad, it was very much a joint effort of both of them, probably John Doerr was involved too—start traveling to Bentonville on recruiting trips.

Ben: Canvas and poach.

David: It was canvas and poach. They zero in on a target.

Ben: Rick Dalzel?

David: Their number one draft pick, Rick Dalzel.

Ben: I think they had been courting him before the IPO, but he didn't end up joining till after.

David: Yes, it was like a year-long recruitment process to get Rick to join. At one point, he actually commits to joining and then backs out. He was really conflicted about this.

Ben: He's super plugged in in the Bentonville community. He's an important part of Walmart.

David: Not only was he deeply embedded in the Bentonville community, Rick was technically the number two person in IT at Walmart. As we talked about last episode, you naively might hear that sentence and be like, number two person in IT at Walmart, who's that? No, Walmart was an amazing technology company and especially distribution supply chain logistics. They're the best in the world.

Ben: At this point, they had been the largest computerized logistics and distribution company in the world, and operated their own private satellite network to communicate amongst all their stores, and had been doing that for a dozen years. A very impressive back-end technology.

David: They were the first big corporation in America to adopt technology and say, that is going to be the heart of what we do. Rick was the lieutenant who implemented it all. He was the hands-on guy doing it. Jeff, Joy, John, and the board, they were like, if we can get this guy, he's the key.

They go through this year-long recruitment process. Like I said, at one point, they convinced Rick to join, and then he called him back and he's like, no, I'm not going to do it. He calls him back because Lee Scott, Walmart's CEO, the third CEO of Walmart in history, takes Rick aside when he hears this. He's like, Rick, you've got a future here. You could be a future CEO of Walmart. You're making a big mistake.

He says, you're making a big mistake. He says, which he's totally right on, look, we've studied these Amazon guys, Walmart is no Barnes & Noble. They know what's going on. He's like, we know how they're doing distribution over there. They're going to hit a brick wall when they get to any kind of scale, which clearly they're going to get to this year. It's going to all fall apart over there. You know that, you know how this works. You would be committing career suicide if you go take this job.

Ben: That was the risk. It paid off in a huge, huge way, largely because Rick was very successful at doing what needed to be done, but that is for sure the risk of making the jump.

David: Eventually, Amazon, Jeff, Joy, and everybody, convinced Rick to make the jump. Right before the IPO in early 1997, he joins. Jeff knows they're going to win at this point.

Brad writes in The Everything Store, "Bezos had predicted that Barnes and Noble would have trouble seriously competing online, and in the end, he was right. The Riggios were reluctant to lose money on a relatively small part of their business, and didn't want to put their most resourceful employees behind an effort that would siphon sales away from the more profitable stores.

On top of that, their company's distribution operation was well entrenched and geared towards servicing physical stores by sending out large shipments of books to a certain number of locations. The shift from that to mailing small orders to individual customers was long, painful, and full of customer service errors. For Amazon, that was just daily business."

There we go. Rick, he alone joining is huge. He also airlifts about a dozen executives out of Walmart to come join him. When he finally does officially accept the offer, Walmart's like, you're dead to us. He gets escorted out of his office by security and the whole thing, which in retrospect was a mistake by Walmart, because that just makes everybody more curious inside Walmart. Like, dang, Rick, he could have been CEO at this place and he just went to go and be head of IT at this company. I better go find out what they're doing, I want to follow Rick.

Ben: At this point, Amazon is well underway from transforming a culture of misfits and geeks who want to be able to ship rare books online to MBA city. This is where they're getting experienced executives. They're really turning on the recruiting engine from top business schools and Walmart.

There are two different ways to look at Amazon. I think on this show, we focus a lot on the business side of it, where there's an unbelievable cash flow dynamic that we'll talk about, there's the whole get the investors you asked for, there's the constant reinvesting in growth.

But up to this point, when you listen to these interviews with Shel Kaphan, or reading all the stories on Greg Linden's blog who was an early engineer, or all the interviews Glenn Fleishman has given, it really is about adapting technologies that were not really ready yet being the first and biggest and being with misfits on the Internet.

There was a big exiting of the 1994–1997 crowd in 1998 and 1999 as Dalzel, his people, and all the MBAs come in to say, okay, it's working and it's not just about this quest for odd books.

David: Yup. I actually would put Dalzel on the Walmart crew. I think there are three key categories of people that were necessary for Amazon to succeed. There were the technologists—Shel in the early days and the freaks and geeks—but then that evolved into a world class technology organization over time.

There were the MBAs that we're going to talk about in a minute. The Andy Jassys, the Jason Kilars, the Harrison Millers, the Jeff Blackburns. And then there were the Walmart people, the Rick Dalzel. Jeff, he didn't come from Walmart, but he's very much cut from that cloth, the back-end retail logistics distribution people. And you really need a world class, all three of those to make this work.

On the distribution and supply chain front, more than a dozen Walmart executives come over to Amazon. In late 1998, Walmart sues Amazon for trying to steal trade secrets. The case settles with no damages, but there was damage. It happened. That DNA came right out of Walmart and right into Amazon. To be fair, like we said, it's a different thing than the Walmart supply chain that they're building. It's the Amazon supply chain.

Ben: Which they didn't realize enough of that first. There were all sorts of false starts in Amazon getting good at distribution because even though they knew better, they were copying the Walmart playbook. They were doing the classic Amazon thing. They were bruteforcing their way through the maze, learning from mistakes, backing up, turning left, and going the other direction, but they needed to go bump into that wall to do it.

David: Yup. When Dalzel comes over and all the Walmart folks, they had the warehouse in Seattle. They said, no, no, no, you don't want a warehouse, you want a distribution center. Because a distribution center, that's the Walmart model. That's Walmart with the first distribution centers, you want something more sophisticated.

In 1998, they go from the one warehouse in Seattle to six distribution centers, the Seattle warehouse becomes one, Delaware, Nevada, Georgia, two in Kentucky. Do you notice they're going to all these states that are close to big population states, but not in the States?

Ben: Yes.

David: But then it actually was Wilke later who said, no, we don't want distribution centers, we want fulfillment centers. That's what Amazon is today. There is a fundamental difference of we're not distributing a bunch of goods to stores, we are fulfilling end-customer orders.

Ben: To end-customers, every single one uniquely, and we need to optimize them to make every single order happen for the very first time it's ever happened in an unpredictable way, predictable en masse, but not on an individual level.

David: For years and years, nobody realized this. What Amazon is building up on this side of the business is an enormous, if not the largest part of their moat. Today, Amazon has 185 fulfillment centers around the world. They have 96 airplanes on their own airline. They have a maritime company. They have 200,000 delivery vans. They've got another 100,000 electric delivery vans on order.

Ben: The company employs 1.6 million people, most of which do this.

David: Yes. Here's the moat. From the viewpoint of the customer, all that is free. Jeff obviously wasn't envisioning that specifically, but this is why they're going to beat Barnes & Noble, and this is why they're going to beat eBay, and this is eventually why they're going to beat Walmart in ecommerce.

Ben: Yeah. Tell us about eBay. If you were to pitch me on both of these businesses, put on my venture capitalist hat, and you told me that I can take this really asset-heavy inventory business with an unbelievable amount of capex that needs to be built out with all these fulfillment centers with Amazon, or I could run the high gross margin asset light business of eBay, 99 times out of 100 I want to invest in eBay. But Amazon dominated eBay, so how'd that play out?

David: The competition with eBay, the Barnes & Noble thing. Yeah, that was the first battle that Amazon wins, but it was obvious they were going to win that. eBay was like, this is a real fight.

At first, they're different. eBay is auctions, it's Beanie Babies, it's Pez dispensers, which by the way, that whole legend of Pierre started eBay so his wife could collect Pez dispensers. A PR person made that to humanize the story. That's not what happened.

Ben: AuctionWeb, not eBay.

David: As all this is happening, you mentioned the MBAs. Jeff and Amazon start hiring Andy Jassy, Jason Kilar, Victoria Pickett, Harrison Miller, Jeff Blackburn and blah-blah- blah. All these people who are coming in, all these MBAs, they're all tasked with adding a new category to Amazon.

Music and CDs, that's what Jassy does. Kilar does DVDs, Victoria does boxed software, Harrison Miller does toys, Chris Payne does electronics, Jeff Blackburn leads BD and starts buying all these other internet companies. Pretty quickly, Amazon and eBay are competing much more head to head than people originally thought.

eBay started as AuctionWeb in 1995 by Pierre Omidyar. It didn't turn into a real venture-backed company and changed its name to eBay until 1997 after Amazon was already public. Of course, famously, Benchmark invests $6.7 million in eBay in the fall of 1997.

Ben: Producing one of the greatest venture investments of all time.

David: That was fall of 1997. I think they own 25% or something, a fair assumption. We'll go tell that whole history soon. eBay goes public in September of 1998 at a $2 billion market cap.

Ben: eBay was the winner. At this point in time, everyone just looked at it and it was like, oh, that's the best dot-com business. Also, think about that. Series A in 1997 raising $7 million, $2 billion market cap IPO in 1998. Come on. I remember thinking how insane it was when Snap went public after what was it, four years?

David: Four years, yeah.

Ben: This was an all time insane moment with eBay going public and mania at an all time high.

David: There are legendary stories of administrative assistants at Benchmark retiring.

Ben: The little piece of the carry of the one investment in...

David: The market cap didn't stop at $2 billion when eBay went public. By the next year, in 1999, they get a $25 billion market cap.

Ben: That's a big company by today's standards, and we have trillion dollar companies now.

David: And it's effectively four years from AuctionWeb, but it's two years from eBay. That's impressive. As all this is happening, in the summer of 1998, right before the eBay IPO, but as Amazon and eBay are more like, wait a minute, we're going in the same direction here, Meg Whitman and Pierre fly up to Seattle.

Ben: Meg Whitman of Disney strat planning fame.

David: Disney, high margin media company. Keep all this in mind. That's the DNA of Meg. They fly up to Seattle to meet with Bezos and Blackburn. Remember, Amazon's the public company at this point, eBay is still this little startup that raised the Series A from Benchmark. They're hot, but they're still startups.

Jeff and Jeff, take them on a tour of the Seattle Fulfillment Center. Pierre's such an engineer. He's like, oh, this is super cool, and then they sit down to meet. The two Jeff's make it maybe not quite like the Barnes & Noble dinner, but they make an oblique reference of, well, maybe Amazon should acquire you. Supposedly, according to Brad, they float a $600 million number if such a thing were to happen.

Meg and Pierre get back to Silicon Valley, and supposedly, according to Brad, Pierre's like, wow, that was really cool. Man, that fulfillment center. They're building something very differentiated. Maybe we should think about that.

Meg supposedly says, and I think this is from an interview with Pierre in the book, this is not a direct quote, I'm paraphrasing, Pierre, warehouses are not cool. We never want to operate warehouses. You know what is cool? High margin internet businesses, that's cool. You don't want to be mucking around with warehouses.

Ben: This is the very, very, very starkest illustration of, what's the best business model over the next few years, and what's the best business to be in long-term? The best business to be in long-term—period—is delighting your customers more than they ever imagined. The best business to be in—certainly for the next few years, maybe even the next decade if you’re eBay—is a high-margin true internet business.

But Bezos is thinking in decades. He's thinking, how are we possibly going to be the best place to buy something on the Internet a decade from now? Unless it's extremely reliable shipping times, very short shipping times, we have it in stock, they're buying it from a vendor that they trust, that is secure. All these things require us to either be the merchant or at least be the ones who fulfill it and keep it in a distribution center or a fulfillment center, so they're both right on different timeframes.

My favorite Bezos quote is, and this, I think, comes from that very first interview that I referenced earlier. I've watched every interview Bezos has given in prep for this, but that one has all the highlights in 3–4 minutes and he's still got hair. He says, "Long term, there is never any misalignment between customer interest and shareholder interest."

David: It's so true.

Ben: And that's such a dramatic statement, because I think a lot of people would argue with that, and he's thinking on an infinite timeframe.

David: What happens after this meeting with Megan Pierre (I think) really illustrates just how special Jeff and Amazon as a company are, because he makes a mental and emotional leap that I don't know many people could have made. He both believes everything you just said. I've read Made in America, I'm building out this advantage, it's going to be my moat, I'm going to delight customers, this is the way.

Ben: And desperately wants to beat eBay at auctions.

David: Desperately wants to be eBay, but he's like, and eBay is also right. This starts at journey, but Amazon today is that amazing, back-end distribution. Like we were just saying, you can get stuff from Amazon faster, better, and cheaper than just about anywhere else on the Internet.

Certainly, an aggregate of everything you can buy, Amazon is head and shoulders above anybody else. And you can buy from other people who are not on Amazon, and that is all thanks to that meeting.

Ben: Yeah. This is again, Amazon having to run into a wall, back up, try it again. Obviously, they don't buy eBay. Obviously, they naturally do have to do the next thing, which is even though Amazon is focused on the customer, they're also focused on their competition.

David: Of course they are.

Ben: Jeff has all these quotes about how the customers, and I think this is in the 1998 letter, maybe the 1999 letter. "We believe that our customers are very loyal up until the moment that there is a better way for them to solve their problems than buying from us."

That's off the top of my head. It's not exact, but it's close. I think his realization is, okay, if eBay has grown really fast and there's a way to get something rarer, cheaper, or something, we have to be in business doing that, too. This is Amazon's first very expensive failed experiment with Amazon Auctions.

David: After the meeting, Jeff Bezos turns to Jeff Blackburn and was like, auctions could be the future, we're going to start a secret project to clone eBay within Amazon. It's almost like the Book Predator with Barnes & Noble, except they're actually competent.

Ben: It's not like we're going to learn from eBay and apply it to our business, go for a different segment than eBay or do auctions differently. We're going to go directly at eBay doing exactly what they're doing.

David: Yes. Now, it makes sense why this would be secret. It's also a secret because Scott Cook, the founder of Intuit, is on the board of both companies. Amazon starts working on Amazon Auctions, literally exact clone of eBay. Now, eBay did not have PayPal at this point in time. Paying on eBay was this huge source of friction and a huge advantage for Amazon. Amazon has your credit card, blah-blah-blah.

Amazon finds out that. Of course, Megan Pierre, they're not dumb at eBay. They know this is a problem. They're talking to startups about acquiring startups that could solve payments on eBay. This is summer of 1998. There's no PayPal yet.

Nfinity, the first kind of [...], they didn't even get started until the end of 1998, early 1999. ebay is talking to a startup called and wants to acquire them to handle payments on eBay. Bezos swoops in, and Amazon steals the deal and acquires, mostly so that eBay doesn't get it.

Ben: And they just went public. Amazon's got all this cash from that, so they're feeling themselves and feeling like they can do stuff like this.

David: Yeah, eBay can't do this yet. Amazon's got highly valued liquid stock, all this cash, blah-blah-blah. If that had gone otherwise, I don't know about PayPal. There's probably no PayPal. There might not be a PayPal Mafia.

Ben: Great point.

David: Silicon Valley totally turns on a knife point at this moment in time. March 1999, Amazon launches Amazon Auctions, clones eBay, competes with eBay. Shocker. If you haven't heard of Amazon Auctions, it's a flop.

Ben: Here's an interesting comment on it. Greg Linden writes on his blog. Again, this early engineer who worked on personalization, auctions, and a bunch of other stuff. "When the site launched, it was technically superior to eBay's faster, better search, and several new useful features. The inventory was reasonable, but not large."

This is one of those things where the flywheel is just already in motion, when you have the network effect of more buyers, attracting more sellers and more sellers attracting more buyers like eBay had, and they were a couple years ahead, it was just already in full swing. Even if you have a more technically superior interface...

David: And the advantage of traffic on that they could send, it didn't matter. They didn't have the network effect.

Ben: Amazon wasn't really prioritizing it. When you go to a product detail page on Amazon, they had invented this pretty amazing thing that really pissed off all the booksellers, which was when you look at a product detail page, you could buy new and used. They're like the same book, so we'll put them both right there.

Of course, that pisses off the book publishers because they're like, wait, our whole thing is that you want to go buy the new book and you can't buy a used one right next to the new one, that they used books are in this other distribution channel. Amazon's like, we don't care. A customer can choose which they want from one singular unified product detail page, which, flash way forward to third-party sellers, it's the same thing today. You're competing as a third-party seller to be the one that gets the traffic from the product detail page when people click the Buy button. They weren't doing that with Amazon Auctions yet.

David: No, it was a separate tab, separate site.

Ben: It was not getting Amazon's traffic.

David: Yeah, it didn't have a network effect. Another reason, people like eBay. They just totally shrugged off Amazon as a competition. A beautiful business model.

Ben: Their market cap continued to go nuts.

David: Yup. Jeff acquired to keep it out of the hands of eBay, but they go start acquiring a lot of companies, a lot of startups in this era, partially, I think to keep them from eBay and other people partially, because I don't know, everybody was drunk back then?

Ben: They were investing in a bunch of them as hedges. They looked at and they thought, oh, we're not going to get into shipping dog food for a while. In fact, I think they had tried to ship some cat litter at the same shipping rates as everything else and it was super expensive. That's an example that's referred to very often by early Amazon employees as a failed distribution, totally mispricing thing.

David: But yeah, they sunk a bunch of money into, Cosmo.

Ben: I think they owned 40% of it or something at some point.

David: Totally. The craziest of all of these acquisitions just from the story is a company called Junglee.

Ben: Yes, which was referenced on the Walmart episode.

David: Indeed. We're not going to talk about what Junglee actually did. It was a comparison shopping site started by three Stanford computer science PhDs and a business guy from Netscape. What it was doesn't matter. That business guy from Netscape, his name was Ram Shriram. That might sound familiar to some folks.

Ben: But probably not to most people.

David: Amazon acquired this company for $150 million–$175 million, something like that. They're in Palo Alto, but Amazon's like, you can't work there anymore. We can't have a tax nexus in California. Remember, this is still in those days. You got to move up to Seattle.

The Junglee team was like, all right, you just gave us a bunch of money, okay, well move up to Seattle. They hate it. The acquisition doesn't work out. It's ill-conceived from the get-go. Within a few months, they all quit and they moved back to Palo Alto.

Ben: Which by the way, then they would go on to ultimately start the thing that would be acquired by Walmart, which became Walmart Labs, which became probably the second biggest reason that Walmart is a very real competitor in ecommerce now, second only to Jet and Marc Lore.

David: They're back in Palo Alto. Ram, the business guy from Netscape, I assume through his co-founders, the Stanford CS PhDs, he gets hooked up with two other Stanford computer science PhDs. Two guys named Larry Page and Sergey Brin. Junglee have gotten acquired, they made all this money, and Sergey and Larry were like, oh, we want to raise a little money for this thing that we're doing.

Ben: Also, how crazy is it that we're nearly three hours into the story of Amazon? Amazon's already public and we're talking about Larry and Sergey at Stanford before Google was founded.

David: Ram's like, sure, you guys seem promising. This whole BackRub, PageRank thing, I get it. It's got potential. Great. He invested the first $250,000 in Google, and he joins the board of Google.

A couple of months go by, about six months to be exact. Jeff and Ram stay in touch. Even though they left Amazon, they're friendly. Jeff hears about Google. He calls up Ram. He's like, hey, I'm going to come meet these guys. Ram's like, sure, come on down to Silicon Valley, I'll host you all at my house.

Ben: Was Jeff interested in search yet? Amazon got obsessed with search and that an A9-era of 2004. Do they have any seeds yet?

David: I think this leads to that.

Ben: Okay.

David: Jeff and Mackenzie flew down to Silicon Valley. They all went over to Ram's house. They have a big, nice breakfast, a lot of back-slapping, Ram, Larry, Sergey, Jeff, MacKenzie. After breakfast, Larry and Sergey leave. Jeff takes Ram aside and he's like, hey, I'm going to put some money in these guys, too. Ram was like, dude, the seed closed six months ago. Kleiner, Sequoia, they're circling about doing a Series A. Jeff's like, I don't care.

Ben: Jeff's like, I'm Jeff Bezos.

David: Yes, that means nothing to me. I want in and I want in on the same terms as you. Ram goes to bat for him. He convinces Larry and Sergey to take another $250,000 of Jeff and MacKenzie's personal money at the seed price.

Ben: Which was?

David: I couldn't figure out what it was. But the Series A that would happen shortly thereafter of Google famously split between John Doerr at Kleiner and Mike Moritz at Sequoia was at $100 million post money valuation, which was insane for the point in time.

Ben: Mike Moritz came in and told Doug Leone, as Doug told that on our interview with him, even after making this investment, he's looking at Google and goes, we've never paid so much for so little.

David: Yes. That episode with Doug.

Ben: Amazing.

David: What a highlight.

Ben: Okay, so that's not at $100 million. We can say, I'm going to guess somewhere $20 million, $25 million?

David: I don't know. Ram led this. My best guess is $10 million or maybe even lower post.

Ben: Seeding, Ram got 10X–20X from the Series A.

David: I think so. I don't know.

Ben: Ram and Jeff, we should say, and MacKenzie.

David: I think it is probably safe to say that Jeff and MacKenzie owned at least 1% of Google, probably even after dilution from the Series A, because they didn't raise another venture round.

Ben: That's right. Google went public just on that series A.

David: They did.

Ben: Google, one of the most immediately cash-generative businesses of all time.

David: Oh, my God. They'd walk in the woods before they found the paid search business model and all that, but oh, my God. He's been asked, he's never commented on whether or not he and MacKenzie sold their Google shares. They wouldn't have even had a chance to sell before the IPO. At a minimum, he held to the IPO, 1%+ of Google. They probably held longer than that, I don't know. That's how Jeff and Mackenzie got wealthy.

Ben: In 2004, Google IPO'd for $23 billion market cap. Their shares would have been worth $230 million at IPO, which was 18 years ago. Since then, over the last 18 years, Google has 65X'd from there.

David: That was me laughing there. But listeners, you should just imagine Jeff Bezos laughing there.

Ben: Even if Bezos wasn't selling any Amazon shares for a while, he had plenty of capital to work with for doing things like investing in crazy, cool...

David: Clocks, rocket companies, and...

Ben: Venture funds.

David: Yeah, Benchmark.

Ben: PSL.

David: Which also, I don't think it was the eBay fund. It couldn't have been the eBay fund. But yeah, then Bezos becomes a large personal investor in Benchmark. In the future, of course, the main backer of eBay. It's also incestuous.

Ben: Think about it this way, too. What if Jeff still owns a percent of Google whether Google Cloud wins or whether AWS wins?

David: Especially now that Jeff's just a board member of Amazon, Scott Cook was a board member of Amazon and eBay.

Ben: What does he own, 17% of Amazon today or something like that?

David: Something like that.

Ben: He's only 17X more incentivized for Amazon to win than Google won. We're making up numbers here. We're speculating quite a bit on what price he got in and everything. He got access because Amazon bought a company and then they all left, but he maintained the relationship. Life is long.

David: Amazing. I feel like there's a lesson there, and the lesson is investing Google.

Ben: I think, yeah. That's all I can take away, too.

David: Back to Amazon. Despite this unbelievable, bountiful windfall for Jeff and MacKenzie personally, things are pretty bad at Amazon at this point in time. The dot-com euphoria is starting to wane. Some cracks are starting to show. Barron's in spring of 1999 publishes the famous Amazon.bomb article.

Ben: Amazon.bomb. There were some analysts who were still very, very excited about Amazon at this time. A Morgan Stanley analyst with the name that some people will definitely know from her Kleiner Perkins days and now bond days, Mary Meeker, at the time just at Morgan Stanley as an analyst wrote right around IPO time that Amazon is the leading retailer merchandiser on the Internet.

She said, “The valuation gives us heartburn of gargantuan proportion.” But she did conclude, “We do not want to miss this one.” A lot of her career at this point would come from trading on the professional capital that came from being extremely right about Amazon, but that doesn't change the dot-com bubble starting to show cracks and then eventually pop.

David: She would be out in the cold here by herself, because the Amazon.bomb piece comes out. Amazon reports, I think, either Q2 or Q3 earnings in 1999. It's the same story, lots of revenue growth, hugely unprofitable.

We didn't say, Joy and then her successor, she worked super hard for three years, totally burned out. Her successor, Warren Jenson took over his CFO from Delta Airlines; it's where he came from. Joy first and then Warren too, they orchestrated raising about $2 billion in convertible debt on the debt markets, which totally saved Amazon's skin.

Ben: And was way more than they raised in the IPO.

David: Way more.

Ben: They only raised $55 million.

David: Yeah. Sometimes, people are like, oh, Amazon what a great example of capital light. They raised $10 million in venture, $55 million in their IPO, and built Amazon, like, no, no, no. There is another $2 billion and they used it. Amazon would have been Amazon.toast, had it not been for that.

In summer of 1999, the stock starts falling. The board gets pretty worried about the company, about Jeff. It's hard to remember this, but this happened. The board asks Jeff to bring in a COO to complement him. It's so painful to read this and go back that this happened. They bring in Bill Campbell, the coach, legendary Bill Campbell.

Ben: We should say he's legendary. Everyone speaks very highly of him. He was brought in to Twitter and then worked as a pseudo nefarious agent on behalf of the board to oust the CEO. You got to wonder what was going on here, too.

David: No, it's not just Twitter. Bill, I think, probably genuinely was amazing. The testimony of so many people to him, even people like Scott Cook, who came in and replace. It wasn't just Twitter. Apple with Steve Jobs, Google with Eric Schmidt, Intuit with Scott Cook.

Ben: It's amazing that the thing that he got reputation for was being a coach, when in fact, the thing that he really did repeatedly—

David: It was convinced the founders to move aside and bring in the adult supervision.

Ben: Yes.

David: There's a fact pattern here, for sure. It doesn't mean he probably wasn't amazing and didn't help all those companies, but the Amazon board brings him into Amazon and simultaneously asked Jeff to go find a COO. Supposedly, actually, a leading candidate for the job was Jamie Dimon, if you can believe that. Isn't that crazy?

Ben: What could have been?

David: They settle on Joe Galli, who had been an executive at Black & Decker. He had actually signed to go take an executive role at Pepsi running the Frito Lay division. What other COO transition to CEO of tech company came from Pepsi?

Ben:. John Sculley?

David: Yeah, it would be John Sculley. There's a Scully situation going on here at Amazon in 1999.

Ben: Bezos does take this seriously. He reorgs. He has everyone report to the Black & Decker guy, to Joe. He says, my only direct report is now Joe. At the same time, he's also like, you're COO, you're not CEO. Joe, under this impression, probably from talking to Bill Campbell—we don't know for sure, and probably from talking to other board members—I think I'm supposed to do CEO-type stuff.

David: And I think I'm supposed to be the CFO for a while and then...

Ben: Move into this role and do it my way. We're going to do it the way that we did it at Black & Decker and from the world where I came from. Amazon rejects this. Joe starts running Amazon, sort of. He starts trying to get people to start moving to his way of doing things in his style of leadership, by the way, while he's commuting back to the East Coast every single weekend rather than being on the ground in Seattle.

David: That wasn't the worst offense.

Ben: The Amazon executives just reject this like a bad organ transplant.

David: Everything you need to know about the culture clash here is that Joe was one of those old school executives, who, the way he did email was he had his secretary printed out and read it to him, and then he would tell her what to respond.

Actually, that sounds pretty awesome. I would love that. I would love to do that. I would do that all day long, or actually for as little time as possible, as in often as possible, as rarely as possible. But yeah, that's not gonna work running Amazon.

Ben: So Joe's out.

David: Yeah. He does, though, make one absolutely incredible, lasting contribution to Amazon, which is he was a key part of recruiting Jeff Wilke. Jeff and everybody was, too, but that absolves a lot of sense.

Ben: For listeners who are unfamiliar with Jeff Wilke, what did Jeff go on to do with the company?

David: Jeff basically inherited and then expanded Rick Dalzel's role. Then eventually, when Bezos started to step back and Jassy became CEO of AWS and Bezos was CEO of the whole company, Jassy's counterpart and CEO of Amazon retail was Jeff Wilke.

Ben: He's got a little bit of a legacy at Amazon, Joe does as he parts ways.

David: Yup. He would go back to the world he came from. He became CEO of the holding company that makes Hoover and Dirt Devil vacuums. I think he did very well there.

Ben: Probably sold a lot of them on Amazon over the years.

David: Probably sold a lot of them on Amazon. Yes, indeed.

Ben: All right. Amazon's woes, though, are real. They now have a big debt service to pay based on this big convertible bond offering. In 1999, they're still growing at what is honestly an insane pace. It's not the amount that they were growing before. I think they're about tripling revenue, which to be clear in 1999 is $600 million–$1.8 billion. It's unbelievably impressive.

Their stock price the previous year from 1998–1999 had 10X'd, so expectations are through the moon for this company. It's not just solid fundamentals that we're valuing it. The way people are valuing Amazon is, sure, there's no net income or GAAP profitability coming out today, but they're growing so fast. They appear to have category leadership. And if the Internet's really going to be the thing that we think it all is, I just want to own a piece. This is, of course, how bubbles happen, then bubbles, of course, pop.

David: Oh, my gosh. We wouldn't know anything about this in recent history, would we?

Ben: No, not at all. By 2001, it's becoming clear that they got to pull back. In 2001, they lay-off 1300 people. This is almost like, Amazon had been so dominant for so long today that it's hard to even think about the fact that I don't know how close to death they were. They weren't dominant, and that feels weird saying today, remembering a time where it wasn't always succeeding.

David: I think they were pretty close to death. After the whole Galli incident—let's call it an incident—and Jeff reaffirms, hey, I do want to be CEO here, I'm putting my hands back on the wheel. He changes the motto of the company from Get Big Fast to "Get Our House in Order." I think they also have t-shirts made of that.

Ben: That reminds me a lot of, what did Facebook change from? It was Move Fast and Break Things. It was like, Move Fast With a Stable Infrastructure or something like that.

David: That was so funny. Not quite the same. I don't know how related it was to the whole coach Campbell-Galli thing. Probably it was more just about the competitive dynamic. Shortly after that, I don't know which side initiated it. One side or the other or both came to Scott Cook and were like, dude, you can't be on both of these boards anymore. And tellingly, Scott chooses eBay.

He actually has a quote to Brad in The Everything Store. He says, "Up until that point, I had seen Jeff only at one speed, the go-go speed of growth at all costs. I had not seen him drive toward profitability and efficiency. Most execs, particularly first time CEOs who get good at one thing, can only dance what they know how to dance. Frankly, I didn't think he could do it." Everything about that is telling, but the whole world thinks the same thing, too. They don't think Amazon could do this.

Jeff, though, I think he always believed he could do this. He announced his internal company goal that he announced to the whole company, part of the Get Our House in Order mantra, that they will be profitable by the fourth quarter of 2001.

They started looking at any possible way to increase cash flow, and necessity being the mother of invention here. they started looking around like, okay, what do we have? What can we do? We've got a pretty good ecommerce website. A lot of people want to have ecommerce websites. What if we start going to other companies who want to have good ecommerce websites and we offer to sell them our website, our infrastructure?

Ben: Almost like being Shopify.

David: Yeah. This is like Shopify, not AWS.

Ben: And they did it in their ludicrously high touch manner. It's not like we're just going to open up our platform. This whole obsession with interfaces, platforms, and APIs that exists within Amazon today, hasn't really happened yet. They're like, who can we basically do weird one-off partnerships with to create some co-branded website for them using our technology and all of our people to sell the stuff that they have relationships with manufacturers on?

David: And customers and that we can then just get paid like a software fee for?

Ben: Yes.

David: They do this with Toys R Us, and then they do it with Borders.

Ben: I remember the Borders branded Amazon, it was really weird.

David: I remember this. I would get Borders gift cards, and you could put them into the Borders site. But because it was also the same back-end as Amazon, you could then use that on Amazon. I totally remember doing this, and it worked the other direction, too.

Ben: The clarity of vision on Amazon seems so clear in hindsight, but there are these weird things that happened along the way where you're like, oh, no, they were just in a corner and did something pretty antithetical to what the drumbeat of the culture and the strategy was. How is this strategic with everything that Bezos has been writing in his letters?

David: It wasn't, but they needed the money. They do it with Target. They literally ran Target's website for years, which ominously, they announced that deal on September 11th, 2001, so rough. They even go pitched the idea to Walmart to do the same thing with Walmart. Walmart was like, yeah, no, thanks, guys. No, nice try.

Here's the super fun part. Amazon is going around pitching all these other retailers. Let us take over for you, run your website, blah-blah-blah. eBay knows Amazon's in a tight spot. They probably heard about Galli, Campbell, and all this stuff. In the fall of 2000, Meg Whitman and Jeff Jordan fly up to Seattle and they pitch Bezos on the opposite idea.

eBay takes over the failed Amazon Auctions and all of third-party sellings, so it'd become zShops, which we'll talk about now on Amazon. Just like eBay, we know how to do this. You keep running, the retail, and we'll do third-party selling for you with eBay technology. It was like, wow, oh, my gosh. Do you know the Michael Jordan meme of like, I took that personal?

Ben: Yes.

David: I think it's from The Last Dance. I think Jeff took that personal.

Ben: Yes, I agree.

David: Yes, I think he took that very personal. He calls a meeting. Remember, they're just trying to survive, get to profitability, generate cash flow. They're doing this crazy stuff with Target and Toys R Us.

Ben: At this point, they've got over $2 billion of debt on the balance sheet. I think it actually increased from 2000-2001 and 2001-2002. They're really just making the interest payments here and trying to reduce the debt load and produce some net income profitability, which still hasn't happened.

David: No.

Ben: It was intentional for the longest time, but now that they need to do it, they need to grow the muscle to do it.

David: Yes. Jeff calls an emergency meeting of, at this point, it was the S team. The senior leadership, it was the J team, the Jeff team. Then when Galli took over and everybody reported to Joe, then it became the S team, the senior team.

Ben: Which it stayed the S team.

David: Which it stayed. That seems more appropriate than the Jeff team. Anyway, he calls a weekend emergency S team meeting at his house to discuss third-party selling on Amazon. I said zShops, so auctions. I can't remember if that was still alive or not.

They had tried saying, okay, well maybe auctions don't make sense on Amazon, but we still want to allow other people to sell on Amazon. What if we just do fixed price, like a regular retail type listing? They started this thing called zShops. But again, it was a separate tab website. It wasn't right on the product page of

Ben: They weren't leveraging the strategic asset that they had, which was traffic and customer loyalty.

David: What they realized is one way to look at the real key thing—and I think this is very true today—that differentiates Amazon positively versus eBay and pretty much everywhere else selling on the Internet, is they have an authoritative product catalog. If you are on a product page for, you know what that thing is that you're going to buy.

Ben: They invented anybody's ever used against the API. They have ASINs. It's a unique Amazon identifying number for a product that they have an authoritative catalog on everything they sell.

David: Anybody who's ever bought something on eBay, you don't really know what you're getting.

Ben: Right. It's almost like Amazon starting as a bookstore had the benefit of ISBN numbers. It's like they decided, we're going to create a proprietary ISBN system for the world for all products.

David: Yes. They came up with this crazy idea in this meeting. There's some backstory that leads to it, which is on the product pages, they had links to zShops listings, and that was the only thing that drove actual converting traffic now. What if we put listings from third-party sellers on our own product pages? That's what eBay wants to do. That's why eBay is interested in talking to us.

What if we just do that and completely revamp how we think about third-party selling on it? But honestly, everything about the product page, and we call it Amazon Marketplace. They launched this in a matter of months. In November of 2000, they launched Marketplace first with books. This is nuts.

People are pissed at Amazon. If you're a Category Manager at Amazon, your competition—and Brad writes about this—just went from being outside the walls of, you just let all your competition inside your walls in the castle on your product page.

Ben: I don't know exactly how it works. I think it's more sophisticated than this. Basically, if some third-party seller is verifiably selling the same exact product and they're doing it for a cheaper price, then the buy button doesn't come from Amazon. The buy button or guys that are competing vendors, third-party seller's product, you as Category Manager, if you've got a number next to your name, that doesn't accrue to your number.

David: Nope. That goes to a totally different team within Amazon. Just like originally, it turns out customers really like competition, paying lower prices, being able to buy more stuff, getting more selection. They launched it in November, even though it launched in the middle of Q4 in 2001.

Ben: Which is a no-no until this point. You basically don't launch anything going into the Christmas season. You're literally not allowed to push code up until this point in Amazon's history around that time.

David: It accounts for 15% of all customer orders on Marketplace. Wild. Today, Marketplace is over 50%, so over half of everything that is sold on is not sold by Amazon.

Ben: I remember the annual letter in 2018 when it eclipsed it. Jeff proudly proclaimed that third-party sellers are kicking our butt. We're very excited about that.

David: What a Jeff thing to say.

Ben: This was when founder leadership becomes really important. They have an immediate organizational design problem, where a whole bunch of people are incentivized and comped against their fiefdom. What you've just done is you've created a brand new business strategy that tells people that the greater good is more important than their fiefdom. In order to rearrange everyone without creating massive infighting and churn to march in this new strategic direction, it's pretty hard to do that as a non-founder.

David: I'm so in awe of Bezos doing this, because he almost just got ousted out of his company. He's on thin ice, the company is on thin ice.

Ben: And this could have blown up the company, too. This is a different business model.

David: All of the emotional incentive that I would imagine for somebody in this amount of pressure is the board, the shareholders, everything, and just be like, okay, I got to come back. I got to save. I can't rock the boat. We got to do a cost cut, blah- blah-blah. He's like, nope, we're going to make this radical shift in this dire moment.

You're totally right. Not only is this something only a founder can do. It's only something that a very special founder would have the confidence to do. Amazingly, it works. Jeff's crazy goal of the company is going to hit profitability Q4 of 2001 that he just plucked out of thin air when he came back after the Galli incident.

They do it. Marketplace is a big component of this. The website deals with Target and Toys R Us are a big component to this. In Q4 of 2001, they did $1.1 billion of revenue, $59 million of operating income, $35 million of pro forma adjusted net income excluding stock based comp and other non cash expenses, which Wall Street's like, yeah, blah-blah-blah.

They do $5 million of honest to God, you can touch it, taste it, take it home, put it in your bank account, GAAP net income for the fourth quarter of 2001. This is huge. They announced results, the stock jumps 25% in one day, which no other internet stocks are jumping up in that moment in time.

Ben: Right. People are licking their wounds after 2000 for three years, four years?

David: It was an amazing achievement.

Ben: Amazon had seen big jumps before, like the Henry Blodget thing during the dot-com era where it was trading below 100 and suddenly jumped to 250 or something. All at once, just on Henry Blodget saying, I think it's going to go to 400. They were no stranger to massive fluctuations in their stock price, but you're right. This is one bright spot in a multi-year dark period for tech.

David: This is post September 11th. This is like today in the stock market. A year ago, stocks jumped 25% in a day, great. This is like, everybody else are going down and we went up.

Ben: Yup. This is the start of where you start to see, oh, Amazon might become bigger than eBay. eBay basically doesn't have a thriving comeback in the post dot-com bubble burst.

David: No. It would be a long journey, but Amazon stock price tripled in 2007 while eBay's fell by over 50%. During that year for the first time since eBay is IPO, Amazon finally passes eBay in market cap. Today, eBay’s market cap...

Ben: It is large. They've done a nice job. It's $27 billion, even after the big drawdown that we've experienced. It's a little bit weird to look at that number, because it's got the divestiture of PayPal in it, had the acquisition and then divestiture of Skype. There are some wonkiness. Their post-2015 has been pretty good.

David: Yup. Still, I think we can declare Amazon the winner here in the long run.

Ben: Yes. I can't tell you the last time I bought something on eBay. God, I'm afraid to look at my Amazon total.

David: Okay. Few more stories we got to tell about this era of Amazon before we talk about another era of Amazon on the next episode. We talked about Google. As the years go by after the dot-com crash and...

Ben: Portals go away and the browse motion on the Internet becomes inefficient, because the Internet's freaking huge and growing really fast. It turns out, search is really important. Amazon's looking at Google, they're like, God, they've got an unbelievable business. It's a monopoly, the gross margins are incredible. Finding things on the Internet seems really important. We should get into that, too.

David: Yup. It's both an opportunity and a problem for us. We want to be the place where people find stuff to buy on the Internet. Honestly, I think this is drawing too broad of a brush, but I think Google killed eBay. The best way to search eBay is Google, it's not eBay.

Ben: The issue with Amazon for a while was the best way to search Amazon was Google.

David: Right. Jeff, of course, through his very direct connection to Google, he saw this problem certainly before eBay, before lots and lots of people. He has a quote on Google from the pretty early days of Amazon dealing with this. He says to folks at Amazon, "Treat Google like a mountain. You can climb the mountain, but you can't move it. You use them, but don't make them smarter, as in like, don't make them smarter about searching our product catalog."

For the first time, knowing what a strategic priority search is becoming on the Internet, and thus to Amazon, Amazon breaks down and starts a secret subsidiary in California, in Palo Alto. They do a whole bunch of legal gymnastics. They're like, oh, it's a separate subsidiary. It's not Amazon.

Ben: It doesn't generate any revenue.

David: But this is the beginning of the end. Eventually, after the financial crisis, a whole bunch of stuff happens. They have to just give in and say, great, we've got operations. We're charging tax everywhere.

Ben: I think it's a misunderstanding of Amazon to say they don't want to pay sales tax because they're being cheap. They view it as a competitive advantage, where shoppers will shop with them because the items can be 5%-10% less because there's no sales tax on them, again, because it's technically putting the onus on the consumer. They're like, well, corporate income tax is a whole separate thing.

David: This is about attracting customers.

Ben: We have our own methods of paying the smallest amount of that possible. But yeah, this is purely about beating competitors to get the customer spend.

David: 100% after I graduated from college, and I was living on my own for the first time with my own salary and expenses, a light bulb went off on my head one day. I was like, I'm going to buy everything on Amazon because I don't pay sales tax. Fortunately, I'm in a place where that doesn't matter to me now. It's the Walmart episode. If saving 5%–10% on your groceries, on your item, like, that matters a lot to a lot of people.

Ben: Totally.

David: Bezos, Amazon, they see Google. They start a subsidiary in Palo Alto and like, we can try and not make Google smarter and play defense here. We got to play offense, too, and we got to improve our own search capabilities. They started hiring search PhDs, leaders, at the subsidiary in Palo Alto that they call A9 short for algorithms, A plus nine letters, algorithms.

Like you said, at first, they're like, oh, we should start our own separate search engine and compete with Google. It turns out, there's a network effect in search as well, which is the more data you have on the more searches happening, the better searches you can return. That's a fool's errand. But there is actually one corner of the Internet where Amazon has better data on searches than Google, and that is searches that happen on

Ben: Yup. Because as much as Google can index all of Amazon's product detail pages, they don't have the data on what people are actually searching for on Amazon, the demand data, the intent data.

David: They don't see a conversion. Plus, there's the review system, which we haven't talked about. It was completely genius, huge to Amazon's success.

Ben: Did you know Shel wrote that over a weekend in 1996, the original review system?

David: I know, amazing.

Ben: One of the first things on

David: Of course, those signals from the review system, the star ratings, the sentiment of the reviews themselves, that becomes a really important factor in waiting search. Today, like, oh, my God, search on Amazon, like, why would you search for products anywhere else? They got Amazon's choice, you've got the rankings, you've got the filtering. It's way better.

This is the beginning of all that. Like we're saying, I think it's also the beginning of the end for eBay because as Google gets better, deep linking from Google into eBay becomes the best way to search the chaotic marketplace of eBay. eBay's paying the Google tax on all that, and Google's the strategic intermediary. Amazon is terrified of the same thing happening to them.

Ben: Meanwhile, over in Google Labs, I loved when Google was a smaller company. I think it was a labs tab and you could click on all these weird little experiments they were doing. It wasn't like Google X, Google moonshot stuff. It was like...

David: Useful stuff.

Ben: Where Google Images came out of, and Gmail, and those sort of things.

David: Maps.

Ben: Yeah. One of them was called Froogle. I think it was product search. I think it was what Google Shopping became.

David: Dude, Froogle, I may be speaking out of turn without researching the full history, but I used to use that all the time, again, as a broke post college student, not as an investment banker, but I was making $60,000 a year living in Manhattan. Money mattered. I believe Froogle was insanely popular. I think I morphed it and shut it down for antitrust concerns.

Ben: Oh, really?

David: It was my understanding. I think, actually, there was a lot of demand for that product.

Ben: Comparison shopping, I think, is ultimately what it was.

David: The other thing, and this is why just Amazon is so good, and we're going to spend a huge portion of the next episode talking about, it's not just that they make search on Amazon better and play defense against Google. They do that. They also play offense. At first, it was like, oh, we're going to make our own search engine, and that was a bad idea.

What is the business model of search? It's advertising. What do they realize? We can build an advertising business with search on Amazon. It's just absolutely brilliant.

Ben: Any web platform of sufficient scale can layer on for free a second business of advertising, because they just have the traffic and they can put stuff in front of people, and they can prioritize it however they see fit. I think Amazon's ad business—I haven't done the research yet for next episode—I think it's somewhere around $40 billion in revenue now.

David: It is a $30 billion revenue run rate. They don't break out the margins, but it's so jazz.

Ben: It's basically 100% margin business.

David: Yes.

Ben: You already have those customers, there are no customer acquisition costs. You don't have to pay anyone out any amount of that revenue for any reason. It's like a Facebook ad. It's the best gross margin business in history.

David: The other incredibly impactful thing that comes out of A9 and improving search on the website, is one of the catalysts that pushes the company to transition from a monolith software architecture to independent microservices. That is amazing for Amazon playing defense, and that is also amazing for providing web services to other developers out there. You might be able to imagine that.

Ben: Are you leaving us there, David?

David: I would leave you there. I would leave you there, but this is a very special episode and a very special company. We've got Acoda.

Ben: Are we getting into hardware? Is that where we're going here?

David: I don't know. We've probably done it more than once. But in my mind, the canonical Acquired episode, Acoda is the PlayStation on the Sony episode.

Ben: Oh, yeah. Where you thought, wow, look at all those 70 years of history, it feels like we're done, and then actually, they create their most successful business unit.

David: Yes. Regardless of how good you and I did or didn't do on, just the story of Sony, is one of the most incredible of all time

Ben: Yes.

David: And then the PlayStation.

Ben: And then one engineer in a corner who barely has express written consent from management advice to go build something.

David: That story is AWS for Amazon. The story we're going to tell is not as impactful from a business standpoint, but the story is just as good. That's the story of the Kindle.

Ben: I'm actually quite curious what the business impact is. I think they don't break it out, but I'm curious if you did any analysis at all. What does Kindle allow them to do that they otherwise might have lost market leadership on or something like that?

David: I didn't do any financial analysis. As we'll talk about in the story, similar to the defense against Google with search, it was defense against Apple and the iPod, the iPhone, the iPad. Today, I love Kindle.

My Kindle is one of my favorite things in the whole world. It's amazing. But I think probably the way most people consume most content on Kindle is apps on other devices, so the Kindle story. This is one of those five people on the Internet and Silicon Valley.

Ben: Oh, I could not believe the people's names behind the original Kindle inception. All right, lay it on us.

David: When I found this out, I texted you. I was just like, oh, my God. Okay. I know you know because we talked about it. But listeners, I bet very few of you know who inspired the idea for Jeff and Amazon to pursue the Kindle.

Ben: Let's give a little bit of hint. When we say inspired, they started an independent company doing Kindle-like things, ereader things, before—

David: Building one of the first few readers.

Ben: Yes.

David: The first successful ereader.

Ben: But long before it would take off, it was not with E Ink, it was with a predecessor technology.

David: It was with LCD, which was a big problem.

Ben: With LCD. How else might you know them? They are the founders of something that their name is not associated with, but someone else's name is massively associated with.

David: They would take the money that they made from this company and roll it into another little company that they would then start after this in 2003 called Tesla Motors. That's right. Martin Eberhard and Marc Tarpenning inspired Jeff Bezos and Amazon to build the Kindle.

Here's the story. In 1997, Martin and Marc were working in Silicon Valley. Napster was happening, the music industry was getting digitized and eviscerated, and bought all this stuff, mp3s, mp3 players. It was total upheaval. Lots of people—the two of them included—were like, it's only a matter of time until other media categories go through the same thing.

Video is going to take a while because bandwidth and file sizes of video is a lot. Broadband isn't a thing yet for most people, but books are really obvious. Smaller file sizes than mp3s, very easily digitizable, this should be a thing.

What's holding back the industry? Unlike mp3s where it's pretty good experience downloading them from Napster, playing them on your computer, mp3 players are becoming a thing, there's no equivalent of an mp3 player for a book. You don't want to read a book on your computer, you want to read a book on a book.

They looked around and they talked to a bunch of exploring technology and they're like, we can make the equivalent of an mp3 layer for a book, an ereader. They started a company, they called it Nouveau Media, and they made the Rocketbook. They made a prototype, but it's hardware. They need to bring it to market, they need capital, they need the largest of, just like their future hardware startup Tesla, the largest of a wealthy person who might want to see this happen.

Ben: Who do they call?

David: They fly up to Seattle and they meet with Jeff Bezos. This is in the bubble era. Bezos was really interested.

Ben: I think Amazon's public at this point.

David: Yes, Amazon had just gone public, Jeff totally gets it. He's like, but our business is selling books. We're an internet company. I see what's happening with Napster.

Ben: This has happened at some point in some way.

David: This is for sure happening at some point in some way. This is the first time I've seen this. I'm very interested. They negotiated for three weeks. They wanted Amazon to sell books. You need books to sell, ebooks. You need relationships with publishers, they want Amazon to become the store or A-store.

This is the sticking point, A-store for the Rocketbook. Bezos also wants to do it, but he's like, look. If we're going to do it, we want exclusivity. I don't want you going and doing the same deal with Barnes & Noble or anybody else.

Ben: Right. Why would we fund the development of this and all the customer acquisition for you if we're not going to be the exclusive provider?

David: Like any good entrepreneurs, when they hear this, they're like, all right, well, Martin and Mark, they fly to New York and they talked to the Riggio brothers. They're like, hey, we're talking to Jeff.

Ben: I love that these guys are back in the story.

David: I know, they're back in the story. Of course, Barnes & Noble wants to crush Amazon at this point. They're like, great, we'll do the deal with you. We don't need exclusivity, but we'll invest in the company. We'll bring Bertelsmann, the German media company in as well. You'll get your publisher relationships, you'll get your store, we'll do this, and we know Jeff won't do the deal.

Eventually Cisco invests as well. In 1999, the device launches to the public. It's too early, but Oprah makes it one of our 10 favorite things for the year. It's a hit. Ultimately, Gemstar-TV Guide, pretty quickly after, acquires the company for almost $200 million. Martin and Marc, they got pretty wealthy.

Ben: These guys are flushing with some cash.

David: That literally leads to Tesla. It's freaking crazy. Also just wild that if Amazon and Bezos hadn't acquired, probably no PayPal, which means Elon doesn't have the money, which means...

Ben: Interesting.

David: The tangled web here is amazing. Jeff and Eberhard remained friends through all this and just like, all right, no hard feelings. There are plenty of other stuff going on at Amazon. As the years progress, they stay in touch. Jeff is always asking Martin like, hey, when do you think the technology, we're thinking about this, when do you think it might be ready?

Apple and Steve Jobs, in 2001, they launched iTunes and the iPod. It's amazing, people love it. Okay, but it's Apple. Tiny market share, you have to have a Mac to use iTunes, to use the iPod. Great for students, but not changing the world here.

Ben: Yes, not the Apple we know of today.

David: In 2003—it was so fun going back and remembering this—they launched iTunes for Windows. That was such a huge moment for Apple, and Steve Jobs knew it. He totally freaking knew it.

Bezos and a couple of other folks went down to meet with Jobs after iTunes for Windows launches, because they're like, we sell a lot of CDs on Amazon. Jobs is like, yeah, you sell a lot of CDs on Amazon. Good luck with that.

By the way, we're not just thinking about CDs and music here. There's now a new threat to not just any business within Amazon, but the original core books is immediately what they're thinking about.

Ben: Which is still a huge part of their sales at this point. Or at least media, books, CDs, DVDs. That's a huge part of Amazon's business.

David: Totally. There's now some urgency in Amazon to deal with this, so Jeff calls Martin back up. They've already started Tesla at this point. He's like, yeah, we got to do this now. Martin's like, okay, well, the LCD screen that we used on the Rocketbook, it had a whole bunch of problems with it. I talked to these guys at the MIT Media Lab about this technology they were developing called E Ink. It wasn't quite ready yet, but you might want to go check them out and see if it's ready now.

Ben: In particular, the LCD uses too much battery, it's bright so it's not good for night reading necessarily. You can't really read in the sun.

David: What do you want to do with a book? You want to take it to the beach. You want to read it outside, you want to read it in bed, all these things that LCD screens, especially at the time, are not good for.

This is such a priority. This was after A9, so they already had the one subsidiary in Palo Alto. They set up a second subsidiary in Palo Alto called Lab126 with the secret mission of make an iPod-like ereader device.

Ben: It took them a while.

David: Years.

Ben: Two full years, and then they slip the release date by a full year. It was supposed to be out for one holiday season. It didn't come out until the next. But when it came out, it was earth-shattering.

Not only is it shocking that Amazon is doing hardware, because that is not a thing that they've ever done before, and that's not what we expect out of them, and there are only a few big successful companies that make consumer computing hardware, that sort of thing, but it really was the introduction of E Ink as a viable technology. People really hadn't seen it before in consumer devices.

David: Now we're going back and looking at photos of some of the sources of that original Kindle that launched. It took till 2007.

Ben: It had that keyboard on it.

David: Yeah, it had the keyboard. It had a wonky scroll wheel, because Bezos was like, I've got a scroll wheel on my Blackberry, and I want a scroll wheel on my Kindle.

Ben: Yeah. He was constantly fighting with the design firm that they had hired to produce it, and putting his own beliefs about how it should be, even though they're the designers. They would come back and they would have him put on the business model and he's like, you're going to take my design advice and you're definitely not giving me Jeff Bezos' business model advice.

David: That's the thing. The device nailed a couple things, E Ink, technology, actually wireless, which was a Bezos thing, because Wi-Fi still wasn't quite everywhere.

Ben: Whispersync, I think was the name of the...

David: Whispersync, yup.

Ben: Or Whispernet?

David: There were obviously things wrong with it, like the keyboard, the scroll wheel. But the device was good enough to have a book-like experience. Then on the business side, you can buy any book ever made for $10. Now it's just unbelievable. It completely changed the industry.

Ben: Gosh, there's too much to get into on this episode, but that would be the seed of massive amounts of unrest and lawsuits in the entire book publishing industry involving Amazon, Apple, all the big publishers, allegations of collusion. This was the thing that violently shook the book industry. Amazon did by launching and by aggregating so much of the power, but then the thing that really upended and truly disrupted the industry was this, we're launching at consumers at $10.

David: Which is funny. It wasn't piracy. It wasn't like the music industry. It was $10 for an e book. The Kindle itself, incredible story, but then that leads to Fire Tablets, Echos, the lady who lives in your Echo, Fire TV, Prime Video, Ring, Era, all this stuff, and freaking Audible.

Oh, my God. Right after the Kindle launch, Amazon buys audible for $300 million. Today, Audible has a 40%+ market share of audiobooks, which is a $5 billion industry growing 25% every year. I tweeted about this. This is going to be one of my most likes tweets ever. I cannot believe it. Audible would be a $10 billion company on its own, more? I don't know.

Ben: It's crazy. Yeah, you're right. In some ways, the on-its-own-thing is the caveat there, because so much of their demand comes from being on the product detail page of a book when you go to checkout and me having the trust and everything that comes guaranteed from using my Amazon account for it.

All right, that's audible. We've got Kindle, we've got Audible. There's a lot more to talk about here before we get into AWS. I really want to dig into Prime, but let's save that for playbook, because I feel like that's going to be a good place to hit what's going on there.

David: Great.

Ben: Before we transition to powers, playbook, and our analysis section, I want to thank our friends at NZS Capital.

David: Indeed.

Ben: This is a very unusual sponsor for us. This segment is brought to you by our friends at NZS Capital, Brinton, Brad, Joe, and John. We reached out to them initially to propose this idea of, hey, do you guys want to do a paid sponsorship? I thought it was a crazy thing to propose and they jumped on it.

For those of you who listened to the last episode, you know that they gave us one very large caveat. They said that the only thing we could ask listeners to do is read one white paper, think about it, and then offer feedback to further refine the thesis. We got a bunch of feedback from people that what NZS is observing here is really interesting. For people who are new to listening to this episode, we want to dive into that same topic again.

Many of you know them from the special episode we did last fall on complexity investing and semiconductors. But for those who don't know, they're a long, only global equity fund that manages money for institutional and accredited investors. They have over a half a billion dollars under management, and the team worked together for many years before starting NZS in 2019. They're among our very favorite thinkers on Acquired, and they are just some of the most genuine, down to earth, curious knowledge-seeking folks we know.

Today, we want to talk about the idea that really started NZS's investment philosophy 10 years ago, complexity investing. This grew out of research work on complexity by the famous Santa Fe Institute. The idea as applied to investing is that it is literally impossible to predict the future, which many try to do in investing, because every market and every company is a complex adaptive system.

This means that an investor simply cannot take in the vastness of inputs to accompany like their competitors, geopolitical changes, or new technology inventions like the Internet—hence complex—to consider how all of these inputs then interplay with each other and cause the system itself to change—hence adaptive—to predict the future with really any level of precision.

David: I feel like we could say this about any episode, but Amazon more than anything. We just told this first part of the history of Amazon and so many moments where if you had all of the inputs and you're looking at Amazon from the outside, you would call this company amazon.toast or amazon.bomb, but Jeff changed, the company changed. They adapted and here we are.

If you're willing to accept this as a fact that you can't predict the future as an investor or really anybody, then the question is, what should you do? NZS's thesis that they lay out in the paper, is that you should invest based on two dimensions, resilience, and optionality.

Resilience, meaning how resilient is a given company to varying degrees of change. Is it a company like Amazon that is able to withstand and thrive through even very large shocks to the operating environment like Covid, the dot-com crash, the financial crisis, or you name it? Or is it more like another great company, Tesla?

Specifically, in the early days of Tesla, that was a very highly path-dependent situation. Everything had to go right. If one thing changed or didn't go according to plan, Tesla or SpaceX wasn't going to make it.

Ben: Dot-toast.

David: Of course, that makes Tesla and SpaceX sound bad, but resilience is not alone enough to tell if something is a good investment. The other dimension you want to pay attention to is optionality. Obviously, early Tesla, early SpaceX, had huge optionality associated with them. By optionality, NZS means really very similar to venture capital and what we talked about so much on the show, asymmetric upside.

So many things could derail something that has high optionality, but if it goes right, is the upside worth the amount of risk that you're taking? Obviously, in the case of those examples we just mentioned, yes, was the answer.

One of the other key insights that NZS has is that these are not inversely correlated variables. Often they are, but you can also find companies, very rare companies, they call ROOTMOs—resilient with out-of-the-money optionality companies—that are both highly resilient and have optionality still associated with them. Those are obviously the very, very best types of companies to invest in.

If you're looking at a company you think as a ROOTMO, then you're investing in a resilient company, but you might get some skunkworks project that they're working on as optionality for "free" because it's not priced into the future value of all the cash flows from the current resilient business.

David: Like web services from the Internet's largest retailer in 2008 or 2009.

Ben: Something like that.

David: Something like that.

Ben: To close out the segment, if you're interested, you should check out the fascinating white paper from NZS, which has some killer diagrams in it, by clicking the link in the show notes. It is well worth reading. We say this literally just as fans of their ideas. We are not clients of NZS.

They really do want feedback on their ideas. You can, of course, email Brinton and Brad from their email addresses right there on the paper. Or even better, we are going to do a Zoom call with them to talk about these ideas together. There is a second link in the show notes to add that to your calendar very soon after this episode on Tuesday, August 16th, 2022, at 4:00 PM Pacific Time. We would love to see you there.

David: Indeed. Thank you, NZS.

Ben: All right. Our thanks to NZS. Now, back to Amazon.

David, let's talk about power. Of course, this is us referencing the Hamilton Helmer book, Seven Powers. The core idea is really investigating what it is that enables a business to achieve persistent differential returns or basically be more profitable than their closest competitor and do so sustainably.

The seven options, the seven powers that Hamilton identifies are counter positioning, scale economies, switching costs, network economies, process power, branding, and cornered resource. David, as I was preparing for this episode, again—I mentioned this earlier—I tried to watch literally every Jeff Bezos talk, especially from the early days. There's this amazing one that he gives at Stanford, at GSB, literally the week that Amazon Prime first launched.

David: Oh, so cool.

Ben: He's talking about it as this brand new thing. It's $79 a year. He's observing this really fascinating thing about the business, where he wants to transform customer experience from a variable cost into a fixed cost. He's describing what if you could shift all of that to a really, really big fixed cost, basically, to get operating leverage on it.

One example that he talks about is that they have this great feature, and everybody's experienced this, I'm sure. When you go to buy something on Amazon, there's a little banner that tells you, you already bought this if you already bought it.

While that may seem like it can diminish short term revenue, his view is it builds trust with the customer for the long term because you say, oh, thanks, Amazon, maybe I already have this in my house, or maybe there is a chance you wanted to buy the same thing and you just get that delightful customer experience, that reassurance that this is indeed the exact same ASIN or an Amazon identifier of a specific product that you are looking for.

He points out, this would cost us the exact same amount to build this thing that provides customer confidence whether we had a million customers or 70 million customers. What he's describing is the most perfect, vivid example of scale economies, where once they get all these customers and once they acquire them all to Prime so they are all loyal, subscribed, guaranteed-to-shop-here customers, then you can amortize every new investment in every new feature across a massive customer base.

How could anyone build as good of an experience as you can, because they have to fund it with revenue from fewer customers? I'm not saying that Amazon only has this as one of the powers that enables them to achieve persistent differential returns versus competitors, but Jeff was writing that part of the book as he was giving the speech. It just sent alarm bells off of my ears.

David: That's awesome. Maybe now actually is the right place to talk a little bit about Prime and this dynamic. Yes, so true. Now, as you say, Amazon isn't necessarily the only company that this is true for. You could say similar things of Walmart, especially now that they have Walmart+.

You could very certainly say the same thing of another one of our favorite companies that we have not covered on Acquired that we have to now after these first two episodes of the season. That would be Costco, Seattle Hometown Heroes.

You mentioned Prime. We skipped over this in history and facts, but I think let's talk about it a little bit here. Jim Senegal and Jeff are buds. They're tight, at least they were.

Ben: And at least Jeff credits a particular lunch with Jim from teaching him a lot of lessons. In particular, the one I think you're referencing, which is customer loyalty is the thing that matters. In particular, because as we all know, Jeff is absolutely laser-focused on not gross margin percentage, but the absolute dollar amount of margin dollars over a full customer lifetime, that you can get.

David: Which is a such a lesson from Costco. It was not a lunch. It was very famously a coffee in the Starbucks of the Bellevue Barnes & Noble, which Jeff will go to great lengths at any point in time to talk about how he was doing business meetings in the early Amazon days. Literally in his competitor’s coffee shops. Not that he's a competitor-focused or anything. No, definitely not.

This coffee where they meet for the first time, Jim from Costco is just like, ah, I've never met him, but he must just be such a mensch. He's old school. He's got the Sol Price DNA, worked for Sol Price, new Sam Walton. His whole thing, he talks about this later.

The reporter asked him. I don't think it was Brad, I think it was somebody else. You gave a lot of key information to Jeff Bezos, who you became friends with, and then he's certainly one of your biggest competitors. Jim's response is just like, this is retail, you shop your competitors. Sam did this, I did this, we all did this. We all shamelessly steal good ideas from each other. This is how it works.

Ben: Jim famously has said that some of his highest performing Costcos are across the parking lot from Sam's Clubs. He relishes competition.

David: Yeah. Actually, the purpose of the meeting was that Jeff wanted to pitch Jim. This was early days when they were expanding the categories on Amazon. There was a bunch of products that they couldn't get yet. They didn't have relationships with suppliers. Jeff wanted to pitch Jim on Costco selling on Amazon for the products that Amazon didn't carry yet. That didn't go too far.

Jim gives him this masterclass on the Costco model. It sounds insane if you're not familiar with it from the outside, but then it makes total sense if you realize you're focused on gross margin dollars over the life of a customer, not percentage. The Costco model is more complicated than this. But essentially, they make 0% operating margin on their retail operations. They sell at such a low price.

Ben: I think I looked into this when we were working on the Walmart episode, something like 5%–7% gross margin business.

David: I think it's a little higher than that, but is basically set such that that when you take out the cost of running both the back end logistics and the warehouses themselves, they are making no profits on the actual retail business. All of the profits of the company come from the memberships, the annual memberships.

Ben: The merchandise just needs to provide you enough value to then renew your membership for the next year.

David: Right. The beauty is, it perfectly plays on customer psychology. Ordinarily, you'd be like, why would anybody pay money for the right to shop? You can just walk into a Walmart, you don't have to pay Sam any money to shop there.

Once you've done that and you've made that sunk cost, if you then believe that you are going to get the lowest prices absolutely anywhere as a result of having that membership, you get this insane combination of the sunk costs effect plus the endowment effect, and you become crazy loyal. You're like, I have paid the money for this membership, I need to get the return on the membership, and I feel like I'm part of this club. I have this guarantee that I'm going to get this benefit that nobody else who aren't members gets. I'm now going to do all of my shopping at Costco.

Ben: Yeah, it's pretty amazing.

David: You get these loyal customers that stay with you for a long time, spend tons of money, not that you're making profit on that money, but that then helps drive the scale to get prices even lower. It also means you don't have to advertise. Costco does basically no traditional advertising because it's all word of mouth, because the customers are so insanely loyal about their memberships.

Ben: Yup. What Jeff Bezos chose to do here was a little bit different, because I don't think he's running a breakeven retail business and just making money on Prime. I think he realized one of the effects you were talking about, which is, once you've made your deposit, your $79 a year to Prime, you're going to keep shopping on Amazon. He almost flipped it and he's like, oh, I want to use that same psychology, but I don't need to make $0 running the business and make everything on Prime.

Part of the reason he had this perspective that he could make money in both ways, was because the way that prime came about was actually the legacy of a couple of other shipping programs they had tried.

David: Supersaver, right?

Ben: Exactly. If you spent enough, then you'd get free shipping. Or if you were willing to wait for your goods for a while and get them batched up, you could get free shipping. This idea was really somebody inside the company pitching.

David: Who was an engineer named Charlie Ward, I believe, submitted it as an idea.

Ben: He's thinking about we're getting better and better at fulfillment. What would we need to charge customers in order to guarantee two-day shipping on everything they ordered basically no matter what? Really lean into that convenience part of the retail holy trinity of price, convenience, and selection.

It was this really interesting dual collision path of, okay, how much do we have to charge people in order to give them two-day shipping? And then this Jeff realization from Jim Senegal at Costco of, wait a minute, if we charge people anything, they'll actually be more loyal, which is the ultimate thing that we care about.

David: Totally. Again, demonstrates Jeff and everybody at Amazon thinking through like, what is the nature of their business? What is the nature of ecommerce? In physical commerce, those dimensions of the holy trinity or at least maybe the aspects of what matter of the retail holy trinity, are different.

Convenience is different in physical. It's a little less convenient to shop at Costco versus Walmart of, maybe you got to reach up higher on the warehouse shelves, but it's not really that different. Whereas shopping online, getting your stuff in two days, next day, or same day, that's a big difference than getting your stuff two weeks from now. That's a really important difference.

Ben: Totally. All that said, even though we're saying, hey, Amazon is not fully saying we just want to make a bunch of money on Prime, I think they do make over $20 billion in revenue per year on just Prime subscriptions.

David: Wow.

Ben: I'm pretty sure they lose money on just Prime if I'm thinking about my own habit. For the amount of stuff that I ordered from Amazon, if I actually had to pay shipping, would I be paying more than $129 in shipping? Absolutely. What about all that stuff that I watch on Prime Video? Absolutely. There's definitely an element to it, where you're like, wow, yeah, it's worth over $20 billion to them in revenue, but I'd be fascinated to see the internal Amazon accounting on how they choose to justify the cost.

David: That $20 billion, whether they're making any actual profits out of that or not—debatable—this is where this ties so tightly into the Amazon flywheel, which is another key piece we didn't discuss in history and facts. They do a management off site in 2001 with Jim Collins, author of Good to Great, where he writes about the flywheel. It's actually before Good to Great came out.

Ben: Didn't they get a little preview of it?

David: Yeah, a little preview. Because of Prime, and this guarantee to all these people who signed up for Prime that you're going to get a two-day shipping, that upfront funds, Amazon's investment, in better distribution and logistics, everything we talked about on the whole episode.

The more capital that they get to fund that and the more customers they get that are using that, the more leverage they get, and the better they can perform in Optimizely. Nobody else has their own airline with 96 planes. Walmart doesn't have their own airline with 96 planes.

Ben: They have more predictability, they have more loyalty, so they have longer customer lifetimes, so they have more absolute margin dollars from purchases coming in. A thing we haven't talked about, which is another just amazing insight, is the cash flow dynamic of this.

Amazon charges me $129 at the beginning of the year before I make any purchases on their website, and they get to do stuff with that cash. It is an incredible form of float on top of many other forms of float that they have going on in their business.

David: Just to complete the flywheel, Amazon through having all of this leverage that we just talked about in their operation, this operating leverage, float, and all these wonderful things, they can work on charging even lower prices providing even more vendor selection and even better convenience. All three on the holy trinity, they get better at that.

That attracts more customers, more customers then attract more sellers and suppliers on the platform. That allows Amazon to get more operating leverage, and then the cycle just repeats itself over, and over, and over, then drives itself around many, many, many times a year.

I could be wrong on this. I believe Amazon's inventory turns per year are something like 16 or something insanely high. Probably not as high like a Costco, but for the complexity of Amazon's operations and the breadth of items that are sold in the store to get that kind of inventory.

Ben: And that's just the first party. Fifty-seven percent of Amazon sales right now are from third-party sellers, where Amazon's just collecting margin dollars and holding no inventory.

David: Yes, scale economies. They got that one.

Ben: Absolutely.

David: I don't think that's the only one that they have.

Ben: No.

David: I think they definitely have brand. No doubt in my mind that they have brand. The definition of brand power is you would buy a commodity at a higher price from brand with power over a brand that doesn't have power.

Ben: I absolutely do this.

David: 100%. Amazon exploits this. This is part of the legacy of search and all the algorithms in the company. Very smart pricing and dynamic pricing on the website. I'm sure I could buy stuff cheaper, most things, and then I'd get them on Amazon. But I don't even look, because I'd have to wait two weeks, I'd have to go find it, or I wouldn't have the smooth customer experience. Of course, I'm just going to go to Amazon.

Ben: For a while, I remember my development over the course of being an Amazon customer here. So think 2008–2012 timeframe when I was in college. I would comparison shop for sure. Amazon versus everything else. I would do that and I would do that. Amazon would win so consistently, because they do the Walmart thing, where they would go out and scrape every other site, create a bot, and make sure that they can be the lowest price anywhere of any reputable retailer.

Enough times that happened where I got conditioned to just stop looking, because they were the lowest price anywhere. I think about five more years went by. Whenever I would comparison shop, if I really spent 10 or 15 minutes, I could always find somewhere selling it cheaper, but something was worse, to your point.

I didn't recognize the brand name of the seller, so there's a branding power there that's very clearly being demonstrated, or the shipping, or I wouldn't be confident that I could return it, or there are just all these little things about Amazon.

Then it became this interesting, explicit choice where I now know, I probably could find this somewhere else cheaper, and I still don't comparison shop. That is an incredible, incredible brand power that they've built.

David: There's then a third hop of, I don't even comparison shop anymore because it's not worth my time to do that.

Ben: Right, because I know that I'm gonna find something potentially marginally cheaper and still not pull the trigger.

David: Again, this is the difference versus when we were broke post college students. What are you going to save? On stuff, are you going to save $10? You're going to spend half an hour to save $10. For a lot of people, that makes a lot of sense.

Ben: And then have potential headache. One out of every 10 things that I buy in that way from a merchant that is not Amazon, I will have some headache with. Therefore, if you probability adjust the amount of dollars that I'm saving in terms of potential time cost later in headache, it's just not worth it.

David: Totally, especially I got a baby now. I ain't got time for that. Hell no. Amazon.

Ben: That's scale economies, that's branding.

David: Network effect, for sure, at this point. Originally, Amazon didn't, because Jeff Bezos took it personal.

Ben: With third-party sellers, you're talking about?

David: With third-party sellers.

Ben: Yes. With marketplace, absolutely. More customers drives it being more attractive for the sellers to come on, which attracts more customers. There's that network economies. Interestingly, there are no supply to supply side or demand to demand side network economies.

David: Yeah, I think that's right.

Ben: The fact that you're an Amazon customer and Amazon customer, I don't care. I don't benefit from that at all. It's interesting, they've never really leaned into that at all.

David: Yeah, it's interesting. This is scale economies. I was going to say maybe a little bit on the seller side, because more scale for Amazon lets them do Fulfillment by Amazon, but that's scale economies. That's not network effects. But definitely, that's two-sided network effects.

You see that power with, just run a couple Google searches and lots of Amazon sellers are unhappy with Amazon. It got too much leverage, there's competition, blah-blah-blah. They'd go do their first party brands. They don't leave. Why don't they leave? Because you need that Amazon sales juice. Where else are you going to sell that much online?

Ben: Absolutely.

David: Do we think they have any others?

Ben: Maybe some lightweight process power. Process power is always so hard to actually put your finger on that I hesitate to name it here.

David: Switching costs, not really. I can buy this stuff on We're not talking about AWS here, we're talking about Amazon retail.

Ben: There's counter positioning in the era that we're talking about Barnes & Noble and subsequently, Walmart, because those folks would have to invest so much and did. Walmart did, at least, to completely reinvent the way that they do distribution and all their distribution centers to be fulfillment centers, and actually go directly to consumers by not letting people shop in big stores, and not having to have infrastructure for that. Amazon counter-positioned against everyone whose cost structure was set up to do that.

David: We talked at the end of the Walmart episode about how Walmart is currently closing down Sam's Clubs and turning them into online fulfillment centers. That tells you everything you need to know right there.

Ben: Absolutely.

David: Certainly, counter position versus Barnes & Noble, the Brad Stone quote we read earlier in the episode of, "Barnes & Noble wasn't going to go all in on this because their distribution network was not tuned for ecommerce. They would have had to redo it." To do that, they would have had to majorly prioritize it within the company, put all their best executives on it, it be less profitable for them. They would lose money in the short run versus the hugely profitable stores. All the incentives were not to do it.

Ben: Absolutely.

David: Today, you can say they still have counter positioning.

Ben: No, that was just a take-off phase thing. I have been just frothing at the mouth to do playbook on this one.

David: All right, let's get into it.

Ben: All right. I want to open with a quote from the very first 1997 letter to shareholders, which I always think is fascinating. This is such a ubiquitous letter at this point that if you google in incognito mode, 1997 letter, this letter from Jeff Bezos comes up.

David: Also, we got to do a shout out to our friend and longtime Acquired community member, Preet Anand, who absolutely made a podcast feed reading the shareholder letters.

Ben: You're taking the words right out of my mouth. Thank you, Preet. I listened to him while I was doing some work in the yard yesterday.

The quote is, and there are many great quotes in here that really highlight the idea that you get the shareholders that you ask for, "When forced to choose between optimizing the appearance of our GAAP accounting and maximizing the present value of future cash flows, we'll take the cash flows." I thought this line by Joy Covey and Jeff is so incredibly prescient that he really is focused on the absolute dollars of free cash flow metric.

I think there's this misconception that people have about Amazon, that they're trading off growth for margin percentage. I don't think that's ever actually what was happening. People often look at startups today and they're like, profitability or growth? I think the way that Jeff always thought about it was, well, we care about free cash flow in the long run.

David: Right, in the long run.

Ben: That is the way that every business is measured. The keywords here are maximizing the present value of future cash flows, which necessitates building a brand around your stock, which I think Elon is the king of today. When you're talking about the present value of future cash flows, since future cash flows are unknown, you do have to build religion around your company today if your goal is to really get investors on board with your long, long, long term vision.

Amazon got thrown in with all these other dot-com companies when you read that Barron's article, Amazon.bomb. A lot of those companies,, for no shipping, you could order a pack of gum to be delivered to your house and it would arrive in an hour. You're like, clearly, they're losing money on this, and I'm not necessarily a loyal subscriber to this. Amazon always was gross margin profitable. They always had solid unit economics, but they would choose to super aggressively reinvest in something.

As we were preparing for this episode among the number of people we pinned in addition to Brad Stone and some of the other folks that we were chatting with were early, early Amazon or around the company, we reached out to a friend of the show, Michael Mauboussin, to see if he had any materials from this time. He's had more than a spidey sense that he would have strong opinions about Amazon at this time.

David: Our episode with Michael, I think it's the seventh most listened to Acquired episode of all time.

Ben: Yes, it's very widely listened to.

David: Which is amazing.

Ben: He's your favorite investor's favorite investor. He's the ultimate finance professor.

David: If you haven't listened to that, go listen to it.

Ben: Yes. He made this presentation at Amazon in 1999, really advocating for exactly the strategy that they were running and just starting to articulate it and put it into a framework form, we have the deck here. One really fascinating observation he makes is that it's really about the weighted average cost of capital, the WACC. You don't need to be a finance professor like Michael to understand this.

Here's how it works. Suppose you want to invest in building a new distribution center so you can either expand the reach of shipping goods and say a new country or decrease the ship time for existing customers. This is Bezos' insight of, how do I turn customer experience into a fixed cost?

Let's say you have no cash in your bank account, you have to raise capital. Either you can sell part of your company with an equity financing like their IPO to get it or you could raise debt and pay some percent of interest, say 10% a year.

David: Which they did.

Ben: Which they did that, too, to the tune of close to $2 billion. That capital has a cost to it. The investments that you make in this distribution center need to outrun your costs to obtain that capital for it to be profitable. But let's say you have a pile of cash in your bank account that you've got as profits from selling goods, that cash is effectively free for you to use.

If you have a competitor who's financing the growth with debt and you can do it purely with those profit dollars, you can beat them in the long term. Even better—and we'll put the slide up on the video format here for Michael's presentation—if you have all the dollars from selling goods, not just the margin dollars, and you don't have to pay your suppliers for like a month after the customer bought it from you...

David: Or two months, or three months, or four months...

Ben: Yes, you can invest heavily into this new distribution center with many, many more dollars, not just the margin dollars. As long as you're confident that that growth will continue and you'll have even more cash on hand at the date that you need to pay the supplier for the thing that you sold months ago that you now owe them for, that works really well.

David: Yes. Oh, boy. Ben, you're saying it's almost like another large operation we may or may not have talked about for 10 hours on Acquired, where they write insurance premiums and reinsurance premiums. They write the policies and they get those premiums from those policies in, and then they don't have to pay the money out until a disaster actually happens. They get to use all that money in between. You're saying it's like float.

Ben: Yes. Amazon today is a $1.5 trillion company that has not raised any material capital since that debt offering that they paid off in 2004 or 2005-ish. They are financing the business entirely with float until, of course, we'll get to AWS, and now they can actually finance it a lot more with just straight up operating income.

David: Actually, that, we should say. I think strictly speaking, that is not a true statement. They have been issuing debt, but I think that is not for financing the business. I think it's like a treasury capital management.

Ben: Okay. All right, fine.

David: It's not like the debt they issued in the early days.

Ben: Yes, very much not. As you can see in putting this slide up, Michael cheekily calls, as if it's really pioneering this new model, where in the old school businesses, something would enter your inventory, you'd pay the supplier three months after it enters your inventory, and then it has to sit on your shelf for a while. Finally, a customer buys your book, and then the payment ends up being received.

They're a few months between when you have to pay your supplier and when you get paid, whereas what Amazon's doing is completely flipping on the head. The book can enter your inventory, the customer buys the book, you then receive their payment pretty soon after that or immediately after that, just after some credit card days, and then you can have a month or two before you need to pay your supplier. The internet business model and ecommerce totally flips it on its head because of the completely different way that the distribution works and that inventory works.

David: Yup. Even further adds depth of understanding to this point of the larger the scale of Amazon's operations in the flywheel, the more capital dollars, cashflow dollars, that they're able to get out of it to continue to fund building out the larger scale of their operations.

Ben: It's this killer insight, that cost of capital and having a negative cash conversion cycle, are directly related or I suppose, inversely related.

David: Yeah, think about it. Yeah, capital as a cost, but here, they're getting paid to use the capital that has a negative cost. It's amazing.

Ben: That's where Prime is really this on steroids.

David: Yes.

Ben: I'm paying Amazon $129 at the beginning of the year and asking for zero in return. In fact, I'm giving them my loyalty in addition to paying them and they're going to do interesting stuff with my cash in the meantime, is really genius.

David: All right, what else do you have?

Ben: Another one is from another early Bezos interview that I was watching, where he had to do a lot of fighting of stock analysts in the early days who were saying, yeah, lipstick on a pig, you're just a retailer. I don't understand how your cost structure is really any different. Sure, you sell it on the Internet, but you're just a razor-thin retailer. Why is this an interesting business?

David: What's the line that people always say, whenever Wall Street becomes disillusioned with Amazon, they say it's a charity being run for the benefit of the American consumer?

Ben: Yes. A lot of people are laughing all the way to the bank on the other side of that bet. He makes this great point, which is, okay, let's say we are just a retailer with a retail business model. There are a few things that are pretty different. A gigantic cost in the retailing business is your rent. If you are in a retail space—it's funny when he's saying this—it's much less expensive than it is now in a Prime place in a city. He cites, it could be like $7 a foot for a great retail space.

David: Oh, you're killing me. I'm thinking about San Francisco real estate.

Ben: Whereas if you're running a warehouse, somewhere where it really makes sense for us to have a distribution center, it's like 30¢ a foot, which is such a valuable point. Stores have to store all of their inventory or a lot of their inventory in very expensive real estate. Amazon totally does not.

David: Man, that is such a good point. That's such a good point.

Ben: I'd actually ever heard this argument before doing this research.

David: That's a fantastic point. Even Walmart, where Walmart stores are not in multi hundred dollar a square foot primo urban real estate, it's still a higher cost of real estate than where Amazon fulfillment centers are.

Ben: Absolutely. It's one of these things where it was interesting reading all the bear cases on Amazon. There are plenty of little quips where it would be fun to tweet them out and be like, this person was so freaking wrong, but a lot of the criticisms were reasonable. This particular one isn't reasonable, the one that we just pushed back on with the cost per square foot.

There's another one that wasn't really reasonable, which was this is a money losing business just like all the other dot-coms, because they actually were profitable if they weren't continuing to reinvest in growth, which would give them this unbelievably durable moat around consumer experience.

The one that is always an interesting thought experiment to me is people would ask, what do you own when you own a share of Amazon? Because much like a lot of stocks over the last couple of years, the price in 1998–1999 was completely disconnected from the reality of the underlying fundamentals.

You had a business that was growing massively, that was generating no GAAP income, and was doing things like reinvesting the float 100% of the revenue dollars they were getting in, so they needed to keep growing in order to ever pay their suppliers back. If the music ever stopped and they didn't keep growing, this isn't just magical, free money with no cost. The cost is if the party ends, you're screwed.

David: It's musical chairs.

Ben: Yes. The reason why Amazon wasn't totally screwed is because they were right in their bet that this was a gigantic market that they could basically grow into forever. Sure, they had a couple of tough years and had to raise some debt capital to get through it, but the naysayers were right if it wasn't a crazy high growth business for three decades. It just so happened that Jeff was right about that.

David: Are you saying he was right about it being day one for the Internet?

Ben: I am saying that if it wasn't day one for the Internet, it would have been a Ponzi scheme. Let me put a finer point on that. It would have been like me going and opening up a credit card to pay off other credit cards that I owe debt on. That is the type of thing we were talking about with the float situation.

David: This is a little bit of a sidebar here. Through the probably two months at this point since we decided we were going to do this episode that we've been researching, I just had in the back of my mind. I'm like, I wouldn't have even thought about this a couple years ago, but magic of compounding acquired. Here we are.

If by some miracle at some point, we get to interview Jeff, I think that's the biggest question I want to ask him. You stepped back? Forget Amazon, let's just talking about the Internet. What coach Campbell thought you might want to do in 1999, 2000 of step back, pursue your other interests, you decided no, wait, it's still day one here. Is it still day one now?

Ben: That is a phenomenal, phenomenal question. Okay. To your point on that, is it still day one for the Internet? I love this question in particular.

Here is a quote from the 1999 letter to shareholders. The thing to note here is he's justifying why they're investing so much money in technology to reduce costs, like just keeps reinvesting, pocketing money back in. He ends with, "We still believe that some 15% of retail commerce may ultimately move online."

David: Who may? Ultimately.

Ben: Guess what ecommerce penetration is right now.

David: Fifteen percent?

Ben: Fifteen percent. It went from 12% to 17% during Covid, and is falling a little bit right now, and is hovering right around 15%. If what he says is we believe that it may move online to the tune of 15%, maybe it's no longer day one for the Internet.

David: It's a good question.

Ben: It's certainly not day one for ecommerce.

David: I personally am definitely not ready to say it's day two, but I'm just very curious. What does Jeff genuinely think?

Ben: These things are so object a definition, too. How many days is it out of? Is this an innings situation? Is this a 365 days? Is it God created the earth in seven days situation, or is it out of seven? What's the denominator?

The other thing that I keep thinking about is, how could I possibly spend more money online? I'm not sure more of my spend or my time could move on the Internet. Internet penetration got to be in the 90%+ in America and getting up there for the rest of the world, too. If you just look at, we're running out of hours in a day and we're running at a household spend to spend on things you could buy over the Internet, so…

David: I think, really, this is the question harking back to what we talked about towards the beginning of the episode. You and I have, fortunately, in our lifetimes when we were kids. But in our professional careers, we have never experienced anything like 1992, 1993, 1994, 1995, where traffic on the Internet was growing 230,000% a year. We've never experienced that. We're benefiting from the aftershocks of that still.

I think that's the question. Where are we in the aftershocks of that? Or is there going to be another event like that in our lifetime? I think everything in our time that we've thought of as that is mobile, cloud, Web3, VR, it's all still just the Internet. Those are aftershocks. That's not the event.

Ben: Going back to this credit card game, Ponzi, or Peter to pay Paul, this mental model of borrowing against something in the future like paying your suppliers in order to do interesting things with the dollars today, I think giving that a little bit more thought since I threw it out, I think the reason why it all worked out is that the Internet ultimately provided a ton of consumer value on an ongoing basis, even when the bubble burst.

If you look at traffic during 2000, 2001, 2002, people kept adopting the Internet. These tech stocks, equity investors ran away from backing them, because people got so ahead of their skis investing on clicks and not even revenue like clicks and eyeballs, let alone gross margin dollars, and hopefully, eventually free cash flow.

The fact of the matter is, even though investors got scared, it provided an incredible amount of consumer value. The fact that people kept doing it meant that Amazon kept growing their customer base, the customer loyalty, and the number of transactions. There was a there there. They could survive the bubble because ultimately, more consumers kept getting more value so the party could keep going over at

David: Yes. It's interesting. I'm thinking back on my personal experience living during that time. I'm curious for you. Did you have any awareness of the tech bubble and or the tech bubble burst?

Ben: No. I was 10 in 1999. I remember September 11th, but I don't remember that it came after a bubble bursting.

David: Right, but you probably remember your experience of the Internet and it growing in your life, right?

Ben: For sure. It sort of grew with me growing up. I remember like, oh, now I'm old enough to have a computer in my room, and oh, now I'm old enough for it to be on our AppleTalk network, and old enough for it to be connected to the actual internet so I can use things like AIM.

I always thought those things were like, if I really think back in rites of passage for someone growing up, and I don't think I realized at the time, these are becoming things exactly at the pace that I'm growing up.

David: Totally. It's so funny when you're younger. Now, there's no difference in our age. I think I'm four years, five years older than you.

Ben: Four, I think. Yeah.

David: Four, I think. Yeah. I was probably just a little bit ahead. I was aware of stuff going on with stocks related to tech companies. I knew that was happening, but I didn't think about it in relation to what I was doing. I just think back, the percentage of my time and mental energy directed at and on the Internet just grew, and grew, and grew exponentially during that time.

Ben: It turns out, having the entire world of information at your fingertips is unbelievably valuable and it just permeated everything.

David: Yeah.

Ben: Okay, I have more.

David: Yeah, go for it. I've got two I want to share. Save me room for two.

Ben: I will. Here's the thing we really didn't talk about, but it is very important to understand about Amazon. They were ludicrously, ludicrously private. They never broke AWS out as a segment. They basically had to. They have always kept everything in this gigantic amalgamation of the fewer numbers we can report, the better.

In their S-1, they never said anything about any cohorts, cost to acquire customer, or lifetime value of an Amazon customer. No one in the outside world know 10-Ks, know S-1. Nothing has ever said anything about that information.

Jeff just believes his famous Bezos charts where he's announcing this cool thing for Alexa and he's like, this was the best year ever. You just see an unlabeled axis that's like, oh, it's upper and to the righter. That has served them really well. They're able to do a lot of maneuvering versus competitors, with their suppliers, with third-party sellers, by just never really disclosing any key information.

David: Yup, the same story with advertising as with AWS. At a certain point, they're going to have to break out advertising. It's a $30–$40 billion run rate business at this point. But for a long time, nobody really knew or understood what was happening inside Amazon with that.

Ben: There's this other one. For listeners who are watching on video, you can see that it's now dark out for David and I. We took a break to go have dinner and then reconvene.

David: Slash put the baby to bed.

Ben: Yeah. I was thinking of myself over dinner. Man, I don't know if we're doing a good job with this episode. It's not really a cohesive story. I think it hit me that that is the point. Amazon was doing so much stuff so fast, concurrently, and learning from it, that it's a brute force pathfinding algorithm that has a bunch of concurrent stuff going on.

It's unbelievably entrepreneurial. It is the most successful scale innovator in the world that has ever existed. The two pizza teams thing, which I'm sure many people are familiar with.

David: Which I think might have been a Rick Dalzel innovation.

Ben: Oh, interesting. The fact that for decades, most of the best entrepreneurial talent in Seattle just stayed at Amazon. The knock on Seattle for so many years was that, thank God, Amazon's a pretty big, bureaucratic company at this point and people are leaving to start companies.

David: Oh, the best people stayed. Look at Jassy.

Ben: Totally. The biggest impediment to the Seattle startup ecosystem was the fact that Amazon facilitated entrepreneurship over, and over, and over again, for people at all stages in their career with all levels of ambition. It's really, really impressive, but doesn't really make for a clean story?

Rather than beating myself up over that mid episode here, I was like, I think that's actually the point. Let's do hardware, let's do a subscription business, let's buy a bunch of planes. They started the company and IPO'd within three years. Everything that this company has ever done has been super fast and often concurrent.

David: Yup. How did you phrase it? I think you texted me, the surface area of this company is just immense.

Ben: Is just ludicrous. Yes. It's so large. It's impossible to cover. I actually made a list when I was thinking about, okay, is this maze thing the right analogy of things that failed, and then they backed up, turned left, and tried another thing instead and this heat seeking brute force algorithm? It's incredible when you look at Auctions, zShops. We didn't even talk about the Sotheby's partnership, where they were trying to do a border style thing with Sotheby's.

David: We didn't talk about the Fire Phone.

Ben: The Fire Phone, A9 search engine, which was just wildly underfunded relative to Google search engine, Block View, which was the predecessor to what Google figured out with huge investment to make Street View, investing tens of millions of dollars and startups, like and Over, and over, and over again, there are these huge failures, and yet it's the most successful company of our time.

There are so many other companies where, compare it to Elon Musk, for example. You look at SpaceX, it worked. Tesla, it worked. PayPal, it worked. Boring Company, we don't know yet, but it seems like it could work. Neuralink, jury's out. It's really early, but it's not a failure.

He doesn't go start these things that are completely dead ends the way that Amazon did dozens, and dozens, and dozens of times. But Amazon is so damn good at learning. There's this great quote again in the 97 letter, which is, "We will make bold rather than timid investment decisions, where we see a sufficient probability of gaining market leadership advantages. Some of these investments will pay off, others will not, and we will have learned another valuable lesson in either case."

My big takeaway is, if you're going to look at Amazon as a straight line, it was a philosophical straight line. It was a strategically squiggly line, but it was a tactically random set of dots that there was just a fact finding algorithm going to figure out.

David: Man, I love that. That is such a good point, but that was the strategy. Jeff says it in the shareholder letters all along.

Ben: Yup, absolutely. All right, what do you got?

David: Okay, my two that I want to highlight. One, the opposite of what Jeff talks about all the time of, we're not competitor-focused or customer-focused, blah-blah-blah. Of course, they're customer-focused. Yes, we've clearly painted the picture that they care about customers, the customer experience-focused, long term customer loyalty is the most important thing, blah-blah-blah.

Ben: Isn't it great that there are these Jeffisms that you and I can shorthand because we're pretty sure that our audience knows them at this point, because every interview he's ever done, he says the same things?

David: Yes. It's so funny. Jeff is also such a part of the lineage of great retail entrepreneurs, starting concurrently and before Sam Walton, but Sol Price, Sam Walton, Jim Senegal, Jeff Bezos. You shop your competitors, and you take their best ideas, and then you refine them and make them even better.

That Sam Walton quote that I just loved from Made in America, "Go shop, our competitors. Come back. Don't tell me what they're doing wrong, tell me what they're doing right." Amazon did the same thing, like the eBay story.

Ben: Doesn't Brad Stone have a way that he frames when Amazon is customer-focused versus competitor-focused? I think it's in his second book in Amazon Unbound.

David: Yeah, that might be in Unbound.

Ben: I always thought this was a good way to approach it, where if it's in an emerging market, they're customer-focused because they can afford to be, especially when they're the market leader or they're out ahead.

But when they're in a competitive market like what grocery became, because when they were first starting all their grocery efforts, it was one of the leaders in online grocery, Amazon Fresh is this crazy experiment and ultimately, they fell behind, you have to be very competitor-focused when you're in a crowded market where you're behind. I think they like to be in markets where they have the luxury of being purely customer-focused, but that's not always the case.

David: In some sense, it's a luxury to have great competitors because they figured out good stuff.

Ben: Bezos didn't just steal from other retailers. The other thing about Jeff is he comes from a finance background, whereas a lot of the classic retailers come from a merchandising background or an operations background.

David: Certainly, internet entrepreneurs, very few came from a finance background.

Ben: There's a lot of John Malone in here. When you look at their tax strategy, the fact that they're generating all this free cash flow but somehow never reporting a GAAP profit, and they're never paying corporate income tax because they have no corporate income, and yet, somehow, they're a trillion and a half dollar company, and they have started paying more taxes recently because they have started being profitable, blah-blah-blah. But for a long time, they really were running the TCI, John Malone, playbook of try not to ever show your profitability.

David: We got to do that episode.

Ben: For sure.

David: That's my one of two. Two of two, which was what pushed us over the edge to do this episode now, which is the period of time Amazon got started a little on the early side before the tech bubble, benefited all throughout the tech bubble, and then got hammered arguably harder than any other surviving internet stock when the bubble burst and in the crash.

It was during that nuclear winter leading up to it, not that they weren't doing this all along, but the hard work was done from 2000-2007, where they built out everything they gave them, like the hugely wide moats that we've talked about on this whole episode. That was the time to build and Jeff was completely unafraid to do so. God, it just makes me think so much about it right now. It makes me think about FTX.

Amazon, granted most of it was debt capital, but during the go-go years, they sucked in billions of dollars of capital. Some of it was spent unwisely. But then when the crash came, they invested through it, they built through it, and distanced themselves by miles from their competitors. It's just like a huge lesson.

Obviously, you got to be smart. You got to be right. You got to have managed your company in a way that you have access to capital during those times. That's the best time to build moats.

Ben: Absolutely. How should we grade this one?

David: Yeah, grading. We talked before the episode about, maybe we grade Amazon retail here and then we'll grade Amazon Web Services on the next one. But like you said, this is like a tangled octopus of a company. We only got up to 2007–2008 in the history here.

Ben: Right. I don't feel, based on everything we've discussed in this episode, qualified to assess Amazon retail as it is today. I think we should scope it to the time period.

David: We didn't talk about Zappos. We didn't talk about We didn't talk about Whole Foods.

Ben: Pill Pack.

David: Echo. We mentioned it, but went medical.

Ben: Although Echo, to me, falls under AWS. Why not?

David: Oh, that'll be fun to talk about. Clearly, it's both. I think we should grade Amazon from founding until just before the financial crisis.

Ben: Okay. It's interesting. If the company were to have ended in 2007, I think they were doing about a billion dollars a year of operating income. This is why it's very interesting to be grading on a timeframe with a company that's thinking in a much longer timeframe. If they're generating a billion-ish dollars of operating income, and I think their market cap at that point was something like $30 billion, if you're a shareholder, they haven't really realized those future cash flows yet.

The pedantic way to look at it would be like, well, if the music stopped there, that would have been pretty bad. But, of course, it didn't. Of course, AWS would still come. Their market cap would absolutely explode.

They've turned on the ability, especially with AWS, get very profitable in the future. That's probably the wrong way to look at it. What if the company shut down? It's more about, how do they execute to set themselves up for ultimately realizing all that value for shareholders?

David: Humans are such funny creatures. The hedonic adaptation is crazy. If you go back in time to 2007, what did you say their market cap was? $30 billion?

Ben: Ish.

David: That was a big company back then. I remember, when I started in venture a couple years later in 2010, you weren't playing for exits in the tens of billions of dollars. If we said, oh, well, I got to underwrite this investment, do I think what are the odds that this is going to be worth $30 billion? People would be like, what are you talking about? We need this to be worth a couple $100 million dollars. That's a huge win. We just hadn't realized yet how big this stuff could get.

Ben: Which is, in part, why people needed to be more ownership sensitive or certainly they were more funds obsessed with ownership than there are now. I still actually believe pretty strongly in ownership, especially as a lead investor and why that's important in architecting a funding model. But at the time, if what you're playing for is $300 million–$400 million outcomes, then it's pretty important for your multi hundred million dollar fund to own a quarter of that company.

David: Yes. Certainly, Tom was very happy with their Amazon investment at that point in time. I think we have to give it an A. Especially, as we talked about it, gosh, just incredible execution through that time.

Ben: I do have this fun stat from the IPO. If you had bought 100 shares at the IPO, which I think, did we say $1700–$1800?

David: Market cap of $438 million?

Ben: Yeah. If you bought 100 shares for $1800 of total investment, today, you'd have $2.6 million and you would have made 1500X, which is bonkers. Then the question becomes, should we grade Tom's investment at Amazon as of 2007?

David: I love that. Great A. Unless he sold in 2007, in which case, F.

Ben: Yeah. 2007, the resolution's pretty low, so it's somewhere between $30 and $40 billion. Let's say you're buying in at $5 million and that goes up to $40 billion, that's a 10,000X. It is crazy if you really start following the ripples out. Yeah, Seattle's whole startup ecosystem.

David: Yeah. Of course, there was Microsoft before, too. So many great folks came out of Microsoft to build companies and still, like Nick at Rec Room. Amazon, it's just a juggernaut.

Ben: Yeah. I don't even know how to apply a letter greater than this than A+. The other thing is surviving the dot-com crash. Basically, no one did. Google did, but Google started right at the tail end of it. Every other retailer, and half of them were things that Amazon was invested in, but,, and all these completely went under.

David: And eBay. I mean, eBay survived. It's around, of course, but it didn't win.

Ben: Pretty believable to make it through that three-year absolute drought of the availability of capital and a complete souring. You couldn't IPO, so if you weren't already out like Amazon was, there's basically no chance that you were going to. I think Google finally IPO'd in 2004.

David: 2004, yeah. Even then, that wasn't like it opened the floodgates.

Ben: Right.

David: All right, we got to go A+.

Ben: A+ execution.

David: Great. We'll do the whole thing on our next episode. If I were to predict a grade for Amazon Web Services, I would predict an A+.

Ben: Why even listen to the episode, David?

David: Right. I think it'll be worth listening to the episode.

Ben: By the way, I've been saying $2 trillion this whole time. I finally just looked it up. Amazon was a $1.9 trillion company, and today is a $1 trillion company. It is crazy what has happened over the last two years.

David: They just reported Q2 earnings and the market liked it.

Ben: It popped 15%.

David: I bet it's closer. Who knows? If we could predict the future, we wouldn't be fans of NZS. By the time this comes out, it's probably fair to say, ballpark, $1.5 trillion-ish. Who knows?

Ben: We'll see. All right, great episode. Should we do some quick carve outs?

David: Let's do carve outs. What you got?

Ben: I have a carve out. I can't remember if you recommended this to me privately or if it was a previous carve out of yours, and that's how I heard it. I just listened to the Rick Rubin episode of the Lex Friedman podcast, and my God, is that a good interview.

David: It's so good.

Ben: Do you think it's a good interview at the beginning? You get 90 minutes in and you're like, this is a really good interview. I think that happens a lot on the Lex Friedman podcast.

David: Yeah, it's so good. Lex is such a good interviewer. His skill as an interviewer is just top notch.

Ben: There's a level of intimacy that he gets with people where it's uncommon to have a level of intimacy. I don't think it's because he previously knows them. I think it's because everybody knows that's what you bring when you're on the Lex Friedman show.

If it's anywhere in your sort of, oh, I should listen to that sometime soon, especially if you're a music fan, and especially if you're a heartfelt music fan, like you're someone who really likes to feel and put yourself in the place of maybe the artist or something they were going through, there's just so much. In particular, the way he goes into the Johnny Cash final album of covers that he did. The Hurt by Trent Reznor.

David: The Trent Reznor Hurt, yeah. Oh, man. The number and breadth of musical history moments that Rick was part of.

Ben: Just sitting there, producing for, creating.

David: Yeah. Not even just sitting there, creating with the artist.

Ben: It's like Forrest Gump in real life.

David: What a legend.

Ben: Yeah.

David: All right. I was going to do just one, but actually I'm trying to decide what to do. I think it's appropriate to do a potpourri, a suite of different types of media here, given that that's Amazon's DNA. They probably bought or consumed most of this through an Amazon service in one way, shape, or form.

Books. I have been reading a few books by Ursula Le Guin, a very famous American author. Great, both sci-fi work and fantasy work, both of which I really enjoy. I read her, I think, probably best known sci-fi novel. It's called the Left Hand of Darkness. Excellent book, highly recommend. I feel like it was written in the 1960s, maybe 1950s or 1960s. I could be wrong on that, but that era of type of sci-fi. It's a character-driven sci-fi, so less about crazy technology and more about as a setting to explore characters. Great.

I'm just starting her Earthsea fantasy series, which I had no idea. Now I'm like reading it and I'm like, oh, and some of the reviews on Amazon talk about probably part of the inspiration for Harry Potter. It's super cool to go get that little bit of history.

Ben: Harry Potter, by the way, broke a lot of Amazon's algorithms. I was listening to a couple of interviews with early engineers who were saying, you may also like or people who like this also like, basically everyone liked Harry Potter. They would have to either special case it or tune some parameters to make it so it just wasn't always recommending Harry Potter with any other product because any other product had a similarity of buyers with Harry Potter.

David: That's funny.

Ben: It's like the Justin Bieber server at Twitter.

David: Late 1990s, early 2000s. Cultural touchstones for the world.

Ben: Yeah.

David: Okay, music. I just today was relisting to My Beautiful Dark Twisted Fantasy by Kanye.

Ben: Dissect?

David: Yes, and then it reminded me, I tweeted about this. I think that was your carve out years ago, season two of the Dissect podcast. The album is a master work.

Ben: I didn't realize what a masterpiece the album was until listening to the podcast. Just the appreciation you get for Kanye as an artist and every single element, musically and lyrically, of every single song, is just next level.

David: We joked about this. I feel we should do a Kanye episode at some point. It'd be the follow up to the Taylor Swift episode.

Ben: The Jedi and the Sith.

David: Exactly. My last piece of media is a throwback to carve out of mine from not that long ago to Elden Ring, the video game. I finally beat it months later. If you're doing anything else and if you have a baby, you're talking months to beat this thing. Unreal achievement of a game, so amazing. I got to say that I also tweeted about this.

I was a little disappointed at the end. I think I felt like I lost steam. I can totally forgive it. If old games were running 100 meters dash and then it got to the point where the achievement of making a triple-A game was like running a marathon, this from Software and Miyazaki, who created it, this is like running an ultra marathon. The amount of work and content and just incredibleness that went into this game is on a scale that no other game has ever matched. It's worth playing, worth sinking months of your life into.

Ben: If you have several months, exactly.

David: Yeah.

Ben: Awesome. Listeners, thanks for going on the journey with us. Man, I cannot wait to dive into AWS research. I try not to research two episodes at once because it's too hard to hold all this in our heads concurrently. I've been resisting diving into the annual letters from 2007 onward and really trying to understand the landscape of cloud today, but that's going to be a great one.

David: This was such a journey, and we're only halfway there. There's more to come.

Ben: Absolutely. Our thanks to Fundrise, Pilot, and NZS Capital. After you finish this episode, come discuss it with all of us at We got a job board. If you're looking for the next move in your career, go to

Big change in all the things that we're calling to action for. I don't even know if that's the right, calling you toward action upon. How many weird prepositions can I throw? These closing calls to action.

Merch, holy crap. It's finally here. Amazon inspired us. Thanks, Jeff Bezos. Your contributions have been many, but you convincing us to start a store on the Internet is perhaps your greatest yet, so thank you for that.

You can go to and find some of the finest t-shirts, hoodies, crewneck sweatshirts. What else is there? Tanks and even onesies available. We'd love your feedback as we consider expanding the store as well.

I don't think we have the infrastructure yet for third-party sellers to come on and create their own Acquired Merch, but perhaps we'll explore that if we can get a wide-enough user base to amortize those fixed costs of making a great user experience for you all across. I got to stop. I got to end this. Check out the LP show. You can find it in any podcast player. With that, listeners, we will see you next time.

David: We'll see you next time.

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