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Mon October 14, 2013
One-Stop Shop: Jeff Bezos Wants You To Buy 'Everything' On Amazon
Originally published on Tue October 15, 2013 11:51 am
In his new book The Everything Store, Brad Stone chronicles how Amazon became an "innovative, disruptive, and often polarizing technology powerhouse." He writes that Amazon was among the first to realize the potential of the Internet and that the company "ended up forever changing the way we shop and read."
Amazon started off selling books, but Jeff Bezos, Amazon's founder and CEO, always had the intention of turning it into an online market that sold everything. In the process of becoming "an everything store," Amazon acquired many other dot-coms including Zappos and Diapers.com, and expanded into selling web services as well. Bezos owns a rocket company, called Blue Origin and in August he invested in old media, purchasing The Washington Post for $250 million.
Bezos himself is the 12th richest person in the U. S., with a fortune estimated at $25 billion. Stone, a senior writer for Bloomberg Businessweek, has covered Amazon and technology in the Silicon Valley for 15 years. His book draws on interviews he conducted with Bezos over the years as well as interviews with more than 300 current and former Amazon executives and employees.
On Bezos' intention to make Amazon an "everything store"
I think Bezos wasn't quite sure [an everything store] would work, and books were a good place to start: They're small, they ship easily in the mail, the selection that the Internet enables was a great strategic advantage over the traditional chain booksellers of the time like Barnes & Noble and Borders. But I do think in the back of his mind he was thinking of an "everything store." In fact, in 1998 when a VP came to him and showed him that Amazon's market was going to be very limited because unfortunately a lot of people don't read, he was not bothered by that at all, and told some of his minions to go study the good markets that might be next.
On the way Amazon prioritizes customer loyalty over profit
[Amazon takes] a commission every time a third party sells something on their site, so in a way it's a much more profitable sale because Amazon is taking the commission and they don't have the expense of storing and shipping the item. But it does create enormous downward price pressure. It's one of the things that merchants, or manufacturers don't really appreciate about Amazon. But as an Amazon shareholder or analyst will tell you, profit, frustratingly, is not something that Bezos or Amazon are after. They're after customer loyalty. They want to lock up the market. They want customers to make Amazon their destination for all of their shopping. So he's had this long-term view of that's the way to conduct his business, and profits are very low down on the list of his priorities.
On the working conditions in the Amazon warehouses
[Amazon] has been criticized for working employees extremely hard for extraordinarily long days, for very short 15 minute breaks that are curtailed on each end by the fact that the employees have to go through security scanners. It's an enormously difficult job. I kind of split ... the fulfillment center [jobs] into two categories: There are 10 months of the year where things are relatively tame, this is January to October. Employees get a decent wage, about $11 or $12 an hour, there are opportunities for advancement, there's some tuition reimbursement that Amazon has recently instituted. As warehouse jobs go, it's probably a little bit above average.
And then there are the holiday months. And this is, in an Amazon fulfillment center, absolute craziness. Amazon just said it was going to hire 70,000 temporary workers for this holiday season alone. It's basically doubling the number that it hired last year. In these two months there's no vacation, there's no tolerance for error. Employees are graded extremely severely. You can basically miss two days and you're out. The break rooms are crammed, I think conditions are difficult.
... I think it's something shoppers should consider. Do you want your dollars to support the local merchant and the employees that they hire? Or do you want your dollars to go to support a fulfillment network that is fairly invisible, that involves many manual and very difficult jobs. On the other hand, we can probably credit Amazon for probably creating some jobs in places where there wasn't a lot of economic opportunity. But nobody should have any illusion: Working in an Amazon fulfillment center is probably one of the most difficult jobs going today.
On the way Bezos runs Amazon
Bezos is a hands-on CEO. He runs the S-Team, which the senior leadership team, he does, I think, spend a lot of his time in the digital initiatives like the Kindle and Kindle Fire. ... But he also runs the bi-annual operating reviews, called OP1 and OP2, he goes to a lot of meetings. ... One of his great talents is very efficiently dispersing his time... but he's extremely hands-on.
One of the things he does is his email address is public — it's firstname.lastname@example.org. And when he gets an email from a customer, perhaps complaining about something, he'll just forward that with a "?" to the right executive or employee. And you get a question mark email, which is called an "escalation" inside the company, and it is frantic. Everybody drops what they're doing to address the problem. So he has a lot of specific ways where he magnifies his time and insight to extend his influence inside this giant company.
On Bezos buying The Washington Post
I concluded that it wasn't all that surprising. I mean, Jeff Bezos has shown over many years that he is a huge fan of the written word. Written documents are key to how Amazon is run. Every meeting starts with a quiet reading of a "six-page narrative," [as] they call them. Of course he started the business with books and about a decade later started the Kindle and kind of revolutionized the book business, so the written word is really key to what he's built. ... I think the opportunity was presented to him when the Graham family decided they wanted to get out of the business, and he thought that his special brand of innovation and long-term thinking and operating discipline could help to revive this franchise.
... My reaction was almost, "Good for the reporters of The Washington Post." I mean, here they are stewing in the pessimism and ... decline of the newspaper business and finally they have someone with very deep pockets and a very long runway, who will probably have quite a personal stake in seeing this thing revived.
TERRY GROSS, HOST:
This is FRESH AIR. I'm Terry Gross. In the new book "The Everything Store: Jeff Bezos and the Age of Amazon," my guest Brad Stone chronicles how Amazon became a, quote, innovative, disruptive and often polarizing technology powerhouse, the company that was among the first to see the boundless promise of the Internet and that ended up forever changing the way we shop and read, end-quote.
Amazon started off selling books, but Jeff Bezos, Amazon's founder and CEO, always had the intention of turning it into an online market that sold everything. In the process of becoming an everything store, Amazon acquired many other dotcoms, including Zappos and diapers.com. It's also expanded into selling Web services. Bezos even owns a rocket company called Blue Origin. In August, he invested in old media, purchasing the Washington Post for $250 million.
Bezos himself is the 12th-richest person in the U.S. with a fortune estimated at $25 billion. Brad Stone has covered Amazon and technology in the Silicon Valley for 15 years. He's a senior writer for Bloomberg Business Week. His book draws on interviews he conducted with Bezos over the years, as well as interviews with more than 300 current and former Amazon executives and employees.
Brad Stone, welcome to FRESH AIR. So you must have been kind of surprised when just as your book was going to press, Jeff Bezos bought the Washington Post. So what of your impressions - what are your impressions of why he bought it and what his intentions are?
BRAD STONE: Well, naturally having been studying Amazon and Jeff Bezos for a number of years, I would love to say that I predicted it, but no, I was completely surprised and of course had to rush to update the book. But after thinking about it for a little bit, I sort of concluded that maybe it wasn't all that surprising.
I mean, Jeff Bezos has shown over many years that he is a huge fan of the written word. Written documents are key to how Amazon is run. Every meeting starts with a quiet reading of a six-page narrative they call them. Of course he started the business with books and about a decade later started the Kindle and kind of revolutionized the book business.
So the written word is really, you know, key to what he's built. You know, I also track in the book a number of books that were key to Amazon's own culture. So, you know, I think that he - you know, the opportunity was presented to him when the Graham family decided that they needed to get out of the business, and he thought that his special brand of innovation and long-term thinking and operating discipline could help to revive this franchise.
GROSS: You know what my reaction was when Jeff Bezos bought the Washington Post? Doesn't he own enough? Like does he have to own everything?
GROSS: Um, yeah.
STONE: My reaction was almost good for the reporters of the Washington Post. I mean, here they are stewing in the pessimism and managed decline of the newspaper business, and finally they have someone with very deep pockets and a very long runway who will probably have quite a personal stake in seeing this thing revived.
GROSS: OK, that's a really good point. What else does Amazon own all or part of?
STONE: Diapers.com, Zappos.com and shoes, a number of different brands, Shopbop in clothing. To a large extent they've tried to integrate everything into the main site, but, you know, when it comes to trying to do something a little bit different or experimenting, sometimes they'll go buy or acquire a different company.
GROSS: So, you know, you think of Zappos and Amazon as being competitors. They're not; they're owned - Zappos is owned by Amazon.
STONE: Well, they were at one point, and Amazon was sort of surprised by Zappos' rise and probably a little scared because Tony Hsieh and his team in Las Vegas were building an extremely flexible franchise, and they were a little bit like Amazon in that they were very customer service oriented, they didn't make a lot of money, and they were scared that Zappos might, you know, either: A, grow into a competitor, a direct competitor; or B, fall into the hands of Wal-Mart.
And so Amazon, as it does, started furiously competing with Zappos, starting its own shoe site, you know, gutting the prices of its products, offering sneaky little discounts on shipping or, you know, $5 back to customers who ordered, and it gutted Zappos's profitability, and they ended up having to sell to Amazon.
GROSS: You describe in your book how Jeff Bezos started on Wall Street, then went to a hedge fund, D.E. Shaw & Co., also known as DESCO. What was his specialty in the investment world?
STONE: Well, D.E. Shaw was among the first generation of so-called quantitative hedge funds. So it used computer systems and algorithms to identify anomalies in the market and to exploit them. And Bezos started there in 1990. David Shaw, who started DESCO, was really looking for, you know, very smart people and to some degree generalists.
He didn't necessarily view DESCO as a hedge fund company but rather as a technology company that, you know, whose first market was buying and trading stocks and bonds. And Jeff Bezos did very well at David - at D.E. Shaw. He was, you know, one of Shaw's top lieutenants. He ran something called the third market business, which, you know, is sort of a geeky financial instrument.
And ultimately Shaw started getting interested in the potential Internet. David Shaw was an academic. He had taught at Columbia, and he saw the Internet coming before most people, and this is 1992, 1993. And Bezos and Shaw started meeting weekly to try to generate new business ideas. And one of those ideas was essentially what we know of now as e-commerce.
And after thinking about the opportunities and thinking about it analytically, as he does, Bezos decided that books were a good place to start, and he went to talk to David Shaw and told him he wanted to do it, but he wanted to do it as a separate company.
And David Shaw told him, you know, that's fine, I understand the entrepreneurial urge, but we might compete with you. And Bezos left and went to Seattle, and the rest is history.
GROSS: The way you describe it in the book, it sounds like Bezos initially wanted to do an everything store, but he thought it was too ambitious to start that way. So even early on he thought of books as, like, just the beginning of what he was trying to accomplish.
STONE: I think that's right. A lot of the very early Amazon employees were surprised by that. I think Bezos wasn't quite sure it would work, and books were a good place to start. You know, they're small, they ship easily in the mail, the selection that the internet enables was a great strategic advantage over the traditional chain booksellers at the time like Barnes & Noble and Borders.
But I do think in the back of his mind, he was thinking of an everything store, and in fact in 1998 when a VP came to him and showed him that Amazon's market was going to be very limited because unfortunately a lot of people don't read, he was not bothered by that at all and, you know, told some of his minions to go study the good markets that might be next.
GROSS: Did Bezos locate Amazon in Seattle for tax reasons?
STONE: I think partly that's true. He had studied mail-order businesses enough to know that you did not locate them in California or New York because you would have to collect sales tax in those states. But, you know, Washington isn't a - it is a relatively populous state. So I think that was one factor.
But another important factor was the quality of the, you know, local engineering pool. And you had Microsoft and Boeing in Washington, and so that was important, and it was also close to Ingram's, which is one of the major book distributors.
GROSS: So, you know, one of the things that Bezos had going for him was that he'd worked at D.E. Shaw, this mutual fund, and they specialized in using algorithms to understand what was happening in the markets. So did he apply similar algorithms to his Internet startup?
STONE: I would actually say that, you know, he wasn't really all that technically involved in the early days. He went, and one of the first things he did was find a startup veteran named Shel Kaphan, who had sort of done the tour of duty in Silicon Valley and had the bruises to show for it. And it was Shel Kaphan and some of the early engineers that really built the original amazon.com site.
And of course, you know, there was no precedent, so they built it all from scratch, very much unlike the startups of today, and were - I would say Jeff made the contribution, is originating, you know, some of those key innovations that we now associate with Amazon, so, you know, book rankings, the number next to every product that authors in particular are obsessed with, also similarities.
You know, he put together an early team and supplied the vision for the recommendations that we now see on Amazon where if a customer went and looked at one book, they got four or five others recommended to them. Those at the time, we take them for granted now, but those at the time were hugely influential.
GROSS: One of the things that Amazon does and has done for a long time is kind of baffling from the standard retail perspective, which is if you go on Amazon, you'll see what you're looking for from the Amazon store, most likely, but then you'll also see what other retailers are selling it for and if you could get it used. What's the logic behind that?
STONE: Well, it's basically selection. It's to give, you know, the customer, you know, every opportunity to find what they're looking for. And it took Amazon years to figure this out, by the way. You know, they tried a number of different things. They tried an auction site. They were desperately concerned about the rise of Ebay in the 1990s because Ebay wasn't stocking or shipping its own inventory. They had a much more profitable business model, and Wall Street loved them.
And Amazon was kind of suffering. And - but auctions didn't work because Ebay had kind of captured that. And eventually there was a meeting in about 2000 at Jeff Bezos' house where they figured out - they were studying this problem, and they figured out that the only reason they were getting traffic to the auction site was because there was sometimes a link, it was called a cross-link, on the retail page.
And what they decided that day in Bezos' house was if Amazon was going to be a marketplace, like Ebay it all had to be on one page. So when you went to, you know, the page for the Hemingway book "The Sun Also Rises," you would get Amazon's inventory, but you would also see the inventory of all these other sellers.
And that was enormously controversial not just within Amazon but of course for the booksellers at the time and the other suppliers, who saw that, you know, not only was Amazon selling their stuff, but here are all these merchants who they didn't know and in some cases were setting prices extremely low.
And even employees of Amazon were upset about it because here they were competing on their own site with other merchants, and yet Bezos really persevered. It's one of the things you have to give him credit for. He saw this vision that, you know, this was a good experience for the customer. And, you know, I think it's one of the reasons why Amazon now exceeds Ebay by a fairly large margin.
GROSS: But was it actually profitable for Amazon to do that, or was that - were they losing money with that system?
STONE: Well, I mean, they take a commission every time a third party sells something on their site. So in a way it's a much more profitable sale because, you know, Amazon's taken the commission, and they don't have the expense of storing and shipping the item.
But it does create, you know, enormous downward price pressure. It's one of the things that merchants or manufacturers don't really appreciate about Amazon, but as any Amazon shareholder or analyst will tell you, you know, profit, frustratingly, is not something that Bezos or Amazon are after. You know, they're after customer loyalty. They want to lock up the market, and they want customers to make Amazon their destination for all their shopping.
And so, you know, he's had this long-term view that that's kind of - that's the way to conduct his business, and, you know, profits are very low down on the list of his priorities.
GROSS: One of the innovations that allowed Amazon to grow was the one-click ordering process. Do you want to explain that?
STONE: Well, sure, it's a fairly simple idea. It's - if Amazon has your credentials and your credit card information, you click once to buy something, and that's it, and they send it to you. And they patented that in the late '90s, and they were criticized everywhere for patenting and then wielding this intellectual property against competitors when really the idea was fairly simple.
And even Bezos has admitted over the years that the patent system is broken, but he's also said something that I think is revealing, which is we don't have many big advantages, so we have to weave together a chain of smaller advantages. And I think that's what he's doing here.
You know, he is incredibly analytical, incredibly strategic, and even though he would deny it, incredibly competitive. And he looks for many points of leverage, and intellectual property over the years has been one of them, and he wields that as a weapon against competitors.
GROSS: Amazon sued Barnes & Noble because Barnes & Noble did something similar to Amazon's one-click ordering process. And...
STONE: Right, way back in the '90s, yeah.
GROSS: Yeah, and Amazon won. So Barnes & Noble had to complicate, had to add a step to its ordering process as a result of that suit. So I guess, like, Jeff Bezos really wants what's best for his customers on his site but not necessarily what's best for his customers on somebody else's site.
STONE: Oh, I think that's absolutely true. I mean, he's a fierce competitor. I have the story way back in 2003 when Amazon was introducing jewelry on the site, and at the time this was important to Jeff Bezos. And I went, and I looked, and all the announcements for the jewelry business were issued on the same day as the press releases of Blue Nile, the main jewelry online retailer.
Like he was basically trying to disrupt their earnings announcements. He - you know, he does say that Amazon is customer-focused, not competitor-focused, but I would say it's both. And he is enormously aware of who his competitors are, and he rushes to assemble these chains of small advantages that can help him win.
GROSS: My guest is Brad Stone, author of the new book "The Everything Store: Jeff Bezos and the Age of Amazon." We'll talk more after a break. This is FRESH AIR.
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GROSS: If you're just joining us, my guest is Brad Stone. He's a business reporter for Bloomberg Business Week and author of the new book "The Everything Store: Jeff Bezos and the Age of Amazon." And it's the story of Jeff Bezos and how he created Amazon, how Amazon has grown. Amazon ships so much stuff, so it has a discount, I don't know how deep it is, from UPS. Tell the story of how it got the discount.
STONE: Right, so back in 2003, Amazon was really just beginning to figure out how to operate an efficient fulfillment network. It had about 70 of these huge warehouses around the country, and by the way today it has about 80, and Jeff Wilke(ph), an Amazon senior vice president, had come in a couple of years before and really cleaned it up and created, you know, some rigor around, you know, lean - which is sort of an operating discipline and (unintelligible).
And instead of sending employees from the Seattle headquarters every holiday season to help, they figured out that actually that doesn't work so well and start to, you know, hire temporary workers. And they also realized that, you know, their volume was considerable and that, you know, they were paying these, you know, rates right off the rate card from UPS, and they could do better.
And, you know, every discount retailer will tell you that their ability to set low prices is directly proportional to their cost structure. You get the costs down, and you set low prices, and of course that's, you know, what Wal-Mart is famously known for.
So Wilke slowly started, you know, his team started experimenting with, you know, using FedEx and doing more drop shipment into the U.S. Postal Service. And he went to UPS in Louisville, and he said we need better rates, or we're going to turn you off.
And they didn't believe him, and Amazon turned off UPS for a couple of weeks and started relying more on FedEx and the U.S. Postal Service, and UPS caved. And Amazon got the rates it wanted. And we see that kind of, you know, big footing now with Amazon across all of its businesses. You know, it kind of learned a valuable lesson in the fight with UPS.
And, you know, we've seen, you know, book publishers and their sales get turned off on Amazon until they come crying back to the table because they rely on Amazon sales. So that was a formative moment.
GROSS: Give us an example with book publishers.
STONE: Oh, wow, well, when John Sargent, the head of Macmillan Publishing in 2010 went to complain to Amazon about its ebook prices and said that it was going to stop selling to Amazon and...
GROSS: Because the ebooks were, like, $9.99, much cheaper than a hardcover book.
STONE: That's right, and the book publishers were worried that that price was destructive, and it was hurting their other retailers and their sales of profitable hardcover books. And John Sargent went to Seattle to complain, and he said he was going to start doing business with Apple, and Amazon cut him off.
And for a weekend, Amazon was not selling not only Macmillan ebooks but physical books, as well.
GROSS: And did that lead to a challenge from Macmillan?
STONE: Well, ultimately Amazon, you know, caved because, you know, I think they realized they were getting bad press, and it was, you know, hurting their selection. And Macmillan and four other book publishers, you know, starting setting their own ebook prices, using something called agency pricing, where they became the seller of record, and they enforced ebooks prices about as high as $15 or $16.
And they started to selling to Apple and to Amazon, and the U.S. Justice Department eventually got interested in that case, and it was just resolved this year. The book publishers settled, but Apple was found guilty of conspiring with the publishers to set prices. They're appealing that case now. But it was, you know, it was a big victory for Amazon.
They got to set their own prices again, and now you go, and you look on Amazon, and a lot of ebook prices are down at $9.99, right where the book publishers don't like them.
GROSS: Brad Stone will be back in the second half of the show. His new book is called "The Everything Store: Jeff Bezos and the Age of Amazon." I'm Terry Gross, and this is FRESH AIR.
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GROSS: This is FRESH AIR. I'm Terry Gross back with Brad Stone, author of the new book "The Everything Store: Jeff Bezos and the Age of Amazon." It's about how Bezos created Amazon and turned it from an online bookseller into an Internet giant by innovating Internet selling, figuring out what consumers want, buying up other dot-coms, and big-footing other businesses. Stone is a reporter for Bloomberg BusinessWeek.
One of the things that Amazon has to deal with is fulfillment centers. You know, basically the warehouses from which things are shipped. And one of the stories that's been investigated in the recent past about Amazon is how the workers are treated at some of those fulfillment centers. And I think it's something that shoppers don't really think about because you don't - you don't see anything that's brick-and-mortar when you're shopping online, so you don't have contact with anybody. So what were some of the things that have been exposed about how workers are treated at some of the fulfillment centers?
STONE: Well, Amazon was famously called out for not installing air-conditioning in its fulfillment centers as part of an investigative project by a Pennsylvania newspaper. It's been criticized for working employees extremely hard, for extraordinarily long days, for very short 15 minute breaks that are, you know, curtailed on each end by the fact that the employees have to go through security scanners.
Look, it's an enormously difficult job. I kind of split work in the fulfillment center into two categories. There are 10 months of the year, I think, where things are relatively tame and this is, you know, January to October. And, you know, employees, they get a decent wage, about $11 or $12 an hour, you know, there are opportunities for advancement, there's some tuition reimbursement that Amazon has recently instituted. It's, you know, as warehouse jobs go, probably a little bit above average.
And then there are the holiday months. And this is, in an Amazon fulfillment center, absolute craziness. I mean Amazon just said it was going to hire 70,000 temporary workers for this holiday season alone. And it's basically doubling the number that it hired last year. In these two months, you know, there's no vacation, there's no tolerance for error. Employees are graded extremely severely. You know, you can miss basically two days and you're out. You know, the break rooms are crammed, I think conditions are difficult.
And I think you're right, it's something that shoppers probably should consider. You know, do you want your dollars to support the local merchant and the employees that they hire? Or do you want, you know, your dollars to go to support a fulfillment network that is fairly invisible, that involves many manual, very difficult jobs.
GROSS: What about the working climate in the more white-collar offices of Amazon?
STONE: I would describe it as adversarial - and purposely so. Jeff Bezos has said that he, you know, he thinks that in a lot of work environments that, you know, companies optimize for what he calls social cohesion - that there's an emphasis on getting along. And he wanted to build a different kind of company, where no one views it as a place to coast, where, you know, everyone is innovating constantly and working as hard as they can and that the least performers are ejected from the company and the best performers are promoted, and it is a tough place to work.
There - I talk to a lot of people who end up staying there a year or two years and then leave before all their stock options have vested. And they call it a gladiator culture and say it's extremely unfavorable, particularly to workers who have families. But I think it's all very purposeful and strategic. I mean, you know, Bezos is a student of books about workplace culture and thinkers, like James Collins, who wrote the books "Good to Great and Built to Last." And he's, you know, incorporated all of that into his mental model and then gone and built, you know, a company with what he believes are the right values.
GROSS: There was a period when Amazon was hiring some executives from Wal-Mart, which surprised me when I was reading your book because I think of them as both being huge companies, but being very different companies. What did Bezos want to achieve by hiring Wal-Mart executives?
STONE: Right. And this also was back in the 1990s - and it was a short phase - where they had to basically get some adult supervision. You know, the business was taking off, it was growing by leaps and bounds, they were trying to build these fulfillment centers, and at the time the warehouse was basically the basement, OK, and they had another little, little warehouse across town in Seattle. So they needed to figure out how to do this, and they went and hired a couple of Wal-Mart veterans, including a head of distribution, someone who could really build the warehouses, and then another executive named Rick Dalzell, who was Amazon's chief information officer for a decade. And that was another thing Wal-Mart did very well, build computer systems. So it was really a DNA transplant. Bezos had read Sam Walton's autobiography and really taken a bunch of Walton's values and dropped them right into Amazon - things like frugality and a bias for action, which is basically this theory that, you know, every employee should be empowered to make improvements and root out defects in the company. And Wal-Mart ended up suing Amazon for taking so many of its people, and they settled that. But, and I think also a lot of these hires didn't work out. I mean the Wal-Mart people came and they saw absolute chaos at Amazon and they were patronizing. And the Amazon folks saw a bunch of, you know, older executives who like to do things in a completely different way. So it was an interesting experiment at an interesting time in Amazon's history, but it didn't really lead to much.
GROSS: You know, in addition to buying a lot of dot-coms, Amazon has also over the years run the websites for several major retailers. What are some of those?
STONE: Right. So back in about 2000, you know, when Amazon was not profitable and the dot-com bubble was turning into the dot-com bust, some executives at Amazon decided that, you know, they needed to kind of branch out and find new sources of revenue. And one idea which immediately got some traction was, you know, let's go and use our expertise to go run the sites of some other retailers. And they did strike deals with Toys "R" Us, with Target, with Borders, with Circuit City, and then some smarter retailers like Wal-Mart and Best Buy decided that it was a great idea and while there were talks. they never led to anything. And these were horrible deals for everyone. You know, the retailers that relied on Amazon, like Circuit City and Borders, I mean both those companies are out of business. And I would argue that the fact that they outsourced their e-commerce responsibilities was a big reason why. Target finally weaned itself off Amazon in 2012 and they had a horrible year. I mean it was a very difficult evolution trying to figure out how to run it themselves. So it was a moment where Amazon was looking at some new opportunities, but ultimately it didn't want to be in the business of helping its competitors, and its competitors finally realized that it was disastrous to go and create a dependency on their biggest competition.
GROSS: In what way do you think Borders' outsourcing of its e-commerce to Amazon contributed to Borders bankruptcy?
STONE: Well, Borders customers, any book buyer, you know, wants to buy in physical stores but they want to buy online. They want to buy physical books but, as we know now, they also want to buy digital books. And by declining at this very key moment to get technically sophisticated in the ways that the new business environment would require, you know, Borders lost a key opportunity and ultimately, by the time that they figured it out, we were in the Great Recession. They couldn't raise capital. They had some profitable stores and some unprofitable stores and the result was they went out of business.
GROSS: My guest is Brad Stone, author of the new book "The Everything Store: Jeff Bezos and the Age of Amazon." We'll talk more after a break. This is FRESH Air.
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GROSS: If you're just running us, we're talking about Amazon and its founder Jeff Bezos. My guest is Brad Stone. He's the author of the new book "The Everything Store: Jeff Bezos and the Age of Amazon." Stone is a reporter for Bloomberg BusinessWeek and has covered high-tech in Silicon Valley for many years.
You know, earlier you were describing how Amazon ended up buying Zappos, and that Zappos - Amazon had been cutting into Zappos' profits, so Zappos kind of needed a buyer at that point. But you describe Zappos as being the kind of bizarro world version of Amazon. In what respect?
STONE: Well, in a couple of key respects. One, you know, at the time Amazon didn't have much in the way of hands-on customer service. This has changed subsequently, but at the time, you know, Bezos wanted, you know, Amazon customers to really to be able to kind of help themselves, you know, self-serve customer service. Zappos was the opposite. I mean they would put someone on the phone with you for hours. They enabled free returns. You could order 10 pairs of shoes and send nine of them back. Zappos is also located in Las Vegas and, you know, Amazon, as we know, is incredibly secretive. Zappos would run tours in its offices, and as people walked through them, employees would stand up and clap. So they were just all sorts of strange ways in which, you know, Tony Hsieh had really created something that was very distinct from Amazon.
GROSS: Has the culture at Zappos changed now that it's owned by Amazon?
STONE: I think unlike most other Amazon acquisitions, where they really have integrated into Amazon, Zappos did strike a peculiar deal and part of that was allowing them to remain independent and to preserve the culture. And they kind of get to do what they want. They've moved their headquarters into downtown Las Vegas. They've renovated City Hall at great expense and moved in there, and Zappos' founder is, you know, basically investing a lot of his personal fortune in reinvigorating downtown Las Vegas. I mean these are not things that Amazon would do. So it is kind of an anomaly the way in which they've managed to remain independent.
GROSS: Amazon has this program, Amazon Prime. It's kind of like you pay a fee of $79 and then all your shipping is free for the rest of the year. And reading your book, it made it seem like that $79 was kind of arbitrary and they really had no idea when they came up with that, whether that was going to be profitable or whether it would lose money.
STONE: It was absolutely arbitrary. Amazon over the previous years - before they introduced Prime - had perfected the art of kind of fast tracking shipments in its fulfillment centers. So you could pay extra to get something in two days or three days. And they basically decided to take this capability and turn it into a loyalty service. You know, actually Bezos had met with Jim Sinegal, the founder of Costco. It was an enormously important coffee that they had and Sinegal, who is a great, you know, generous guy, explained the whole Costco model, which is a remarkable one. People pay to shop at Costco, and I think, you know, that had a sort of big impact on Jeff Bezos. And that's what Prime is, you know, people are paying to get, you know, reliable two-day delivery. But, you know, there's nothing free about it, it is $79 a year.
When they were originating Prime, they had really no idea, you know, how often people would order and how much it would cost to expedite all these shipments. Seventy-nine dollars was basically selected because it's a prime number and because it didn't seem like it was giving too much away or that it was too expensive.
GROSS: Does Amazon think it's making money with that program?
STONE: Well, Prime right now is absolutely central to everything Amazon does. I mean it's no longer just a two-day shipping program. You sign up for Prime and you get access to their, you know, to their video offerings. If you own a Kindle, you get to rent one e-book for free at a time. In fact, Amazon has really gone and built a whole separate business around Prime. It would be enormously difficult for anyone, for any analyst, to figure out if Prime is profitable or not, because it really creates an intangible - which is a customer's loyalty to Amazon.
Often, if you're a prime member, you use Amazon for most of your shopping. You know, you're more likely to buy a Kindle or a Kindle Fire tablet and you're, sort of, all Amazon, all the time.
GROSS: Um, do you think that Amazon has translated its retailing and Internet power into political lobbying power on issues that would be favorable to Amazon's business?
STONE: Oh, absolutely. If you look at how they manage the sales tax issue for the last five years, they've been masterful, you know, in seeing their ultimate loyalty to their customers and to their shareholders, Amazon mightily resisted all the state sales tax collection efforts. That really started in 2008 as states started to feel, you know, pressure to raise their revenues during the recession. And they invested tremendously in their lobbying effort, and they had, you know, huge team of lobbyists and sales tax experts. And they went and they fought, you know, state by state, these sales tax collection efforts - and in many cases, pretty ruthlessly. They would do things like cut off their affiliates. So these are local merchants that would collect commissions every time somebody clicked an item on their website and went and bought something on Amazon. They just cut 'em off in places like Colorado and New York.
In California, they initiated a ballot fight to try to circumvent the local sales tax collection efforts. And then in about 2011 - 2012, I think they made a decision that was hurting their brand and that they were, kind of, come out on the unfavorable end of the publicity around the sales tax fight. And they started going and making deals - state by state - and clever deals. They would go, and in California, for instance, get another year of sales tax free purchases; and then go and get tax benefits to go and create new fulfillment centers in the state. And they really leveraged an admission, a concession of defeat in each state into additional benefits. So, you know, as with all things, you, kind of, have to just, you know, tip your hat to Amazon and how it played that contentious issue, and how it exploited its advantages and ultimately turned defeat into a form of victory.
GROSS: Amazon has about 90,000 employees, according to your book. So what exactly does Jeff Bezos do now, at Amazon? It's such a huge enterprise, what's his role?
STONE: Well, it's massive. And 90,000, that's actually, probably over 100,000 by now. Plus, they're going to hire 70,000 temporary workers for the holidays. So really, it's growing and growing rapidly. But Bezos is a hands on CEO. He, you know, he runs the S team, which is the senior leadership team. He does, I think, spend a lot of his time in the digital initiatives - like the Kindle and Kindle Fire - as we talked about. But he also runs the biannual operating reviews that Amazon called OP1 and OP2. He goes to a lot of meetings. He also, remarkably - I mean, one of his great talents is very efficiently dispersing his time - he runs a completely separate company - his space company called Blue Origin. He does that about one day a week, and of course, now has other obligations at the Washington Post and elsewhere. But he's extremely hands on. And one of the things he does is when - his email address is public, it's email@example.com - and when he gets an email from a customer, perhaps complaining about something, he'll just forward that with a question mark to the right executive or the employee.
And you get a question mark email - which is called an escalation inside the company - and it is frantic. You know, everybody drops what they're doing to address the problem. So he has a lot of specific ways where he kind of magnifies his time and insight to extend his influence inside this giant company.
GROSS: Brad Stone, thank you so much for talking with us.
STONE: Thank you Terry.
GROSS: Brad Stone is the author of the new book, "The Everything Store: Jeff Bezos and the Age of Amazon." On our website you can read the first chapter, which is about how the idea for an Internet everything store was originated when Bezos worked at a quantitative hedge fund. That's at freshair.npr.org. This is FRESH AIR.
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