Amazon.com

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 Amazon.com 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 https://www.youtube.com/watch?v=NSEdnld6i9A, which truly is the giant’s shoulder that Jeff Bezos stood upon. Let’s go!! *Links:* - Jeff’s first public Amazon interview: https://www.youtube.com/watch?v=rWRbTnE1PEM - Our early-Acquired-days interview with Tom Alberg: https://www.acquired.fm/episodes/episode-28-the-amazon-ipo-with-original-amazon-board-member-tom-alberg - Episode sources: https://www.acquired.fm/episodes/amazon-com#sources *Carve Outs:* - Rick Rubin on the Lex Fridman Podcast: https://lexfridman.com/rick-rubin/ - Ursula Le Guin: https://www.amazon.com/Ursula-K.-Le-Guin/e/B000AQ2M2S%3F - Dissect Season 2 on _My Beautiful Dark Twisted Fantasy_: https://dissectpodcast.com/2017/08/01/dissect-is-back-with-season-2/ - Elden Ring (again): https://en.bandainamcoent.eu/elden-ring/elden-ring *More Acquired:* - Get email updates https://www.acquired.fm/email and vote on future episodes! - Join the Slack http://acquired.fm/slack - Check out the latest swag in the ACQ Merch Store https://www.acquired.fm/store! _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._

Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.

• 0:00David Rosenthal?

  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. And we wanted to, instead of our usual funny cold opener here, take a moment and dedicate this episode to Tom.

• 0:22Ben Gilbert?

  Tom had such a huge impact on David 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 Macau 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, gosh, four or five years ago now, David.

• 0:52David Rosenthal?

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

• 1:05Ben Gilbert?

  Well, I'll remember Tom. He gave back in so many wonderful ways, and this episode is dedicated to you, Tom Alberg. Thank you.

• 1:30Ben Gilbert?

  Welcome to season 11, episode two 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.

• 1:45David Rosenthal?

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

• 1:49Ben Gilbert?

  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, our episode with Alfred Lin on Zappos, and of course, by referencing Bezos's famous 2009 speech about outsourcing anything that does not make your beer taste better over and over and over again.

• 2:27David Rosenthal?

  And over.

• 2:29Ben Gilbert?

  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 amazon.com, 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, and we'll save that for our next episode.

• 2:59David Rosenthal?

  Woo-hoo.

• 3:01Ben Gilbert?

  This story is for longtime students of Amazon and newcomers alike. So while you may be familiar with Jeff's flywheel diagram, or the famed Door Desks, or the Barron's article from the dot-com bust headlined "Amazon dot-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.

• 3:24David Rosenthal?

  It's just such a good story, too.

• 3:27Ben Gilbert?

  Yeah.

• 3:28David Rosenthal?

  I'm so glad we did Walmart first. We almost didn't, because it just perfectly sets the stage for Amazon.

• 3:36Ben Gilbert?

  Oh, yeah. 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 their dot-com siblings burst into flames? So 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. So 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.

• 4:16Ben Gilbert?

  We are launching with men's and women's t-shirts, sweatshirts, tanks, and even onesies, if you, like David, have a little one at home. And if you decide to be first in this first wave of people to support the fashionable Acquired merch, you should tweet at us, @AcquiredFM, and we will retweet some of our favorites. So the link is in the show notes, or you can go to acquired.fm/store. All right, listeners. Now is a great time to tell you about a longtime friend of the show, Vanta. AI has scrambled the whole security picture. It used to be that you proved that you were secure once a year on audit or a static PDF, then everyone would nod and you're done. But in an AI-first world, that doesn't hold up anymore.

• 5:01David Rosenthal?

  Yep. Your risk surface changes every week now. A vendor turns on an AI feature, or someone writes in a new model without telling IT, and your posture is different than it was last week, let alone at your last audit. Vanta's own research found that around 70% of companies have this quote-unquote "shadow AI" running with no security review at all.

• 5:22Ben Gilbert?

  Right. And that's where Vanta comes in. They're the leading agentic trust platform, meaning they've built the thing that closes the gap. And the way that they close that gap is Vanta Agent. Think of it as a GRC engineer, that's Governance, Risk and Compliance, except that it's software and it doesn't sleep. It finds the issues, drafts the fixes, and cuts the time that you'd spend on vendor assessments in half.

• 5:44David Rosenthal?

  In half! Which is exactly why more than 16,000 companies today run on Vanta. Companies like Ramp, Cursor, and Snowflake all stay audit-ready and catch the risks that crop up between audits across every vendor, every AI tool, the whole environment.

• 6:02Ben Gilbert?

  And that's the real value. Trust has to be continuous now, which is why Vanta automates your security, your compliance, and the work to earn and prove trust. We're huge fans of Vanta over here, and literally hundreds of Acquired listeners have become Vanta customers at their companies over the years. So you can get $1,000 off Vanta at vanta.com/acquired. That's V-A-N-T-A dot com slash acquired for $1,000 off, and just tell them that Ben and David sent you. Well, 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

• 6:43Ben Gilbert?

  a member since 2016. Austin is at the Solana Foundation, very deep in the world of Web3 and crypto, and gave us a great, great primer on the world of Web3 today. So check that out. And if you want early access, it's already live for paid Acquired LPs at acquired.fm/lp.

• 7:04Ben Gilbert?

  All right. Now, without any further ado, David, onto our story. And listeners, this show is not investment advice. David and I may have investments, certainly have investments

• 7:14David Rosenthal?

  Certainly.

• 7:15Ben Gilbert?

  in the companies we will discuss this time. Do your own research, and this is for entertainment purposes only.

• 7:20David Rosenthal?

  Oh, man. Amazon was my, not only my idea dinner pick at the arena show, but has been like my favorite company and stock and number one position in my portfolio for at least 10 years now, I think. More than 10 years. Incredible company.

• 7:39Ben Gilbert?

  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.

• 7:54David Rosenthal?

  That's true. 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. And I figured I was like essentially getting a tracking stock on Amazon.

• 8:06Ben Gilbert?

  Yep. Yep. Yep.

• 8:08David Rosenthal?

  All right. Well, we start in a very fun place today, which is the end of the most recent acquired episode on Walmart. And 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, Sam writes 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

• 8:50David Rosenthal?

  good enough ideas to go all the way, providing that someone wants it badly enough to do what it takes."

• 8:58Ben Gilbert?

  Oh, such a good quote. And 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.

• 9:11David Rosenthal?

  It was like the prophet speaking.

• 9:13Ben Gilbert?

  Yes.

• 9:14David Rosenthal?

  He was describing reality and history as it was happening, and he had no idea. Amazing.

• 9:21Ben Gilbert?

  Yeah.

• 9:22David Rosenthal?

  Well, 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.

• 9:39Ben Gilbert?

  For sure.

• 9:40David Rosenthal?

  We actually talked to Brad the other week when we were preparing for this.

• 9:44Ben Gilbert?

  We had to. It was both a question of like, 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.

• 9:53David Rosenthal?

  No doubt in my mind, it is one of the best business books written of the last 20 years, you know, of the 2000s for sure.

• 10:00Ben Gilbert?

  Oh, it's a thriller. Yeah.

• 10:02David Rosenthal?

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

• 10:13Ben Gilbert?

  Yep.

• 10:14David Rosenthal?

  All right. We jump from 1992 in Bentonville, Arkansas, to Albuquerque, New Mexico on January 12, 1964, where one Jeffrey Preston Jorgensen is born. Many people listening, especially if you've read Brad's book, you 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

• 10:58David Rosenthal?

  time. Turns out their fathers actually worked together. And 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.

• 11:17Ben Gilbert?

  Which for folks who don't know, that laboratory was established, I think, because it played a huge part in the nuclear program's development for the United States.

• 11:26David Rosenthal?

  So Los Alamos, New Mexico, which I think is like a hour, hour and a half north of Albuquerque, I think, that's where the Manhattan Project happened, and that's where the atomic bomb was developed. After World War II, though, quite a while after World War II, the government split the US nuclear program into like research, and that was Los Alamos and a bunch of other labs around the country, and then actual like management of the weapons. So there's like nuclear research and nuclear energy, and there was nuclear weapons. So Sandia is the organization developed by the government, and it's actually a private operation now,

• 12:08David Rosenthal?

  that manages nuclear weapons. And so both of Jeff Bezos's biological grandfathers worked there together. And Jeff's mom, Jackie, her dad was named Lawrence Preston Geese, Pop, he went by Pop Geese. He actually not only worked at Sandia, he was the head of Sandia.

• 12:31Ben Gilbert?

  Oh, wow.

• 12:31David Rosenthal?

  He ran the US nuclear weapons program. And before that, he was one of the original members of DARPA.

• 12:39Ben Gilbert?

  Whoa.

• 12:40David Rosenthal?

  Encourages the development of the ARPANET, the internet, the DARPA Challenge. Obviously, that was much after his time, but man, you can't make this stuff up. That's crazy.

• 12:49Ben Gilbert?

  Yeah.

• 12:50David Rosenthal?

  So their kids managed to get pregnant in high school, and Ted and Jackie decide to get married before the baby is born, which they do. The marriage doesn't last, though. I mean, it's not really set up for success here. And when Jeff is about 18 months old, they end up getting divorced. And Jackie, Jeff's mom, takes the baby, moves back in with her parents, because she's still only like 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. And her new husband's

• 13:32David Rosenthal?

  name is Miguel Angel Bezos Perez. Today, who goes by

• 13:38Ben Gilbert?

  Mike.

• 13:38David Rosenthal?

  Mike Bezos.

• 13:39Ben Gilbert?

  Yep.

• 13:40David Rosenthal?

  Jeff Bezos's adopted father. And his story is incredible and actually sort of touches our stories in a very small way.

• 13:48Ben Gilbert?

  Huh.

• 13:49David Rosenthal?

  Mike is from Cuba, and he was a student at a like elite private high school in Cuba when the revolution happened and Castro took over. And his parents were able to get him out and send him to Miami.

• 14:04Ben Gilbert?

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

• 14:08David Rosenthal?

  There was. Mike was part of this. So he gets shipped to Miami, doesn't know anybody in America, doesn't speak English. He ends up from Miami, getting shipped to Wilmington, Delaware, where he lives in a group home. And he attends Celestiano High School, which I don't, that probably doesn't mean anything to you because you didn't do high school in Wilmington like I did. But I played sports against Sally's growing up. This is so awesome. He and Jackie last year just gave a $12 million donation to Celestiano, which I think might be like the largest single donation to a Catholic high school in America.

• 14:50Ben Gilbert?

  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.

• 14:57David Rosenthal?

  Oh, we will get into it.

• 14:59Ben Gilbert?

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

• 15:03David Rosenthal?

  I know.

• 15:04Ben Gilbert?

  I think we're picking favorites here.

• 15:05David Rosenthal?

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

• 15:43Ben Gilbert?

  And becoming like a pretty senior executive, right?

• 15:46David Rosenthal?

  Very senior executive. So he had some capital to invest a few years later, which we will get into. And they move the family to Houston. A, Mike's story is just amazing. B, Bezos grew up, his dad worked for Exxon, like Standard Oil. Like, there's the connection.

• 16:05Ben Gilbert?

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

• 16:47David Rosenthal?

  I didn't think about that. Definitely Pop Geese, 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.

• 17:06Ben Gilbert?

  Yep.

• 17:07David Rosenthal?

  Super cool. So 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. So at the time, there was a woman named Julie Ray, who was writing a book about this whole new concept of like gifted streams in elementary school education. And Houston is one of the kind of leading school systems that's doing this. So she goes to the administration and she's like, hey, is there, you know? A student that I could shadow and like see how gifted education is working. And they're like, we have exactly the student for you, Jeffrey Bezos.

• 17:51Ben Gilbert?

  I mean, there's 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. I mean, he was like one of one of one, and he would go on to be valedictorian of many things in his life, but here's sort of a first sort of proxy for that.

• 18:18David Rosenthal?

  Super cool. There's a quote in the book, so it's written under, he's a pseudonym. He's quote unquote, Tim in the book.

• 18:24Ben Gilbert?

  To protect an identity of a child who can't yet pick if they want publicity. Right?

• 18:28David Rosenthal?

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

• 18:50Ben Gilbert?

  Foreshadowing.

• 18:51David Rosenthal?

  So 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. And by big ranch, I mean, a 24,000 acre ranch in West Texas that is 100 miles from the nearest retail outlet. And starting at this point, so 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.

• 19:32Ben Gilbert?

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

• 19:49David Rosenthal?

  You know, Brad writes about this in the book, but, and Jeff talks about this too. Like, 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. Like they build their own tools. They perform their own veterinary work. There's a story about performing surgery on one of the bird dog's tails. It's crazy. They're rebuilding farm equipment when it breaks.

• 20:17Ben Gilbert?

  How have we had? We went 250 episodes without a bird dog ever coming up. And now two episodes in a row.

• 20:21David Rosenthal?

  Two in a row.

• 20:22Ben Gilbert?

  And bird dogs.

• 20:22David Rosenthal?

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

• 20:26Ben Gilbert?

  Great retailers growing up around bird dogs.

• 20:28David Rosenthal?

  But yeah, 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.

• 20:40Ben Gilbert?

  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. But I think one of the sort of things that hit me when, you know, of course I follow Jeff on, on Instagram and you see him in sort of his cowboy boots with the Blue Origin rocket. And I remember when I first saw those before really understanding his past, I was like, well, that's sort of disingenuous. Like tech billionaire guy throws on his cowboy boots and heads to West Texas. And he's like, acting like I'm one of the locals, but like,

• 21:14David Rosenthal?

  But he actually is.

• 21:14Ben Gilbert?

  That's what he grew up doing on the farm. Yeah.

• 21:17David Rosenthal?

  Yeah. The ranch in Van Horn, Texas, I think it is now, where all Blue Origin's operations are based. Like, yeah, it's like, it's there. That's why it's in West Texas.

• 21:27Ben Gilbert?

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

• 21:29David Rosenthal?

  There's literally space to launch rockets.

• 21:33Ben Gilbert?

  All right.

• 21:34David Rosenthal?

  All right. So when Jeff's a teenager for high school, Exxon moves his dad to Florida, first to Pensacola, and then to Miami. This is like, you know, so cool little cap for this episode to Mike's story. He comes back to Miami, you know, 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.

• 21:57Ben Gilbert?

  Had to be, yeah.

• 21:58David Rosenthal?

  He goes from like, literally steps off the plane to Miami, has nothing. And now he brings his family back to Miami with so much. 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 studying.

• 22:23Ben Gilbert?

  Is that really what they, how you say it?

• 22:25David Rosenthal?

  That is, it is, yes. I'm a Princetonian.

• 22:27Ben Gilbert?

  I see.

• 22:28David Rosenthal?

  Or, 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 is also there at the same time. I don't think they, I don't think they were friends. Jeff was a couple of years behind, but they were there at the same time.

• 22:48Ben Gilbert?

  Fascinating.

• 22:49David Rosenthal?

  So 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 Phytel, which had been founded by a couple Columbia computer science professors and was developing like a very, very early network technology for high-speed trading applications.

• 23:16Ben Gilbert?

  Huh.

• 23:16David Rosenthal?

  They were like tech for, 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 like kind of a precursor to that. So he does that for two years. And then in 1988, he's like, all right, like I'm, you know, working for this startup, building infrastructure for this then completely new discipline of finance of like quantitative trading and finance. Those guys are customers are actually making a lot more money. Maybe I should go work for them.

• 23:49Ben Gilbert?

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

• 24:19David Rosenthal?

  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, it's totally like one of those Steve Jobs things. Like you can't connect the dots looking forward, but when you look back through Jeff's past, Joy Cuffee, who we'll talk about, actually has like this quote that she gives to Brad Stone, like, It's like a straight line, you know, from birth to Jeff Bezos today. Like, it makes total sense.

• 24:43Ben Gilbert?

  Well, 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's brain. Like, it really is a company made in his image. And that's kind of the case for a lot of these types of people. Like, you look at Apple, that was very much the case for Steve Jobs. Also, by the way, an adopted son of immigrants.

• 25:05David Rosenthal?

  Yep.

• 25:05Ben Gilbert?

  I've always just found that interesting. But 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.

• 25:20David Rosenthal?

  Probably arguably for longer than that. I mean, until recent times.

• 25:24Ben Gilbert?

  Yep.

• 25:24David Rosenthal?

  So in 1988, he leaves Fytel, 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 and finance. Like, he's a technical guy, he's a computer science graduate. He had been working in this sort of network operations for early-stage quant finance. That's probably what he's doing. So 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. And Deutsche Bank's gonna come back up later in the episode. Yep, yep. He's worked at startups, you know, computer science. Like, he's got this entrepreneurial kind of bug.

• 26:06David Rosenthal?

  So on the side, he becomes friends with a guy named Halsey Minor, which listeners probably a bunch of bells are going off. And 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, like, right around this time, right after that, goes on to start CNET.

• 26:31Ben Gilbert?

  It's crazy. The internet was so freaking small then. And also, like, if you were to squint... And describe CNET at a really high level. It's like distributing the written word over this budding world wide web, which is sort of what Amazon did.

• 26:46David Rosenthal?

  Yeah.

• 26:47Ben Gilbert?

  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.

• 26:56David Rosenthal?

  Yep. And I think they remain friends for, well, certainly for a while, if not still to this day.

• 27:02Ben Gilbert?

  And Bezos does always sort of 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. And the new piece of technology is particularly good at distributing hypertext over a globally available network. And 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 books. You Google search something, you're going to get websites. You're not going to get books. And despite Amazon and Google and everyone trying, the book publishers have sort of very physically DRM'd these books such that you cannot search them in a very digitally native internet way.

• 27:46David Rosenthal?

  Yeah, it's funny, even today. So 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 firm, financial firm that has been started just a couple of years earlier called D E Shaw. And Jeff, I think unexpectedly, completely falls in love, falls in love in many ways at D Shaw. So some history on D E Shaw for folks who don't know. I didn't know a lot of this.

• 28:28David Rosenthal?

  So the founder, David E Shaw, was a Stanford computer science PhD from the eighties, 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 Phytel that Jeff originally worked for.

• 28:47Ben Gilbert?

  Yeah.

• 28:47David Rosenthal?

  He was like a serious, is a serious academic. He's actually back in academia now. He won the Gordon Bell Prize.

• 28:55Ben Gilbert?

  David Shaw is back in academia?

• 28:57David Rosenthal?

  Yeah.

• 28:57Ben Gilbert?

  Oh, wow.

• 28:58David Rosenthal?

  Not at an institution, but he's a member of the National Academy of Engineering and the National Academy of Sciences. Like, he's the real deal. His stepfather, when he was growing up, was a finance professor at UCLA. And so he'd always kind of 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. And I think his model for this was Jim Simons, who in 1982, started Renaissance Technologies and RennTech. I bet actually, a lot of people listening don't know, like, I just said that name and a lot of people are like, oh, what's that?

• 29:40Ben Gilbert?

  Okay, great.

• 29:40David Rosenthal?

  What are these guys talking about?

• 29:42Ben Gilbert?

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

• 29:51David Rosenthal?

  Dude, RennTech and Simons is unreal. I'm pretty sure they are the best performing investors of all time, full stop, period. We should do an episode on RennTech.

• 30:03Ben Gilbert?

  If we can get any information. I mean, that's the interesting thing about RennTech is like, it's a fortress.

• 30:08David Rosenthal?

  So supposedly, the core medallion fund, which is now all private capital of RennTech employees and Simons himself, like, there's no outside investors, averaged a 66.1% annual return from 1988 to 2018, 30 years.

• 30:30Ben Gilbert?

  What?

• 30:30David Rosenthal?

  At 66% compounding. Nobody's ever beaten that.

• 30:34Ben Gilbert?

  We may need to go regrade our Berkshire Hathaway episode.

• 30:37David Rosenthal?

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

• 30:50Ben Gilbert?

  Right. And 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 the sort of group of creative artisans who, you know, invested in businesses and started businesses and came up with new ideas and viewed the world through different lenses. And sure, this is how they make money, but DESCO or D E S Co. was so much more than that.

• 31:17David Rosenthal?

  Totally. Well, and I think this is what Jeff falls in love with about the firm and about David. So Jeff joins, he rises through the ranks super quickly. He becomes the fourth senior vice president at the firm. So like highest level below David, and I assume by far the youngest. He's like in his mid to late twenties at this point. He is like the future, like the rising star at DE Shaw. And he and David become super close. Now, there's not a lot written about this, which you'll maybe see why in a second. But like, they were very close and I got to imagine that David kind of saw himself as a, you know, a mentor to Jeff.

• 31:58Ben Gilbert?

  Oh, for sure.

• 31:59David Rosenthal?

  So Jeff loves it there. He's involved in recruiting, bringing in all these super smart people of all disciplines into DE Shaw. And the MO was kind of like, we just want to find the smartest people in the world. Doesn't matter if they know nothing about business and finance. It's kind of like Bridgewater today is kind of the inheritor of this. Like just bring them in here and we'll figure out stuff for them to do. So a bunch of people who become really key early Amazon employees. Jeff Holden, I believe Bezos is involved in recruiting.

• 32:29Ben Gilbert?

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

• 32:34David Rosenthal?

  Amazing how that happened.

• 32:35Ben Gilbert?

  It's conspicuously close to two years exactly after Jeff left DE Shaw.

• 32:39David Rosenthal?

  Yeah, but maybe like there's a non-compete or something.

• 32:43Ben Gilbert?

  Non-sillicit.

• 32:44David Rosenthal?

  Nicholas Lovejoy and another Princeton grad who joined the firm. Mackenzie Scott Tuttle. And that's what we were referring to of Jeff falling in love at DE Shaw in more ways than one. Jeff and Mackenzie would get married. And I think technically Mackenzie was the first Amazon employee.

• 33:06Ben Gilbert?

  Yes, it's interesting. I don't know technically in terms of like literally, was she the first person to become a W2'd employee? But certainly she was already doing work, I think particularly on accounting, working with legal, kind of setting up the operations of the business. Before Jeff hired Shell Kappen, who was the first engineer, the first sort of full-time hire other than he and Mackenzie.

• 33:29David Rosenthal?

  Yeah, but Mackenzie was like, definitely like an employee of the business, doing work on the business. So. Within D E Shaw, kind of like you said, they're this quant trading firm and like, yeah, that's how they make their money, but they view themselves as being kind of entrepreneurial and starting these other businesses and doing stuff. And so David has Jeff working on a bunch of this stuff. The first project he leads is building out what they called the third market business. And it was an idea that to create a sort of 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. So, super cool.

• 34:09Ben Gilbert?

  Which, by the way, this feels like it's probably the predecessor to dark pools.

• 34:13David Rosenthal?

  Oh.

• 34:14Ben Gilbert?

  I mean, if they're making transactions off exchange and then batch shipping them to exchanges to get lower fees, that is sort of the financial world that we live in today, where lots of transactions happen off the exchange. And that's sort of the predecessor to payment for order flow. I mean, they were at the early days of all this stuff.

• 34:31David Rosenthal?

  And Robin Hood and Citadel and all that. Well, they definitely were because at the same time, the internet is, it's so early, you know, we're in like early, you know, mosaic Netscape days, like 92, 93. But David and Jeff, you know, given their backgrounds and like David having done his PhD at Stanford, they know all these people that are starting the internet.

• 34:53Ben Gilbert?

  And even Bezos himself, I mean, 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 and a Unix command terminal. And you can maybe Telnet was around at that point, but.

• 35:11David Rosenthal?

  Yeah, there was no world wide web.

• 35:12Ben Gilbert?

  Yes.

• 35:13David Rosenthal?

  So David and Jeff get really excited about this and David kind of reassines Jeff as one of the most senior people in the firm, that the two of them are going to work together to come up with business plans that they're going to start. Internet opportunities within DE Shaw. So I think the first one that they do is a online retail brokerage for financial trading, like E-Trade. It was a competitor to E-Trade. And I don't know for sure, but I'm wondering if that maybe the third market business that Jeff was working on might, might have like transformed into this because it makes so much more sense over the internet.

• 35:52Ben Gilbert?

  Yeah, totally agree. They also started Juno, which that became reasonably successful. Like I remember seeing commercials for it, getting CDs for it. And that was like early email.

• 36:03David Rosenthal?

  Juno was one of the first free email services.

• 36:07Ben Gilbert?

  That's right.

• 36:07David Rosenthal?

  On the web. And then they merged with Net Zero and became an ISP and an email provider. Yeah, but it was started by Jeff and David within DE Shaw, like both of these. So like, that's what they're doing during these years. You know, I think that's like 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 week and like research, you know, the feasibility of the ideas and then like work on them with employees within DE Shaw. And then they launched them and they did this with a couple of businesses.

• 36:43Ben Gilbert?

  And they weren't the only ones doing this. It's interesting how there were other people who observed, oh my God, the internet. And it was like, okay, cool. Like this is clearly the next technology wave. Like we had the PC. What do we do with this thing? And Microsoft is one that comes to mind. This is the Rich Barton story with Expedia.

• 37:00David Rosenthal?

  That's right.

• 37:01Ben Gilbert?

  That was a division of Microsoft looking at internet potential businesses and saying, how do we start them? And of course, I think long time 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. Can I spin it out? Broker in that deal. DE Shaw, I think was actually before Microsoft in realizing, okay, the internet's going to be huge by a handful of years. But the thing that sort of led to the dot com mania was people realizing all at once, oh my God, the tidal wave is coming.

• 37:34David Rosenthal?

  Yep, they were ahead of the pack though.

• 37:36Ben Gilbert?

  For sure.

• 37:37David Rosenthal?

  There were not many folks that were recognizing this at this point in time. So they've done the, the online trading thing, the E-Trade competitor. That ended up getting acquired by Merrill Lynch. They did Juno.

• 37:51David Rosenthal?

  And they're brainstorming all these other ideas. And one day they come up with an idea that they both get pretty excited about. And as Brad writes about in the book, the name for the idea is the everything store.

• 38:06Ben Gilbert?

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

• 38:09David Rosenthal?

  So the concept was, in one way, amazon.com. 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 retail. So you know, the discounters, Walmart, Kmart, you know, Sears, all that physical stuff. You're just going to cut them all out. And this kind of beautiful internet business is going to be just the kind of algorithmic matchmaker between customers that want to buy stuff and manufacturers who make stuff.

• 38:53David Rosenthal?

  And that's sort of what Amazon is.

• 38:55Ben Gilbert?

  There's definitely this like, well, you know, the internet is going to change so much that factories will just be able to sell right to consumers online. And it's sort of like rounding away all the messy middle that we talked about on our episode with Jeremy from italic of like, you've got the manufacturers, you've got the product designers, you've got the distributors, you've got the brand, then 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.

• 39:24David Rosenthal?

  Yeah.

• 39:24Ben Gilbert?

  It was like this sort of very low res picture of the way the retail landscape worked.

• 39:30David Rosenthal?

  This totally reeks of like 1999 era MBA business plan that like, you know, I'm going to drop out of HBS and I've got this startup idea, a business plan, I'm going to get it funded and go, you know, but to their credit, they were a few years ahead of this and like, nobody knew at the time, like, nobody actually knew how the internet was going to play out.

• 39:50Ben Gilbert?

  Yep.

• 39:51David Rosenthal?

  This seemed maybe plausible, you know, and if it would work, it'd be beautiful, right? Like you wouldn't have to actually do anything. You'd just sit in the middle and take a tax on transactions. And so the idea was that the manufacturers would drop ship.

• 40:08David Rosenthal?

  Orders directly to customers. Oh, man.

• 40:12Ben Gilbert?

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

• 40:14David Rosenthal?

  Yeah, totally. Like, that's gonna work.

• 40:16Ben Gilbert?

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

• 40:28David Rosenthal?

  Yes. So the two of them, they're both very excited about this, as they should be.

• 40:32Ben Gilbert?

  Commerce, pretty big market, huh?

• 40:34David Rosenthal?

  Yeah, turns out like retail in America is maybe, other than US real estate, maybe the biggest market in the world?

• 40:42Ben Gilbert?

  Yeah, auto, I think, and maybe food.

• 40:45David Rosenthal?

  So they, like you said, Ben, they, they quickly realize, okay, if we're gonna do this, you can't just start with the everything store. You need to pick one category, build that, build the consumer brand and, you know, the website and the traffic, and then you can add categories over time on top of that. So Jeff goes off, you know, during his weekly research activities and his researches and he decides that books are the ideal category for a few reasons. One, they are perfect commodities. So like a paperback copy of book X is a paperback copy of book X. Doesn't matter where you bought it, how you bought it. To the customer experience, it's basically the same thing.

• 41:26Ben Gilbert?

  Yep.

• 41:26David Rosenthal?

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

• 41:42Ben Gilbert?

  And do you know where Ingram is located?

• 41:45David Rosenthal?

  Oregon, right?

• 41:46Ben Gilbert?

  Yep, Roseburg, Oregon, a convenient one day drive or less, half day drive from Seattle.

• 41:52David Rosenthal?

  Although Jeff was not thinking about that at the time.

• 41:54Ben Gilbert?

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

• 41:56David Rosenthal?

  So it'd actually be 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 commercial market for commercial books. You have access to the inventory.

• 42:11Ben Gilbert?

  Yep. There are a few other things too, like especially books are great because when you compare them, you know, with music, there's six different record labels that you'd have to get each of them on boards. They could consider music because obviously shipping books and shipping CDs, pretty comparable experience from a weight perspective and packing perspective and all that. So to the extent that it's going to be shipping to people, then you sort of have to just look at the industry dynamics of each of those because just like books, CDs are perfect copies, perfect commodities.

• 42:40David Rosenthal?

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

• 42:45Ben Gilbert?

  Yes. But with books, unlike where music that we talked about in our Taylor Swift episode, there's six labels, there are 4,200 book publishers. So while you can sort of very quickly get the whole catalog of the two distributors, if you end up actually negotiating with publishers, there's a lot of individual publishers and all these small publishers actually do matter because there's 3 million different books that are active and in print worldwide and the long tail matters.

• 43:13David Rosenthal?

  Yep.

• 43:14Ben Gilbert?

  It's not just like everyone wants to listen to Taylor Swift in books. There are lots of rare or out of print books that people totally want.

• 43:22David Rosenthal?

  The genres, there's niches, there's, yeah.

• 43:25Ben Gilbert?

  And the status quo is going to Barnes and Noble and special ordering something and paying a bunch of extra money for that so it can arrive in a month.

• 43:32David Rosenthal?

  And I think David and Jeff considered music and CDs as well. Yeah, I suspect this is probably the reason they decided to go with books. Actually Brad quotes Jeff in the Everything Store, quote, "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 customers' value selection." You know, Borders and Barnes and Noble, they'd like say they're book superstores, but I think they only stocked like 80,000 or so maybe titles, like which is a lot, but it's not 3 million.

• 44:12Ben Gilbert?

  It's not the infinite shelf space of the internet. Also worth noting, Barnes and 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 and Noble or Borders scale.

• 44:30David Rosenthal?

  Yep, yep.

• 44:31Ben Gilbert?

  And David, you said something important there, which is that only with the internet could you really build this true superstore. And 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 sort of just interviewed him right outside the conference. And 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, if you can do something in the old paradigm, you should. And when there's a new paradigm like the internet, you basically want to find things that you could not do any other way.

• 45:10David Rosenthal?

  Ooh, I love that.

• 45:11Ben Gilbert?

  In order to really exploit the power of the new paradigm.

• 45:15David Rosenthal?

  Oh, that's such a great playbook theme that we should highlight here. Like, I mean, I'm thinking about web three, right? Like, duh, like, it's so obvious. Yeah, you can build stuff in web three that you can do in web two. And like, that's sort of fine. But like, really, you want the stuff, you want to find the stuff that you can't do otherwise.

• 45:34Ben Gilbert?

  Right. Don't go create the banner ad and slap it on the internet and be like, see, it's like a magazine, but on the internet, you know, invent the feed format.

• 45:41David Rosenthal?

  Totally. Oh, that's so great. I hadn't seen that interview. That's awesome. So Jeff, you know, like we've been saying, like, he just keeps getting more and more excited about this, the more he digs in. And he and a couple other employees at D Shaw, they start researching competition because there were other online bookstores at this point in time. There was books.com, a few kind of local, physical bookstores around the country had started up e-commerce internet storefronts. You could buy books from XYZ local bookshop around the country and have them ship it to you. And so they start experimenting with the competition and they realize that nobody's got the whole catalog, so to speak, the infinite selection. It's still all in this kind of old school, physical paradigm.

• 46:23David Rosenthal?

  Like, yeah, we'll put up an e-commerce storefront, we'll put up a website, but we're just selling our inventory out of the, you know, what we got in the back here.

• 46:31Ben Gilbert?

  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 like code executes when you hit a URL to dynamically generate a page, that really wasn't happening yet. And so all you could ever do is fetch these static sites. And so it kind of just relied on whatever bookstore put up that page to make sure it was updated with what's actually in the store.

• 47:03David Rosenthal?

  Yep. So Jeff is like, man, this is a big idea. There is a window to go do this right now. Oh, somebody's going to figure this out.

• 47:12Ben Gilbert?

  Do you know the stat on internet growth?

• 47:15David Rosenthal?

  Oh, yes. He gets it wrong, right?

• 47:17Ben Gilbert?

  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.

• 47:28David Rosenthal?

  Yep. The number of packets sent over

• 47:31Ben Gilbert?

  The internet.

• 47:32David Rosenthal?

  Web packets sent over the year of 1993.

• 47:35Ben Gilbert?

  It grew 2,300% in that single year.

• 47:41David Rosenthal?

  Ah, no, no, no, no. This is the error that Brad writes about in the book. It grew 2,300x from January 1st, 1993 to January 1st, 1994.

• 47:54Ben Gilbert?

  Wait, he was off by 100?

• 47:57David Rosenthal?

  Yes, which is 230,000%.

• 48:01Ben Gilbert?

  What? Somehow I missed that.

• 48:03David Rosenthal?

  Yeah, he would later quote in speeches that he read this report and he saw the traffic was growing 2,300% and like it jolted him out of his complacency and realized this idea is huge. I gotta go like do this on my own.

• 48:15Ben Gilbert?

  Holy crap. No, I mean, I was going to make the point of like, if you see anything growing 2,300%, you should start a business on top of it. But I didn't realize that I was with the outdated stat.

• 48:27David Rosenthal?

  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 2,300%. But if you see something that's growing 230,000% in one year, you really gotta quit your job and go do this.

• 48:46Ben Gilbert?

  It is crazy. Like, you know, being in venture, we sort of look for like, oh, what's the next technology wave and what's the next paradigm? And is it web three? And is it some form of VR or AR?

• 48:57David Rosenthal?

  That's true. You and I have never seen this in our professional lifetimes.

• 49:00Ben Gilbert?

  We have never witnessed this. No.

• 49:02David Rosenthal?

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

• 49:05Ben Gilbert?

  Mobile didn't happen this quickly. There was no single year in mobile that was nearly as fast as the rapidity of the internet adoption. And so a lot of us in venture and in startup land right now are starting businesses and investing in businesses that it's innovating around the edges and it's innovating on stuff that's pretty mature. There's nothing that is the sort of 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.

• 49:35David Rosenthal?

  Yeah, I think we should just like pause the episode right now and highlight everything comes from this. Like, all we are doing now is like 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 and this is the beginning. Everything now is still just derivative of the internet.

• 50:01Ben Gilbert?

  Yeah, 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.

• 50:09David Rosenthal?

  Yep.

• 50:10Ben Gilbert?

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

• 50:23David Rosenthal?

  You know, in Jeff's head and lived experience, this is all like happening at once. He's been working on this internet stuff. 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, you know, adults amount of his complacency. He's like, dang, I've got this really cushy job here at DE Shaw, but I might need to leave this and go do this on my own.

• 50:47Ben Gilbert?

  Hmm.

• 50:48David Rosenthal?

  What happens next is sort of, uh, open for debate. You know, Jeff wrestles with this decision for a little bit. Keon McKenzie, they just got married. They love their life. They love D Shaw. They love living in New York. Jeff really is kind of the heir apparent to take over D Shaw. And actually, like I'd said, just a few years later, in 2001, David retires, goes back to computer science research, leaves the firm in the hands of other people. Like, very reasonable that that could have been Jeff if he hadn't left.

• 51:21Ben Gilbert?

  Yeah, absolutely.

• 51:22David Rosenthal?

  Jeff calls up his parents, calls up Mike and Jackie and is like, what should I do? And they're like, oh, you should stay at D Shaw.

• 51:30Ben Gilbert?

  Of course. It's very successful. You get a great salary. You're well thought of in your industry.

• 51:35David Rosenthal?

  Yep. How many 28 year old, 30 year olds have the kind of success and opportunity that you do? Not many. So Jeff's thinking about what to do. And he talks about, later he comes up with this framework for making the decision that he calls the regret minimization framework.

• 51:53Ben Gilbert?

  I love this.

• 51:53David Rosenthal?

  It really is. It's such a beautiful way to think about big life decisions like this. I've used it. It's really great.

• 52:00Ben Gilbert?

  Absolutely. Me too.

• 52:01David Rosenthal?

  The framework for people who don't know is when I'm 80 years old and 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 and I'm looking back and like, I made that decision. Do I regret it more or less than what the alternative would have been?

• 52:29Ben Gilbert?

  Hmm.

• 52:30David Rosenthal?

  And 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 Shaw. That's going to be some serious regret.

• 52:43Ben Gilbert?

  And he really, and 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 un Bezos.

• 52:54David Rosenthal?

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

• 53:14Ben Gilbert?

  Yep.

• 53:15David Rosenthal?

  So. He goes to tell David that he's gonna leave, he's gonna build the everything store on his own.

• 53:24Ben Gilbert?

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

• 53:35David Rosenthal?

  Yes, this is where the legend is David's like, let's go for a walk. And they go off from the skyscraper office in midtown Manhattan, go for a walk through Central Park for like two, three hours. They talk through it all and 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. Like I left Morgan Stanley to start D E Shaw. I get it. I've been in your shoes.

• 54:15Ben Gilbert?

  Yep.

• 54:16David Rosenthal?

  And if you leave and do this on your own, like I'll regret it, but you have my blessing. That's the legend of how it went. Whether that actually is what happened, like I genuinely don't know, but it's a very nice legend. Let's put it that way.

• 54:30Ben Gilbert?

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

• 54:41David Rosenthal?

  Well, Jeff goes to raise money for Amazon and

• 54:44Ben Gilbert?

  He doesn't raise it from David.

• 54:45David Rosenthal?

  Yeah, right. Like that would be an obvious source of capital.

• 54:48Ben Gilbert?

  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 one measly million dollars over 60 meetings ultimately from 22 different investors to sell 20% of the company in order to raise that first million. If it was an option for him to call David and shortcut that, you would think he would have.

• 55:12David Rosenthal?

  At the end of the day, none of this matters because I am 100% convinced there's no down in my mind, nor 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. Like, this is the beauty of venture capital and the American entrepreneurial system. Usually, building things that are great are hard. And usually, when things are hard, if you are just an employee making a salary and somebody else owns the company.

• 55:43Ben Gilbert?

  You don't have level of maniacal progress.

• 55:47David Rosenthal?

  Yes.

• 55:47Ben Gilbert?

  That Amazon did in its early days.

• 55:49David Rosenthal?

  Certainly, certainly did, that we're going to talk about. So, and the idea was completely flawed. Like, the business plan was worthless because lots of people had that business plan, you know, and it was completely unrealistic.

• 56:02Ben Gilbert?

  Right. It is interesting thinking about who the internet appealed to at this moment. And it appealed to Jeff, or it was on Jeff's radar because Jeff is a nerd.

• 56:15David Rosenthal?

  Yes.

• 56:16Ben Gilbert?

  He has a CS background. He was really into Star Trek. He loved obscure novels. He loved storytelling. And 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 it was people who loved libraries and programming.

• 56:40David Rosenthal?

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

• 56:48Ben Gilbert?

  For sure. So, this is the sort of thing that put it on Jeff's radar. It's also the sort of thing that really defined who would be willing to join Jeff on this crazy adventure. It wasn't that he was going and recruiting right away the very sort of best and brightest out of the top institutions with the shiniest resumes and who could really do anything. It was people whose heart 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.

• 57:19David Rosenthal?

  Yep.

• 57:19Ben Gilbert?

  That was the sort of seed of the original culture of the people who were attracted to Amazon, both as customers and employees.

• 57:26David Rosenthal?

  Which was not D E Shaw.

• 57:28Ben Gilbert?

  No.

• 57:29David Rosenthal?

  And I think this is also another reason why Jeff really struggled with it because he loved D E Shaw. He met his wife there.

• 57:36Ben Gilbert?

  Right.

• 57:36David Rosenthal?

  He loved those people. Eventually that DNA would come into Amazon. But yeah, let's talk about Shell Capen and the first non-Mackenzie employee of Amazon.

• 57:46Ben Gilbert?

  To move the story along, so 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 sort of bootstrapped startup at the time.

• 58:02David Rosenthal?

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

• 58:14Ben Gilbert?

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

• 58:42David Rosenthal?

  But you would think, given Jeff's history, Florida or Texas would

• 58:45Ben Gilbert?

  Right.

• 58:46David Rosenthal?

  make more sense.

• 58:47Ben Gilbert?

  But there's another big one, too.

• 58:49David Rosenthal?

  Well, there are two more big ones.

• 58:50Ben Gilbert?

  One of them is the access to technical talent.

• 58:52David Rosenthal?

  Yes.

• 58:53Ben Gilbert?

  Microsoft was just absolutely in its heyday and 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.

• 59:05David Rosenthal?

  Yep.

• 59:05Ben Gilbert?

  And what's the fourth?

• 59:07David Rosenthal?

  Well, the fourth, you have to rewind a little bit to the recruiting of Shell. So Shell, Jeff got introduced to actually through a D E Shaw colleague. And Shell was an engineer, a programmer, who lived in Santa Cruz, California, and had worked for a bunch of kind of early Silicon Valley startups.

• 59:27Ben Gilbert?

  Yep.

• 59:28David Rosenthal?

  Including Stewart Brand and the Whole Earth Catalog.

• 59:33Ben Gilbert?

  Oh, yeah, absolutely.

• 59:34David Rosenthal?

  Yeah, at the Whole Earth Truck Store in Menlo Park.

• 59:38Ben Gilbert?

  Which is like a rare books retailer, right?

• 59:41David Rosenthal?

  You know, it was counterculture. It was 70. It was like curiosities that Stewart thought was cool and would be in the Whole Earth Catalog. And then they sold them out of the back of a truck in Menlo Park.

• 59:51Ben Gilbert?

  Perfect. And for listeners who are like Whole Earth Catalog, Stuart Brand, what are you talking about? Well, there is one other element of tech history which will quickly sort of jolt you out of your seat and go, oh, that's what we're talking about here. When Steve Jobs, who is sort of widely attributed to the quote, "Stay hungry, stay foolish." When he originally invoked that, he was citing Stuart Brand and it was printed in the cover, I think the inside cover of the Whole Earth Catalog.

• 1:00:23David Rosenthal?

  It was of the last issue.

• 1:00:24Ben Gilbert?

  The last issue.

• 1:00:25David Rosenthal?

  When they stopped publishing it, they did the photo, the iconic photo from outer space of the Earth as seen from outer space. And it said, "Stay hungry, stay foolish."

• 1:00:36Ben Gilbert?

  So good.

• 1:00:37David Rosenthal?

  Total inspiration for Steve Jobs. Yeah. So Shell was working there.

• 1:00:41Ben Gilbert?

  Which is so cool because then Stuart sort of 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 Stuart Brand and a bunch of those folks down the line, too.

• 1:00:54David Rosenthal?

  Yep. And they work on the clock of the long now, I think it is, the 10,000 year clock.

• 1:00:59Ben Gilbert?

  Which was an investment from Bezos Expeditions. I think it's a, it was one of the earliest sort of projects that he backed when he became individually wealthy.

• 1:01:08David Rosenthal?

  Hmm. Oh, how did Jeff become individually wealthy? Hmm. It wasn't necessarily from selling his Amazon shares. We'll get to that.

• 1:01:16Ben Gilbert?

  Yep.

• 1:01:16David Rosenthal?

  You are not going to believe it when we tell that story.

• 1:01:18Ben Gilbert?

  How Jeff Bezos became a billionaire and it had nothing to do with amazon.com.

• 1:01:22David Rosenthal?

  That would be the clickbait. If we were like a YouTube native podcasts, that would be the title of the episode.

• 1:01:27Ben Gilbert?

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

• 1:01:32David Rosenthal?

  We need to do a photo shoot of us in like crazy pose, like, oh my God, like, you know, title card.

• 1:01:37Ben Gilbert?

  Youtubers, man. All right. So Jeff gets introduced to Shell.

• 1:01:43David Rosenthal?

  Shell's part of this deep legacy of everything. Silicon Valley startups, you know, what becomes the internet? I believe the original intention was Jeff and Mackenzie were going to move out to Santa Cruz and they were going to build Amazon in Silicon Valley. Like, duh, why wouldn't you? Yeah, maybe it's a little farther to Oregon, to Ingram's, but like not that much farther. It's fine. But I didn't realize how recent this had happened, like this all at the same time. In 1992, the Supreme Court has ruled on a decision that retail companies do not have to collect sales tax in states where they don't have physical presence, like operations.

• 1:02:24Ben Gilbert?

  Right.

• 1:02:25David Rosenthal?

  Now, 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.

• 1:02:34Ben Gilbert?

  Means that the burden is on the customer instead of the retailer.

• 1:02:37David Rosenthal?

  And not on the retailer.

• 1:02:39Ben Gilbert?

  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 by the.

• 1:02:47David Rosenthal?

  Oh my God, it's like crypto taxes.

• 1:02:49Ben Gilbert?

  Yeah, people will pay taxes if it's easy. They won't if it's hard.

• 1:02:52David Rosenthal?

  So Jeff finds out, reads about this and is like, oh, no, no, no, no, no, no. We cannot base this company in California.

• 1:02:59Ben Gilbert?

  Not New York.

• 1:03:00David Rosenthal?

  Not New York, not Texas, probably not Florida. What is the Venn diagram of like, close to book distributor? Has access to technical talent?

• 1:03:11Ben Gilbert?

  Not too populous.

• 1:03:12David Rosenthal?

  But enough technical people I can hire, but not so much that I'm.

• 1:03:16Ben Gilbert?

  Cannibalizing.

• 1:03:17David Rosenthal?

  Cutting out a huge swath of my market. Seattle is the obvious choice.

• 1:03:22Ben Gilbert?

  Which you wouldn't pick today because 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. And so you would not want to, in this day and age.

• 1:03:43David Rosenthal?

  Make that same decision.

• 1:03:44Ben Gilbert?

  Execute this strategy and make that decision about Washington state. But.

• 1:03:48David Rosenthal?

  Totally.

• 1:03:48Ben Gilbert?

  Jeff faces hadn't created Amazon yet, and so therefore it was a perfect place.

• 1:03:52David Rosenthal?

  Actually, I kind of 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 and.

• 1:04:00Ben Gilbert?

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

• 1:04:04David Rosenthal?

  It's the land of opportunity.

• 1:04:06Ben Gilbert?

  Yep.

• 1:04:07David Rosenthal?

  And it was the land of opportunity for Jeff Bezos. You know, the legend is that he and Mackenzie are driving across country. They realize this, they like veer hard to the right in Texas. And instead of going due west to California, they go northwest to Seattle.

• 1:04:21Ben Gilbert?

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

• 1:04:32David Rosenthal?

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

• 1:04:38Ben Gilbert?

  But I think a thing that did happen while Mackenzie is driving and Jeff is sort of 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 Kadabra.

• 1:04:49David Rosenthal?

  Kadabra like, oh, it's magic. I can get, you know, whatever I want.

• 1:04:53Ben Gilbert?

  Anything I want, whenever I want. And, you know, Jeff's like, yeah, Kadabra. And he's like, cadaver. And so that was like the first sign of this may not be the best name. He would have a series of other potentially bad names, too.

• 1:05:06David Rosenthal?

  Really bad.

• 1:05:07Ben Gilbert?

  Relentless.com.

• 1:05:09David Rosenthal?

  Relentless.com, which still goes to Amazon.

• 1:05:11Ben Gilbert?

  redirects to Amazon.

• 1:05:12David Rosenthal?

  Yeah, supposedly he and Mackenzie both really liked relentless.com. This may be completely false. So like, you know, don't hold me to this, but I wonder if that's a little subtle dig at D E Shaw of like, I'm going to go be an entrepreneur relentless. Like I wouldn't be relentless if I were in a cushy skyscraper in Manhattan.

• 1:05:33Ben Gilbert?

  It's not a very customer centric name.

• 1:05:35David Rosenthal?

  No, it's definitely not.

• 1:05:37Ben Gilbert?

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

• 1:05:40David Rosenthal?

  Well, that's what I wonder, like, where did that come from?

• 1:05:42Ben Gilbert?

  Yeah. I mean, you would, you would use it to describe Jeff's personality, but it's an odd name for the business.

• 1:05:47David Rosenthal?

  Definitely. So eventually friends convinced them that relentless sounds kind of sinister. And the story goes, Jeff starts looking in the dictionary at A words. Now, 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.

• 1:06:08Ben Gilbert?

  He actually was because sites like Yahoo, like portal sites, directory sites listed alphabetically.

• 1:06:13David Rosenthal?

  Totally. I mean, this is like, we've been such a beneficiary of this at Acquired. This is our secret sauce.

• 1:06:18Ben Gilbert?

  Podcasts are the last vestige of the old internet.

• 1:06:20David Rosenthal?

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

• 1:06:38Ben Gilbert?

  So perfect.

• 1:06:39David Rosenthal?

  So they just need one more thing. They've hired Shell 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?

• 1:06:50Ben Gilbert?

  I did. I was in the neighborhood and I was listening to a great podcast on the Internet History Podcast with friend of the show, Brian McCullough. He was interviewing Shell about the early days about this, you know, house that Jeff McKenzie lived in. And they have the garage retrofitted to be an office, Amazon's first office. And Shell is programming, sitting in that garage. And I looked and it was a few blocks from me and I was like, I gotta ride by.

• 1:07:15David Rosenthal?

  You texted me the photo. I was so, so jealous.

• 1:07:17Ben Gilbert?

  Which felt wrong, you know, someone lives there and all that, but it is a historical landmark in the world.

• 1:07:22David Rosenthal?

  Well, you didn't go knock on the door.

• 1:07:23Ben Gilbert?

  No, no.

• 1:07:24David Rosenthal?

  Yeah, I think that's fine. So they just need one more thing, which is capital. You know, Jeff and McKenzie had done great at D Shaw. So they put in $95,000 to start. Shell himself puts in $5,000. This takes me back to the Walmart episode and gosh, so smart of like having your employees actually invest dollars in the business. Jeff's parents, Mike and Jackie, put in another $100,000. So they have $200,000. That's enough. They hire a couple more engineers to work with Shell, start building out the site. Jeff goes and starts working on relationships with Ingram and Baker and Taylor. McKenzie's doing all the bookkeeping and is sort of like the first CFO of the company.

• 1:08:09David Rosenthal?

  Jeff, this is fun, also echoes of Sam Walton. Did you read about this? How he goes down and takes a course in book selling down in Portland?

• 1:08:20Ben Gilbert?

  Yes, that was awesome. At like the National Booksellers or Book Retailers Association, right?

• 1:08:25David Rosenthal?

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

• 1:08:34Ben Gilbert?

  Yep. It's worth pointing out at this point. So, you know, we sort of glazed over like, all right, Shell gets hired and he starts programming. There's very interesting set of technology choices that are made here and Shell turns out to be the perfect hire. Jeff got very lucky. I don't think Amazon would exist today if it weren't for Shell. And I think that's sort of a widely acknowledged thing among the early team, including Jeff. But there's not really like a spec. Jeff, I think coded up the first HTML webpage himself, that sort of white one with the A, with the Amazon river running through it that predates the logo. But when he starts describing it to Shell, Shell's pretty much like, okay, cool. Like, I know what to build. It's going to be a store. And there's not like a lot of these yet, but like, it's a website where you can buy stuff online. Great. And he just

• 1:09:17Ben Gilbert?

  sort of starts coding. And there's a couple of interesting things here, one of which is the technology choice of databases. And do you know what database they would eventually sort of choose to standardize on? Because Shell was not a database guy before this.

• 1:09:32David Rosenthal?

  I'm tempted to say Oracle.

• 1:09:34Ben Gilbert?

  Definitely Oracle.

• 1:09:35David Rosenthal?

  Ah, interesting.

• 1:09:37Ben Gilbert?

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

• 1:09:52David Rosenthal?

  Oh, my God. Talk about freaking foreshadowing here. Like, if you are an enterprise technology company, you ignore startups at your own peril.

• 1:10:02Ben Gilbert?

  Absolutely. I love that story.

• 1:10:05David Rosenthal?

  Oh, that's amazing.

• 1:10:07Ben Gilbert?

  There's a couple of other interesting things here. And anybody who's been a PM or an engineer working on like an engineer PM team, or a business guy, tech guy team, will sort of know this feeling. And remember, the internet at this point is just very, very pathetic. Like, it's just not the internet as you think about it today in terms of speed or graphics or interface or trust or anything, especially trust around credit cards. Like, 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. And they had a way in which you could do stuff like enter just five digits of your credit card and then 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.

• 1:10:50Ben Gilbert?

  But Jeff tells Shell, 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. The other of which is email, which people seem to trust a lot. So build two storefronts, one that's accessible via email and one that's accessible via web. And Shell kind of just ignores the email thing. He's like, eh, I'm in this technology a lot. I don't think it's going to be an email based store. And it's a good thing that he started with web. And by the time they had sort of gotten that stood up, it was clear that Jeff had sort of 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?

• 1:11:33Ben Gilbert?

  That's how crappy the web was, is it wasn't clear that that was a better form factor than email.

• 1:11:38David Rosenthal?

  In Brad's book, I get the sense that that's very typical of early Jeff management style of we gotta go do this. And then, you know, some of them like you actually got to do it. Then some of you are like, well, if I ignore this for a little while.

• 1:11:50Ben Gilbert?

  Yeah.

• 1:11:50David Rosenthal?

  We're going to do the right thing here.

• 1:11:52Ben Gilbert?

  Yeah. It also became clear in listening to a lot of these interviews with early engineers that they use the word 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 like 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. But what was clear at Amazon in the early days was front end meant consumer facing and back end meant warehouse facing technology. And it was basically all server side. In fact, there weren't even cookies yet. And so Shell had to basically invent this way for users to maintain favorited items

• 1:12:36Ben Gilbert?

  or a shopping cart without leaving a cookie. And so how do you do that without cookies or sessions? He Invented this really insane engine. It's basically a rendering engine called Obidos, which if anybody knows their South American geography.

• 1:12:52David Rosenthal?

  It's a tributary to the Amazon, right?

• 1:12:54Ben Gilbert?

  Yeah. And for people who remember browsing Amazon in the early days, you'd go to like amazon.com slash exec slash Obidos slash something, something, something.

• 1:13:03David Rosenthal?

  Oh, I definitely didn't do this. This is awesome.

• 1:13:06Ben Gilbert?

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

• 1:13:39David Rosenthal?

  Ah, so cool.

• 1:13:40Ben Gilbert?

  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. And it was all this Obidos sort of dynamic web serving engine that Shell built.

• 1:13:57David Rosenthal?

  I love it. I love it. That's so cool.

• 1:14:00Ben Gilbert?

  Yeah.

• 1:14:01David Rosenthal?

  So, yeah, Shell is like, you're so right. Like, he was the right guy for the job.

• 1:14:07Ben Gilbert?

  Yep.

• 1:14:07David Rosenthal?

  This was a grizzled sort of 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.

• 1:14:19Ben Gilbert?

  No. And in fact, in job postings, I think Bezos put things like experience with websites would be a bonus, but not required. Cause like, 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 sort of like brand new at the time.

• 1:14:41David Rosenthal?

  Yeah. Amazing. So Shell and the early team of engineers that they bring on working together, they get a beta built like pretty fast.

• 1:14:53Ben Gilbert?

  Really fast.

• 1:14:54David Rosenthal?

  It was summer of 94 when Jeff and Mackenzie leave D E Shaw. And then it takes a few months to figure all the stuff out in the garage in Bellevue. In April of 1995,

• 1:15:08David Rosenthal?

  They ship a beta version of the site. They send out a link to friends and family like, try it out. You can buy any book you want. Shell'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 Gerdl-Escher-Bach.

• 1:15:30Ben Gilbert?

  Oh.

• 1:15:31David Rosenthal?

  It's super cool. Anyway, it's all like about the nature of consciousness and like a carve out for another day.

• 1:15:37Ben Gilbert?

  Yeah.

• 1:15:38David Rosenthal?

  But super cool and very apt, geeky first purchase on amazon.com.

• 1:15:44Ben Gilbert?

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

• 1:15:49David Rosenthal?

  Yep. And 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 mean, I guess Mark was part of starting this wave. So he was talking about the previous wave, but like me now looking back, I'm like, we freaking missed it, Ben. I have FOMO.

• 1:16:12Ben Gilbert?

  You have FOMO. Yeah.

• 1:16:13David Rosenthal?

  This would never happen today. They launched it and people came, people loved it. Like it freaking worked immediately.

• 1:16:20Ben Gilbert?

  Yeah. Yeah. And it went very quickly from like 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.

• 1:16:39David Rosenthal?

  Bots.

• 1:16:40Ben Gilbert?

  This is very real people who are one or two clicks out from the early adopters, solving real problems that they had before. And it's just 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 and 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.

• 1:17:05David Rosenthal?

  Oh, inbound media inquiries. Okay. So they launch it. In the first two weeks, they do $25,000 in revenue. But it's just people telling their friends, can't do that today. Like $25,000 in revenue, like in two weeks, you launched something today. Nobody's going to use it. And then they get an inbound media inquiry two weeks after they launch it from.

• 1:17:28David Rosenthal?

  David Filo and Jerry Yang saying, hey, we heard about the, your site, Amazon, it looks pretty cool. Do you mind if we feature it on our homepage?

• 1:17:41Ben Gilbert?

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

• 1:17:45David Rosenthal?

  And that was the brand new, at that point, like literally brand new.

• 1:17:50Ben Gilbert?

  Yahoo.com.

• 1:17:51David Rosenthal?

  Dot com. David and Jerry, of course, had started their guide to the web when they were at Stanford grad students the year before in 1994, and they had just incorporated, raised money from Sequoia Capital, turned it into an actual business and created Yahoo, only in March of 1995.

• 1:18:12Ben Gilbert?

  Wow.

• 1:18:13David Rosenthal?

  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 Yahoo.com.

• 1:18:23Ben Gilbert?

  Growth hack.

• 1:18:24David Rosenthal?

  So apparently they get the email.

• 1:18:25Ben Gilbert?

  And had they raised their seed round, their million dollar angel round yet?

• 1:18:28David Rosenthal?

  No, no, no. So all that context you had on Shell, 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 Shell'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.

• 1:18:49Ben Gilbert?

  Cause he's only been at startups that didn't really work.

• 1:18:52David Rosenthal?

  Yes.

• 1:18:52Ben Gilbert?

  He made stuff functional and he was thinking of a certain scale, but he wasn't thinking like million scale.

• 1:18:58David Rosenthal?

  Of course, Jeff being Jeff is like, damn the torpedoes, like full speed ahead. We're doing this. We're going to say yes to Yahoo. So they do it. Within the next two weeks, so 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. There, by the end of those two weeks, they are doing 20,000 in sales a week.

• 1:19:25Ben Gilbert?

  On books. These things cost like 20 or 30 bucks each.

• 1:19:28David Rosenthal?

  And people don't read books.

• 1:19:31David Rosenthal?

  You know, yeah, there's Barnes and Noble and Boardwalk. Like, people don't read books. They made all their money on DVDs and CDs. Nobody reads books. We, you and me and the acquired community, like, we read books, but we're a vast minority.

• 1:19:42Ben Gilbert?

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

• 1:19:48David Rosenthal?

  Totally. So that first half year that the site is live to the public, they do half a million dollars in revenue in six months with the $200,000 in friends and family funding.

• 1:19:59Ben Gilbert?

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

• 1:20:10David Rosenthal?

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

• 1:20:18Ben Gilbert?

  Right.

• 1:20:19David Rosenthal?

  I'm feeling the FOMO.

• 1:20:23Ben Gilbert?

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

• 1:20:25David Rosenthal?

  Right. That's the thing.

• 1:20:26Ben Gilbert?

  We all have to be intellectually honest with ourselves. We're like, 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?

• 1:20:41David Rosenthal?

  Yep. We sort of did this a little bit, not intentionally with podcasting, I think, and acquired.

• 1:20:49Ben Gilbert?

  Yeah.

• 1:20:50David Rosenthal?

  A little bit. We got a similar type wave.

• 1:20:53Ben Gilbert?

  Right. Honestly, though, 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

• 1:21:06David Rosenthal?

  in on this.

• 1:21:06Ben Gilbert?

  caught up in all this.

• 1:21:07David Rosenthal?

  Oh, yeah.

• 1:21:08Ben Gilbert?

  In some ways, I'm feeling the massive FOMO of like, God, if I was just born five or 10 years earlier.

• 1:21:13David Rosenthal?

  Yeah. Yeah. I mean, it's, this is who we are. And I imagine who many of our listeners are too.

• 1:21:20Ben Gilbert?

  Yeah. 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 in your credit card number.

• 1:21:28David Rosenthal?

  The infrastructure is just completely falling apart.

• 1:21:30Ben Gilbert?

  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. But one thing that was very clear is that Shell and the team were building things at a very low level of abstraction. I mean, they were building everything in basically a click up 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 sort of high level frameworks. So even though the technology at the time sucked, I mean, there was no bandwidth. Compute was really, really, really hard to come by.

• 1:22:14Ben Gilbert?

  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.

• 1:22:32David Rosenthal?

  Yep.

• 1:22:32Ben Gilbert?

  And they basically could take advantage of these early internet technologies before the bandwidth and compute was really ready for most people to develop applications for them.

• 1:22:41David Rosenthal?

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

• 1:22:59Ben Gilbert?

  And the way they were doing that was not to take inventory at the time. They were ordering retail first from other bookstores and 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. And it was taking obviously forever to actually get that to the customer.

• 1:23:16David Rosenthal?

  The distributors had minimum order sizes. So they were ordering big boxes of stuff coming to the garage.

• 1:23:24Ben Gilbert?

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

• 1:23:32David Rosenthal?

  I think it was 10.

• 1:23:33Ben Gilbert?

  Yeah. And that way they could place an order with the distributor. The hack. Was if it's sort of 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. So that was their hack to make it so the distributors would actually send them the one copy of the one book that they wanted.

• 1:24:01David Rosenthal?

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

• 1:24:07Ben Gilbert?

  Yes.

• 1:24:07David Rosenthal?

  So quickly they get a warehouse in Soto, in the kind of industrial neighborhood down by the King Dome at that point in time. They start staffing it up with temp workers. Famously, they tell the staffing agency to quote, "Send us your freaks."

• 1:24:20Ben Gilbert?

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

• 1:24:26David Rosenthal?

  This was the era of grunge in Seattle. So all these grunge club musicians are like working in Amazon warehouses after their gigs. Super cool.

• 1:24:33Ben Gilbert?

  Yep.

• 1:24:34David Rosenthal?

  Famously, Nick Lovejoy from D Shaw, he comes up with the idea of packing tables. This becomes like Amazon lore. At first, they're literally just reassembling, you know, and doing shipping, just like on their hands and knees on the floor.

• 1:24:48David Rosenthal?

  And he's like, you need to get them tables to do this up above the floor.

• 1:24:52Ben Gilbert?

  Yeah. And 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. And she said that because the temp agency was like sending them all these people that were basically professionals. They would expect to use modern tools. And at Amazon, the low level software thing wasn't just for their infrastructure. They expected their customer service people to like use Unix terminals and write commands. So that when someone write right in, and they're like, where's my order? Like, everything's on command line. And so Jade's using that to try to articulate to the temp agency, here's the profile of person that we need, because all these people are kind of useless to us if they expect a bunch of very good tools to do their job.

• 1:25:34David Rosenthal?

  Uh huh. 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. And we're going to talk about eBay in a minute here, but it's just like the Walmart story and fighting against Kmart and other people. Like, Amazon now is building a native logistics supply chain and distribution for e-commerce.

• 1:26:05David Rosenthal?

  That they are going to own and operate that nobody else, literally nobody else in the world is doing this, not Walmart, not Kmart, not Barnes and Noble.

• 1:26:15Ben Gilbert?

  No.

• 1:26:15David Rosenthal?

  They all have their own incredible logistics systems, but they're tuned for, I've got this book superstore of 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.

• 1:26:33Ben Gilbert?

  And basically no two orders are the same. So 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, you know, maybe there could be a little variance. It's completely new. And so 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. And 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.

• 1:27:16David Rosenthal?

  Yeah.

• 1:27:17Ben Gilbert?

  And that would just happen 10,000 times again, compound and compound and compound.

• 1:27:21David Rosenthal?

  Well, what's cool is like, yeah, there are big differences between the Walmart supply chain and the Barnes and Noble supply chain and Amazon, but eBay sure as hell isn't building packing tables.

• 1:27:30Ben Gilbert?

  Yep.

• 1:27:31David Rosenthal?

  So they need some more money to capitalize all this. So Jeff goes out to raise that first seed round that we did the whole episode with Tom Alberg about back in early acquired days. Tom is just the best.

• 1:27:43Ben Gilbert?

  Tom is the best. I re-listened to that episode and I was thinking like, oh, this is going to be terrible because this was like very early and acquired. It's so not, and it's very listenable. And most of that is because Tom is an unbelievable guest. He's kind and he also is so earnest, but lived the whole thing. I mean, 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.

• 1:28:11David Rosenthal?

  Yeah. Longest serving board member in Amazon history, other than Jeff. So cool. So they raised that $1 million round from a bunch of kind of local business folks in Seattle, of which Tom is one and one of the most involved in the company.

• 1:28:27Ben Gilbert?

  Nick Hanauer, a bunch of local business folks here.

• 1:28:30David Rosenthal?

  So in 1996, remember they did half a million in revenue for the half year of 1995 that they were alive. They do 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 95.

• 1:28:52Ben Gilbert?

  So they about 15xed in their first year, but they 15xed off a base of 500,000. It's not like off of nothing.

• 1:28:59David Rosenthal?

  Yeah, they didn't go from like five to 100 or something like that.

• 1:29:02Ben Gilbert?

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

• 1:29:09David Rosenthal?

  And then you look at it and it's like you went from 20K ARR to 100K ARR.

• 1:29:13Ben Gilbert?

  Right. And this is, yeah, wow. 500K in six months to 15.7 the following year. Okay. So that's 1996.

• 1:29:21David Rosenthal?

  That's 1996. So as this rise is happening, obviously more and more people start paying attention and go listen to the whole episode, but Tom tells the story on our episode with him. I'll just quote from Tom here. So I come home one night after work at like 6pm or something, and my wife says, do you know some guy named John Doerr? And I said, well, actually I do. And 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, tells you something about how to sell yourself and show your interest.

• 1:30:02David Rosenthal?

  And of course, that is the legendary John Doerr of Kleiner Perkins.

• 1:30:07Ben Gilbert?

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

• 1:30:22David Rosenthal?

  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. So this shows you how much clout John had. Well, A, just the hustle, the persistence, even though he was the legendary John Doerr. He's calling Tom like 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.

• 1:30:59Ben Gilbert?

  And I think they were competing against General Atlantic.

• 1:31:01David Rosenthal?

  Many firms, including General Atlantic, which was the first runner-up. Now, there was some structure to the deal. So it wasn't like a clean, 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, you know, General Atlantic, but they were offering like double the valuation, close to double, I think.

• 1:31:22Ben Gilbert?

  Wow.

• 1:31:22David Rosenthal?

  And Amazon and Jeff went with John and Kleiner because they were John and Kleiner. And there's a fun little sidebar of John wins the deal. And this was kind of his playbook at the time. Great. You know, I'm going to be involved, but I've got this great associate who I'm going to put, 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? And they brainstorm, they come up with an idea and Jeff calls John back and is 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.

• 1:31:59Ben Gilbert?

  You know, and John's like out of the bandwidth. I'm on too many other boards right now. He's got what Netscape?

• 1:32:05David Rosenthal?

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

• 1:32:15Ben Gilbert?

  Nothing to sneeze at.

• 1:32:16David Rosenthal?

  But this was such a hot deal and Jeff was so persuasive that John made time. And I think he's probably glad that he made time to join the board.

• 1:32:27Ben Gilbert?

  Yep.

• 1:32:27David Rosenthal?

  So they raised this money from Kleiner. Jeff does two things.

• 1:32:32Ben Gilbert?

  And this was $7 million?

• 1:32:34David Rosenthal?

  Eight million.

• 1:32:35Ben Gilbert?

  Eight million. So, so far in the lifetime of the company, he's raised nine million dollars.

• 1:32:39David Rosenthal?

  A little more than nine because there was the friends and family money, the Bezos family as a whole.

• 1:32:43Ben Gilbert?

  Nine, two.

• 1:32:44David Rosenthal?

  It was actually more like nine, four, 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.

• 1:33:02Ben Gilbert?

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

• 1:33:11David Rosenthal?

  Oh, I cannot wait to talk about how Jeff Bezos and Mackenzie got wealthy. It's got to wait just a little bit longer, got to wait a little longer.

• 1:33:16Ben Gilbert?

  All right, all right.

• 1:33:17David Rosenthal?

  So 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 Dora as like a shot of steroids into himself and the company.

• 1:33:34Ben Gilbert?

  It certainly emboldened his vision. He sort of used this as like someone waving the flag of like, go, go, go. Like you should feel free to have a much, much more ambitious plan now.

• 1:33:44David Rosenthal?

  Jeff, I don't think is 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, that he makes that the motto.

• 1:33:56Ben Gilbert?

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

• 1:34:02David Rosenthal?

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

• 1:34:22Ben Gilbert?

  Who originally had zero interest. This is another person who 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 meet 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 Mrs. Model of all time.

• 1:34:41David Rosenthal?

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

• 1:34:51Ben Gilbert?

  Yeah.

• 1:34:52David Rosenthal?

  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, like the second highest score in history, the history of the exam, 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 and there's so many people like that involved in Amazon that are

• 1:35:15Ben Gilbert?

  Yeah.

• 1:35:15David Rosenthal?

  Just like these incredible stories of perseverance.

• 1:35:18Ben Gilbert?

  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, 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. And 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 a Joy Covey invention too. I mean, she was really the sort of co-architect of that strategy.

• 1:35:59David Rosenthal?

  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. And Brad publishes the whole thing at the end of the book and I'll just quote from it here. Joy's telling Brad, "I think about the early days and the level of clarity, vision, potential, and values that Jeff brought. And then I look at Amazon today, this is 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

• 1:36:40David Rosenthal?

  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."

• 1:37:00Ben Gilbert?

  Which she would have been right about in 2013.

• 1:37:02David Rosenthal?

  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.

• 1:37:15Ben Gilbert?

  Amazon's just this incredible Rorschach test. There is a way to look at it where it is, 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.

• 1:37:37David Rosenthal?

  Was amazon.com?

• 1:37:38Ben Gilbert?

  Was amazon.com 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, back up, back up, back up, back up, refine, turn. Amazon brute forced their way to success a lot in just finding out where all the doors were by trying all of them.

• 1:37:59David Rosenthal?

  Yep. That is a great way to put it.

• 1:38:02Ben Gilbert?

  It is worth highlighting this period of time, this 94 to 97, this pre-going public time, even though they had the imprimatur, as you put it, David, of Kleiner Perkins. And even though they were located in Seattle near Microsoft, and 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 is like, oh my God, oh my God, oh my God. The internet is going crazy and a bookstore actually doesn't look like an interesting thing on the internet to most engineers. So they actually had a recruiting problem where talented engineers who were like, oh my God,

• 1:38:45Ben Gilbert?

  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.

• 1:39:00David Rosenthal?

  Yeah.

• 1:39:01Ben Gilbert?

  That's a much, in many ways, a much harder computational problem of building a good experience and backend system for facilitating a real-time auction.

• 1:39:10David Rosenthal?

  Marketplace, yeah.

• 1:39:11Ben Gilbert?

  And countdowns and the online bookstore thing seems kinda boring. And so it's remarkably hard for them to recruit.

• 1:39:19David Rosenthal?

  There are a couple great Eric Schmidt quotes in the Everything Store. Derek Schmidt, of course, former CEO of Google. It's just so great. And they're like so like begrudging backhanded compliments to Amazon and Jeff. But one of them is talking about AWS. It's like, ah, the book guys figured out computer science.

• 1:39:41David Rosenthal?

  And then of course, like we're telling this story like Jeff freaking new computer science, you know, back in the.

• 1:39:45Ben Gilbert?

  Oh, 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 sort of like willed them being a technology company into existence. And I don't think anybody now is like, oh, they're a retailer or they're any specific category of retailer. They're like, yeah, they're a dominant technology firm.

• 1:40:06David Rosenthal?

  Yeah. Now he probably wishes that people were like, oh, don't worry about Amazon, you know? Okay, back to the story. So Joy joins right at the end of 96, right after the Kleiner round. And Jeff, definitely because he wanted to do it and, you know, is consistent with get big fast. Maybe it was also sort of like 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. Now. You know, Tom talked about this too in our interview with him. Part of it was the capital markets were open. The revenue growth was insane, like the dot com mania is just starting to heat up. Strength leads to strength, all of that.

• 1:40:47David Rosenthal?

  Jeff also thought that it would be a great marketing event for the company. And like, he was totally right. You know, the amount of coverage they got in mainstream media. They went from, even though John Doerr had joined the board, yeah, 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 in the world.

• 1:41:16Ben Gilbert?

  Yep. And it turned out they did get something right in this notion of like long tail books. There's very few people who want one particular book in a long tail, but most people want something in the long tail. And so their product market fit sort of originally came from, we can get you special order books quickly and easily. And your user experience in buying them will be basically the same as buying a Harry Potter book, you know, a best seller.

• 1:41:40David Rosenthal?

  This gets sort of alluded to in the everything store and a function of amazon.com 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.

• 1:41:54Ben Gilbert?

  Like every new technology.

• 1:41:56David Rosenthal?

  Like every new technology. Let's just leave it at that.

• 1:41:59Ben Gilbert?

  Yes. And 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. And 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 like Shopify, but 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 3,000 in sales per retailer.

• 1:42:42Ben Gilbert?

  So Amazon nailed a category and an operational model where they were able to be like the one dominant e-commerce site. And you know, this predates pets.com, this predates

• 1:42:55David Rosenthal?

  eBay.

• 1:42:55Ben Gilbert?

  Cosmo.com, eBay. They were almost the earliest. They were of the first wave and just nailed it on a bunch of vectors where there's this great quote from Jane Slade, "There were no grownups that could help us." Every time they would bring in a vendor for like customer service software or database or anything, the implementation reps would just look at all the numbers and be like, what? Our software actually can't help you. And so 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.

• 1:43:29David Rosenthal?

  Well, 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, if you want to make your beer taste better, you got to build your own infrastructure.

• 1:43:42Ben Gilbert?

  For sure. All right, listeners, now is a great time to thank our longtime friend of the show, ServiceNow. If you are running a large enterprise, AI agents are likely spread across every team and deploying them is no longer the hard part.

• 1:43:57David Rosenthal?

  Yeah, the hard part is knowing what permissions they have, what employees are using them for, or what decisions AI is making. AI security for an enterprise at scale is not a small concern. Like, the risks are real.

• 1:44:11Ben Gilbert?

  Exactly. And the challenge with AI is governing it, securing it, measuring it, and making sure that it actually delivers value. That is why ServiceNow built the AI Control Tower.

• 1:44:21David Rosenthal?

  Yep. AI Control Tower gives enterprises a single place to see, manage, govern, and optimize AI across the entire business. And it works with any AI, not just theirs. Every device on your network, every permission across every system, every AI agent, visible and secure in one place.

• 1:44:39Ben Gilbert?

  And ServiceNow can do this because they've spent more than 20 years building the operational backbone of the enterprise. The workflows, governance, approvals, security controls, and institutional knowledge that power how work actually gets done across IT, HR, customer service, finance, and security.

• 1:44:55David Rosenthal?

  ServiceNow already runs more than 100 billion workflows annually and trillions of transactions for more than 85% of the Fortune 500. So when companies need a place to govern AI at enterprise scale, they're building on a platform at the center of how their business already operates.

• 1:45:12Ben Gilbert?

  And in a future that isn't going to be one AI, it's going to be thousands of AI agents working across every function of the company. But the question is, who's managing them all?

• 1:45:21David Rosenthal?

  So if you're trying to turn AI ambition into real business outcomes and make it work safely, securely at scale, go check out servicenow.com/acquired and tell them that Ben and David sent you. Okay, so Joy joins at the end of 1996. Jeff's like, we're gonna go public now. So, 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.

• 1:45:58Ben Gilbert?

  Yes.

• 1:45:58David Rosenthal?

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

• 1:46:21Ben Gilbert?

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

• 1:46:32David Rosenthal?

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

• 1:46:46Ben Gilbert?

  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.

• 1:46:54David Rosenthal?

  Everything like that. And also, this other thing ultimately is a good thing, too. Not at the time. It attracts the attention of the Riggio brothers, who are the founders and CEO and chairman, separately CEO and chairman of Barnes and Noble. You know, they knew about Amazon, whatever, you know, Amazon internet, like, you know, we don't need to worry about that. Well, all of a sudden, this little company in Seattle has filed to go public.

• 1:47:22Ben Gilbert?

  And is claiming to be Earth's largest bookstore.

• 1:47:24David Rosenthal?

  Yeah, they're like, huh, that doesn't sound right to us. I just think of like Borders, like yeah, Barnes and 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 and

• 1:47:38Ben Gilbert?

  Yep.

• 1:47:39David Rosenthal?

  The founders had moved on. Louis Border had moved on.

• 1:47:42Ben Gilbert?

  To start Webvan.

• 1:47:43David Rosenthal?

  To start Webvan. So great. So great.

• 1:47:47Ben Gilbert?

  Isn't that crazy?

• 1:47:48David Rosenthal?

  Barnes and Noble was the juggernaut. Now, the Riggio brothers, when Amazon files for an IPO, they fly out to Seattle and they schedule a dinner with Jeff. Jeff brings along Tom. His Tom, in addition to being just 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. So he's got the right set of skills to bring to this dinner.

• 1:48:14Ben Gilbert?

  Yes.

• 1:48:15David Rosenthal?

  So the Riggio brothers, their father was a New York City cab driver and a semi-professional boxer who twice defeated Rocky Graziano, Len, the kind of lead of the two of them, I think the older brother. He technically did go to NYU, but like, let's just say, uh, they went to the University of Hard Knocks. Their way of doing business is very different. Also, we gotta talk about this. I don't think you have any idea.

• 1:48:47David Rosenthal?

  Do you know, just like we talked about last episode about the whole crazy, you know, Borders, Kmart, Webvan, Kiva came out of Webvan, which of course, Amazon acquired and

• 1:48:58Ben Gilbert?

  Right. Kiva Robotics.

• 1:49:00David Rosenthal?

  Yep. Incredible history. Do you know what the Riggio brothers spun out of Barnes and Noble? I'm not talking about the Nook or Barnes and Noble.com. You're never gonna guess this.

• 1:49:11Ben Gilbert?

  No.

• 1:49:12David Rosenthal?

  It actually makes sense. GameStop.

• 1:49:16Ben Gilbert?

  No way. Really?

• 1:49:18David Rosenthal?

  I'm dead serious. So, okay. It was actually software, et cetera.

• 1:49:24Ben Gilbert?

  I gotta look at the stock price of both of these.

• 1:49:26David Rosenthal?

  GameStop is the merger of software, et cetera, which spun out of Barnes and Noble and Babbage's software. Remember Babbage's back in the day?

• 1:49:34Ben Gilbert?

  Hmm. Sounds vaguely familiar.

• 1:49:37David Rosenthal?

  They were like a video game and computer software retailer. Yeah. GameStop. Freaking GameStop.

• 1:49:42Ben Gilbert?

  Oh my God. Okay. What do you think Barnes and Noble Education, Inc. is from a market cap perspective today?

• 1:49:53David Rosenthal?

  Maybe 500 million?

• 1:49:54Ben Gilbert?

  143 million.

• 1:49:58David Rosenthal?

  Okay, what's GameStop today?

• 1:50:00Ben Gilbert?

  10.3 billion.

• 1:50:01David Rosenthal?

  Yeah.

• 1:50:03Ben Gilbert?

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

• 1:50:07David Rosenthal?

  Stonks, baby.

• 1:50:10Ben Gilbert?

  I assume Barnes and Noble Education, Inc. is Barnes and Noble, the big company, B N E D is their ticker.

• 1:50:17David Rosenthal?

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

• 1:50:20Ben Gilbert?

  Yeah, that makes sense. I don't think you end up cratering this far without some kind of recapitalization or something happening.

• 1:50:27David Rosenthal?

  Well, speaking of Barnes and Noble cratering, this dinner didn't help.

• 1:50:33David Rosenthal?

  These two, like, you know, tough New York guys, they're like, where are you coming from? This nerd out in Seattle, like, go listen to our episode with Tom. His personality is not blustery, you know, brash New Yorker, you know, like, I'm sure the Riggios came to this dinner and they were just like, we're gonna freaking crush these, you know, geeks.

• 1:50:53David Rosenthal?

  Oh, boy, did they not. So they go home after the dinner.

• 1:50:57Ben Gilbert?

  And the dinner was sort of like a soft, we want to buy you? Or was the dinner a soft, we're gonna run you out of business?

• 1:51:04David Rosenthal?

  It was both.

• 1:51:05Ben Gilbert?

  Yeah.

• 1:51:05David Rosenthal?

  It was, hey, we've heard about you. You know, we're Barnes and Noble, right? And, you know, we've been thinking about doing the internet. We're gonna 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.

• 1:51:21Ben Gilbert?

  And 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."

• 1:51:33Ben Gilbert?

  I always think back on the Wall Street whiz for Jeff Bezos.

• 1:51:37David Rosenthal?

  Well, and actually, what the Riggio brothers are saying, this is what everybody thinks. So when Amazon does go public, it's not a great IPO. They price on May 15th, 1997, they raised $54 million at a $438 million market cap. And then they trade down on day one.

• 1:51:56Ben Gilbert?

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

• 1:52:06David Rosenthal?

  Well, it would rocket back up. They went through the wave and then the fall.

• 1:52:09Ben Gilbert?

  Yes.

• 1:52:09David Rosenthal?

  But the head of Forrester Research, you know, the big research firm, they write a note about Amazon and the industry.

• 1:52:18Ben Gilbert?

  Called Amazon dot toast.

• 1:52:20David Rosenthal?

  They title it Amazon dot 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 and Noble is going to kill them. Oh, boy. So what are the Reggio brothers doing? They go back home to New York and they do two things. One, they launch a new project, new, you know, initiative within the company with the codename book predator.

• 1:52:47Ben Gilbert?

  In case there was any confusion.

• 1:52:48David Rosenthal?

  In case there's any confusion about what the intent of this is and that they're going to kill Amazon with the new Barnes and Noble dot com. The other thing they do is sue Amazon and they conveniently for them or inconveniently for Amazon, announced the lawsuit three days before the IPO prices.

• 1:53:07Ben Gilbert?

  Brutal.

• 1:53:07David Rosenthal?

  Hence the Amazon dot toast memo. And they sued them for, Ben, what you said of Amazon claiming to have Earth's largest selection of books. And I think the suit is like, well, you don't have a store. You can't go select the books.

• 1:53:19Ben Gilbert?

  That's so pedantic and annoying.

• 1:53:21David Rosenthal?

  So, 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 the whole year before. They did 28 million that quarter.

• 1:53:42Ben Gilbert?

  Unbelievable.

• 1:53:43David Rosenthal?

  So, uh, Wall Street reverses course. The stock takes off. For the full year of 1997, they do just a hair under $150 million in revenue. So that's 10x the year before.

• 1:53:56Ben Gilbert?

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

• 1:54:09David Rosenthal?

  Now, when I said that. Barnes and Noble was gonna launch Book Predator and beat Amazon. And I was like, "Okay, what do I mean by okay?" This starts a pattern. It would be hubris of Jeff, Joy, and Mackenzie and everybody and Shell and 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.

• 1:54:37Ben Gilbert?

  Yes.

• 1:54:38David Rosenthal?

  He knows the Walmart story.

• 1:54:40Ben Gilbert?

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

• 1:54:56David Rosenthal?

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

• 1:55:15Ben Gilbert?

  Yeah.

• 1:55:16David Rosenthal?

  And so Jeff, because of this, because he's read Made in America, he knows that he can beat Barnes and Noble. But the way to do it is through distribution by building native distribution logistics supply chain for e-commerce, not for physical stores. And it is different enough that, just like Walmart, could build native distribution for their network of Walmart supercenters. And 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. And I know we need to do it, but I can't really do it. But I know some people who can."

• 1:55:59David Rosenthal?

  So in early 97, 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. They start traveling to Bentonville on recruiting trips.

• 1:56:13Ben Gilbert?

  Canvas and Poach.

• 1:56:14David Rosenthal?

  Into Canvas and Poach, and they- They zero in on a target.

• 1:56:19Ben Gilbert?

  Rick Dalzell.

• 1:56:20David Rosenthal?

  Their number one draft pick, Rick Dalzell.

• 1:56:25Ben Gilbert?

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

• 1:56:28David Rosenthal?

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

• 1:56:38Ben Gilbert?

  He, I mean, he's super plugged in in the Bentonville community. He's an important part of Walmart.

• 1:56:43David Rosenthal?

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

• 1:57:10Ben Gilbert?

  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 backend technology.

• 1:57:24David Rosenthal?

  They were the first big corporation in America to adopt technology and say, that is going to be like the heart of what we do. And Rick was the lieutenant who implemented it all. He was the hands-on guy doing it. So Jeff and Joy and John and the board, they were like, if we can get this guy, he's the key. So they go through this year-long recruitment process. Like I said, at one point they convinced Rick to join and then he calls him back and is like, no, I'm not going to do it. He calls them back because Lee Scott, Walmart CEO, the third CEO of Walmart in history, takes Rick aside when he hears this and he's like, Rick, you've got a future here.

• 1:58:06David Rosenthal?

  You could be a future CEO of Walmart. You're making a big mistake. A, he says, you're making a big mistake. And B, he says, which he's totally right on. He's like, look, we've studied these Amazon guys. Walmart is no Barnes and Noble. They know what's going on. He's like, we know how they're doing distribution over there. They're gonna hit a brick wall when they get to any kind of scale, which clearly they're going to get to this year. It's gonna 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.

• 1:58:41Ben Gilbert?

  Which that was the risk. I mean, 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.

• 1:58:53David Rosenthal?

  Eventually, Amazon, Jeff and Joy and everybody, they convinced Rick to make the jump. And so, right before the IPO in early 97, he joins and Jeff knows they're going to win at this point. So 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 Regios 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

• 1:59:37David Rosenthal?

  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. Hmm. There we go. So Rick, he alone joining is like huge. He also airlifts about a dozen executives out of Walmart to come join him. So when he finally does officially accept the offer, Walmart's like, you're dead to us. And so he gets escorted out of his office by security, 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 be head

• 2:00:19David Rosenthal?

  of IT at this company and say, I better go find out what they're doing. Like, I want to follow Rick.

• 2:00:24Ben Gilbert?

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

• 2:00:41David Rosenthal?

  And Walmart.

• 2:00:42Ben Gilbert?

  And Walmart. There's sort of two different ways to look at Amazon. And I think on this show, we focus a lot on the sort of business. Side of it where there's the unbelievable cash flow dynamic that we'll talk about. There's the whole get the investors you ask for. There's the constant reinvesting in growth. But up to this point, you know, when you listen to these interviews with Shell Capin, 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 misfits on the internet. There was a big exiting of the sort of 94 to 97 crowd in 98 and 99

• 2:01:27Ben Gilbert?

  as Dalzell and his people and all the MBAs sort of come in to say, okay, it's working and it's not just about this quest for odd books.

• 2:01:36David Rosenthal?

  Yep. I actually would put Dalzell and the Walmart crew. I think there are three key categories of people that were necessary for Amazon to succeed. There were the technologists, Shell in their 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 Jassies, the Jason Kylars, the Harrison Millers, the Jeff Blackburns. And then there were the Walmart people, the Rick Dalzell. Jeff Wilkie didn't come from Walmart, but he's very much cut from that cloth. The backend retail logistics, distribution people. And you really needed world-class, all three of those to make this work.

• 2:02:20Ben Gilbert?

  Yeah.

• 2:02:21David Rosenthal?

  So 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.

• 2:02:41Ben Gilbert?

  Yep.

• 2:02:42David Rosenthal?

  And 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.

• 2:02:49Ben Gilbert?

  Which they didn't realize enough of at first. There was all sorts of false starts in Amazon getting good at distribution because even though they knew better, they sort of were copying the Walmart playbook and they were doing the classic Amazon thing. They were brute forcing 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.

• 2:03:12David Rosenthal?

  Yep. So when Del Zell comes over and all the Walmart folks, they had the warehouse in Seattle and they say like, 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 where the first distribution centers, like you want something more sophisticated. So they go in 1998 from the one warehouse in Seattle to six distribution centers. The Seattle warehouse becomes one, Delaware, Nevada, Georgia, two in Kentucky. You notice they're going to all these states that are like close to big population states, but not in the states.

• 2:03:44Ben Gilbert?

  Yes.

• 2:03:44David Rosenthal?

  But then it actually was Wilkie later who said, no, we don't want distribution centers. We want fulfillment centers. And so that's what Amazon is today. And there is a fundamental difference. So we're not distributing a bunch of goods to stores. We are fulfilling end customer orders.

• 2:04:01Ben Gilbert?

  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.

• 2:04:11David Rosenthal?

  Totally.

• 2:04:12Ben Gilbert?

  In a sort of unpredictable way. I mean predictable en masse, but not on an individual level.

• 2:04:17David Rosenthal?

  For years and years, nobody realized this, but what Amazon's 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.

• 2:04:44Ben Gilbert?

  I mean, the company employs 1.6 million people, most of which do this.

• 2:04:50David Rosenthal?

  Yes. And here's the moat. From the viewpoint of the customer, all that is free. Jeff obviously wasn't envisioning that specifically, but like this is why they're going to beat Barnes and Noble. And this is why they're going to beat eBay. And this is eventually why they're going to beat Walmart in e-commerce.

• 2:05:09Ben Gilbert?

  Yeah. Well, tell us about eBay. If you were to pitch me on both of these businesses and put on my venture capitalist hat, and you told me that I could 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'd want to invest in eBay. But Amazon dominated eBay. So how'd that play out?

• 2:05:41David Rosenthal?

  So the competition with eBay, the Barnes and Noble thing, yeah, that was the first battle that Amazon wins, but it was obvious they were going to win that. eBay, like, this is a real fight. So 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, that was, a PR person made that up to humanize the story. That's not what happened.

• 2:06:10Ben Gilbert?

  Auction web, not eBay.

• 2:06:12David Rosenthal?

  So as all this is happening, you mentioned the MBAs, Jeff and Amazon start hiring Andy Jassy, Jason Kilar, Victoria Pickett, Harrison Miller, Jeff Blackburn, 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 box software, Harrison Miller does toys, Chris Payne does electronics, Jeff Blackburn leads BD and starts buying all these other internet companies. So pretty quickly, Amazon and eBay, they're competing much more head-to-head than people originally thought. So eBay started

• 2:06:52David Rosenthal?

  as auction web in 1995 by Pierre Omidyar, didn't turn into like a real venture-backed company and change its name to eBay until 1997, after Amazon was already public. And of course, famously Benchmark invests 6.7 million in eBay in the fall of 1997.

• 2:07:13Ben Gilbert?

  Producing one of the greatest venture investments of all time.

• 2:07:15David Rosenthal?

  So that was fall of 97. I think they owned like 25% or something of, you know, fair assumption. We'll go tell that whole history soon. But eBay goes public in September of 1998.

• 2:07:30David Rosenthal?

  At a $2 billion market cap.

• 2:07:31Ben Gilbert?

  I mean eBay was the winner. At this point in time, everyone just looked at it and was like, oh, that's the best dot com business. And also think about that. Series A in 97, raising $7 million, $2 billion market cap IPO in 98.

• 2:07:47David Rosenthal?

  Yes.

• 2:07:48Ben Gilbert?

  Come on. I remember thinking how insane it was when Snap went public after, what was it? Four years?

• 2:07:55David Rosenthal?

  Four years, yeah.

• 2:07:56Ben Gilbert?

  This was an all time insane moment with eBay going public and Mania at an all time high.

• 2:08:00David Rosenthal?

  Oh, they're legendary stories of administrative assistants at Benchmark retiring.

• 2:08:05Ben Gilbert?

  The little piece of the carry of the one investment in, yeah.

• 2:08:09David Rosenthal?

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

• 2:08:19Ben Gilbert?

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

• 2:08:23David Rosenthal?

  And it's effectively four years from Auction Web, but it's two years from eBay. That's impressive.

• 2:08:28Ben Gilbert?

  Yep.

• 2:08:29David Rosenthal?

  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 kind of going in the same direction here. Meg Whitman and Pierre fly up to Seattle.

• 2:08:50Ben Gilbert?

  Meg Whitman of Disney strat planning fame.

• 2:08:53David Rosenthal?

  Disney, high margin media company. Keep all this in mind. That's the DNA of 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 had raised the series A from Benchmark. They're hot, but you know, they're still startup. Jeff and Jeff take them on a tour of the Seattle Fulfillment Center. And Pierre is like, he's such a like engineer. He's like, oh, this is super cool. You know, then they sit down to meet the two Jeffs, make a kind of, maybe not quite like the Barnes and Noble dinner, but they make a sort of oblique reference of, well, maybe Amazon should acquire you. Supposedly, according to Brad, they sort of float like a $600 million number if such a thing were to happen.

• 2:09:36David Rosenthal?

  So 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. And Meg supposedly says, I think this is from an interview with Pierre in the book. Meg says, Pierre, 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.

• 2:10:11Ben Gilbert?

  Well, and 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? Well, the best business to be in long term, period, is delighting your customers more than they ever imagined. And 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. And 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.

• 2:10:55Ben Gilbert?

  They're buying it from a vendor that they trust, that is secure. All these things sort of 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. And my favorite Bezos quote is, and this, I think, comes from that very first interview that I referenced earlier. I mean, I've watched every interview Bezos has given in prep for this, but that one has all the highlights in like three to four minutes. And, you know, he's still got hair. He says, long term, there is never any misalignment between customer interest and shareholder interest.

• 2:11:34David Rosenthal?

  So true.

• 2:11:35Ben Gilbert?

  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.

• 2:11:45David Rosenthal?

  What happens after this meeting with Meg and Pierre, I think, really illustrates just how special Jeff and Amazon as a company are.

• 2:11:56David Rosenthal?

  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 and building out this advantage. It's going to be my mode. I'm going to delight customers. This is the way.

• 2:12:12Ben Gilbert?

  And desperately wants to beat eBay at auctions.

• 2:12:14David Rosenthal?

  Well, desperately wants to beat eBay, but he's like, and eBay is also right. And this starts a journey, but Amazon today is that amazing backend distribution. Like we were just saying, you can get stuff from Amazon faster and better and cheaper than just about anywhere else on the internet. And certainly in aggregate of everything you can buy, Amazon is head and shoulders above anybody else. And you can buy from other people who are not amazon.com on Amazon. And that is all thanks to that meeting.

• 2:12:48Ben Gilbert?

  Yeah. I mean, this is again, Amazon having to run into a wall, back up, try it again. So 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.

• 2:13:04David Rosenthal?

  Of course they are.

• 2:13:05Ben Gilbert?

  Jeff has all these quotes about how the customers, and I think this is in the 98 letter, maybe the 99 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. And so that's off the top of my head. It's not exact, but it's close. And I think his realization is, okay, if eBay has grown really fast and there's a way to get something rarer or cheaper or something, we kind of have to be in business doing that, too. So this is Amazon's first very expensive failed experiment with Amazon auctions.

• 2:13:42David Rosenthal?

  So after the meeting, Jeff Bezos turns to Jeff Blackburn is 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 and Noble, except they're actually competent.

• 2:13:54Ben Gilbert?

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

• 2:14:04David Rosenthal?

  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. So Amazon starts working on Amazon auctions, literally. Exact clone of eBay. Now eBay did not have PayPal at this point in time. So paying on eBay was this huge source of friction and a huge advantage for Amazon. Amazon has your credit card, you know, blah, blah, blah. Amazon finds out that, of course, Megan, Pierre and her, they're not dumb at eBay. They know this is a problem. They're talking to startups about acquiring startups that couldn't, you know, solve payments on eBay. Now, this is summer 1998. There's no PayPal yet.

• 2:14:45David Rosenthal?

  Confinity, the first kind of, you know, they didn't even get started until the end of 98, like early 99.

• 2:14:51Ben Gilbert?

  Wow.

• 2:14:52David Rosenthal?

  eBay is talking to a startup called accept.com and wants to acquire them to handle payments on eBay. Bezos swoops in and Amazon steals the deal and acquires accept.com, mostly so that eBay doesn't get it.

• 2:15:09Ben Gilbert?

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

• 2:15:16David Rosenthal?

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

• 2:15:27Ben Gilbert?

  Yeah, great point.

• 2:15:29David Rosenthal?

  Man, Silicon Valley like totally turns on a knife point at this moment in time. Okay, so March 99, Amazon launches, Amazon auctions, clones eBay, competes with eBay. And shocker, you haven't heard of Amazon auctions. It's a flop.

• 2:15:45Ben Gilbert?

  So here's an interesting comment on it. So Greg Linden writes on his blog, again, this early engineer who worked on personalization and auctions, a bunch of other stuff. So 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 was 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 of years ahead. It was just already in full swing. And even if you have a more technically superior. Interface.

• 2:16:17David Rosenthal?

  And the advantage of traffic on amazon.com that they could send there like it didn't matter.

• 2:16:21Ben Gilbert?

  Yep.

• 2:16:21David Rosenthal?

  They didn't have the network effect.

• 2:16:22Ben Gilbert?

  And Amazon wasn't really prioritizing it. So 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. And 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. The used books are on this other distribution channel. And Amazon's like, we don't care. The customer can choose which they want from one singular unified product detail page, which flash way forward to.

• 2:17:01David Rosenthal?

  Marketplaces.

• 2:17:01Ben Gilbert?

  Third-party sellers.

• 2:17:02David Rosenthal?

  Yeah.

• 2:17:02Ben Gilbert?

  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. So they weren't doing that with Amazon auctions yet.

• 2:17:13David Rosenthal?

  No, it was a separate tab, separate site.

• 2:17:15Ben Gilbert?

  Auctions.amazon.com. It was not getting Amazon's traffic.

• 2:17:19David Rosenthal?

  Yeah, didn't have a network effect. Another reason people like eBay, man, they just totally shrugged off Amazon as a competition. Beautiful business model.

• 2:17:28Ben Gilbert?

  So their market cap continued to go nuts.

• 2:17:30David Rosenthal?

  Yep. Now Jeff, so he acquired accept.com to keep it out of the hands of eBay. They go start acquiring like 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.

• 2:17:48Ben Gilbert?

  And they were investing in a bunch of them as kind of hedges. They looked at pets.com 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 sort of a failed distribution, totally mispricing thing.

• 2:18:09David Rosenthal?

  But yeah, they sunk a bunch of money into pets.com, Cosmo.

• 2:18:12Ben Gilbert?

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

• 2:18:15David Rosenthal?

  Totally. So the craziest of all of these acquisitions, just from the story, is a company called Jungly.

• 2:18:24Ben Gilbert?

  Yes, which was referenced on the Walmart episode.

• 2:18:27David Rosenthal?

  Indeed. We're not going to talk about what Jungly 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.

• 2:18:43Ben Gilbert?

  But probably not to most people.

• 2:18:45David Rosenthal?

  So Amazon acquires this company for like, I don't know, 150, 175 million dollars, 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 gotta move up to Seattle. So the Jungly team, like, all right, well, you just gave us a bunch of money. Okay, we'll 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 move back to Palo Alto.

• 2:19:14Ben Gilbert?

  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

• 2:19:20David Rosenthal?

  Yes.

• 2:19:21Ben Gilbert?

  probably the second biggest reason that Walmart is a very real competitor in e-commerce now, second only to Jet and Mark Lorre.

• 2:19:29David Rosenthal?

  So 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.

• 2:19:48David Rosenthal?

  Jungly had gotten acquired. They'd made all this money, you know, and Sergey and Larry are like, oh, we want to raise a little money for this thing that we're doing.

• 2:19:57Ben Gilbert?

  Also, how crazy is it that we're nearly three hours into the story of Amazon? Amazon's already public.

• 2:20:03David Rosenthal?

  Yes.

• 2:20:03Ben Gilbert?

  And we're talking about Larry and Sergey at Stanford before Google's founded.

• 2:20:08David Rosenthal?

  So Ram's like, sure, you guys seem promising. This whole back rub, page rank thing. I get it. It's got potential. Great. He invests the first $250,000 in Google and he joins the board of Google. Now, a couple of months go by, about six months to be exact. Jeff and Ram kind of stay in touch and even though they left Amazon, they're friendly. Jeff hears about Google, calls up Ram and he's like, hey. I want to come meet these guys. Ram's like, sure. Come on down to Silicon Valley. I'll host you all at my house.

• 2:20:41Ben Gilbert?

  And was Jeff interested in search yet? Amazon got obsessed with search in that sort of A9 era of 2004. Do they have any seeds yet?

• 2:20:50David Rosenthal?

  I think this leads to that.

• 2:20:51Ben Gilbert?

  Okay.

• 2:20:52David Rosenthal?

  So Jeff and Mackenzie fly down to Silicon Valley. They all go over to Ram's house. They have a big, you know, nice breakfast, a lot of backslapping, Ram, Larry, Sergey, Jeff, Mackenzie. After the breakfast, Larry and Sergey leave. Jeff takes Ram aside and he's like, hey, I want to put some money in these guys too. And Ram's like, dude, the seed closed six months ago and like Kleiner, Sequoia, like they're circling about doing a series A. Like Jeff's like, I don't care.

• 2:21:21Ben Gilbert?

  Jeff's like, I'm Jeff Bezos.

• 2:21:23David Rosenthal?

  Yes, that means nothing to me. I want in and I want in on the same terms as you.

• 2:21:33David Rosenthal?

  So Ram goes to bat for him and he convinces Larry and Sergey to take another $250,000 of Jeff and Mackenzie's personal money at the seed price.

• 2:21:45Ben Gilbert?

  Which was?

• 2:21:46David Rosenthal?

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

• 2:22:01Ben Gilbert?

  And Mike Moritz came in and told Doug Leone, as Doug told it 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.

• 2:22:12David Rosenthal?

  Yes. Oh my God, that episode with Doug. Ah.

• 2:22:16Ben Gilbert?

  Amazing.

• 2:22:16David Rosenthal?

  What a highlight.

• 2:22:18Ben Gilbert?

  Okay. So that's not at 100. So we can say like, I'm going to guess somewhere 20 million, 25.

• 2:22:24David Rosenthal?

  No, I mean, Ram led this.

• 2:22:25Ben Gilbert?

  10?

• 2:22:26David Rosenthal?

  My best guess is 10 or maybe even lower post.

• 2:22:30Ben Gilbert?

  So you think Ram got like a 10 to 20 X from the series A?

• 2:22:33David Rosenthal?

  I think so. I don't know.

• 2:22:34Ben Gilbert?

  Ram and Jeff, we should say. And Mackenzie.

• 2:22:38David Rosenthal?

  I think it is probably safe to say that Jeff and Mackenzie owned at least 1% of Google.

• 2:22:44Ben Gilbert?

  Personally.

• 2:22:45David Rosenthal?

  Probably even after dilution from the Series A because they didn't raise another venture around.

• 2:22:49Ben Gilbert?

  That's right. Google went public just on that Series A.

• 2:22:52David Rosenthal?

  They did.

• 2:22:53Ben Gilbert?

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

• 2:22:58David Rosenthal?

  My God. Well, they had to, you know, walk in the woods before they found the paid search business model and, you know, all that, but like, my God. So Jeff has never commented, he's been asked, he's never commented on whether or not he and Mackenzie sold their Google shares. But they wouldn't have even had a chance to sell before the IPO. So at a minimum, he held to the IPO. Like 1% of Google, probably held longer than that. Like, I don't know. That's how Jeff and Mackenzie got wealthy.

• 2:23:28Ben Gilbert?

  So in 2004, Google IPO'd for $23 billion market cap.

• 2:23:33David Rosenthal?

  Yep.

• 2:23:34Ben Gilbert?

  So their shares would have been worth $230 million.

• 2:23:38David Rosenthal?

  Quarter billion.

• 2:23:39Ben Gilbert?

  At IPO, which was 18 years ago. And since then, over the last 18 years, Google has 65x'd from there.

• 2:23:52David Rosenthal?

  That was me laughing there, but listeners, you should just imagine Jeff Bezos laughing there.

• 2:24:01Ben Gilbert?

  Oh, man. So, yes, 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.

• 2:24:11David Rosenthal?

  Clocks and rocket companies and.

• 2:24:14Ben Gilbert?

  Venture funds.

• 2:24:15David Rosenthal?

  Yeah. Benchmark.

• 2:24:18Ben Gilbert?

  PSL.

• 2:24:19David Rosenthal?

  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. So it's also incestuous.

• 2:24:29Ben Gilbert?

  Think about it this way, too. What if Jeff still owns 1% of Google? Whether Google Cloud wins or whether AWS wins.

• 2:24:39David Rosenthal?

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

• 2:24:43Ben Gilbert?

  What is he on, like 17% of Amazon today? Something like that?

• 2:24:48David Rosenthal?

  Something like that.

• 2:24:49Ben Gilbert?

  So he's only 17x more incentivized for Amazon to win than Google to win. We're making up numbers here. We're sort of, we're speculating quite a bit on what price he got in and everything. And he got access because Amazon bought a company and then they all left, but he maintained the relationship. I mean, these things, life is long.

• 2:25:05David Rosenthal?

  Amazing.

• 2:25:07David Rosenthal?

  I feel like there's a lesson there and the lesson is invest in Google.

• 2:25:11Ben Gilbert?

  I think, yeah, that's all I can take away too.

• 2:25:14David Rosenthal?

  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 the spring of 1999 publishes the famous amazon dot bomb article.

• 2:25:37Ben Gilbert?

  Amazon dot 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."

• 2:26:10David Rosenthal?

  And she was right.

• 2:26:11Ben Gilbert?

  A lot of her career at this point would come from sort of trading on professional capital that came from being extremely right about Amazon.

• 2:26:20David Rosenthal?

  Totally.

• 2:26:21Ben Gilbert?

  But that doesn't change the dot com bubble starting to show cracks and then eventually pop.

• 2:26:26David Rosenthal?

  She would be out in the cold here by herself because the amazon dot bomb piece comes out. Amazon reports, I think either Q2 or Q3 earnings in 1999. And I mean, it's the same story. Like lots of revenue growth, hugely unprofitable. We, we didn't say joy. And then her success, she worked super hard for three years, totally burned out. Her successor, Warren Jensen, took over as CFO from Delta Airlines is where he came from. Joy first and then, and then Warren too. They orchestrate raising about $2 billion in convertible debt on the debt markets, which totally saves Amazon's skin.

• 2:27:06Ben Gilbert?

  And was way more than they raised in the IPO.

• 2:27:08David Rosenthal?

  Way more.

• 2:27:09Ben Gilbert?

  They only raised 55 million.

• 2:27:11David Rosenthal?

  Yeah. Sometimes people are like, oh, Amazon, what a great example of capital light. They raised $10 million in venture and 55 in their IPO and built Amazon. Like, no, no, no. There is another $2 billion.

• 2:27:23Ben Gilbert?

  And they used it.

• 2:27:24David Rosenthal?

  And they used it. Amazon would have been amazon dot toast had it not been for that. So summer of 1999, the stock starts falling. The board gets pretty worried about the company, about Jeff. I mean, it's hard to remember this, but yeah, this happened. The board asks Jeff to bring in a COO to compliment him. It's so painful to read this and like, go back that this happened. And they bring in Bill Campbell, the coach, the legendary Bill Campbell.

• 2:27:58Ben Gilbert?

  Who, we should say, he's legendary. He's, 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 gotta wonder what was going on here, too.

• 2:28:15David Rosenthal?

  No, it's not just Twitter. Like, Bill, I think, probably genuinely was amazing. And the testimony of so many people to him, even people like Scott Cook, who he came in and replaced. So it wasn't just Twitter. Apple with Steve Jobs, Google with, you know, Eric Schmidt, Intuit with Scott Cook.

• 2:28:33Ben Gilbert?

  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-

• 2:28:39David Rosenthal?

  It was convince the founders to move aside and bring in the adult supervision.

• 2:28:44Ben Gilbert?

  Yes.

• 2:28:44David Rosenthal?

  There's a fact pattern here, for sure. Doesn't mean he probably wasn't amazing and like, didn't help all those companies. But yeah, the Amazon board brings him into Amazon and simultaneously asks Jeff to go find a COO. So supposedly, actually, a leading candidate for the job was Jamie Dimon, if you can believe that. Isn't that crazy?

• 2:29:04Ben Gilbert?

  What could have been?

• 2:29:05David Rosenthal?

  They settle on Joe Galley, who had been an executive at Black & Decker. And he had actually signed to go take an executive role at Pepsi, running the Frito-Lay division. What other COO transitioned to CEO of tech company came from Pepsi?

• 2:29:25Ben Gilbert?

  John Sculley.

• 2:29:26David Rosenthal?

  That would be John Sculley. So there's a Sculley situation going on here at Amazon in 1999.

• 2:29:33Ben Gilbert?

  So Bezos does take this seriously. He reorgs. He has everyone report to the Black & Decker guy, to Joe. And, you know, he says, my only direct report is now Joe. And- At the same time, he's also like, you look, you're COO, you're not CEO. And Joe's sort of 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.

• 2:30:01David Rosenthal?

  And like, I think I'm supposed to like be the COO for a while and then.

• 2:30:05Ben Gilbert?

  Move into this role and, you know, do it my way. We're going to do it the way that we did it at Black and Decker and from the world where I came from. And Amazon rejects this. So Joe starts running Amazon, sort of. He starts sort of trying to get people to start moving to his way of doing things and 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.

• 2:30:35David Rosenthal?

  Oh, man, that wasn't the worst offense.

• 2:30:38Ben Gilbert?

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

• 2:30:42David Rosenthal?

  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 print it out and read it to him. And then he would tell her what to respond. Yeah. Actually, that sounds pretty awesome. I would love that. I would love to do.

• 2:31:10Ben Gilbert?

  You definitely would. Yes.

• 2:31:11David Rosenthal?

  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 going to work running Amazon.

• 2:31:23Ben Gilbert?

  So Joe's out.

• 2:31:25David Rosenthal?

  Yep. He does, though, make one absolutely incredible lasting contribution to Amazon, which is he was a key part of recruiting Jeff Welke. I think Jeff and everybody was too, but that absolves a lot of sins.

• 2:31:42Ben Gilbert?

  And for listeners unfamiliar with Jeff Wilkie, what did Jeff go on to do at the company?

• 2:31:46David Rosenthal?

  Jeff basically inherited and then expanded Rick Dalzell's role. And 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 Wilkie.

• 2:32:06Ben Gilbert?

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

• 2:32:10David Rosenthal?

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

• 2:32:21Ben Gilbert?

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

• 2:32:23David Rosenthal?

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

• 2:32:27Ben Gilbert?

  All right. So Amazon's woes, though, are real. They now have a big debt service to pay based on this big convertible bond offering. And 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 99 is like 600 million to 1.8 billion. Unbelievably impressive, but their stock price the previous year from 98 to 99 had 10xed. And 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,

• 2:33:09Ben Gilbert?

  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. And so this is, of course, how bubbles happen, then bubbles, of course, pop.

• 2:33:21David Rosenthal?

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

• 2:33:25Ben Gilbert?

  No, not at all. So by 2001, it's becoming clear that they got to pull back. And so in 2001, they lay off 1,300 people. And 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, but they almost, well, they weren't dominant. And that feels weird, saying today, remembering a time where it wasn't always succeeding.

• 2:33:54David Rosenthal?

  I think they were pretty close to death. So after the whole golly.

• 2:34:00David Rosenthal?

  Incident, let's call it an incident. And Jeff kinda reaffirms, hey, I do wanna be CEO here. I'm putting my hands back on the wheel. He changes the motto of the company from get big fast to quote, "get our house in order." I think they also had T-shirts made of that.

• 2:34:17Ben Gilbert?

  That reminds me a lot of, uh, 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.

• 2:34:27David Rosenthal?

  That was so funny. Not quite the same, not quite the same.

• 2:34:31Ben Gilbert?

  No.

• 2:34:31David Rosenthal?

  I don't know how related it was to the whole Coach Campbell golly thing. It probably was more just about the competitive dynamic. But shortly after that, I don't know which side initiated it, but 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. And there's, 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 grow 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.

• 2:35:14David Rosenthal?

  Frankly, I didn't think he could do it." And A, everything about that is telling, but like, the whole world thinks the same thing too. They don't think Amazon can do this.

• 2:35:26Ben Gilbert?

  Yeah.

• 2:35:27David Rosenthal?

  Jeff, though, I think he always believed he could do this. So he announces a internal company goal that he announces to the whole company, part of the get our house in order mantra, that they will be profitable by the fourth quarter of 2001. So they start looking at any possible way to increase cash flow. And necessity being the mother of invention here. They start looking around like, okay, what do we have? What can we do? We've got a pretty good e-commerce website. A lot of people want to have e-commerce websites. What if we start going to other companies who want to have good e-commerce websites? And we offer to sell them our website, like our infrastructure.

• 2:36:10Ben Gilbert?

  Almost like being Shopify.

• 2:36:12David Rosenthal?

  Yeah, this is like Shopify, not AWS.

• 2:36:16Ben Gilbert?

  And they do it in a ludicrously high-touch manner.

• 2:36:19David Rosenthal?

  Yes.

• 2:36:19Ben Gilbert?

  It's not like we're just going to open up our platform. This whole obsession with interfaces and platforms and APIs that exist with Amazon today Hasn't really happened yet.

• 2:36:27David Rosenthal?

  No.

• 2:36:28Ben Gilbert?

  So they're like, who can we basically do weird one-off partnerships with to create some sort of co-branded website for them using our technology and all of our people to sell the stuff that they have relationships with manufacturers on.

• 2:36:43David Rosenthal?

  And customers and that we can then just get paid like a software fee for.

• 2:36:48Ben Gilbert?

  Yes.

• 2:36:49David Rosenthal?

  So they do this with Toys R Us and then they do it with Borders.

• 2:36:53Ben Gilbert?

  I remember the Borders branded Amazon. It was really weird.

• 2:36:57David Rosenthal?

  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 backend as Amazon, you could then use that on Amazon. I totally remember doing this and it worked the other direction, too.

• 2:37:11Ben Gilbert?

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

• 2:37:34David Rosenthal?

  It wasn't, but they needed the money.

• 2:37:36Ben Gilbert?

  Yeah.

• 2:37:37David Rosenthal?

  So they do it with Target. They literally ran Target's website for years, which ominously, they announced that deal on September 11th, 2001. So, oof, rough. They even go pitch the idea to Walmart to do the same thing with Walmart. Walmart is, they're like, yeah, no, thanks, guys.

• 2:38:00David Rosenthal?

  Nice try. Here's the super fun part. So Amazon is going around pitching all these other retailers. Let us take over for you, you know, run your website, blah, blah, blah. eBay knows they know Amazon's in a tight spot. They probably heard about Golly and 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 selling. So it had become Z shops, which we'll talk about now on Amazon. Just let eBay, we know how to do this.

• 2:38:44David Rosenthal?

  You keep running amazon.com, the retail, and we'll do third-party selling for you with eBay technology. On Amazon, like, wow, oh, my gosh. You know, the, the Michael Jordan meme of like, I took that personal?

• 2:38:58Ben Gilbert?

  Yes.

• 2:38:59David Rosenthal?

  I think from the last dance, I think Jeff took that personal.

• 2:39:03Ben Gilbert?

  Yes, I agree.

• 2:39:04David Rosenthal?

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

• 2:39:18Ben Gilbert?

  I mean, at this point, they've got over $2 billion of debt on the balance sheet. I think it actually increased from 2000 to 2001 and 2001 to 2002. So they're like 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.

• 2:39:38David Rosenthal?

  Still hasn't happened. No, no.

• 2:39:39Ben Gilbert?

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

• 2:39:46David Rosenthal?

  Yes. So 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. And then when Golly took over and everybody reported to Joe, then it became the S team, the senior team.

• 2:40:02Ben Gilbert?

  Which it stayed, the S team.

• 2:40:03David Rosenthal?

  Which it stayed. That seems more appropriate than the Jeff team. But anyway, he calls a weekend emergency ST meeting at his house to discuss third-party selling on Amazon. Now, 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, you know, like a regular retail type listing? So they started this thing called Zshops. But again, it was a separate tab website, wasn't like right on the product page of amazon.com.

• 2:40:40Ben Gilbert?

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

• 2:40:45David Rosenthal?

  And what they realize 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. You know, if you were on a product page for amazon.com, you know what that thing is that you're gonna buy.

• 2:41:07Ben Gilbert?

  I mean, they invented, anybody who's ever used against the API, like they have ASIN, A-S-I-N, it's a unique Amazon identifying number for a product, that they have an authoritative catalog on everything they sell.

• 2:41:19David Rosenthal?

  And anybody who's ever bought something on eBay, you don't really know what you're getting.

• 2:41:23Ben Gilbert?

  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.

• 2:41:32David Rosenthal?

  Yes, yes.

• 2:41:33Ben Gilbert?

  For all products.

• 2:41:35David Rosenthal?

  So they come up with this crazy idea in this meeting, and there's some backstory that leads to it, which is they, on the product pages, they had links to Zshops listings, and that was the only thing that kind of drove actual converting traffic. And they're like, what if we put listings from third-party sellers?

• 2:41:53Ben Gilbert?

  Oh, yes.

• 2:41:53David Rosenthal?

  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. And so they launched this in a matter of months. In November of 2000, they launched Marketplace first with books. This is like nuts. Yeah. People are pissed at Amazon. But you're a category manager at Amazon. Your competition, Brad writes about this, just went from like being outside the walls of amazon.com. You just let all your competition inside your walls, in the castle, on your product page.

• 2:42:37Ben Gilbert?

  And I don't know exactly how it works. I think it's more sophisticated than this, but basically like 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 buys the competing vendors, you know, third-party sellers' product. And so you as category manager, if you've got a number next to your name, that doesn't accrue to your number.

• 2:43:02David Rosenthal?

  Nope. That goes to a totally different team within Amazon, but kind of just like amazon.com originally. It turns out customers really like competition, paying lower prices, being able to buy more stuff, getting more selection. They launch it in November and even though it launched in the middle of Q4 in 2001.

• 2:43:25Ben Gilbert?

  Which was 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.

• 2:43:34David Rosenthal?

  It accounts for 15% of all customer orders on amazon.com marketplace. While today marketplace is over 50%, so over half of everything that is sold on amazon.com is not sold by Amazon.

• 2:43:48Ben Gilbert?

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

• 2:43:58David Rosenthal?

  What a Jeff thing to say.

• 2:44:00Ben Gilbert?

  This is 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. And 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. And 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.

• 2:44:32David Rosenthal?

  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's on thin ice.

• 2:44:40Ben Gilbert?

  And this could have blown up the company too. I mean, this is a different business model.

• 2:44:44David Rosenthal?

  All of the emotional incentive that I would imagine for somebody in this amount of pressure is like to the board, the shareholders, everything, just be like. Okay, I gotta come back. I gotta save. Can't rock the boat. We gotta, you know, cost cut, blah, blah. And he's like, nope, we're gonna like make this radical shift in this dire moment. You're totally right. Not only is this something like 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 like plucked out of thin air when he kind of came back after the golly incident. They do it. Marketplace is a big component of this. The website deals

• 2:45:26David Rosenthal?

  with Target and Toys R Us are a big component of this. In Q4 of 2001, they do 1.1 billion of revenue, 59 million of operating income, 35 million of pro forma adjusted net income, excluding stock-based comp and other, you know, non-cash expenses, which Wall Street's like, yeah, yeah, blah, blah, blah. But 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 announce results, the stock jumps 25% in one day,

• 2:46:09David Rosenthal?

  which no other internet stocks were jumping up in that moment in time.

• 2:46:14Ben Gilbert?

  Right. I mean, people are licking their wounds after 2000 for three years, four years.

• 2:46:20David Rosenthal?

  Yeah, it was an amazing achievement.

• 2:46:23Ben Gilbert?

  Amazon had seen big jumps before, like the Henry Blodgett thing during the dot com era where it was trading below 100 and suddenly jumped to like 250 or something. And all at once, just on Henry Blodgett saying, I think it's going to go to 400.

• 2:46:35David Rosenthal?

  Yeah.

• 2:46:36Ben Gilbert?

  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.

• 2:46:44David Rosenthal?

  This is post September 11th. This is like today, you know, in the stock market. Like, yeah, a year ago. Yeah, stocks jumped 25% of the day like, you know, great, everybody's doing, you know, this is like, everybody else is going down and we went up.

• 2:46:58Ben Gilbert?

  Yep. And this is kind of 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.com bubble burst.

• 2:47:12David Rosenthal?

  No, it would be a long journey, but Amazon's stock price tripled in 2007 while eBay's fell by over 50%. And during that year, for the first time since like eBay's IPO, Amazon finally passes eBay in market cap. Today eBay's market cap.

• 2:47:31Ben Gilbert?

  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 comes, you know, it's got the divestiture of PayPal in it. It had the acquisition and then divestiture of Skype. So there's some wonkiness. Their post 2015 has been pretty good.

• 2:47:51David Rosenthal?

  Yep. But still, I mean, I think we can declare Amazon the winner here in the long run.

• 2:47:56Ben Gilbert?

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

• 2:48:02David Rosenthal?

  Okay. Few more stories we got to tell about this kind of era of Amazon. Before we talk about another era of Amazon on the next episode. So we talked about Google. As the years go by, after the dot com crash and.

• 2:48:22Ben Gilbert?

  Portals sort of go away and the browse motion on the internet becomes kind of inefficient because the internet's fricking huge and growing really fast. Turns out, search is really important. And so Amazon's looking at Google. They're like, God, they've got an unbelievable business. It's kind of a monopoly. The gross margins are incredible. Finding things on the internet seems really important. We should get into that too.

• 2:48:45David Rosenthal?

  Yep. 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 mean, I think this is drawing too broad of a brush, but I think Google killed eBay, right? You know, the best way to search eBay is Google. It's not eBay.

• 2:48:59Ben Gilbert?

  And the issue with Amazon for a while was the best way to search Amazon was Google.

• 2:49:03David Rosenthal?

  Right. And Jeff, of course, through his very direct connection to Google, he saw this problem certainly before eBay, but you know, but before lots and lots of people. He has a quote on Google from like the pretty early days of Amazon kind of dealing with this. And he says to folks at Amazon, treat Google like a mountain. You can climb the mountain, but you can't move it. Use them, but don't make them smarter. As in like, don't make them smarter about searching our product catalog. So for the first time, knowing like what a strategic priority search is becoming on the internet and thus to

• 2:49:41David Rosenthal?

  Amazon, Amazon breaks down and starts a secret subsidiary in California, in Palo Alto. They do a whole bunch of legal gymnastics to like, oh, it's a separate subsidiary. It's not Amazon.

• 2:49:55Ben Gilbert?

  It doesn't generate any revenue.

• 2:49:57David Rosenthal?

  But this is the beginning of the end. Like, you know, eventually after the financial crisis, a whole bunch of stuff happens and they have to just give in and say, great, we've got operations, we're charging tax everywhere.

• 2:50:06Ben Gilbert?

  I think it's a misunderstanding of Amazon to say they're, 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 five to 10% less because there's no sales tax on them. Again, because it's technically putting the onus on the consumer. And they're like, well, corporate income tax is a whole separate thing. And, you know,

• 2:50:27David Rosenthal?

  No, this is about attracting customers.

• 2:50:29Ben Gilbert?

  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.

• 2:50:36David Rosenthal?

  100% after I graduated from college and I was living on my own for the first time with my own salary and expenses, you know, a light bulb went off on my head. One day I was like, I'm gonna buy everything on Amazon because I don't pay sales tax.

• 2:50:51Ben Gilbert?

  Yep.

• 2:50:52David Rosenthal?

  Fortunately, now I'm in a place where that doesn't matter to me now. It's kind of like the Walmart episode. If saving 5% to 10% on your groceries on your item, like that matters a lot to a lot of people.

• 2:51:03Ben Gilbert?

  Totally.

• 2:51:04David Rosenthal?

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

• 2:51:29Ben Gilbert?

  Ayo.

• 2:51:29David Rosenthal?

  Algorithms, Ayo. And like you said at first, they're like, oh, we should start our own separate search engine and compete with Google. Well, it turns out there's a network effect in search as well.

• 2:51:40Ben Gilbert?

  Yeah.

• 2:51:41David Rosenthal?

  Which is the more data you have on the more searches happening, the better searches you can return. So 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 amazon.com.

• 2:51:57Ben Gilbert?

  Yep. Cause 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.

• 2:52:11David Rosenthal?

  And they don't see conversion. Plus there's the review system, which we haven't talked about was completely genius, huge to Amazon's success.

• 2:52:20Ben Gilbert?

  Did you know Shell wrote that over a weekend in 96? The original review system?

• 2:52:25David Rosenthal?

  I know, amazing.

• 2:52:27Ben Gilbert?

  One of the first things on amazon.com.

• 2:52:29David Rosenthal?

  But 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. You know, and today, like, 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 got the filtering, it's way better.

• 2:52:45Ben Gilbert?

  Yep.

• 2:52:45David Rosenthal?

  This is the beginning of all that. And 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 and eBay is paying the Google tax on all that, you know, and Google's the strategic intermediary. Amazon is terrified of the same thing happening to them.

• 2:53:08Ben Gilbert?

  And meanwhile, over in Google Labs, man, 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. That wasn't like Google X, Google moonshot stuff. It was like

• 2:53:21David Rosenthal?

  Useful stuff.

• 2:53:21Ben Gilbert?

  Where Google Images came out of and like Gmail and those sort of things.

• 2:53:25David Rosenthal?

  Maps and yeah.

• 2:53:26Ben Gilbert?

  Yeah. And one of them was called Frugal. It was F R O O G L E. And I think it was like product search. And I think it was kind of what Google Shopping became.

• 2:53:36David Rosenthal?

  Dude, Frugal, 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 broke, I mean, as an investment banker, but like I was making 60K a year living in Manhattan. Money mattered. And I believe Frugal was insanely popular and I think kind of morphed it and shut it down for antitrust concerns.

• 2:53:57Ben Gilbert?

  Oh, really?

• 2:53:58David Rosenthal?

  My understanding, like, I think it actually was like, there was a lot of demand for that product.

• 2:54:02Ben Gilbert?

  Huh. I mean, it was comparison shopping, I think, is ultimately what it, what it was.

• 2:54:07David Rosenthal?

  So the other thing, and this is what's just getting, Amazon is so good at, 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. And it, you know, first it was like, oh, we're going to make our own search engine and that was a bad idea. Well, what is the business model of search? It's advertising.

• 2:54:33Ben Gilbert?

  Advertising.

• 2:54:34David Rosenthal?

  And what do they realize? We can build an advertising business with search on Amazon? Just absolutely brilliant.

• 2:54:44Ben Gilbert?

  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. And I think Amazon's ad business, I haven't done the research yet for next episode, but I think it's somewhere around $40 billion in revenue now.

• 2:55:05David Rosenthal?

  It is $30 billion revenue run rate of Incredibly high, I mean, they don't break out the margins, but like it's search ads.

• 2:55:12Ben Gilbert?

  It's basically 100% margin business.

• 2:55:14David Rosenthal?

  Yes.

• 2:55:15Ben Gilbert?

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

• 2:55:27David Rosenthal?

  The other incredibly impactful thing that comes out of A9 and search and improving search on the amazon.com website is that really is one of the catalysts that pushes the company to transition from a monolith software architecture to microservices, independent microservices. And that is amazing for Amazon playing defense. And that is also amazing for providing web services to other developers out there.

• 2:56:03Ben Gilbert?

  Yes.

• 2:56:03David Rosenthal?

  Might be able to imagine that.

• 2:56:05Ben Gilbert?

  Are you leaving us there, David?

• 2:56:07David Rosenthal?

  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 a Coda and

• 2:56:17Ben Gilbert?

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

• 2:56:22David Rosenthal?

  I don't know. We've probably done it more than once, but in my mind, the canonical acquired episode Coda is the PlayStation on the Sony episode.

• 2:56:31Ben Gilbert?

  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.

• 2:56:39David Rosenthal?

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

• 2:56:46Ben Gilbert?

  Yes.

• 2:56:47David Rosenthal?

  And then you, you know, you're done. And then the PlayStation.

• 2:56:52Ben Gilbert?

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

• 2:56:59David Rosenthal?

  Well, it's like, you know, 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. And that's the story of the Kindle.

• 2:57:12Ben Gilbert?

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

• 2:57:25David Rosenthal?

  Well, I didn't do any financial analysis, but 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. And 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, there were like five people in the internet in Silicon Valley.

• 2:58:00Ben Gilbert?

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

• 2:58:05David Rosenthal?

  When I found this out and I texted you, I was just like, oh, my God. Okay. Do you know, 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.

• 2:58:24Ben Gilbert?

  And let's give a little bit of hints. So when we say inspired, they started an independent company doing Kindle-like things, e-reader things before.

• 2:58:34David Rosenthal?

  One of the first e-readers.

• 2:58:35Ben Gilbert?

  Yes.

• 2:58:36David Rosenthal?

  The first successful e-reader.

• 2:58:37Ben Gilbert?

  But long before it would take off, it was not with e-ink. It was with a predecessor technology.

• 2:58:42David Rosenthal?

  It was with LCD, which was a big problem.

• 2:58:44Ben Gilbert?

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

• 2:58:54David Rosenthal?

  Well, 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 Everhard and Mark Tarpening inspired Jeff Bezos and Amazon to build the Kindle.

• 2:59:17David Rosenthal?

  Here's the story. So in 1997, Martin and Mark were working in Silicon Valley. Napster was happening. The music industry was getting digitized and eviscerated and, you know, all the stuff, MP3s, MP3 players, you know, it was total upheaval. And 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. And video is going to take a while because bandwidth and file sizes of video is a lot and broadband isn't a thing yet for most people. But books are

• 2:59:57David Rosenthal?

  really obvious, right? Smaller file sizes than MP3s, very easily digitizable. This should be a thing. Now, what's holding back the industry? Like, unlike MP3s where like, 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. So they develop, they, you know, go around, they like, talk to a bunch of, explore a bunch of technology and they're like, we can make the equivalent of an MP3 player for a book, an e-reader. So they start a company, they call it Nuvo Media, and they make the Rocket Book. They make a prototype, but it's hardware. They need to like, bring it to market, they

• 3:00:39David Rosenthal?

  need capital, they need the largesse of, just like their future hardware startup Tesla, the largesse of a wealthy person who might want to see this happen. So who do they call? They fly up to Seattle and they meet with Jeff Bezos. This is in the bubble era. And Bezos is really interested. And I think Amazon's public at this point. Yes, Amazon's public, had just gone public. Jeff totally gets it. He's like, I mean, our business is selling books. We're an internet company. I see what's happening with Napster. This is happening at some point in some way. This is for sure happening at some point in some way. This is the first time I've seen this. This is the first real, like, I'm very interested. So they negotiate for

• 3:01:22David Rosenthal?

  three weeks and they, they want Amazon to become, you know, to sell books. You need like, 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 Rocket Book. And 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 and Noble or anybody else.

• 3:01:49Ben Gilbert?

  Right. Why would we fund the development of this?

• 3:01:51David Rosenthal?

  Right.

• 3:01:52Ben Gilbert?

  And all the customer acquisition for you if we're not going to be the exclusive provider?

• 3:01:56David Rosenthal?

  So like any good entrepreneurs and 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.

• 3:02:09Ben Gilbert?

  I love that these guys are back in the story.

• 3:02:11David Rosenthal?

  I know they're back in the story. And of course, Barnes and 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 and like, it's too early, but like Oprah makes it one of her 10 favorite things for the year. Like it's, it's a hit. So ultimately Gemstar TV Guide, pretty quickly after, acquires the company for almost $200 million. So Martin and Mark, they get pretty wealthy and.

• 3:02:52Ben Gilbert?

  These guys are flush with some cash and you know.

• 3:02:55David Rosenthal?

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

• 3:03:09Ben Gilbert?

  Oh, interesting.

• 3:03:10David Rosenthal?

  Man, like the tangled web here is amazing, amazing. So Jeff and Eberhard, they kind of remain friends through all this and like, just like, all right, you know, no hard feelings. Like there's plenty of other stuff going on at Amazon. And as the years progress, they kind of stay in touch and Jeff is always asking Martin like.

• 3:03:35David Rosenthal?

  Hey, when do you think the technology, you know, we're thinking about this? When do you think it might be ready? Then in 2003, Apple and Steve Jobs, well, 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.

• 3:03:59Ben Gilbert?

  Yes, not the Apple we know of today.

• 3:04:01David Rosenthal?

  And in 2003, oh, it's so fun going back and remembering this. They launch iTunes for Windows. That was such a huge moment for Apple and Steve Jobs knew it. Like, he totally freaking knew it. So Bezos and a couple other folks go down to meet with Jobs after iTunes for Windows launches. Cause they're like, shoot, you know, like we sell a lot of CDs on Amazon. And Jobs is like, yeah, you sell a lot of CDs on Amazon. Good luck with that. And by the way, like, we're not just thinking about CDs and music here. So there's now a new threat to not just any business within Amazon,

• 3:04:44David Rosenthal?

  but like the original core books is immediately what they're thinking about.

• 3:04:48Ben Gilbert?

  Which is still like 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.

• 3:04:56David Rosenthal?

  Totally. So there's now some urgency in Amazon to deal with this. So Jeff calls Martin back up, but they've already started Tesla at this point. And he's like, um, yeah, we gotta do this now. And Martin's like, okay, well, the LCD screen that we used on the Rocket Book 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. And it wasn't quite ready yet, but you might want to go like, check them out and see if it's ready now.

• 3:05:30Ben Gilbert?

  And 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 it in the sun.

• 3:05:38David Rosenthal?

  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.

• 3:05:47Ben Gilbert?

  Yep.

• 3:05:48David Rosenthal?

  So this is such a priority.

• 3:05:52David Rosenthal?

  This was after A9, so they already had the one subsidiary in Palo Alto. They set up a second subsidiary in Palo Alto called Lab 126 with the secret mission of make an iPod-like e-reader device.

• 3:06:08Ben Gilbert?

  And I mean, it took them a while.

• 3:06:12David Rosenthal?

  Years.

• 3:06:13Ben Gilbert?

  I mean, two full years and then they slipped the release date by a full year. It was supposed to be out for one holiday season, didn't come out till 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's 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.

• 3:06:46David Rosenthal?

  I mean, there were, gosh, go back and look at photos of, we'll look to some of the sources of that original Kindle that launched, it took till 2007.

• 3:06:54Ben Gilbert?

  It had that keyboard on it.

• 3:06:56David Rosenthal?

  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.

• 3:07:06Ben Gilbert?

  Oh, yeah. Like, he was constantly fighting with the design firm that they had hired to produce it and putting in his own beliefs about how it should be, even though they're the designers. And they would come back and they would say, they would have input on the business model. And he's like, not only are you, you're going to take my design advice and you're definitely not giving me Jeff Bezos' business model advice.

• 3:07:26David Rosenthal?

  And that's the thing. The device nailed a couple of things. E-ink, technology, actually wireless, which was a Bezos thing, like, because Wi-Fi still wasn't quite everywhere.

• 3:07:36Ben Gilbert?

  WhisperSync, I think, was the name of the...

• 3:07:39David Rosenthal?

  WhisperSync, yep.

• 3:07:40Ben Gilbert?

  Or WhisperNet.

• 3:07:41David Rosenthal?

  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. And then on the business side, you can buy any book ever made.

• 3:07:53Ben Gilbert?

  Anywhere, anytime.

• 3:07:54David Rosenthal?

  For $10. And that was just unbelievable. Completely changed the industry.

• 3:08:01Ben Gilbert?

  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, like Amazon kind of 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.

• 3:08:31David Rosenthal?

  Which is funny, it wasn't piracy. It wasn't like the music industry.

• 3:08:35Ben Gilbert?

  Right.

• 3:08:36David Rosenthal?

  It was $10 for an ebook. Yeah. So that, I mean, the Kindle itself, incredible story, but then that leads to Fire tablets, Echoes, the lady who lives in your Echo, Fire TV, Prime Video, Ring, Eero, like all this stuff, and freaking Audible. Oh, my God. Right after the Kindle launch, they buy Audible, Amazon buys Audible for $300 million. Today, Audible has a 40-plus percent market share of audiobooks, which is a $5 billion industry growing 25%.

• 3:09:10Ben Gilbert?

  Wow.

• 3:09:10David Rosenthal?

  Every year. I tweeted about this. This is gonna be one of my like most liked tweets ever. I cannot believe it. Like Audible would be a $10 billion company on its own? More? I don't know.

• 3:09:21Ben Gilbert?

  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. So that's Audible. So we've got Kindle, we've got Audible. There's a lot more to talk about here before we get into AWS. But I think, like, I really want to dig into Prime, but let's save that for Playbook because I feel like that's gonna be a good place to hit sort of what's going on there.

• 3:09:55David Rosenthal?

  Great.

• 3:09:56Ben Gilbert?

  All right, listeners. Now is a great time to talk about a new partner of ours here on Acquired, Logora, the agentic operating system that is redefining how the world's best legal teams work.

• 3:10:09David Rosenthal?

  Yep. It's sort of obvious that AI is going to completely change the legal industry. I bet most of you listening have dropped a contract into some sort of AI chatbot out there. Logora took that insight and asked the question, what if you really built something with that power from the ground up for the legal industry?

• 3:10:26Ben Gilbert?

  So the founders did exactly what great founders do, operate with obsessive customer focus. They embedded inside a massive law firm for months. They sat with the lawyers just watching how the work really gets done.

• 3:10:41David Rosenthal?

  And that's how you get features that customers love, like tabular review, where you drop in a folder of hundreds of contracts and it pulls every key term into a grid a lawyer can actually work with. Logora's bet here is interesting. Since it lets each lawyer handle more complexity, any given person can increase the quality of their work and do higher value work. And this means that the pie can grow even as each individual task takes less time.

• 3:11:05Ben Gilbert?

  And they recently launched Logora Agent, offering greater intelligence and performance. The agent lets lawyers set an objective, then it can handle the planning and the execution and delivery of the final product. Legal teams get to maintain full control and transparency since they're still involved where judgment is required.

• 3:11:24David Rosenthal?

  And Logora works where you already work. You can use it within Microsoft Word while redlining or drafting. The early Logora numbers essentially speak for themselves. When they have a head-to-head pilot with their top competitor, they win 70% of the time. Logora now has over 100,000 lawyers on the platform from 1,200 legal teams in 50 countries. And crazily, they went from 1 million to 100 million in ARR in about 18 months.

• 3:11:54Ben Gilbert?

  Truly insane numbers. And that is the real test. Plenty of things demo well, but the question is whether a busy associate actually reaches for it during crunch time, or whether a partner trusts it before going into a conversation with a major client. If your legal team wants to check it out, whether you're a law firm or you're in-house at a company, you can learn more at logora.com/acquired and just tell them that Ben and David sent you. Well, let's talk about power. So of course, this is us referencing the Hamilton Helmer book, Seven Powers. And 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.

• 3:12:38Ben Gilbert?

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

• 3:13:05David Rosenthal?

  Oh, so cool.

• 3:13:06Ben Gilbert?

  And he's sort of talking about it as this brand new thing. He's like, it's $79 a year. And 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. And he's sort of describing, what if you could shift all of that to a really, really big fixed cost, basically to get operating leverage on it. And 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. And while that may seem like it can diminish short-term revenue, his view is it builds trust with the customer for the long term,

• 3:13:49Ben Gilbert?

  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 Amazon identifier of a specific product that you are looking for. Well, he points out, well, 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. And 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.

• 3:14:28Ben Gilbert?

  Then you can amortize every new investment and every new feature across a massive customer base. So 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 it was like Jeff was writing that part of the book as he was sort of giving this speech and it just sent alarm bells off in my ears.

• 3:15:01David Rosenthal?

  Ah, that's awesome. Well, 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 Plus. 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.

• 3:15:34Ben Gilbert?

  Oh, yeah.

• 3:15:35David Rosenthal?

  Seattle hometown heroes. So you mentioned Prime. We skipped over this in History and Facts, but I think let's talk about it a little bit here.

• 3:15:43Ben Gilbert?

  Great.

• 3:15:44David Rosenthal?

  Jim Senegal and Jeff are buds. They're tight.

• 3:15:47Ben Gilbert?

  Well.

• 3:15:48David Rosenthal?

  At least they were.

• 3:15:49Ben Gilbert?

  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. And 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 sort of get.

• 3:16:15David Rosenthal?

  Which is such a lesson from Costco. And it was not a lunch. It was very famously a coffee. In the Starbucks of the Bellevue Barnes and 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 competitors' coffee shops. Not that he's, you know, competitor focused or anything. No, definitely not. Definitely. But yeah, no. So this coffee where they meet for the first time, Jim from Costco is just like, oh, I've never met him, but he must just be such a mensch. He's old school. He's got the Saul Price DNA, worked for Saul Price, you know, knew Sam Walton, his whole thing. He talks about this

• 3:16:59David Rosenthal?

  later. He's like, the reporter asked him, I don't think it was Brad. I think it was somebody else. Like you gave a lot of key information to Jeff Bezos, who, you know, you became friends with. And then he's certainly one of your biggest competitors. And, you know, Jim's response is just like, this is retail. Like 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.

• 3:17:25Ben Gilbert?

  And Jim famously has said that some of his highest performing Costcos are across the parking lot from Sam's clubs, the relish's competition.

• 3:17:32David Rosenthal?

  Yeah. So actually the purpose of the meeting was that Jeff wanted to pitch Jim on, this was like early days when they were expanding the categories on Amazon and there was a bunch of products that they couldn't get yet. They didn't have relationships with suppliers. So Jeff wanted to pitch Jim on Costco selling on Amazon for like the products that Amazon didn't carry yet. That didn't go too far. But yeah, Jim gives him like this masterclass on the Costco model. And it sounds insane if you're not familiar with it from the outside, but then makes total sense if you realize you're focused on gross margin dollars over the life of a customer, not percentage. So the Costco model is they make essentially, it's more complicated

• 3:18:18David Rosenthal?

  than this, but essentially they make 0% operating margin on their retail operations. They sell at such a low price.

• 3:18:29Ben Gilbert?

  I think I looked into this when we were working on the Walmart episode. It's something like five to 7% gross margin business.

• 3:18:34David Rosenthal?

  I think it's a little higher than that, but it is basically set that such that like, when you take out the cost of running both the backend logistics and the warehouses themselves, they are making no profits on the actual retail business.

• 3:18:51David Rosenthal?

  And all of the profits of the company come from the memberships, the annual memberships.

• 3:18:57Ben Gilbert?

  So the merchandise just needs to provide you enough value to then renew your membership for the next year.

• 3:19:03David Rosenthal?

  Right. And the beauty is it perfectly plays on customer psychology. Ordinarily, you'd be like, why would anybody pay money for the right to shop at someplace? You can just walk into a Walmart. You don't have to pay Sam any money to shop there. Well, 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 in as a result of having that membership, you get this insane combination of like 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.

• 3:19:44David Rosenthal?

  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.

• 3:19:54Ben Gilbert?

  Yeah, it's pretty amazing.

• 3:19:55David Rosenthal?

  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.

• 3:20:17Ben Gilbert?

  Yep. Now, what Jeff Bezos chose to do here was a little bit different because I don't think he's running a break even retail business and just making money on Prime. I think he sort of 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 gonna keep shopping on Amazon. He almost flipped it and is like, oh, I want to use that same psychology, but I, I don't need to run a, I don't need to make $0 running the business and make everything on Prime. And 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.

• 3:21:02David Rosenthal?

  Super saver, right?

• 3:21:03Ben Gilbert?

  Yep. Yep, 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. And this idea was really somebody inside the company sort of pitching.

• 3:21:15David Rosenthal?

  It was an engineer named Charlie Ward, I believe, submitted it as an idea.

• 3:21:20Ben Gilbert?

  And 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. And so 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.

• 3:21:56David Rosenthal?

  Yep, totally. And again, demonstrates Jeff and everybody at Amazon thinking through like, what is the nature of their business? What is the nature of e-commerce? 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. Yeah, it's a little less convenient to shop at Costco versus Walmart of, yeah, maybe you gotta like reach up higher on the warehouse shelves, but it's not really that different. You know, whereas shopping online, getting your stuff in two days or next day or same day, that's a big difference than getting your stuff two weeks from now. Like, that's a really important difference.

• 3:22:41Ben Gilbert?

  Yeah, totally. Now, all that said, even though we're saying, hey, you know, 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.

• 3:22:56David Rosenthal?

  Wow.

• 3:22:57Ben Gilbert?

  I'm pretty sure they lose money on just Prime if I'm thinking about my own habit. For the amount of stuff that are from Amazon, if I actually had to pay shipping, would I be paying more than $129 in shipping? Absolutely. And what about all that stuff that I watch on Prime Video? Absolutely. So 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.

• 3:23:26David Rosenthal?

  That 20 billion, you know, whether they're making any like actual profits out of that or not, debatable, but this is where it just ties so tightly into the Amazon flywheel, which is another key piece we didn't discuss in history and facts, but comes from. They do a management offsite in 2001 with Jim Collins, author of Good Degree, where he writes about the flywheel. It was actually before Good Degree came out.

• 3:23:51Ben Gilbert?

  Right. Didn't they get a little preview of it?

• 3:23:53David Rosenthal?

  Yeah, a little preview, but because of Prime and this kind of guarantee to all these people who sign up for Prime that you're going to get two-day shipping, that kind of upfront funds Amazon's investment in better distribution and logistics, everything we talked about on the whole episode. And then like 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 and optimize. Like, nobody else has their own airline with 96 planes. I'm like, Walmart doesn't have their own airline with 96 planes.

• 3:24:30Ben Gilbert?

  So they have more predictability. They have more loyalty. So they have longer customer lifetime. So they have more absolute margin dollars from purchases coming in. But 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.

• 3:25:02David Rosenthal?

  Just to complete the flywheel, Amazon, through having all of this leverage that we just talked about in their operation, this operating leverage and float and all these wonderful things, they can work on charging even lower prices, providing even more vendor selection and even better convenience, like all three on the Holy Trinity, they give better at that. That attracts more customers. More customers then attract more sellers and suppliers on the platform. And then that allows Amazon to get more operating leverage. And then the cycle just repeats itself over and over and over and drives itself around many, many, many times a year. I think now

• 3:25:48David Rosenthal?

  I could be wrong on this. I believe Amazon's inventory turns per year are something like 16 or something like insanely high, probably not as high as 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.

• 3:26:08Ben Gilbert?

  And that's just the first party. I mean, 57% of Amazon's sales right now are from third-party sellers where Amazon's just collecting margin dollars and holding no inventory.

• 3:26:18David Rosenthal?

  So yes, scale economies. They got that one.

• 3:26:22Ben Gilbert?

  Absolutely.

• 3:26:23David Rosenthal?

  As I don't think that's the only one that they have.

• 3:26:25Ben Gilbert?

  No.

• 3:26:26David Rosenthal?

  I think they definitely have brand. No doubt in my mind that they have brand. Like 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.

• 3:26:41Ben Gilbert?

  I absolutely do this.

• 3:26:42David Rosenthal?

  100%. And Amazon exploits this. This is part of the legacy of search and all the algorithms of the company. Very smart pricing and dynamic pricing on the website. But yeah, I'm sure I could buy stuff cheaper, most things.

• 3:26:57Ben Gilbert?

  But you don't look.

• 3:26:57David Rosenthal?

  Then I'd get them on Amazon, but I don't even look because I'd have to wait two weeks or I'd have to go find it or like I wouldn't have the smooth customer experience. Like, of course, I'm just going to go to Amazon.

• 3:27:08Ben Gilbert?

  And it used to be, so for a while, I remember my development over the course of being an Amazon customer here. So think like 2008 to 12 timeframe when I was in college, I would comparison shop for sure. Amazon versus everything else. And I would do that and I would do that. And Amazon would win so consistently because they do the Walmart thing where they would go out and scrape every other site and create a bot and make sure that they could be the lowest price anywhere of a reputable retailer. And so enough times that happened where I got conditioned to just stop looking because they were lowest price anywhere. Then I think about five more years went by and 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.

• 3:27:49Ben Gilbert?

  I didn't recognize the brand name of the seller. And 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's just all these little things about Amazon where 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.

• 3:28:13Ben Gilbert?

  That is an incredible, incredible brand power that they've built.

• 3:28:17David Rosenthal?

  There's then a third hop of, I don't even comparison shop anymore because it's not worth my time to do that.

• 3:28:24Ben Gilbert?

  Right. Cause I know that I'm going to find something potentially marginally cheaper and still not pull the trigger.

• 3:28:30David Rosenthal?

  Again, this is a difference versus like when we were broke post-college students.

• 3:28:34Ben Gilbert?

  Yes.

• 3:28:35David Rosenthal?

  You know, what are you going to save on stuff? You're going to save 10 bucks? Like you're going to spend half an hour to save 10 bucks. For a lot of people, that makes a lot of sense, but like.

• 3:28:44Ben Gilbert?

  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. And so 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.

• 3:29:00David Rosenthal?

  Totally. Especially, I've got a baby now. Like, I ain't got time for that. Like, hell no. Amazon.

• 3:29:07Ben Gilbert?

  So that's scale economies. That's branding.

• 3:29:10David Rosenthal?

  Network effect for sure. At this point, you know, originally, Amazon didn't, but because they adapted, stole, because Jeff Bezos took it personal.

• 3:29:19Ben Gilbert?

  With third-party sellers you're talking about.

• 3:29:20David Rosenthal?

  With third-party sellers.

• 3:29:21Ben Gilbert?

  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.

• 3:29:36David Rosenthal?

  Yeah, I think that's right.

• 3:29:37Ben Gilbert?

  The fact that you're an Amazon customer, an Amazon customer, I don't care. I don't benefit from that at all. And it's interesting. They've never really leaned into that at all.

• 3:29:44David Rosenthal?

  Yeah, it's interesting. I mean, maybe, well, no, the scale economies. I was going to say maybe a little bit on the seller side because, you know, more scale for Amazon lets them do fulfillment by Amazon. And I bet that's scale economies. That's not.

• 3:29:57Ben Gilbert?

  Yeah.

• 3:29:57David Rosenthal?

  Network effects, but definitely that two-sided network effects. And you see that power with, you know, just run a couple of Google searches and like, lots of Amazon sellers are unhappy with Amazon. Too much leverage. There's competition, blah, blah, blah. They 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?

• 3:30:21Ben Gilbert?

  Yep. Yep, absolutely.

• 3:30:25David Rosenthal?

  Do we think they have any others?

• 3:30:27Ben Gilbert?

  Maybe some lightweight process power. Process power is always so hard to actually put your finger on that I hesitate to name it here.

• 3:30:33David Rosenthal?

  Switching costs, not really. I mean, I can buy this stuff on walmart.com or we're not talking about AWS here. We're talking about Amazon retail.

• 3:30:43Ben Gilbert?

  There's counter positioning in the era that we're talking about Barnes and Noble and subsequently Walmart, because those folks would have to invest so much and did, well 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.

• 3:31:11David Rosenthal?

  We talked at the end of the Walmart episode about how Walmart is currently closing down Sam's Clubs and turning them into online walmart.com fulfillment centers. That tells you everything you need to know right there.

• 3:31:25Ben Gilbert?

  Yep. Yep, absolutely.

• 3:31:27David Rosenthal?

  And certainly counter position versus Barnes and Noble. I mean, the Brad Stone quote we read earlier in the episode of, you know, Barnes and Noble wasn't going to go all in on this because their distribution network was not tuned for e-commerce. They would have had to redo it. And then to do that, they would have had to like majorly prioritize it within the company, put all their best executives on it, change the, you know, it would be less profitable for them. They would lose money in the short run versus the hugely profitable stores. Like it just, all the incentives were not to do it.

• 3:31:59Ben Gilbert?

  Yep. Yep, absolutely.

• 3:32:02David Rosenthal?

  Today, I don't know that you can say they still have counter positioning.

• 3:32:06Ben Gilbert?

  No, that was just a take off phase thing.

• 3:32:08David Rosenthal?

  Yep.

• 3:32:09Ben Gilbert?

  I have been just frothing at the mouth to do playbook on this one. So.

• 3:32:12David Rosenthal?

  All right, let's get into it.

• 3:32:13Ben Gilbert?

  All right. Well, I want to open with a quote from the very first 1997 letter to shareholders, which I always think it's 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.

• 3:32:32David Rosenthal?

  Also, we got to do a shout out to our friend and longtime acquired community member, Preet Anand, who

• 3:32:40Ben Gilbert?

  Absolutely.

• 3:32:41David Rosenthal?

  made a podcast feed reading the shareholder letters.

• 3:32:44Ben Gilbert?

  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. So the quote is, and there's 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. And I think there's this misconception that people have about Amazon that they're sort of trading off growth for margin percentage.

• 3:33:27Ben Gilbert?

  And 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.

• 3:33:42David Rosenthal?

  Right, in the long run.

• 3:33:43Ben Gilbert?

  That is the way that every business is measured. And so the key words here are maximizing the present value of future cash flows, which necessitates building a brand around your stock, which I think Elon is sort of the king of today. Because when you're talking about the present value of future cash flows, since future cash flows are unknown, you do have to kind of build religion around your company today. If your goal is to really get investors on board with your long, long, long-term vision, and Amazon sort of got thrown in with all these other dot com companies. When you sort of read that Barron's article, amazon dot bomb, and a lot of those companies,

• 3:34:27Ben Gilbert?

  Cosmo.com, you know, for no shipping, you could order a pack of gum to be delivered to your house and it would arrive at an hour. You're like, clearly they're losing money on this and I'm not necessarily a loyal subscriber to this. Well, Amazon always was gross margin profitable. They always had solid unit economics, but they would choose to super aggressively reinvest in something. And as we were preparing for this episode, among the number of people we pinged, in addition to Brad Stone and some of the other folks that we were chatting with that were early, early Amazon or sort of around the company, we reached out to friend of the show, Michael Moebison, to see if he had any materials from this time. And we had more than a spidey sense that he would have strong opinions about Amazon at this time.

• 3:35:09David Rosenthal?

  Our episode with Michael, I think is what, like the seventh most listened to, acquired episode of all time?

• 3:35:16Ben Gilbert?

  Yes, it's very widely listened to.

• 3:35:17David Rosenthal?

  Yeah, which is amazing.

• 3:35:19Ben Gilbert?

  He's your favorite investor's favorite investor. He's the ultimate finance professor.

• 3:35:23David Rosenthal?

  If you haven't listened to that, go listen to it.

• 3:35:25Ben Gilbert?

  Yes. So he made this presentation at Amazon in 1999, really advocating for exactly the strategy that they were running and just starting to sort of articulate it and put it into a framework form. And we have the deck here. So one really fascinating observation he makes is that it's really about the weighted average cost of capital, the WACC or WACC. And you don't need to be a finance professor like Michael to understand this. So here's how it sort of works. Suppose you want to invest in building a new distribution center so you can either expand the reach of shipping goods in, say, a new country, or decrease the ship time for existing customers. This is Bezos's sort of insight of how do I turn customer experience into a fixed cost? Well, let's say you have no cash in your bank account.

• 3:36:09Ben Gilbert?

  Well, you have to raise capital. So 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.

• 3:36:20David Rosenthal?

  Which they did.

• 3:36:21Ben Gilbert?

  Which they did that too, to the tune of, what, close to $2 billion?

• 3:36:25David Rosenthal?

  2 billion.

• 3:36:26Ben Gilbert?

  So that capital has a cost to it and 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 got as profits from selling goods. That cash is effectively free for you to use. So if you have a competitor who's financing the growth with debt and you can do it purely with those profit dollars, well, 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

• 3:37:11Ben Gilbert?

  you.

• 3:37:12David Rosenthal?

  Or two months, or three months, or four months.

• 3:37:15Ben Gilbert?

  Yes, you can invest heavily into this new distribution center with many, many more dollars, not just the margin dollars. And 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, well, that works really well.

• 3:37:37David Rosenthal?

  Yes, oh, boy. So 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 like, you know, write insurance premiums and reinsurance premiums and 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 and they get to use all that money in between. You're saying it's like float?

• 3:38:10Ben Gilbert?

  Yes, and 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, 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.

• 3:38:33David Rosenthal?

  Actually, though, 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.

• 3:38:45Ben Gilbert?

  Okay. All right. All right. All right. All right. Fine.

• 3:38:48David Rosenthal?

  It's not like the debt they issued in the early days.

• 3:38:50Ben Gilbert?

  Yes, very much not. But as you can see in putting this slide up, Michael sort of cheekily calls amazon.com cashflow.com 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. And then finally a customer buys your book and then the payment ends up being received. And so there's sort of a few months between when you have to pay your supplier and when you get paid. Whereas what Amazon's doing is completely flipping it 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.

• 3:39:34Ben Gilbert?

  And then you can have a month or two before you need to pay your supplier. So the internet business model and e-commerce totally flips it on its head because of the completely different way that the distribution works and that inventory works.

• 3:39:50David Rosenthal?

  Yep. 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 that they're, you know, cash flow dollars that they're able to get out of it to continue to fund building out the larger scale of their operations.

• 3:40:10Ben Gilbert?

  It's this killer insight that cost of capital and having a negative cash conversion cycle are directly related.

• 3:40:18David Rosenthal?

  Yes.

• 3:40:19Ben Gilbert?

  Or I suppose inversely related.

• 3:40:21David Rosenthal?

  Yeah, you just step back and think about it. You're like, yeah, capital has a cost. But here they're sort of getting paid to use the capital.

• 3:40:30Ben Gilbert?

  Right.

• 3:40:30David Rosenthal?

  It has a negative cost. It's amazing.

• 3:40:32Ben Gilbert?

  Well, and that's where Prime is really this on steroids.

• 3:40:35David Rosenthal?

  Yes.

• 3:40:36Ben Gilbert?

  I'm paying Amazon $129 at the beginning of the year and asking for zero in return. And 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.

• 3:40:48David Rosenthal?

  All right. What else you got?

• 3:40:49Ben Gilbert?

  Well, 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?"

• 3:41:08David Rosenthal?

  Right. 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?

• 3:41:18Ben Gilbert?

  Yes. A lot of people are laughing all the way to the bank on the other side of that bet. So he makes this great point, which is, okay, let's say we are just a retailer with a retail business model. Well, there's a few things that are pretty different and a gigantic cost in the retailing business is your rent. And if you are in a retail space, and 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."

• 3:41:49David Rosenthal?

  Oh, you're killing me here.

• 3:41:51Ben Gilbert?

  Whereas-

• 3:41:52David Rosenthal?

  Thinking about San Francisco real estate.

• 3:41:56Ben Gilbert?

  Whereas if you're running a warehouse somewhere where it really makes sense for us to have a distribution center, it's like 30 cents a foot, which is such, 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.

• 3:42:11David Rosenthal?

  Man, that is such a good point. That's such a good point.

• 3:42:15Ben Gilbert?

  And I'd actually never heard this argument before doing this research.

• 3:42:17David Rosenthal?

  That's a fantastic point. Even Walmart, where Walmart stores are not in multi hundred dollar a square foot, prime, prime, funny choice of word, primo urban real estate, it's still a higher cost of real estate than where Amazon fulfillment centers are.

• 3:42:39Ben Gilbert?

  Yep, absolutely. So it's one of these things where like, it was interesting reading all the bear cases on Amazon. There's plenty of little quips where you, 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 sort of push 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 sort of ask, well, what

• 3:43:22Ben Gilbert?

  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 98, 99 was completely disconnected from the reality of the underlying fundamentals. And so 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. Like 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.

• 3:44:06David Rosenthal?

  It's musical chairs.

• 3:44:08Ben Gilbert?

  Yes. And so 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. And 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.

• 3:44:34David Rosenthal?

  Are you saying he was right about it being day one for the internet?

• 3:44:40Ben Gilbert?

  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 owed debt on. That is the type of thing we were talking about with the float situation.

• 3:44:56David Rosenthal?

  This is a little bit of a sidebar here, but through the probably two months at this point, since we decided we were going to do

• 3:45:04Ben Gilbert?

  Yep.

• 3:45:04David Rosenthal?

  this episode that we've been researching. I just kind of had in the back of my mind, I'm like, I wouldn't have even thought about this a couple of 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. Is it still day one? Like you step back.

• 3:45:27David Rosenthal?

  Forget Amazon, let's just talk about the internet. What you thought you might want to do or the board, you know, or Coach Campbell thought you might want to do in 1999, 2000 of like, step back, pursue your other interests. You decided, no, wait, it's still day one here. Is it still day one now? Like

• 3:45:43Ben Gilbert?

  That is a phenomenal, phenomenal question. Okay. But to your point on that, is it still day one for the internet? Which I love this question in particular. Here is a quote from the 1999 letter to shareholders. And 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, plowing money back in. He ends with, we still believe that some 15% of retail commerce may ultimately move online.

• 3:46:17David Rosenthal?

  May ultimately.

• 3:46:19Ben Gilbert?

  Guess what e-commerce penetration is right now?

• 3:46:22David Rosenthal?

  15%?

• 3:46:23Ben Gilbert?

  15%. It went from like 12% to like 17% during COVID and this is falling a little bit right now and is hovering right around 15%. So 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.

• 3:46:41David Rosenthal?

  It's a good question.

• 3:46:42Ben Gilbert?

  Certainly not day one for e-commerce.

• 3:46:44David Rosenthal?

  I personally am definitely not ready to say it's day two, but I'm just very curious. Like, what does Jeff genuinely think?

• 3:46:50Ben Gilbert?

  Well, these things are subject to 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? So, you know, is out of seven? What's the denominator? The other thing that I keep thinking about is like, how could I possibly spend more money online? I'm not sure more of my spend or my time could move on the internet. And internet penetration has got to be in like the 90 plus percent in America and like getting up there for the rest of the world, too. So if you just look at like, we're running out of hours in a day and we're running out of household spend to spend on things you could buy over the internet. So.

• 3:47:27David Rosenthal?

  I think really like this is the question like 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, 93, 94, 95, where traffic on the internet was growing 230,000% a year. Like, we've never experienced that. We're still, we're benefiting from the aftershocks of that still.

• 3:47:55Ben Gilbert?

  Yeah.

• 3:47:55David Rosenthal?

  I think that's the question. Like, where are we in the aftershocks of that? Or is there going to be another event like that in our lifetimes? I mean, I think everything in our time that we've thought of as that is mobile, cloud, web three, you know, VR all like, it's all still just the internet. Those are aftershocks. That's not.

• 3:48:15Ben Gilbert?

  Right.

• 3:48:15David Rosenthal?

  The event.

• 3:48:17Ben Gilbert?

  Going back to this credit card game or Ponzi or Peter to pay Paul, I don't like 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've been giving that a little bit more thought since I sort of threw it out.

• 3:48:34Ben Gilbert?

  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. But the fact of the matter is, even though investors got scared, it provided an incredible amount of consumer value. And so the fact that people kept doing

• 3:49:16Ben Gilbert?

  it meant that Amazon kept growing their customer base and the customer loyalty and the number of transactions. And so there was a there there.

• 3:49:25David Rosenthal?

  Yeah.

• 3:49:25Ben Gilbert?

  And they could survive the bubble because ultimately more consumers kept getting more value. So the party could keep going over at cashflow.com.

• 3:49:37David Rosenthal?

  Yes. It's interesting. I'm thinking back on my personal experience living during that time. You know, I'm curious for you, like, did you have any awareness of the tech bubble and/or the tech bubble bursting?

• 3:49:52Ben Gilbert?

  I was 10 in 1999.

• 3:49:53David Rosenthal?

  Right, right, right. But-

• 3:49:55Ben Gilbert?

  I remember September 11th, but I don't remember that it came after a bubble bursting.

• 3:49:59David Rosenthal?

  Right. But you probably remember your experience of the internet and it growing in your life, right?

• 3:50:10Ben Gilbert?

  For sure. It sort of grew with me growing up. So 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 Apple Talk 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 at it, like 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.

• 3:50:39David Rosenthal?

  Yes, totally. You know, it's so funny. When you're younger, like now there's like no difference in our age. But like, I think because I'm what, like four years, five years older than you?

• 3:50:50Ben Gilbert?

  Four, I think, yeah.

• 3:50:51David Rosenthal?

  Four, I think, yeah. I was probably like just a little bit ahead. Like, I was aware of stuff going on with stocks related to tech companies. But like, I knew that was happening, but I didn't think about it in relation to what I was doing. But like, yeah, like, I just think back of like, the percentage of my time and mental energy directed at and on the internet just grew and grew and grew exponentially during that time.

• 3:51:18Ben Gilbert?

  Right. Turns out having the entire world of information at your fingertips is unbelievably valuable.

• 3:51:25David Rosenthal?

  Yeah.

• 3:51:26Ben Gilbert?

  And like it just permeated everything.

• 3:51:28David Rosenthal?

  Yeah.

• 3:51:29Ben Gilbert?

  Okay, I have more.

• 3:51:30David Rosenthal?

  Yo, go for it. I've got two I want to share. So.

• 3:51:33Ben Gilbert?

  All right.

• 3:51:33David Rosenthal?

  Save me room for two.

• 3:51:35Ben Gilbert?

  I will. So here's the thing we really didn't talk about, but is very important to understand about Amazon. They were ludicrously, ludicrously private. They never broke AWS out as a segment when it was, they basically had to. They have always kept everything in this sort of just like gigantic amalgamation of the fewer numbers we can report, the better. And so in their S1, they never said anything about any sort of cohorts or cost to acquire a customer or lifetime value in an Amazon customer. No one in the outside world, no 10Ks, no S1, nothing has ever said anything about that information. And Jeff just believes, you know, there's these famous Bezos charts where he's like, you know, announcing this cool thing for Alexa and he's like, this was the best year ever. And you just see an unlabeled

• 3:52:20Ben Gilbert?

  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.

• 3:52:34David Rosenthal?

  Yep. Same story with advertising as with AWS. At a certain point, they're going to have to break out advertising. You know, it's 30, 40 billion dollar run rate business at this point.

• 3:52:45Ben Gilbert?

  Yeah.

• 3:52:46David Rosenthal?

  But for a long time, nobody really knew or understood what was happening inside Amazon with that.

• 3:52:52Ben Gilbert?

  Yep. You know, 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. And we took a break to go have dinner and then reconvene and.

• 3:53:03David Rosenthal?

  Slash, put baby to bed.

• 3:53:06Ben Gilbert?

  Yeah. I was thinking to myself over dinner, man, like, I don't know if we're doing a good job with this episode. It's not really a cohesive story. And then I think it kind of hit me that like, that is the point. Amazon was doing so much stuff so fast concurrently and learning from it, that it's kind of a brute force pathfinding algorithm that has a bunch of concurrent stuff going on. I mean, 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.

• 3:53:43David Rosenthal?

  Which I think might have been a Rick Dalzell innovation.

• 3:53:48Ben Gilbert?

  Oh, interesting. The fact that for decades, most of the best entrepreneurial and talent in Seattle just stayed at Amazon.

• 3:53:56David Rosenthal?

  Right, right, right.

• 3:53:57Ben Gilbert?

  And the knock on Seattle for so many years was that, you know, thank God, Amazon's a pretty big kind of bureaucratic company at this point, and people are leaving to start companies.

• 3:54:06David Rosenthal?

  Oh, the best people stayed. Look at Jassy.

• 3:54:08Ben Gilbert?

  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 and is really, really impressive, but doesn't really make for a clean story.

• 3:54:26David Rosenthal?

  Yeah.

• 3:54:26Ben Gilbert?

  And rather than sort of 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. I mean, they started the company and IPO'd within three years. So like, everything that this company has ever done has been super fast and often concurrent.

• 3:54:45David Rosenthal?

  Yep. How did you phrase it? I think you texted me, "The surface area of this company is just immense."

• 3:54:52Ben Gilbert?

  It's just ludicrous. Yes. It's so large. It's kind of impossible to cover. I actually made a list when I was sort of thinking about, okay, is this maze thing the right analogy of things that failed and then they backed up and turned left and tried another thing instead and sort of this heat-seeking brute force algorithm. It's incredible when you look at auctions, Z-Shops, we didn't even talk about the Sotheby's partnership where they were.

• 3:55:15David Rosenthal?

  Oh, yeah. Oh, my gosh.

• 3:55:16Ben Gilbert?

  Trying to do a Borders-style thing with Sotheby's.

• 3:55:19David Rosenthal?

  We didn't talk about the Fire Phone.

• 3:55:20Ben Gilbert?

  The Fire Phone, A9 search engine, which was just wildly underfunded relative to Google's search engine, BlockView, which was the predecessor to what Google figured out with huge investment to make Street View, investing tens of millions of dollars in startups like HomeGrocer.com and Pets.com is just, over and over and over again, there's these huge failures. And yet,

• 3:55:44Ben Gilbert?

  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 like, 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. So 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

• 3:56:29Ben Gilbert?

  another valuable lesson in either case." And 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.

• 3:56:51David Rosenthal?

  Man, I love that. That is such a good point. But that was the strategy. Jeff says it in the shareholder letters all along.

• 3:56:59Ben Gilbert?

  Yep, absolutely. All right, what do you got?

• 3:57:04David Rosenthal?

  Okay, so my two that I want to highlight. One is the opposite of what Jeff talks about all the time of, we're not competitor focused or a customer focused, blah, blah, blah. Like, yeah, of course, they're customer focused. Yes, we've clearly painted the picture that they care about customers. Their customer experience focused, customer, long-term customer loyalty is the most important thing, blah, blah, blah.

• 3:57:28Ben Gilbert?

  Isn't it great that there's these Jeffisms that like you and I can shorthand? Because we're pretty sure that our audience knows them at this point. Cause every interview he's ever done, he sort of says the same things.

• 3:57:37David Rosenthal?

  Yes.

• 3:57:39David Rosenthal?

  So funny, but Jeff is also such a part of the lineage of great retail entrepreneurs, starting concurrently and before Sam Walton, but Saul 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, you know, Made in America of like, go shop our competitors, come back, don't tell me what they're doing wrong, tell me what they're doing right.

• 3:58:13Ben Gilbert?

  They're doing right. Yeah.

• 3:58:15David Rosenthal?

  And Amazon did the same thing. Like the eBay story.

• 3:58:20Ben Gilbert?

  Doesn't Brad Stone have a way that he sort of frames when Amazon is customer focused versus competitor focused? I think it's in his second book, In Amazon Unbound.

• 3:58:30David Rosenthal?

  Oh, yeah, it might be in Unbound.

• 3:58:33Ben Gilbert?

  I always thought this was a good way to approach it where if it's in a 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 a very sort of, were the leaders in online grocery? Amazon Fresh is this sort of crazy experiment? And ultimately, they sort of fell behind. You have to be very competitor focused when you're in a crowded market where you're behind. And so I think they like to be in markets where they have the luxury of being purely customer focused, but they're always, that's not always the case.

• 3:59:12David Rosenthal?

  Yep. And like, in some sense, it's a luxury. In some sense, it's a luxury to have great competitors because they've figured out good stuff, you know?

• 3:59:20Ben Gilbert?

  Yeah. And 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.

• 3:59:33David Rosenthal?

  Well, and certainly, internet entrepreneurs, very few came from a finance background.

• 3:59:38Ben Gilbert?

  I mean, there's a lot of John Malone in here. When you sort of 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 kind of the TCI John Malone playbook of try not to ever show your profitability.

• 4:00:06David Rosenthal?

  We gotta do that episode.

• 4:00:08Ben Gilbert?

  For sure.

• 4:00:09David Rosenthal?

  For sure. Okay, so 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. And it was during that kind of nuclear winter when Amazon, I mean, leading up to it,

• 4:00:49David Rosenthal?

  not that they weren't doing this all along, but the hard work was done from 2000 to 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 like right now, makes me think about FTX, right? Amazon, granted, most of it was dead capital, but during the go-go years, they sucked in billions of dollars of capital. And yeah, some of it was spent unwisely, but then when the crash came,

• 4:01:30David Rosenthal?

  they invested through it, they built through it and distanced themselves by miles from their competitors. Yeah, it's just like a huge lesson. Like obviously you gotta be smart, you gotta be right. You know, you gotta have managed your company in a way that you have access to capital during those times. But that's the best time to build moats.

• 4:01:50Ben Gilbert?

  Yep. Yeah, absolutely. How should we grade this one?

• 4:01:55David Rosenthal?

  Yeah, grading.

• 4:01:58David Rosenthal?

  I think the best thing to do, we talked before the episode about like, 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. You can't, you know, we only got up to 2007, 2008 in the history here.

• 4:02:15Ben Gilbert?

  Right. I don't feel, based on everything we've discussed in this episode, qualified to assess Amazon retail as it is today. So I think we should scope it to the time period.

• 4:02:25David Rosenthal?

  We didn't talk about Zappos. We didn't talk about diapers.com. We didn't talk about Whole Foods.

• 4:02:31Ben Gilbert?

  Pillpack. I mean.

• 4:02:33David Rosenthal?

  Echo, you know, we mentioned it, but.

• 4:02:35Ben Gilbert?

  One medical.

• 4:02:36David Rosenthal?

  One medical.

• 4:02:37Ben Gilbert?

  Although Echo to me falls under AWS, but.

• 4:02:40David Rosenthal?

  Oh, that'll be fun to talk about.

• 4:02:42Ben Gilbert?

  Yeah.

• 4:02:43David Rosenthal?

  I mean, clearly it's both.

• 4:02:45Ben Gilbert?

  Right.

• 4:02:46David Rosenthal?

  So I think we should grade Amazon from founding until just before the financial crisis.

• 4:02:55Ben Gilbert?

  Okay. It's interesting. So if the company were to have ended in 2007, I think they were doing about a billion dollars a year of operating income.

• 4:03:05David Rosenthal?

  Hmm.

• 4:03:06Ben Gilbert?

  Their market cap, this is why it's very interesting to be grading on a timeframe with a company that's thinking in a much longer timeframe. So if they're generating like 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. So the sort of like pedantic way to look at it would be like, well, if the music stopped there, that would have been pretty bad.

• 4:03:36David Rosenthal?

  Yep.

• 4:03:36Ben Gilbert?

  But of course it didn't. And of course, AWS would still come, their market cap would absolutely explode. A lot would sort of change. And they've turned on the ability, especially with AWS, to get very profitable in the future. So that's probably the wrong way to look at it. Like, 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?

• 4:03:59David Rosenthal?

  Humans are such funny creatures. The hedonic adaptation is crazy. If you go back in time to 2007, what did you say market cap was, what, like 30 billion?

• 4:04:10Ben Gilbert?

  Ish.

• 4:04:11David Rosenthal?

  That was a big company back then.

• 4:04:13Ben Gilbert?

  Yeah.

• 4:04:14David Rosenthal?

  I mean, I remember when I started at Venture a couple of years later in 2010. You weren't playing for exits in the like tens of billions of dollars. If you said like, oh, I got to underrate, you know, this investment. Do I think, what are the odds that this is going to be worth $30 billion? Like, people would be like, what are you talking about? Like Lafayette, like, it's like, no, we need like, you know, this to be worth a couple hundred million dollars. That's a huge win.

• 4:04:39Ben Gilbert?

  Yeah.

• 4:04:39David Rosenthal?

  We just hadn't realized yet how big this stuff could get.

• 4:04:43Ben Gilbert?

  Which is in part why people needed to be more ownership sensitive. Or certainly there were more funds obsessed with ownership than there are now. I still actually believe pretty strongly in, in ownership, especially as a lead investor and why that's important in architecting a fund model. But at the time, if what you're playing for is three, $400 million outcomes, then like, it's pretty important for your multi hundred million dollar fund to own like a quarter of that company.

• 4:05:07David Rosenthal?

  Yes, yes. Certainly Tom was very happy with their Amazon investment at that point in time. So yeah, I mean, I think we have to give it an A. And especially, you know, as we talked about, like, gosh, like, just incredible execution through that time.

• 4:05:24Ben Gilbert?

  I do have sort of this fun stat from the IPO. If you had bought 100 shares at the IPO, which I think, did we say 17, 18?

• 4:05:34David Rosenthal?

  Market cap of 438?

• 4:05:36Ben Gilbert?

  Yeah.

• 4:05:37David Rosenthal?

  Million?

• 4:05:38Ben Gilbert?

  If you bought 100 shares for, call it $1,800 of total investment, today you'd have $2.6 million and you would have made 1,500x.

• 4:05:46David Rosenthal?

  Yeah.

• 4:05:47Ben Gilbert?

  Which is bonkers. So then the question becomes, should we grade Tom's investment in Amazon as of 2007?

• 4:05:52David Rosenthal?

  Oh, I love that. Great, A.

• 4:05:56Ben Gilbert?

  Great, A.

• 4:05:57David Rosenthal?

  Well, unless he sold in 2007, in which case, F.

• 4:06:03Ben Gilbert?

  Yeah. 2007, it was worth about, the resolution's pretty low in the, so somewhere between 30 and 40 billion dollars. So let's say you're buying in at 5 million and it goes up to 40 billion.

• 4:06:17David Rosenthal?

  You're pretty happy.

• 4:06:18Ben Gilbert?

  That's a 10,000x.

• 4:06:19David Rosenthal?

  Yeah.

• 4:06:20Ben Gilbert?

  It is crazy if you really start following the ripples out. Yeah, Seattle's whole startup ecosystem.

• 4:06:27David Rosenthal?

  Yeah, I mean, of course, there was Microsoft before too. And so many great folks came out of Microsoft to build companies and still like Nick at Rec Room. But yeah, Amazon, it's just a juggernaut.

• 4:06:39Ben Gilbert?

  Yeah, I don't even know how to apply a letter grade other than A plus. I mean, the other thing is like surviving the dot com crash. Basically, no one did. Google did, but Google was started like right at the tail end of it. Every other retailer, I mean, and half of them were things that Amazon was invested in. But drugstore.com and pets.com and all these completely went under.

• 4:07:00David Rosenthal?

  And eBay, I mean, eBay survived. It's around, of course, but it didn't win, you know?

• 4:07:05Ben Gilbert?

  Yeah, pretty unbelievable to make it through that sort of three year absolute drought of the availability of capital and a complete souring. I mean, and you couldn't IPO. So, you know, if you weren't already out like Amazon was, there's basically no chance that you were going to until I think Google finally IPO'd in 2004.

• 4:07:26David Rosenthal?

  2004, yeah. And even then, that wasn't like it opened the floodgates.

• 4:07:31Ben Gilbert?

  Right.

• 4:07:32David Rosenthal?

  Yeah, we gotta go.

• 4:07:34Ben Gilbert?

  A plus execution.

• 4:07:35David Rosenthal?

  Yeah, great.

• 4:07:35Ben Gilbert?

  Yeah.

• 4:07:36David Rosenthal?

  We'll do the whole thing on our next episode. I can't, you know, if I were to predict a grade for Amazon Web Services, I would predict an A plus.

• 4:07:46Ben Gilbert?

  Wow, why even listen to the episode, David?

• 4:07:48David Rosenthal?

  Right, yeah.

• 4:07:50David Rosenthal?

  I think it'll be worth listening to the episode.

• 4:07:52Ben Gilbert?

  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.

• 4:08:02David Rosenthal?

  But they just reported Q2 earnings and the market liked it, so.

• 4:08:08Ben Gilbert?

  Pop 15%.

• 4:08:09David Rosenthal?

  I bet it's closer by the time, who knows? If we could predict the future, we wouldn't be fans of NZS. But by the time this comes out, probably fair to say ballpark, one and a half trillion-ish. Who knows?

• 4:08:23Ben Gilbert?

  Yeah, yeah, we'll see, we'll see.

• 4:08:27David Rosenthal?

  All right, listeners. Now is a great time to talk about one of our favorite companies, Statsig.

• 4:08:33Ben Gilbert?

  Yes, there is a reason why the best product teams rely on Statsig, whether they are iterating on their core product features or shipping AI-powered experiences at scale.

• 4:08:44David Rosenthal?

  Yep. In the crazy speed of today's AI world, shipping fast is just table stakes now. It's basically trivial to build and deploy your app constantly. The real advantage is how quickly you learn what changes actually created value for customers and how fast you can use that signal to guide what you ship next.

• 4:09:04Ben Gilbert?

  This is where Statsig comes in. It brings experimentation, feature flags, and product analytics into one unified system so teams can ship safely, test rigorously, and directly link what they changed to how users actually behaved.

• 4:09:17David Rosenthal?

  So if you want to make learning your competitive advantage, whether you're building new AI experiences or just evolving your existing core product, go to statsig.com/acquired to get started.

• 4:09:28Ben Gilbert?

  All right. Great episode. Should we do some quick carve-outs?

• 4:09:30David Rosenthal?

  Let's do carve-outs. What you got?

• 4:09:32Ben Gilbert?

  So I have a carve-out, and 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. But I just listened to the Rick Rubin episode of the Lex Friedman podcast, and my God, is that a good interview.

• 4:09:46David Rosenthal?

  So good.

• 4:09:47Ben Gilbert?

  You think it's a good interview at the beginning, and then like you get like 90 minutes in, and you're like, this is a really good interview. And I think that happens a lot on the Lex Friedman podcast.

• 4:09:58David Rosenthal?

  Ah, yeah. So good. Lex is such a good interviewer. Like, his skill as an interviewer is just top-notch.

• 4:10:06Ben Gilbert?

  There's a level of intimacy that he gets with people where it's uncommon to have a level of intimacy. And 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 Fridman Show. So if it's anywhere in your sort of, oh, I should listen to that some point soon, and 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. I mean, in particular, the way he goes into the Johnny Cash sort of final album of

• 4:10:43David Rosenthal?

  Oh, yeah.

• 4:10:44Ben Gilbert?

  that he did.

• 4:10:46David Rosenthal?

  And the

• 4:10:47Ben Gilbert?

  Hurt by Trent Reznor. Yeah.

• 4:10:49David Rosenthal?

  The Trent Reznor Hurt. Yeah. Oh, man. The number and breadth of like

• 4:10:56David Rosenthal?

  Musical history moments that Rick was part of.

• 4:10:59Ben Gilbert?

  Just sitting there producing for, creating.

• 4:11:02David Rosenthal?

  Yeah, not even just sitting there, like creating with the artist.

• 4:11:05Ben Gilbert?

  Yeah. It's like Forrest Gump in real life.

• 4:11:08David Rosenthal?

  What a legend.

• 4:11:09Ben Gilbert?

  Yeah.

• 4:11:10David Rosenthal?

  All right. I was gonna do this one, but I actually, I think it's, I was 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. I probably bought or consumed most of this through an Amazon service, one way, shape or form. Books, I have been reading a few books by Ursula Le Guin, very famous American author. Great, both sci fi work and fantasy work, both which I really enjoy. Sci fi, I read her, I think probably best known sci fi novel. It's called The Left Hand of Darkness. Excellent book, highly recommend.

• 4:11:53David Rosenthal?

  And they're kind of in that same vein of like, I feel like it was written in the 60s, maybe 50s or 60s. I could be wrong on that, but that era of type of sci fi. And it's very not, it's a character driven sci fi. So less about like crazy technology and more about as a setting to explore characters. Great. And then I'm just starting her Earthsea fantasy series, which I had no idea. And now I'm like, reading it through, I'm like, oh, and some of the reviews on Amazon talk about, this is probably part of the inspiration for Harry Potter. Super, super cool to go get that little bit of history.

• 4:12:30Ben Gilbert?

  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 like, the you may also like, or people who like this also like, basically everyone liked Harry Potter. And so 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 if buyers with Harry Potter.

• 4:12:55David Rosenthal?

  That's funny.

• 4:12:56Ben Gilbert?

  It's like the Justin Bieber server at Twitter.

• 4:12:58David Rosenthal?

  Late 90s, early 2000s. Yeah, like cultural touchstones for the world.

• 4:13:04Ben Gilbert?

  Yeah.

• 4:13:05David Rosenthal?

  Okay, then music. I just today was re-listening to my beautiful Dark Twisted Fantasy. By Kanye.

• 4:13:13Ben Gilbert?

  Dissect.

• 4:13:14David Rosenthal?

  Yes. And then it reminded me, I tweeted about this. I think that was your Carvout years ago, season two of Dissect, the Dissect podcast. Oh, I mean, the album is a master, masterwork.

• 4:13:29Ben Gilbert?

  And I didn't realize what a masterpiece the album was until listening to the podcast and then gained this, 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.

• 4:13:45David Rosenthal?

  We joked about this, but I feel we should do a Kanye episode at some point, you know, it'd be the, the follow-up to the Taylor Swift episode.

• 4:13:53Ben Gilbert?

  Yeah, the, the Jedi and the Sith.

• 4:13:56David Rosenthal?

  Yeah, exactly. My last piece of media is a throwback to Carvout of mine from not that long ago to Elden Ring, the video game. I finally beat it months later.

• 4:14:11David Rosenthal?

  If you're doing anything else, and if you like, have a baby, like you're talking months to beat this thing. Unreal achievement of a game, like so amazing. I gotta say that. I also tweeted about this. I was a little disappointed at the end. I think I felt like it lost steam, but like I, I can totally forgive it because I mean, this is like, if every other game, you know, if old games, you know, were like, running a like, you know, 100 meter dash, and then like, it got to the point where like, 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 like incredibleness that went into this game is on a scale that I like, no other game has ever matched. So worth playing, worth sinking months of your life into.

• 4:14:58Ben Gilbert?

  If you have several months. Yeah, exactly.

• 4:15:00David Rosenthal?

  Yeah.

• 4:15:02Ben Gilbert?

  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. So I've been sort of resisting diving into the annual letters from 07 onward and really trying to understand the landscape of cloud today, but it's gonna be a great one. This was such a journey. We're only halfway there. There's more to come. Yeah, absolutely. After you finish this episode, come discuss it with all of us at acquired.fm/Slack. Got a job board. If you're looking for the next move in your career, go to acquired.fm/jobs. Big change in all the things that we're calling to action for. I don't even know if that's the

• 4:15:46Ben Gilbert?

  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 acquired.fm/store and find some of the finest t-shirts, hoodies, crew neck sweatshirts. Onesies. What else is there? Tanks and even onesies available. And we'd love your feedback as we consider expanding the store as well. And 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

• 4:16:31Ben Gilbert?

  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 gotta stop. I gotta end this. Check out the LP show. You can find it in any podcast player. And with that, listeners, we will see you next time. We'll see you next time.