#282 Jeff Bezos Shareholder Letters

What I learned from rereading Jeff Bezos' Shareholder Letters (for the 3rd time!) Read Jeff's letters in book form: Invent and Wander: The Collected Writings of Jeff Bezos or for free online: Amazon Investor Relations ---- Get access to the World’s Most Valuable Notebook for Founders by investing in a subscription to Founders Notes ---- Follow one of my favorite podcasts Invest Like The Best [2:30] Amazon hopes to create an enduring franchise [3:00] Because of our emphasis on the long term, we may make decisions and weigh trade-offs differently than some companies. [4:00] We will continue to focus relentlessly on our customers. [4:00] We will work hard to spend wisely and maintain our lean culture. We understand the importance of continually reinforcing a cost-conscious culture. [4:00] We set out to offer customers something they simply could not get any other way. [5:00] Word of mouth remains the most powerful customer acquisition tool that we have. [5:00] We are working to build something important, something that matters to our customers, something that we can all tell our grandchildren about. Such things aren't meant to be easy. [6:00] "To read Bezos’ shareholder letters is to get a crash course in running a high-growth internet business from someone who mastered it before any of the playbooks were written." — From CB Insights [7:00] Common themes repeated in Jeff’s letters: More innovation is ahead of us. It is still early. The opportunity —if we execute well — is enormous. We will move quickly. We will endure. Amazon will be a durable, long-lasting company. We will focus on cash flow. Once in a lifetime opportunities will be risky. Jeff gave himself a 30% chance of success— at best. Customer obsession is our North Star. It is what we will bet the company on. We will be BOLD. We will have a frugal, lean culture that Sam Walton would approve of. This will be hard. All valuable things are. We will have to learn along the way. [8:00] Sam Walton: Made In America by Sam Walton. (Founders #234) [11:00] I would love to ask Jeff the question, “If you could only have one word to describe you on your tombstone, what would it be?” My guess is he would pick “relentless.” [16:00] We believe we have reached a "tipping point," where this platform allows us to launch new ecommerce businesses faster, with a higher quality of customer experience, a lower incremental cost, a higher chance of success, and a faster path to scale and profitability than any other company. (A company that builds companies) [17:00] Made in Japan: Akio Morita and Sony by Akio Morita. (Founders #102) [19:00] We will continue to invest heavily in introductions to new customers. Though it's sometimes hard to imagine with all that has happened in the last five years, this remains Day 1 for ecommerce, and these are the early days of category formation where many customers are forming relationships for the first time. We must work hard to grow the number of customers who shop with us. (He was right about this — what is the lifetime value of an Amazon customer over 17 years?) [21:00] To us, operational excellence implies two things: delivering continuous improvement in customer experience and driving productivity, margin, efficiency, and asset velocity across all our businesses. Often, the best way to drive one of these is to deliver the other. For instance, more efficient distribution yields faster delivery times, which in turn lowers contacts per order and customer service costs. These, in turn, improve customer experience and build brand, which in turn decreases customer acquisition and retention costs. [22:00] Creative Selection: Inside Apple's Design Process During the Golden Age of Steve Jobs by Ken Kocienda (Founders #281) [24:00] Jeff Bezos on The Electricity Metaphor for the Web's Future[27:00] Repeat this loop: Focus on cost improvement makes it possible for us to afford to lower prices, which drives growth. Growth spreads fixed costs across more sales, reducing cost per unit, which makes possible more price reductions. Customers like this, and it's good for shareholders. Please expect us to repeat this loop. [29:00] The Everything Store: Jeff Bezos and the Age of Amazon by Brad Stone. (Founders #179) [35:00] My Life and Work by Henry Ford. (Founders #266) [40:00] Jeff Bezos is unapologetically extreme. He is already the best and still wants to be better. [41:00] This part is incredible— on the need for good judgement and why data may lead you to make the wrong decision: Our quantitative understanding of elasticity is short-term. We can estimate what a price reduction will do this week and this quarter. But we cannot numerically estimate the effect that consistently lowering prices will have on our business over five years or ten years or more. Our judgment is that relentlessly returning efficiency improvements and scale economies to customers in the form of lower prices creates a virtuous cycle that leads over the long term to a much larger dollar amount of free cash flow, and thereby to a much more valuable Amazon. [43:00] Don’t build an undifferentiated commodity business. — Zero to One: Notes on Startups, or How to Build the Future by Peter Thiel. (Founders #278) [44:00] Differentiation is survival. [49:00] Missionaries build better products. [50:00] Long-term thinking levers our existing abilities and lets us do new things we couldn't otherwise contemplate. It supports the failure and iteration required for invention, and it frees us to pioneer in unexplored spaces. Seek instant gratification-or the elusive promise of it-and chances are you'll find a crowd there ahead of you. Long-term orientation interacts well with customer obsession. If we can identify a customer need and if we can further develop conviction that that need is meaningful and durable, our approach permits us to work patiently for multiple years to deliver a solution. [52:00] Problems are just opportunities in work clothes. [53:00] Similar idea said two different ways: Jeff Bezos: The financial results for 2009 reflect the cumulative efforts of 15 years of customer experience improvements. Peter Thiel: If you focus on near-term growth above all else, you miss the most important question you should be asking: will this business still be around a decade from now? [55:00] The most radical and transformative of inventions are often those that empower others to unleash their creativity—to pursue their dreams. [57:00] A dreamy business offering has at least four characteristics. —Customers love it —It can grow to very large size —It has strong returns on capital —It's durable in time-with the potential to endure for decades. When you find one of these get married. [1:03:00] Be a yardstick of quality. Some people aren't used to an environment where excellence is expected. — Inside Steve’s Brain by Leander Kahney. (Founders #204) [1:03:00] I believe high standards are teachable. High standards are contagious. —Jeff Bezos [1:04:00] Leaders have relentlessly high standards. Many people may think these standards are unreasonably high. [1:07:00] The key point here is that you can improve results through the simple act of teaching scope-that a great memo probably should take a week or more. [1:10:00] Differentiation is Survival and the Universe Wants You to be Typical In what ways does the world pull at you in an attempt to make you normal? How much work does it take to maintain your distinctiveness? To keep alive the thing or things that make you special? We all know that distinctiveness – originality – is valuable. What I’m asking you to do is to embrace how much energy it takes to maintain that distinctiveness. The world wants you to be typical – in a thousand ways, it pulls at you. Don’t let it happen. ---- Get access to the World’s Most Valuable Notebook for Founders by investing in a subscription to Founders Notes ---- “I have listened to every episode released and look forward to every episode that comes out. The only criticism I would have is that after each podcast I usually want to buy the book because I am interested so my poor wallet suffers. ” — Gareth Be like Gareth. Buy a book: All the books featured on Founders Podcast ---- Founders Notes gives you the ability to tap into the collective knowledge of history's greatest entrepreneurs on demand. Use it to supplement the decisions you make in your work. Get access to Founders Notes here. ---- “I have listened to every episode released and look forward to every episode that comes out. The only criticism I would have is that after each podcast I usually want to buy the book because I am interested so my poor wallet suffers. ” — Gareth Be like Gareth. Buy a book: All the books featured on Founders Podcast

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

• 0:00David Senra?

  It's all about the long term. Jeff Bezos's first shareholder letter in 1997. This is day one for the internet and if we execute well for Amazon. Today, online commerce saves customers money and precious time. Tomorrow, through personalization, online commerce will accelerate the very process of discovery. Amazon uses the internet to create real value for its customers. And by doing so, hopes to create an enduring franchise, even in established and large markets. We have a window of opportunity as larger players marshal the resources to pursue the online opportunity. And as customers, new to purchasing online, are receptive to forming new relationships.

• 0:41David Senra?

  Our goal is to move quickly to solidify and extend our current position while we begin to pursue the online commerce opportunities in other areas. We see substantial opportunity in the large markets that we are targeting. This strategy is not without risk. It requires serious investment and crisp execution against established leaders. We believe that a fundamental measure of our success will be the shareholder value we create over the long term. The stronger our market leadership, the more powerful our economic model. Market leadership can translate directly to higher revenue, higher profitability,

• 1:21David Senra?

  greater capital velocity, and correspondingly stronger returns on invested capital. We have invested and will continue to invest aggressively to expand and leverage our customer base, brand, and infrastructure as we move to establish an enduring franchise. There's that word again, where right in the beginning, he's already said that we used the word enduring twice. Because of our emphasis on the long term, we may make decisions and weigh trade-offs differently than some companies. We want to share with you our fundamental management and decision-making approach so that you, our shareholders, may confirm that is consistent with your investment philosophy. We will continue to focus relentlessly on our customers.

• 2:06David Senra?

  We will make bold rather than timid investment decisions where we see a sufficient probability of gaining market leadership advantages. Some of these investments will pay off, others will not, and we will have learned another valuable lesson in either case. 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. We will work hard to spend wisely and maintain our lean culture. We understand the importance of continually reinforcing a cost-conscious culture. We will obsess over customers.

• 2:48David Senra?

  From the beginning, our focus has been on offering our customers compelling value. We set out to offer customers something they simply could not get any other way and began serving them with books. We brought them much more selection than was possible in a physical store and presented it in a useful, easy-to-search and easy-to-browse format in a store that's open 365 days a year, 24 hours a day. We maintained a dogged focus on improving the shopping experience. We dramatically lowered prices, further increasing customer value. Word of mouth remains the most powerful customer acquisition tool that we have. I take great pride in being part of this team.

• 3:31David Senra?

  Setting the bar high in our approach to hiring has been and will continue to be the single most important element of Amazon's success. It is not easy to work here. We are working to build something important, something that matters to our customers, something that we can tell our grandchildren about. Such things are meant to be easy.

• 3:52David Senra?

  We are still in the early stages of learning how to bring new value to our customers through internet commerce. We know vastly more about online commerce than when Amazon was founded, but we still have so much to learn. Though we are optimistic, we must remain vigilant and maintain a sense of urgency.

• 4:12David Senra?

  That was an excerpt from Jeff Bezos's very first shareholder letter. So this is the third time that I've read Jeff Bezos's shareholder letters. I plan on rereading them many times in the future. The first time I made a podcast about his shareholder letters was all the way back on episode 71. And if you look at episode 71, the tagline, the description for that episode, I actually got from a fantastic business email newsletter called CB Insights. And they had a post about Jeff's shareholder letters. And I think they put it the best way, like, why would you want to spend so much time reading them and learning from them? And they said, "To read Bezos's shareholder letters is to get a crash course in running a high-growth internet business from someone who mastered it before any of the playbooks were written."

• 4:54David Senra?

  And so before I go to the 1998 shareholder letter, which is all about obsessions, I just want to go over the notes that I had from 1997, just these things that I jotted down for myself. Because a main theme of the shareholder letters is a main theme of the history of entrepreneurship, that fact that repetition is persuasive. Almost all of history's greatest founders, they identified a handful of principles that were important to them as they were building the business, and they constantly repeated that decade after decade. And you're going to see that as we go through Jeff's shareholder letters. And it was so important that that 1997 shareholder letter was attached to every single, the end of every single other shareholder letter. It can be thought of as the founding document for Amazon.

• 5:36David Senra?

  And so some of the notes that I jotted down as I read that shareholder letter, you know, for the third or fourth time. "More innovation is ahead of us. It is still early. The opportunity, if we execute well, is enormous. We will move quickly. We will endure." Right from the very beginning, Jeff's goal was, Amazon was going to be a durable, long-lasting company. "We will focus on cash flow. Once-in-a-lifetime opportunities," which is what he considered building Amazon, "will be risky." In fact, I've heard him talk in other interviews that he gave himself, at best, a 30% chance of success. He thought the likely outcome of Amazon would be complete failure. "Customer obsession is our North Star. It is what we will bet the company

• 6:20David Senra?

  on. We will be bold. We will have a frugal..." These are all my notes, keep in mind. "We will have a frugal, lean culture that Sam Walton would approve of." Just famous for reading and being heavily influenced by Sam Walton's autobiography, he'd have the executives inside Amazon read it. He'd hand out copies where he would actually go and highlight important parts and give it to people he was working with. I've read Sam's book multiple times. The last time I did a podcast on it was episode 234. If you haven't listened to that yet, you probably want to listen to it after this. "So we'll have a frugal, lean culture that Sam Walton would approve of. This will be hard, all valuable things are, and we will have to learn along the way." And so those are main themes that you're going to see him repeat over and over again. The note on the very first page of the 1998 shareholder letter that I wrote myself is "Repetition is persuasive. This is day

• 7:04David Senra?

  one. We must stay vigilant. We will act with a sense of urgency because there's both risk and opportunities ahead, and we will have failures." So let's go over to the shareholder letter. "It is truly day one for the internet, and if we execute our business plan well, it remains day one for Amazon. We think the opportunities and risks ahead of us are even greater than those behind us. We will have to make many conscious and deliberate choices, some of which will be bold and unconventional. Hopefully, some will turn out to be winners. Certainly, some will turn out to be mistakes. Heads-down focus on customers helped us make substantial progress in 1998." And so this 1998 shareholder letter is all about what they are going to choose to be

• 7:47David Senra?

  obsessed about. "We intend to build the world's most customer-centric company, but there's no rest for the weary. I constantly remind our employees to be afraid, to wake up every morning terrified, not of our competition, but of our customers. Our customers have made our business what it is. They're the ones with whom we have a relationship, and they're the ones to whom we owe a great obligation, and we consider them to be loyal to us, right up until the second that someone else offers them a better service. We must be committed to constant improvement, experimentation, and innovation in every initiative. We love to be pioneers. It's in the DNA of the company, and it's a good thing, too, because we'll need that pioneering spirit to succeed. In fact..."

• 8:32David Senra?

  When he talks about, hey, we're going to experiment, we're going to be pioneers, we're going to invent. If you read his very last shareholder letter, which I have a handful of highlights from, I'll get to later, but also you'll see in a bunch of interviews how he describes himself. He says, "I am an inventor. I didn't know that the first time I read the shareholder letter." So I think knowing how he thinks about himself adds more context to why these things are important to him. "We love to be pioneers. It's in the DNA of the company and it's a good thing too because we'll need that pioneering spirit to succeed. We're proud of the differentiation we've built through constant innovation and relentless focus on customer experience." I don't think I have the Kindle version of this book, maybe I do.

• 9:14David Senra?

  But I would imagine if you search the word relentless, it's going to pop up a bunch of times. In fact, to this day, if you go to relentless.com, Jeff owns that domain name and it points to Amazon. I would love to ask him the question. If you could only have one word to describe you on your tombstone, what would it be? My guess is he would pick relentless. So then he's going to get into how he thinks, like, what's the proper way to hire? This section is work hard, have fun, make history. "It would be impossible to produce results in an environment as dynamic as the internet without extraordinary people. Working to create a little bit of history isn't supposed to be easy." More repetition there, right? "And, well, we're finding that things are as they're supposed to be." So he's saying it's obviously very difficult.

• 9:57David Senra?

  "Setting that bar high in our approach to hiring has been and will continue to be the single most important element of Amazon's success." That is a sentence, it's very similar, has a sentence very similar to that in the very first shareholder letter as well. "During our hiring meetings, we ask people to consider three questions before making a decision. Number one, will you admire this person? For myself, I've always tried hard to work only with people I admire and I encourage folks here to be just as demanding. Life is definitely too short to do otherwise. Number two, will this person raise the average level of effectiveness of the group that they're entering?" That's a great question. "We want to fight entropy. The bar has to continuously go up."

• 10:39David Senra?

  And number three, "Along what dimension might this person be a superstar?" This was the most, like, I was very surprised when I read this again. So he's talking about, you know, many people have some kind of unique skills or interests and perspectives that actually enrich the work environment for everybody else that they're working with. And this just threw me for a loop. It's often something that's not even related to their jobs. One person at Amazon is a national spelling bee champion. I suspect it doesn't help her in her everyday work, but it does make working here more fun. And then he goes back into this idea, hey, this, we have a gigantic, unbelievably valuable, we found out, you know, trillions of dollars, uh, uh, potential opportunity in front of them, and it's supposed to be hard.

• 11:23David Senra?

  As we look forward, we believe that the overall e-commerce opportunity is enormous. Although Amazon has established a strong leadership position, it is certain that competition will even further accelerate. So he's talking about what he wants. He wants operational excellence and high efficiency. And then another main idea he has is that you should clearly articulate your philosophy so that you're, the right people can self-select in, not only people that are working for you, but any shareholders or investors that you may attract. So he says, "The most important thing I could say in this letter was said in last year's letter, which detailed our long-term investment approach. Because we have so many new shareholders, we've appended last year's letter immediately after this year's. I invite you to please read the section titled, 'It is all about the long term.'

• 12:07David Senra?

  You might want to read it twice to make sure that we're the kind of company you want to be invested in. As it says there, we do not claim it's the right philosophy. We just claim that it's ours." So 1999, this one's titled, "Building for the Long Term", and he starts right away, "Stay relentlessly focused on the customer. We can be uniquely positioned to serve new customers best and benefit as a result. Our relentless focus on customers has worked." So he's just talking about, he's recapping the year. This is also something he talks about in his very last shareholder letter. The reason that customers pay you, the reason they pay Amazon, the reason they pay any business is because we and you create value for them. And so that's why he preaches, that's where your focus should be. This is very interesting.

• 12:50David Senra?

  So it's like, uh, he's giving a talk at Stanford University, and he's asked a question like, "What do you own? If I'm a shareholder of Amazon, what do I own?" "At a recent event at Stanford University campus, a young woman came to the microphone and asked me a great question. I have 100 shares of Amazon. What do I..." And so he's just like, "Oh, that's an interesting question." Here's his answer. "You own a piece of the leading e-commerce platform. We believe that we have reached a tipping point where this platform..." Now, he's already describing his business as a platform. And when I went over, so I had already read... I read through all the shareholder letters, right? And then before I sit down to record and to talk to you again, I reread all my highlights, right? So it hit me on that, that, the rereading of this part.

• 13:33David Senra?

  I'm like, oh, if this is the note I left myself, if you stop and think about it, it is a company that builds other companies. That is how he viewed Amazon. In fact, in the last shareholder, he talks about this and all of our, he names like the most valuable businesses that, that they invented along the way and the, you know, the 20 or something years separating the very first shareholder letter to the last one. And he's like, when we started in 1997, we hadn't invented Prime, we didn't invent Marketplace, we didn't invent Alexa or AWS. There was no way we could have predicted they were, the companies were going to invent, but he set up the company from the very beginning to create more companies as they go along and learn more. Cause listen to what he says here. We believe that we've reached a tipping point where this platform, Amazon, allows us to

• 14:17David Senra?

  launch new e-commerce businesses faster with a higher quality of customer experience, a lower incremental cost, a higher chance of success, and a faster path to scale and profitability than any other company. Our vision is to use this platform to build Earth's most centric company. So that is an extremely important point. And it also relates to why I think you should feel confident investing time listening to Founders Podcast because all of history's greatest entrepreneurs did exactly what you're doing now. They're learning from the great people that came before them. This idea, this, this blew my mind, right? This idea of, hey, I'm going to create the world's, the one that he's talking about right here in the shareholder letter. Our vision is to use this platform to build Earth's most customer-centric company. He learned that idea from the founder of Sony, Akia Marita. I, I covered his autobiography, which is absolutely fantastic.

• 15:01David Senra?

  I'll go back on Founders 102 if you haven't listened to it. Let me pull out another, this is something I heard Jeff saying, I know what I took on this conversation he had. And so the note I left myself here is Jeff bases on what he learned from Akia Marita and how it influenced the building of Amazon. Right after World War II, Akia Marita, the guy who founded, this is Jeff talking, right after World War II, Akia Marita, the guy who founded Sony, made the mission for Sony that they were going to make Japan known for quality. And you have to remember, this was at a time when Japan was known for cheap, copycat products. And Marita didn't say, we're going to make Sony known for quality. He said, we're going to make Japan known for quality. This is the punchline. He chose a mission for Sony that was bigger than Sony. And when we talk about Earth's most customer-centric company,

• 15:45David Senra?

  we have a similar idea in mind. We want other companies to look at Amazon and see us as a standard bearer for obsessive focus on the customer as opposed to obsessive focus on the competitor. I love how all this stuff ties together. So let's go back to this. Our vision is to use this platform to build Earth's most customer-centric company. As it is probably clear, this platform affords an unusually large-scale opportunity, one that should be, one that should prove very valuable for both customers and shareholders. If we can make the most of it, despite the many risks and complexities, we are deeply committed to doing so. And so if you read between the lines, what he's saying with that, again, another idea of his. Building a valuable company will be difficult.

• 16:29David Senra?

  It is supposed to be difficult. And then he goes into his goals for next year, which at that time would be the year 2000. Get big fast is something he repeats over and over again. He says, when you're on, when you're on, when you're in internet business, you can either be really, really small or really, really large. The internet kind of destroys the middle. So he says, we will continue to invest heavily in introductions to new customers. Though it's sometimes hard to imagine, with all that has happened in the last five years, this remains day one for e-commerce. And these are the early days of category formation, where many customers are forming relationships for the first time. He was right about that. I go back all the time and look when I, like, when I buy certain books. I was like, when's the last time I read it? When's, when I bought it? You know, once I started ordering books on Amazon,

• 17:11David Senra?

  he captured a customer for now, what, 15, 17 years, however long it's been. So he's like, they're forming new relationships for the first time. We should attract as many of these people as possible. And then if we just obsess over them and constantly provide value, they will be loyal to us. What is the lifetime value of somebody's been ordering, not only books, but almost everything on Amazon for 17 years? He was dead right about this. So he says, this remains day one for e-commerce. And these are the early days of category coordination formation, where many customers are forming relationships for the first time. We must work hard to grow the number of customers who shop with us. On the very next page, note I left myself. He sees how everything connects and feeds into his overall plan for Amazon. There's this very famous thing, you should, very famous image. If you Google image search, Amazon flywheel.

• 17:56David Senra?

  I think the visual gives a basic idea. This is not the exact same thing and his flywheel has evolved over time. But you can see that's how he thinks naturally because this is a very early days of the company. He's talking about this. So he talks about the importance of very high standards. He talks about over and over again. To us, operational excellence implies two things. Delivering continuous improvement in customer experience and driving productivity, margin, efficiency and asset velocity across all of our businesses. Often, now this is where it all connects. This is very interesting. Often, the best way to drive one of these, right? He just said, hey, we're going to constantly continue to improve in customer experience. Right? We're going to drive productivity, increase margin, efficiency and asset velocity across all of our businesses. Then this is where, how he connects all this together for you and I. Often, the very best way to drive one of these is to deliver the other.

• 18:41David Senra?

  For instance, more efficient distribution yields faster delivery times, which in turns lowers contacts per order and customer service costs. These in turn, improve customer experience and build brand, which in turn decreases customer acquisition and retention costs. That is one of the most important paragraphs, I feel, in all of the shareholder letters. Again, you can read them for free if you don't have the book that I'm holding in my hand. That is 1999. I will put that entire paragraph in the show notes. Make sure you get this shareholder letter and read this whole part. That is so important. Our whole company is highly focused on driving operational excellence in each area of our business in 2000 and then obviously moving forward.

• 19:24David Senra?

  Being world-class in both customer experience and operations will allow us to grow faster and deliver even higher service levels. And even though we're still in the very beginning of these shareholder letters, I think you see Jeff Bezos is unapologetically extreme. He sets an extremely high bar. He uses words over and over again, words like world-class, excellence, highly focused.

• 19:48David Senra?

  If you listened to the episode on Steve Jobs that I did last week, Jeff Bezos also reminds me of Vince Lombardi. There's an entire section in that book, which is absolutely fantastic, about what Vince Lombardi and Steve Jobs had in common. And in that story, Vince Lombardi is meeting with his new players for the very first time, and he's giving them the speech. And Lombardi was also unapologetically extreme. And he tells them, "I'm not remotely interested in being just good." So now we get into the pain part, the inevitable pain part of entrepreneurship. This is when Amazon's stock drops by 80%. And you're going to see Jeff does something extremely smart here. You and I talked about this a couple of weeks ago. I did that book, What I Learned Before I Sold to Warren Buffett.

• 20:32David Senra?

  It's episode 279. And something that his dad taught him was that you need to concern yourself only with the controllables. They were trying to build a diamond business during the Depression. They went through, that company, I think, was like 79 years old by the time they sold to Warren Buffett. So they went through multiple different financial panics. And his dad's like, "Listen, we can't control the macro environment. All we should be focused on, rather, is what we can actually control inside the actual business." So I wrote, "Everyone else was focused on the stock. Jeff was focused on the internal metrics of his business." So he's like, "This is a bizarre experience." Because, yeah, the stock dropped by 80%, but the actual internal metrics of the company are improving. So it says, "Ouch. It's been a brutal year for many in the capital markets, and certainly for Amazon shareholders.

• 21:17David Senra?

  As of this writing, the shares are down more than 80% from when I wrote you last year. Nevertheless, by almost any measure, Amazon, the company, is in a stronger position than at any time in the past." And he does something smart here where he starts out with all the mistakes. He's like, "Listen, I say we're going to be bold. We're going to make bold investment decisions. We are not going to make timid investment decisions. But bold bets can and will fail sometimes. That's completely expected." So they wind up losing a bunch of money on these other dot-com startups. Many of you have heard me talk about the bold bets that we as a company have made and will continue to make. Our decision to invest in smaller e-commerce companies, including Living.com and Pets.com, both of which shut down operations in 2000. We lost a significant amount of money on both, but we're going to see Jeff is learning.

• 22:01David Senra?

  And I'm going to tie this into another. He gave a TED Talk on the Internet's electricity metaphor. I took notes on it many, many years ago. I'll include it, the link down below, but check this out. He realized like, oh, this isn't the gold rush. That's the wrong metaphor for building an Internet company in the mid to late 90s. So he's learning. We made these investments because we knew we wouldn't ourselves be entering these particular categories anytime soon, and we believed passionately in the land rush metaphor, the gold rush metaphor for the Internet. Indeed, that metaphor was an extraordinary useful decision aid for several years, starting in 1994, but we now believe its usefulness largely faded over the last couple of years.

• 22:42David Senra?

  In retrospect, we significantly underestimated how much time would be available to enter these categories. And so according to this, I first took notes on Jeff Bezos's TED Talk on the electricity metaphor for the web's future all the way back in 2019. I watched it again before I sat down to talk to you. And in this talk, he's like, oh, the analogy between the Internet boom and the gold rush starts to diverge because in the gold rush, like, there's a finite amount of gold that you can take out of the ground. But the Internet gets bigger every day. And he says, there's a much better analogy that allows you to be incredibly optimistic. So he is still incredibly optimistic when everybody else around him, the external world, is saying, you know, all this is, this isn't going to work out. You are now valued 80% less in the last 12 months, even though your business is getting better, right? This Jeff, this is Jeff talking.

• 23:27David Senra?

  There's a much better analogy that allows you to be incredibly optimistic, and that analogy is the electric industry. And his comparison between the Internet and the electric industry, this is my favorite paragraph, "They are both thin, horizontal, enabling layers that go across lots of different industries. It is not a specific thing. They both can be used as incredible means of transmitting power. They are both, they both are an incredible means of communicating information flows." And then just one final thing that may be more important than everything else in the talk is comparing and contrasting your view on the industry that you're working in with other people's view. At this time, the external world is telling Jeff, the gold rush, the Internet gold rush is over, and Jeff's like, uh, no. We haven't even barely begun.

• 24:12David Senra?

  He says we're in the 1908 Hurley washing machine stage of the internet. You have to watch the video to understand that it was actually hilarious. This is the paragraph that just fires me up. If you really, because I feel this way about podcasting. If you really do believe it's the very, very beginning, then you are incredibly optimistic. I do think there is more innovation ahead of us than there is behind us. We are very, very early. And Jeff turned out to be dead right. I would spend the 18 minutes to watch the video. It's absolutely, it's just fantastic. You see his thinking. It's just the Jeff Bezos of 2003, like, he had no idea how correct he was and the innovation and inventing that laid before him for the company that he was building. It's absolutely, and he looks completely different, by the way, too. All right, so let's go back to this.

• 24:55David Senra?

  Online selling relative to traditional retailing is a scale business. So this goes back to his main idea. Listen, if you're on the internet, you can be really small or really big. Obviously, he's like, we're going to be the biggest. And this is why. Online selling relative to traditional retailing is a scale business characterized by high fixed costs and relatively low variable costs. This makes it difficult to be a medium-sized e-commerce company. So moving on to the 2001 shareholder letter, we see this idea where he feels everything is connected. The note is simple to myself. Repeat this loop. Focus on cost improvement. So this is a very old idea, something you and I have learned. History of entrepreneurship is full of people that just keep telling you, all the founders keep telling you over and over again, watch your costs, watch your costs.

• 25:40David Senra?

  The maxim that I always think of, I can't remember if it was either Andrew Carnegie or his partner, Henry Clay Frick, gentlemen, watch your costs. That is what they preached up and down their organizational structure. Watch your costs, watch your costs, watch your costs. Focus on cost improvement. This is Jeff telling you. Why is it so important? He brings up the importance of frugality and having a low-cost structure over and over and over again. Focus on cost improvement makes it possible for us to afford to lower prices, which drives growth. Growth then spreads fixed costs across more sales, reducing cost per unit, which makes possible more price reductions. Customers like this, and it's good for shareholders. Please expect us to repeat this loop. Then he starts to summarize some of the gains and growth they had.

• 26:22David Senra?

  I'm gonna pull out one sentence because he says this is the single most important thing, and it is probably what he repeats the most. "Most important, we stayed relentlessly focused on the customer." Then he jumps into the next paragraph. "Obsess over customers." He does not, he, he does not care if you think he repeats himself. He does, and he does that intentionally. He is telling you with the frequency in which he, he repeats these ideas, what is important to him? I love this. "Obsess over customers." "Until July, Amazon had primarily been built on two pillars of customer experience, selection and convenience. We added a third customer experience pillar, relentlessly lowering prices." So now he's using that word again, relentlessly lowering prices.

• 27:05David Senra?

  He's like, "Listen, we were able to improve the customer experience because we have more selection and it's more convenient if we just ship you what you want instead of you driving to the store or waiting in line and everything else." Now, where did he get the idea to relentlessly lower prices? If you listen to episode 179, which is when I read Jeff's biography, which is called "The Everything Store," I think that was the second or third time I read it, you already know the story. This came as a result of one of the most important meetings that Jeff had in his entire life. It is when Jim Sinigal, the founder of Costco, met with Jeff for coffee, if I remember correctly. They actually meet for coffee inside, like at a Starbucks, inside of a Barnes & Noble, which is funny because I was obviously one of Amazon's main competitors at the time. And so I want to read a bunch of highlights from "The Everything Store."

• 27:51David Senra?

  This is absolutely fantastic. I love the way Jim Sinigal thinks. I wish, so many people are like, "Why haven't you done an episode on Costco?" I can't, there's no books on, no biographies on Jim Sinigal, unfortunately. And the day it releases, I wish he'd write an autobiography, is the day I make the podcast. So it says, it's just giving some background on the fact that they have a lot to like. "Like Bezos, Sinigal had rejected multiple acquisition offers over the years, including one from Sam Walton, and Sinigal liked to say he didn't have an exit strategy that he was building a company for the long term." Bezos listened carefully and once again drew key lessons from a more experienced retail veteran. What are you and I doing at this exact same moment? It is exactly, exactly what Bezos did. He was obsessed about studying and learning from people that came before him.

• 28:35David Senra?

  And in this case, Jim Sinigal is way more successful and way more wealthier. Obviously, that's changed now than Bezos was at the time. Bezos listened carefully and once again drew key lessons from a more experienced retail veteran. And what does Jeff do? He doesn't just, oh, that's a nice idea. He takes that idea, he learns a new idea, goes back to a company and relentlessly implements it. Sinigal explained the Costco model to Bezos. It was all about customer loyalty. There are some 4,000 products in the average Costco warehouse. There are copious quantities of everything in there and it's all dirt cheap. Costco buys in bulk and marks up everything at a standard across the board 14%, even when it could charge more. That's an idea that Bezos has. He's beating them on selection, convenience and prices.

• 29:18David Senra?

  When people say, hey, you know, we're beating them on prices by such a large margin. Let's increase it a little bit more. He's like, no. Sinigal goes into the fact that their most, all their profit comes from the annual membership. It's going to sound a lot like what Prime turns into, right? Jim told him the membership fee is a one-time pain, but it reinforced its, but its value is reinforced every time customers walk in and see a 47-inch TV that's $200 cheaper than anywhere else. And then Jim also realized how it all connects. Costco's low prices generated heavy sales volume and the company then used its significant size to demand the best possible deals from suppliers, thus raising its per-unit gross profit dollars. And you have to ask, Jim, why are you educating a potential competitor?

• 29:59David Senra?

  And Jim says, because I benefited from people that came before me that gave me their ideas. A decade later, in filing preparing to retire, Sinigal remembers the conversation well. I think Jeff looked at it and thought that was something that he could apply to his business as well. He does not regret educating an entrepreneur who would evolve into a ferocious competitor. This is what Jim said. I've always had the opinion that we have shamelessly stolen any good ideas.

• 30:22David Senra?

  And then this is the result. Bezos took the lessons he learned during that coffee in 2001 and applied them with a vengeance. The Monday after the meeting with Sinigal, Bezos opened an S team, that's his executive team meeting, by saying he was determined to make a change. The company's pricing strategy, he said, according to several executives who were there, was incoherent. Amazon preached low prices, but in some cases, the prices were higher than competitors. Like Walmart and Costco, Bezos said, Amazon should have everyday low prices. This is why, if Amazon could stay competitor on price, it would win the day on unlimited selection and on the convenience afforded to customers who didn't have to get in the car to go to a store and wait in line. That July, as a result of the Sinigal meeting, Amazon announced it was cutting prices of books, music, and videos by 20 to 30%.

• 31:06David Senra?

  And this is when they started identifying the flywheel, they started identifying the loop that has been mentioned a few times in the Shorho letters so far. Lower prices led to more customer visits, more customers increased the volume of sales, and attracted more commission-paying third-party sellers to the site. That allowed Amazon to get more out of fixed costs, which he just referenced, right? It's like, we are a large fixed-cost business. Online selling is a large, excuse me, let me not butcher his point. I'm gonna go, I had to, let me go back in the previous year. Online selling is a scale business characterized by high fixed costs and relatively low variable costs, right? And he goes back to this, this allowed Amazon to get more out of fixed costs, like the fulfillment centers and the servers needed to run the website. This greater efficiency then enabled it to lower prices further.

• 31:49David Senra?

  Feed any part of this flywheel, they reasoned, that is Jeff and his executive team, right? This is their thinking behind this, and they were dead right about this. Feed any part of this flywheel, they reasoned, and it should accelerate the loop. And this is where it gets really crazy. If you believe the ideas that Jeff learned in that meeting with Jim Sinigal helped Amazon survive and then grow, and you look at the difference between where Amazon was before the meeting and where it is as a result of the fact that it was able to survive for the next 20 years. What is the value? What is the economic value of those ideas? This is why studying the history of entrepreneurship is so valuable. It is exactly, there's a line in Poor Charlie's Almanack,

• 32:33David Senra?

  The Wit and Wisdom of Charlie Munger, that summarizes exactly what you and I are learning. And in Poor Charlie's Almanack, it says, "There are ideas worth billions in a $30 history book." That is how you and I know we're on the right track. I record this in a recording booth. I feel like kicking the door right now. This fills me up with so much energy because it's attainable for all of us. The collection of these ideas. Obviously, the application execution is on us individually. But it's crazy how generous so many of these entrepreneurs are with letting us learn from their experience. It gets me, I gotta calm down. All right, going to 2002, I love this. So at least in the book that I'm reading, they title all these and it says, "What's good for customers is good for shareholders." I wrote, Jeff repeats this over and over again.

• 33:16David Senra?

  And he says, this is really interesting because I, there's only one paragraph here. But a lot of what came to, let me read the paragraph. I think reading the paragraph first and then telling you why I thought of Henry Ford. Let me just read it to you. "One of our most exciting peculiarities is poorly understood. People see that we are determined to offer both world-leading customer experience and the lowest possible prices. But to some, this dual goal seems paradoxical." So this is a year after talking to Senegal. He says, "Hey, we're going to do lowest prices possible and world-leading customer experience." The reason I think that popped to mind is because I just reread Henry Ford's autobiography. That's episode 266. And you can look at the show notes of episode 266.

• 34:00David Senra?

  It said, like, you could distill Henry Ford's, like, his philosophy on company building, or what was important to him down to five words, "Maximum service at minimum cost." And also in that autobiography, which is a very similar theme to what Jeff's saying that he's trying to do here, there's something also very similar to this philosophy within Henry Ford's autobiography. He's like, "Listen, I don't want to make a low-quality, cheap product. I want to make a high-quality." Cheap product. Or maybe a better way to put that is like, I don't want to make a low quality inexpensive product. I want to make a high quality inexpensive product. And so now Jeff goes into more detail about, hey, I learned this from Jim. We're going to have everyday low prices. He goes back to the meeting, tells his S team, hey, we're going to be just like Costco and Walmart. Because if we can match the prices, we're going to have everyday low prices.

• 34:44David Senra?

  If we can match them on price, we're going to beat them on convenience and selection, right? And so look at the, the amount of work they're willing to do to make sure they're actually matching this goal where Bezos is saying, hey, we're going to organize around this principle and we're going to show with our actions that it's important to us. Our pricing objective is not to discount a small number of products for a limited period of time, but to offer low prices every day and apply them broadly across our entire product range. To illustrate this point, we recently did a price comparison versus a major well-known chain of book superstores. We did not handpick a choice, a choice group of books against which we wanted to compare, right? So he says, instead, we, we use their published list of their 100 best sellers for the year 2002.

• 35:29David Senra?

  So then they say, okay, you, you put up this, this is your bestselling books for the year 100. We're going to go to these stores, we're going to buy all these books. We're going to see how much it costs us to buy at your store and then we're going to do the same thing on Amazon. So it says, we priced all 100 titles by visiting their stores. It took us six hours in four of their different superstores to find all 100 books on their list. So right there, it's like, wait a minute, these are your bestselling books. I had to go to four different bookstores just to get all 100 of them, right? Or you could just sit down in front of your computer and do this way faster. When we added everything up, we spent, we discovered that at their stores, these 100 bestselling books cost $1,561. At Amazon, the same books cost $1,195 for a total savings of $366 or 23%. 2003 is a really short letter.

• 36:13David Senra?

  It's all about long-term thinking and it really is talking about, hey, you need to design your customer experience with their long-term benefit. The long-term benefit of the customer in mind, not the money that you'll make in the short term. And he's saying this is counterintuitive and rare and he gives a perfect example to illustrate why it's so difficult to do that. As we design our customer experience, we do so with long-term owners in mind. We, we empower customers to review products. So the reviews, obviously everybody knows this now, this was relatively new at the time, you could do a review. Like you're going to Amazon to buy something and they, on their own, the sales page could be a bad review or, you know, like a bunch of bad reviews and so you don't buy them. So it says, "We received complaints from a few vendors basically wondering if we understood what business we're in. You make money when you sell things. Why would you allow negative

• 36:58David Senra?

  reviews on your website?" they said. "Speaking as a focus group of one, I know I've sometimes changed my mind before making purchases on Amazon as a result of negative or lukewarm customer reviews." Though, and this is, this is so important because it goes against, I think, human nature. "Though negative reviews cost us some sales in the short term, helping customers make better purchases, decisions ultimately pays off for the company." And that is so important because he feels there is no misalignment between customer and shareholder interest. If you're always taking care of the customer, then the shareholders will be rewarded over the long term. He quotes Ben Graham a bunch in this book as well, or not the book, in the shareholder letters. On that time scale, the interests of shareholders and customers are aligned

• 37:39David Senra?

  if you do this over a long period of time, right? This year, the widely followed American Customer Satisfaction Index gave Amazon a score of 88, which is the highest customer satisfaction score ever recorded in any service industry. A representative of the American Customer Satisfaction Index was quoted as saying, "If they go any higher, they will get a nosebleed." And then Jeff says, "We are working on that." Again, unapologetically extreme. He's got ridiculously high standards. He is already the best. Amazon already got the highest score out of any company on this index ever. And he's like, "Okay, I still want to be better." Okay, so then he's got a shareholder letter. This is, this part is incredible. It's all about making decisions,

• 38:21David Senra?

  really on the need for good judgment and why data may actually lead you to make the wrong decision. And this is also why, he talks about the importance of wandering. He says, like, the best decisions he's ever made in his life were not math-driven. They were like intuitive taste or like gut-based decisions. He starts out, I'm gonna skip over the part where he's like, you know, if you, if you have data, making decisions is really easy. But usually when you're building a company, and he says this later on, he's like, "Listen, if you wait for all the data, if you wait to get 90% sure, like, you're just gonna move too slow." He's like, "You're gonna have to get used to being really good at making decisions with maybe 70% of the amount of data that you actually need." So he says, "Not all of our important decisions can be made in a math-based way. Sometimes we have little or no historical

• 39:06David Senra?

  data to guide us and proactive experimentation..."

• 39:10David Senra?

  As a means to get data, right? And proactive experimentation is impossible, impractical, or tantamount to a decision to proceed. The prime ingredient in these decisions is judgment. He uses that as an opening to describe like, why is he significantly lowering prices? We have made a decision to continuously and significantly lower prices for customers year after year. This is an example of a very important decision that cannot be made in a math-based way. And so he explains, "With rare exceptions, the volume increase in the short term is never enough to pay for the price decrease. However, our quantitative understanding of elasticity is short term. We can estimate what a price reduction will do this week and this quarter.

• 39:54David Senra?

  But we, and this is the most important part, but we cannot numerically estimate the effect that consistently lowering prices will have on our business over five, five years, or 10 years, or more. Our judgment," and he italicizes the word judgment, "our judgment is that relentlessly returning efficiency improvements and scale economies to customers in the form of lower prices creates a virtuous cycle that leads over the long term to a much larger dollar amount of free cash flow, and thereby to a much more valuable Amazon." And he hints on why so few businesses get this correct. Math-based decisions command wide agreement. Judgment-based decisions are rightly debated,

• 40:38David Senra?

  and they're often controversial. We will start with the customer and work backwards. In our judgment, there's that word again, in our judgment, that is the best way to create shareholder value. The next shareholder goes into his thinking about, hey, like, how do you decide when to, like, build new business? Like, how do you decide what to go into? And really, he could think about, he's going to give us, he's asked the question, hey, Bezos, when are you actually going to go into open physical stores, right? This is in 2006. And this goes back to, I would summarize this, he's like, I have no interest in building an undifferentiated commodity business, which you and I just discussed in length, because I just read Peter Thiel's book, the main theme of Zero to One is the fact that undifferentiated

• 41:21David Senra?

  commodity businesses don't make any money. And he explicitly says in that book, don't build one, that's episode 278, if you haven't listened to it yet. I often get asked, when are you going to go open physical stores? The potential size of a network of physical stores is exciting, right? Physical world retailing is a cagey and ancient business that is already well-served, and we don't have any ideas for how to build a physical world store experience that's meaningfully differentiated for customers. Differentiation is something that Bezos is obsessed with. One of the most interesting themes in his last shareholder letter is the fact that he feels differentiation is survival, and it's something you have to put a constant amount of energy into, because the universe

• 42:04David Senra?

  wants you to be typical. And so Jeff, you know, 15 years ago, said, hey, I have no interest in building an undifferentiated commodity business. I'm not going to jump into this, even if it's a large market, I can make a lot of money until I figure out a way to differentiate. And 15 years later, he's still using the fact that, hey, differentiation is survival. That's such a fantastic maxim. Still, the importance of differentiation, and how he thinks about building new businesses. In some large companies, it might be difficult to grow new businesses from tiny seeds because of the patience and nurturing required. Amazon's culture is unusually supportive of small businesses with big potential, and I believe that's a source of our competitive advantage. Something else, I don't know if he ever explicitly uses this sentence, but this is definitely something he would agree with. Patience can be a competitive advantage. We have many people at our company who have

• 42:48David Senra?

  watched multiple $10 million seeds turn into billion-dollar businesses. That firsthand experience and the culture that has grown up around those successes is a big part of why we can start businesses from scratch. The culture demands that these new businesses be high potential, and that they be innovative and differentiated, there's that word again. So they have to be high potential, innovative, and differentiated, but it does not demand that they be large on the day that they are born. And then this next section is on a team of missionaries. It's one of his main themes. He says, listen, missionaries build, they just build better products. They actually care for non-financial reasons. I'm reading this because this is also very important to me. Reading is a lifelong passion of mine.

• 43:30David Senra?

  It's maybe the most, it is the most important hobby that I've ever developed and the longest running hobby that I've had. Think about reading as forced meditation. I think books are the antidote to like shorter attention spans. I don't think there's a better use of my time, any form of media besides books and podcasts. I think that the combination of both, just the amount, like if you, in my own like life, you may have experienced this as well, of like, everything I learned in college is compared to like what I've learned from books and podcasts on my own is less than 1%. I just think they're extremely important. I love the fact that he says that Amazon, you know, it started with books because they were missionaries for reading. And then he just has better ideas. Like, when you hear Jeff's talk, he's constantly referencing the books that he is learning from.

• 44:15David Senra?

  I just heard a talk, one talk he gave, I think it was like the David Rubenstein Show or something like that. And he's already the rich, at that point, he was like the richest person, quote unquote, in the world. And he's referencing books, right? He has infinite amount of resources, could hire anybody to give him one-on-one teaching, right? Or he could learn from anybody in the world, and yet he can still pick up a book that's $20 and that he finds valuable in his life. There's a reason he talks about this later on, that anything that has, he's talking about how hard it is to improve the book. I wasn't going to read this point, I just thought that was interesting, but it just came to mind. Anything that has persisted in roughly the same form and resisted change for 500 years is unlikely to be improved easily. He's like, you could never outbook the book. So, we humans, but the larger point here is really the importance of reading.

• 45:00David Senra?

  No matter, everybody has time, whether it's an audiobook, whether it's Kindle, doesn't matter, a physical book. They have to be part of your repertoire. We humans co-evolve with our tools. We change our tools and then our tools change us. Writing invented thousands of years ago as a grand whopper of a tool. And I have no doubt that it changed us dramatically. 500 years ago, Gutenberg's invention, the printing press, led to a significant step change in the cost of books. Physical books ushered in a new way of collaborating and learning. Lately, network tools like computers and cell phones have changed us too. They shifted us towards information snacking. And I would argue towards shorter attention spans. His whole point is like that, why they were trying to make the Kindle. This, you should, he's trying to get more people to read, right? To have a longer attention span.

• 45:44David Senra?

  The best description of reading I ever heard was from, I think she was a librarian. I've mentioned this a few times and I can't remember. I should write down her name and go find it again. But she said, reading is forced meditation. No one is going to describe spending time on social media as forced meditation. If our tools make information snacking easier, we're going to shift towards information snacking and away from long-term reading. Kindle is purpose-built for long-form reading. We hope Kindle may gradually and incrementally move us over years into a world of longer attention spans of, or with longer spans of attention. He's writing this in 2007. There's no way that I think anybody's going to argue that we have longer attention spans now, you know, many years later. Provided, they would, the Kindle would provide a counterbalance to the recent proliferation of info-snacking tools because the info-snacking tools are very addictive.

• 46:28David Senra?

  And, you know, very, they can be short-term pleasurable, but no one's going to, after you scroll through social media for an hour, you're not like, oh, that was so great. As opposed to like, if you read a really great book and you spend an hour with just an amazing writer and amazing mind, you're energized from that, right? I realize my tone here. Like, when I got done, I know this is technically not a book, even though I'm reading in a book form, these shareholder letters. Like, I was filled with energy. I was like, I cannot believe, this is like a gift to the world, a gift to the future generations of entrepreneurs, that Jeff took the time, you know, how much editing and writing went into and distilling all these experiences of 20-plus years of shareholder letters. Like, it is such, it's a miracle. And it's not just for the information, the valuable knowledge and wisdom that he transfers to you and I.

• 47:10David Senra?

  It's the hours put into sitting there and really thinking about what he's saying and not thinking about anything else. It's just absolutely fantastic. I realize my tone here tends towards the missionary. I guess my tone does too. And I can assure you, it's heartfelt. I'm glad about that because missionaries make, or, excuse me, missionaries build better products. Moving to the next year, this is all about working backwards. Why, he's talking about why working backwards from the customer needs will actually make you a more skilled operator over time. This was very interesting because I like how he'll introduce a topic, introduce an idea, he'll repeat it, but he repeats in different ways and then he builds on it. So you have a deeper understanding over time. This is just very, very well-written and very clear thinking in these letters. "In this turbulent global economy," he's writing this after the great financial crisis

• 47:54David Senra?

  in 2008, "our fundamental approach remains the same. We will stay heads down, focused on the long-term and obsessed over customers. Long-term thinking levers our existing abilities and lets us do new things we couldn't otherwise contemplate. It supports the failure in iteration required for invention and it frees us to pioneer in unexplored spaces. Seek instant gratification or the elusive promise of it and chances are you will find a crowd there ahead of you." Long-term, or this is excellent. "Long-term orientation interacts well with customer obsession." If we can identify a customer need and if we can further develop conviction that the need is meaningful and durable, our approach permits us to work patiently for multiple

• 48:37David Senra?

  years to avoid, or excuse me, multiple years to deliver a solution. Working backward from customer needs can be contrasted with a skills-forward approach where existing skills and competencies are used to drive business opportunities. So I'm going to pause right there. Why is the note saying, hey, if you work backwards from the customer's needs, this is actually going to force you. It will make you a more skilled business operator over time. Because he's like, well, if we have to work back, we start with what's best for the customer, we might not have those skills to build the thing. That's irrelevant. We will go out and learn them. And he's saying, most businesses say, they use what he's calling a skills-forward approach. Meaning, this is a skill set I have now, let's see what opportunities I can pursue. He's like, no, that's ass-backwards, dude.

• 49:20David Senra?

  With a skills-forward approach where skills and competencies are used to drive business opportunities. The skills-forward approach says, "We're really good at X. What else can we do with X?" If you use that exclusively, then the company employing it will never be driven to develop fresh skills. Eventually, the existing skills will become outmoded. Working backward from customers, customer needs often demands that we acquire new competencies and exercise new muscles, never mind how uncomfortable and awkward feeling those first steps might be. Working backwards from the cut, this is me talking now, or me writing to myself, working backwards from the customer's needs

• 50:02David Senra?

  will make you a more skilled business operator over time. This is also fantastic, goes back to the importance of legality, the importance of always, importance of not allowing waste to permeate throughout your company, the importance of having a low-cost structure. The customer experience path we've chosen requires us to have an efficient cost structure. The good news for shareholders is that we see much opportunity for improvement in that regard. So there's a story, I'm going to interrupt my own story, another book where it talked about Jeff's crazy because you would tell him something bad about his business and he would get excited. And this is why, because he sees that problems are just opportunities in work clothes. So he's like, hey, if the customer experience path, we have to have an efficient cost structure. The good news for share, for share owners is that we see much opportunity for improvement in that regard,

• 50:47David Senra?

  saying, hey, we know we can, we can lower costs, we can have a more efficient cost structure. Everywhere we look, we find what experienced Japanese manufacturers would call muda, or waste. So everywhere we look, we find waste. I find this incredibly energizing. I see it as potential, years and years of variable and fixed productivity gains and more efficient, higher velocity and flexible capital expenditures. He's got a footnote here, this is absolutely fantastic. At a fulfillment center recently, one of our kaizen experts asked me, I'm in favor of a clean fulfillment center, but why are you cleaning? Why don't you eliminate the source of dirt? And Jeff says, I felt like the Karate Kid.

• 51:32David Senra?

  And that term, in case you didn't know, I had to look it up myself. It's kaizen, most likely pronouncing it incorrectly, maybe kaizen. It is a Japanese term, meaning change for the better or continuous improve. One of my favorite sentences from Zero to One, the book you and I just talked about on episode 278 a few weeks ago, is going to relate to exactly what Jeff is saying here. This is 2009 shareholder letter. He says, the financial results for 2009 reflect the cumulative efforts of 15 years of customer experience improvements. That's the end of Jeff's sentence. This is the beginning of Peter's. If you focus on near-term growth above all else, you miss the most important question you should be asking. Will this business still be around a decade from?

• 52:18David Senra?

  Skipping ahead by a year or two, he's talking about the fact that Amazon, it will be a place of invention. We will build new businesses, innovative businesses that no one else has done before. He calls it the power of invention. Really, I just, when I, there's only a few sentences I pulled off from this entire year. One of it, he talks about, he starts talking about AWS, Amazon Web Services, which is now this gigantic, you know, who knows how much the business would be worth if it was actually outside of Amazon. It's very valuable. I think in the last, I think the last shareholder letter, he talks about like the growth of AWS specifically. I think it was like something, I forgot how fast it grew, but now it's up to like $50 billion a year, whatever it was when he wrote that letter. This is the main point. "The value of Amazon Web Services is undeniable."

• 53:02David Senra?

  Meaning, from the customer's perspective, the value is undeniable. I think about this in my terms, so known enough myself, is a good question to ask yourself. Is the value my product provides undeniable? And then he's just got a fantastic quote. He's talking about all these other businesses that they're inventing on behalf of the customer. I love this. "The most radical and transformative of inventions are often those that empower others," and he italicized that, "others," "to unleash their," I italicized that too, "creativity to produce their dreams." I'm going to read that without me interrupting. "The most radical and transformative of inventions are often those that empower others to unleash their creativity to pursue their dreams." Moving ahead, he's got an entire shareholder letter dedicated to the importance of being internally driven.

• 53:46David Senra?

  Now, this section was fantastic. I added some highlights from the previous time that I read it. What I don't remember though, and I looked for it. I put, "This is wild. It reminds me of Charlie Munger on Costco being against human nature." My guess is the fact that they could improve or increase prices and they don't, but I couldn't find that anywhere in my notes. So I'm not entirely sure what I was referencing there. So it says, "Our energy at Amazon comes from the desire to impress customers rather than the zeal to best our competitors. One advantage, perhaps a somewhat subtle one, of a customer-driven focus is that it aids a certain type of proactivity. When we're at our best, we don't wait for external pressures. We are internally driven to improve our services, adding benefits and features before we have to.

• 54:29David Senra?

  We lower prices and increase value for customers before we have to. We invent before we have to. These investments are motivated by customer focus rather than by reaction to competition." And so he gives an example of this. Well, he says, "We built an automated system that looked for occasions when we've provided a customer experience that is not up to our standards, and those systems then proactively refund customers." One industry observer recently received an automated email from us that said, "We noticed that you experienced poor video playback while watching the following rental on Amazon Video On Demand, Casablanca. We are sorry for the inconvenience and have issued you a refund for the following amount, $2.99. We hope to see you again soon." Surprised by the proactive refund, he ended up writing about the experience.

• 55:13David Senra?

  "Amazon noticed that I experienced poor video playback, and they decided to give me a refund because of that." Wow, talk about putting customers first. And this is his main point, "Doing it proactively is more expensive for us, but it also surprises, delights, and earns trust." And a few years later, at the beginning of the 2014 shareholder letter, he gives the characteristics that he looks for in businesses that he wants to keep forever. "A dreamy business offering has at least four characteristics: Customers love it, it can grow to a very large size, it has strong returns on capital, and it's durable in time with the potential to endure for decades. When you find one of these, get married.

• 55:56David Senra?

  We are now happily wed to what I believe are three such life partners: Marketplace, Prime, and AWS." And so, those are just three more big winners, but a lot of that is like you have to do a lot of experimentation, and the reason you need to do that is because the big winners pay for many experiments. It does not matter if it took them 100 failed experiments to get these three giant businesses. So he talks a lot about why you have to be bold in the world of business, and I just wrote right above this section, "This is so important to remember." "Outsize returns often come from betting against conventional wisdom, and conventional wisdom is usually right. Given a 10% chance of a 100x payoff, you should take that bet every time, but you're still going to be wrong nine times out of 10."

• 56:41David Senra?

  We all know that if you swing for the fences, you're going to strike out a lot. But you're also going to hit some home runs. The difference between baseball and business, however, is that baseball has a truncated outcome distribution. When you swing, no matter how well you connect with the ball, the most returns you can get is four. In business, every once in a while, when you step up to the plate, you can score 1,000 runs. This long-tailed distribution of returns is why it's important to be bold. Big winners pay for so many experiments. So then he dedicates one of his shareholder letters, one year of shareholder letters, to this idea of fending off day two. And so it says, Jeff, what does day two look like? That's the question I got at our most recent all-hands meeting.

• 57:26David Senra?

  I've been reminding people that it's day one for a couple of decades. I work in an Amazon building named day one. And when I move buildings, I took the name with me. I spend time thinking about this topic. And this is his answer. Day two is stasis, followed by irrelevance, followed by excruciating painful decline, followed by death. And that is why it's always day one. And so he goes into more detail about this. To be sure, this kind of decline would happen in extreme slow motion. An established company might harvest day two for decades, but the final result would still come. I'm interested in the question, how do you fend off day two? What are the techniques and tactics? How do you keep the vitality of day one even inside a large organization? Such a question cannot have a simple answer.

• 58:11David Senra?

  So he's going to give us a few ideas. I think he's got four different ideas here. Cannot have a simple answer. There will be many elements, multiple paths, and many traps. I don't know the whole answer, but I know bits of it. Here's a starter pack of essentials for day one defense. And he puts this into four categories. Customer obsession, a skeptical view of proxies, the eager adoption of external trends, and high-velocity decision-making. So the first one, true customer obsession. You and I have talked about it a bunch today. I don't have to go into more detail. This one was interesting. Resist proxies. As companies get larger and more complex, there's a tendency to manage to proxies. This comes in many shapes and sizes, and it's dangerous and subtle. A common example is process as proxy.

• 58:57David Senra?

  Good process serves you so you can serve customers. But if you're not watchful, the process becomes the thing. The process becomes the proxy for the result you want. It's not that rare, he's talking about in large organizations. It's not that rare to hear a junior leader defend a bad outcome with something like, "Well, we followed the process." A more experienced leader will use it as an opportunity to investigate and improve the process. So resist proxies, the third one. Embrace external trends. This one was surprising, but then I understood what he meant. And just think about like the very beginning of Amazon was Jeff embracing an external trend. That external trend being the internet, right? The growth of the internet at the very beginning.

• 59:41David Senra?

  The outside world can push you into day two if you won't or can't embrace powerful trends quickly. If you fight them, you're probably fighting the future. Embrace them and you have a tailwind. We're in the middle of an obvious one right now. Machine learning and artificial intelligence. And then his final piece of advice on this is that you have to be capable of making high-velocity decisions. Day two companies make high-quality decisions, but they make high-quality decisions slowly. You have to somehow make high-quality, high-velocity decisions. And so he says, "Amazon is determined to keep our decision-making velocity high. Speed matters in business." And so this is a main theme he's repeated over and over again, not only shareholder letters, but also in the different books and different talks.

• 1:00:26David Senra?

  And he uses this metaphor over and over again about the fact that there is one-way doors and two-way doors when making decisions. And if a decision is easily reversible, the two-way doors, what he calls it, you should be doing those very fast. There are, and he says, like, most of the decisions that you're gonna make as you're building your business are two-way doors. Every once in a while, you have to have, there's a one-way door. It's like, if I make a decision, I can't go back. So it's like, you better really think and slow down and make sure you're making those decisions correctly. But he says a common mistake is that As companies age, they treat two-way doors as one-way doors. So he says, "Never use a one-size-fits-all decision-making process. Many decisions are reversible." And he says they're two-way doors. Then he continues, "Most decisions should probably be made with somewhere around 70% of the information that you wish you had.

• 1:01:11David Senra?

  If you wait for 90%, in most cases, you're probably being too slow. Plus, either way, you need to get good at quickly recognizing and correcting bad decisions. If you're good at course correcting, being wrong may be less costly than you think. Whereas being slow is going to be expensive for sure." And the next shareholder letter is all about how to build a culture of high standards. And he says, "High standards are contagious." Another way to think about this is what Steve Jobs would repeat over and over again, that you should be a yardstick for quality, that some people are not used to an environment where excellence is actually expected. So Jeff says, "I believe high standards are teachable. People are pretty good at learning high standards simply through exposure. High standards are contagious.

• 1:01:55David Senra?

  Bring a new person onto a high-standard team, and they'll quickly adapt." The opposite, this is so important, right? So, "High standards are contagious, so are low standards." And he says that by saying, "The opposite is also true." And he also does not believe that high standards are universal, they're domain-specific, and you have to learn how to apply high standards in multiple different domains. "I believe high standards are domain-specific, and that you have to learn high standards separately in every arena of interest. Understanding this point is important because it keeps you humble. You can consider yourself a person of high standards in general and still have debilitating blind spots. There can be whole arenas of endeavor where you may not even know that your standards are low or nonexistent, and certainly not world-class.

• 1:02:40David Senra?

  It is critical to be open to that likelihood." And he's got this great quote later on that I want to put into this section before we move on. "Leaders have relentlessly high standards. Many people may think these standards are unreasonably high." So this next section actually threw me for a loop. This is just absolutely incredible thinking. And it's that you're gonna have to fix unrealistic beliefs on scope. And so he talks about, hey, we have a friend, she's like, really, really good, she could do like a perfect freestanding handstand. And she was telling Jeff that she even hired a handstand coach, and he's like, "I can't believe there's such a thing, like, why would you need a coach for that?" And the coach gave her, in the very first lesson, gave her some really good advice. And it's about understanding a realistic scope.

• 1:03:23David Senra?

  Most people, he said, think that if they work hard, they should be able to master a handstand in about two weeks. The reality is that it takes about six months of daily practice. If you think you should be able to do it in two weeks, you're just gonna end up quitting. Unrealistic beliefs on scope are often hidden and undiscussed will kill high standards. And so he applies this in his business. He says, listen, Amazon culture is famous for having these six-page narratives. They will not do PowerPoint. Instead, before a meeting, you have to write out like what the ideas or what you're thinking. You should put way more time than you think you should in preparing these documents because you're taking up so much time and having a meeting in the first place, right? So he says, we don't do PowerPoint.

• 1:04:06David Senra?

  At Amazon, we write narratively structured six-page memos. We silently read one at the beginning of each meeting in a kind of study hall. And so he talks about the quality of these memos varies widely. And so they realize like, what is the main, like, why are we finding? If there is a bad memo, what is the likely cause? And he realized, it's, it's, he says, when a memo isn't great, it's not the writer's inability to recognize the high standard, but instead a wrong expectation on scope. This is very fascinating. They mistakenly believe a high-standard six-page memo can be written in one or two days or even a few hours, when really it might take a week or more. They're trying to perfect a handstand in just two weeks, and we're not coaching them right.

• 1:04:50David Senra?

  The great memos are written and rewritten, shared with colleagues who are asked to improve the work, set aside for a couple of days, and then edited again with a fresh mind. They simply cannot be done in a day or two. The key point here is that you can improve results through the simple act of teaching scope, that a great memo probably should take a week or more. So then Jeff starts writing about his idea of the importance of wandering. He not only writes about it in his shareholder letters, but he also talks about it in public speeches. And so he says, sometimes, often actually in business, you do know where you're going. And when you do, you can be efficient. You can put in a place, you can put in place a plan and execute. In contrast, wandering in business is not efficient.

• 1:05:34David Senra?

  So this is what I was referencing earlier, where he says multiple times that the best, like all their best ideas, the most opportunities came from wandering. In contrast, wandering in business is not efficient, but it's also not random. It's guided by hunch, gut, intuition, curiosity, and powered by a deep conviction that the prize for customers is big enough that it's worth being a little messy and tangential to find our way there. Wandering is an essential counterbalance to efficiency. You need to employ both. The outside discoveries, the nonlinear ones, are highly likely to require wandering. And so he gives us this example. AWS, as a whole, is an example. No one asked for AWS.

• 1:06:20David Senra?

  No one. Turns out, the world was in fact, ready and hungry for an offering like AWS, but didn't know it. We had a hunch, followed our curiosity, took the necessary financial risks, and began building, reworking, experimenting, and iterating countless times as we proceeded. And so he combines this idea of the importance of wandering with another idea that's related to it, that your failures need to scale to as your business scales. So he's going to use the example of Echo for this. As a company grows, everything needs to scale, including the size of your failed experiments. If the size of your failures isn't growing, you're not going to be inventing at a size that can actually move the needle.

• 1:07:00David Senra?

  And so his point is like Amazon's side, at Amazon's size, we're going to have to occasionally have multi-billion dollar failures. So this kind of large scale risk-taking is part of the service we as a large company can provide to our customers and to society. The good news for shareholders is that a single big winning bet can more than cover the cost of many losers. And so he talks about how disastrous the Fire Phone was, they lost a bunch of money, but it also led them in part to developing Echo. Development of the Fire Phone and Echo was started around the same time. While the Fire Phone was a failure, we were able to take our learnings and, as well as our developers, and accelerate our efforts building Echo and Alexa. No customer was asking for Echo. This was definitely us wandering. Market research doesn't help.

• 1:07:45David Senra?

  If you had gone to a customer in 2013 and said, "Would you like a black, always-on cylinder in your kitchen about the size of a Pringles can that you can talk to and ask questions, that also turns on your lights and plays music?" I guarantee you, they would have looked at you strangely and said, "No, thank you." And then he says, "Since that first-generation Echo, customers have purchased more than 100 million. They've sold a couple hundred million." I just searched for this earlier to see if I could get the updated numbers. And I think the biggest number I saw was like 200 or 300 million of these things they've sold so far.

• 1:08:17David Senra?

  And finally, we've reached his last shareholder letter. I just want to pull out one piece of advice that Jeff has for you and I that I thought was absolutely excellent. Differentiation is survival, and the universe wants you to be typical. In what ways does the world pull at you in an attempt to make you normal? How much work does it take to maintain your distinctiveness, to keep alive the thing or the things that make you special? We all know that distinctiveness, originality, is valuable. What I'm asking you to do is embrace how much energy it takes to maintain that distinctiveness. The world wants you to be typical in a thousand ways. It pulls at you. Don't let that happen.

• 1:09:01David Senra?

  And that is where I'll leave it for the full story. Highly recommend reading Jeff's shareholder letters for yourself and rereading them throughout your career. I will leave a link on, it's on Amazon's website, amazon.com/ir. But I'll leave a link below. You can read it for free. If you want them in book form and you want to use the book that I use for this, it's called "Invent and Wander: The Collective Writings of Jeff Bezos." I will also leave a link below. If you buy the book, you'll be supporting the podcast at the same time. That is 282 books down, 1,000 to go, and I'll talk to you again soon. I want to give you a quick update to the Founder's Membership Program. I was calling it Founder's Daily, and I just changed the name to Founder's Premium because I added an additional benefit. I'm going to start doing AMA Ask Me Anything episodes. You can subscribe.

• 1:09:46David Senra?

  There's a link down below in the show notes in your podcast player. You can also find the link at founderspodcast.com. And once you subscribe, you'll get immediate access to the private podcast feed. So far, I've done about 60 of these little miniature episodes where I give you one idea from one of history's greatest founders every day. But now, after you subscribe, you'll see the ability that says Ask Me Anything. You can submit a question, and then as soon as I get enough questions, I'm going to record an AMA episode where I actually answer those questions. And so the way I think about Founder's Premium is it's my attempt to go even deeper. I want to take the lessons that you and I are learning on founders and reinforce them through the short daily ideas and then the longer Ask Me Anything episodes. So if that sounds like something you'd be interested in, check out the link below, and you can also go to founderspodcast.com.