The Myth-Making of Amazon and Jeff Bezos

Amazon stock today is a testament to free-market capitalistic success. This is the image you’re fed. Hard-work and determination grant you a window of opportunity for you to transform and disrupt the world on a trillion dollar scale.

We scarcely look into the history, though. With Apple, we know the Steve Jobs story. We see the genius. We know the zig-zag between an operating system and the first popular MP3 player to the iPhone that eventually broke out as a worldwide brand everybody had to have. We have seen the success with Microsoft in the same fashion: As a kid, I saw the transformation of the operating system over the years. It was aging and maturing at the same rate I was.

When we turn to Jeff Bezos, we draw a blank.

There are a few really interesting things that connect the dots people scarcely talk about.

1. The deal that saved Amazon from the grave.
2. Going from selling stuff on the internet to creating the operating system for the internet.
3. Transforming the business of selling stuff themselves into the idea of allowing others to sell for them — going from a business that sells to a business middleman.

Amazon built the infrastructure of the internet, but that actually happened after the dot com bust.

Here are some cool statistics:

• When the dot com bubble burst, there were about 400 million people on the internet and 17 million websites.
• Today, there are over a billion websites and over 3.5 billion people on the internet.
• A lot of people assign the failure of companies during the dot com era to chasing too few users at the time.
• The ideas were in the right place, but the game had begun too early and too fast.
• The growing and scaling pains of other companies that ended up in the graveyard existed in Bezos’ profile, too.

In fact, Amazon had its initial public offering on May 15, 1997, at $18 ($1.50 after splits) a share. In just a few short days, it was trading at just a touch below $100 ($8.50 after splits) a share.

At Amazon’s peak during the dotcom bubble, it was $1,500 a share (a touch above $110 a share after splits).

When the company crashed, it bottomed out near $80 a share (approximately $7 a share after splits).

It had lost over 90% of its value.

Its market cap was hardly over a billion dollars. The Amazon we know and love today was as close to extinction as any other dot com era company.

What saved Amazon was its CFO, Warren Jenson, who sold $670 million in convertible bonds to European investors in early February of 2000.

“Early in 2000, Warren Jenson, the fiscally conservative new chief financial officer from Delta, decided that the company needed a stronger cash position as a hedge against the possibility that nervous suppliers might ask to be paid more quickly for the products amazon sold. Ruth Porat, co-head of Morgan Stanley’s global-technology group, advised him to tap into the European market, and so in February, Amazon sold $672 million in convertible bonds to overseas investors. This time, with the stock market fluctuating and the global economy tipping into recession, the process wasn’t as easy as the previous fund-raising had been. Amazon was forced to offer a far more generous 6.9 percent interest rate and flexible conversion terms — another sign that times were changing. The deal was completed just a month before the crash of the stock market, after which it became exceedingly difficult for any company to raise money. Without that cushion, Amazon would almost certainly have faced the prospect of insolvency over the next year.”— Brad Stone, The Everything Store: Jeff Bezos and the Age of Amazon

Their CFO’s convertible bond issuance allowed the company to stay liquid while it tumbled to its near death. In fact, Amazon’s market cap was only a few billion dollars when the crash bottomed out. The most important note to take home from Brad Stone’s book is that they would have “certainly faced the prospect of insolvency” without the CFO’s lucky decision to grab a hold of more cash.

At the trough of the crash, hundreds of companies had lost over $2 trillion in value. Almost all of these companies died off. Amazon was still hanging on.

Amazon didn’t see its dot com peak again until 2009, almost a decade later:

In essence, this deal helped cushion Amazon for literally the next decade.

It allowed Amazon to survive long enough for Chris Pinkham and Benjamin Black to present a paper on their vision for Amazon’s retail computing infrastructure. They were going to develop the tools that would allow others to scale businesses and ideas on their platform.

They had the vision to invest and create the infrastructure of the internet.

This happened in late 2003.

By 2006, Amazon Web Services was re-launched under Andy Jassy, and exists as we know it today.

It “helps free developers from worrying about where they are going to store data, whether it will be safe and secure, if it will be available when they need it, the costs associated with server maintenance, or whether they have enough storage available. Amazon S3 enables developers to focus on innovating with data, rather than figuring out how to store it.”

At its release, it had more than 150,000 developers signed up.

These failures were what ended up making Bezos’s company what it is today.

Remember that thought about how the internet and data were growing at some insane pace? Remember how the number of websites grew from 17 million to over a billion despite the bubble bursting?

The developers at Amazon had the vision for that continued growth despite what they experienced.

From selling his own products to creating the road map of the internet, Amazon Web Services transformed the railroad of the internet into an ultra-fast airplane.

You didn’t need to go from A to B to C anymore. You didn’t need to push at a turtle’s pace.

You could move as an innovator, from A to Z.

They saw what people needed, and they differentiated themselves from anyone else by creating the cloud and creating the tools for everyone else to do what Jeff wanted to do in the beginning. Amazon succeeded by removing Bezos’s original vision for the company.

The funniest part about Amazon is that it set itself apart by making tools for everyone else to set themselves apart. They began to separate themselves as a company that sells their own things. Instead, they gave you the things you needed to help you sell stuff to other people; and you could do it all on their platform. They became a meta-company of sorts.

In the process, Amazon ended up owning the infrastructure that everyone else helped him build.

Amazon took what Bezos wanted to do and instead built the infrastructure for everyone else to do it themselves.

And it happened by accident.

And it happened years before Google and Microsoft got into the game.

Even today, the numbers for his sales don’t look so amazing on their own.

AWS is over half the company’s profit despite revenue for sales exceeding $250 billion.

Their most recent annual report reflects the same narrative:

At the start of Bezos’s company, they sold 100% of their own products.

Over half of the stuff being sold on their platform, 20 years later, is not theirs.

When you look further into the report, you’ll see that they divide their business into three segments:

They’ll give you what they call “operating income”, which is interesting for the simple reason that it is a way to hide how much actual profit one segment is providing.

In any case, their cumulative net income, or profit, for 2018 was $10.073 billion dollars.

They don’t give you operating expenses for AWS alone, and that is probably because investors would see the percentage of profit coming out of AWS in proportion to their total profit number.

Amazon had a total of $233 billion in net sales for 2018. Of that chunk, $26 billion came from Amazon Web Services.

Of that chunk, Amazon’s profit from AWS was approximately $7.3 billion.

Their total profit for that year was a touch above $10 billion.

And they sold over $200 billion in stuff that wasn’t web services.

In 2017, Amazon would have been in the red if its web services segment didn’t make money.

$4.1 billion in operating income, when $4.3 billion came out of web services.

AWS grows about 40–50% each year. It is Amazon’s main artery. Without it, Amazon would have gone bankrupt a long time ago. Web services is the only thing subsidizing the actual service from Amazon that everyone knows and cares about.

The next venture Amazon delves into for a revenue stream will be equally interesting.

Selling their things or their customer’s things has reintroduced Amazon to their growing pains over 20 years ago.

Whatever Amazon does next for profit, I doubt it will be shipping physical products.

I would put my money on what they’re growing at Twitch; a live streaming platform for content creators.

Amazon has gotten to where it is because it took a step out of the path that nearly killed them.

From compiling books to becoming the compiler.

I bet you anything they’ll be doing it again soon. Even then, they won’t know what it is themselves and it won’t be Bezos who transforms it.