Amazon Founder, Jeff Bezos', Shareholder Letters


I spent 5 hours on a plane flying to Las Vegas for a friend's wedding so this gave me a lot of extra time to read.  Where as most people hate flying for understandable reasons, I enjoy it because I have no computer, no service on my phone, and no other distractions to deter me from reading.  There is a nice quote from Jeff Bezos on the shrinking of attention spans that arises from all of these distractions, and yes, even a guy as smart as Jeff is susceptible to these same distractions that shorten our own attention spans.  Here is the quote:


"Lately, networked tools such as desktop computers, laptops, cell phones and PDAs have changed us too.  They've shifted us more toward information snacking, and I would argue toward shorter attention spans."


So what did I spend my 5 hours reading on Thursday?  All of Jeff Bezos' letters to shareholders from 1997 to 2011.  I came across these letters after reading an article on LinkedIn that compares Warren Buffet to Jeff Bezos, and he mentioned Bezos' letters so I couldn't resist reading them myself.


Here are some of the interesting highlights I got from them:


Jeff Bezos understands the importance of not focusing on the short term, but focusing on the long term; even if that means sacrificing short term gains for long term ones.

He mentioned Ben Graham and his quote about the market being a voting machine in the short term, and a weighing machine in the long term. 

He mentioned this in the 2000 shareholder letter right as Amazon's stock dropped 80% as the Dot Com bubble burst. The mention of this quote was probably the biggest similarity to Warren Buffett that I found in these letters.


He has an incredible focus on making sure the customer is always satisfied and happy with the product. I myself had an experience where I ordered a product from Amazon and I wasn't entitled to a full refund, but after speaking with a service representative over the phone they decided to give me the full refund.  Some can argue that constantly giving into the customer isn't the right approach to make because it can hurt profits like in my refund experience, but it has worked tremendously well for Jeff Bezos and Amazon shareholders.


Jeff includes a copy of his 1997 letter to shareholders in every single letter because it outlines the company's focus and what the shareholders (owners) are buying when they buy Amazon's stock.


In either 2001 or 2002,  Jeff Bezos went around to the stores in New York City and Seattle of the well-known largest book superstores and compared the prices of these book superstores against the prices at Amazon.  This process took 6 hours and what he found was that the 100 best selling books were 23% cheaper on Amazon than they were in these stores.

Some of my favorite passages from his shareholder letters are below:


"At a recent event at the Stanford University campus, a young woman came to the microphone and asked me a great question:  'I have 100 shares of Amazon.com. What do I own?'


I was surprised I hadn’t heard it before, at least not so simply put. What do you own? You own a piece of the leading e-commerce platform.


The Amazon.com platform is comprised of brand, customers, technology, distribution capability, deep e-commerce expertise, and a great team with a passion for innovation and a passion for serving customers well. We begin the year 2000 with 17 million customers, a world wide reputation for customer focus, the best e-commerce software systems, and purpose-built distribution and customer service infrastructure. We believe we have reached a “tipping point,” where this platform allows us to 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 customer-centric company, a place where customers can come to find and discover anything and everything they might want to buy online. We won’t do so alone, but together with what will be thousands of partners of all sizes. We’ll listen to customers, invent on their behalf, and personalize the store for each of them, all while working hard to continue to earn their trust. As is probably clear, this platform affords an unusually large scale opportunity, 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."


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"For instance, shortly after launching Amazon.com in 1995, we empowered customers to review products.  While now a routine Amazon.com practice, at the time we received complaints from a few vendors, basically wondering if we understood our business: 'You make money when you sell things—why would you allow negative reviews on your website?' Speaking as a focus group of one, I know I’ve sometimes changed my mind before making purchases on Amazon.com as a result of negative or lukewarm customer reviews. Though negative reviews cost us some sales in the short term, helping customers make better purchase decisions ultimately pays off for the company."

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"Why not focus first and foremost, as many do, on earnings, earnings per share or earnings growth? The simple answer is that earnings don’t directly translate into cash flows, and shares are worth only the present value of their future cash flows, not the present value of their future earnings. Future earnings are a component—but not the only important component—of future cash flow per share. Working capital and capital expenditures are also important, as is future share dilution. Though some may find it counter intuitive, a company can actually impair shareholder value in certain circumstances by growing earnings. This happens when the capital investments required for growth exceed the present value of the cash flow derived from those investments."

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"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?' I felt like the Karate Kid."

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Not only is Amazon's success due to Jeff Bezos' brilliance, but also to Moore's law where extraordinary increases in available bandwidth, disk space, and processing power continue to get cheap really fast.


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"Price performance of processing power is doubling about every 18 months (Moore’s Law), price performance of disk space is doubling about every 12 months, and price performance of bandwidth is doubling about every 9 months. Given that last doubling rate, Amazon.com will be able to use 60 times as much bandwidth per customer 5 years from now while holding our bandwidth cost per customer constant.


Similarly, price performance improvements in disk space and processing power will allow us to, for example, do ever more and better real-time personalization of our Web site. In the physical world, retailers will continue to use technology to reduce costs, but not to transform the customer experience. We too will use technology to reduce costs, but the bigger effect will be using technology to drive adoption and revenue. We still believe that some 15% of retail commerce may ultimately move online."

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