Letters from Jeff
Josh
0x8BE2
July 5th, 2022

What can you learn from a person who built one of the largest, most innovative, and dominant companies in American history? Frankly, way too much to cover in one written piece like this; however, after spending the afternoon reading through each and every one of Jeff Bezos’ annual shareholder letters, I could not help but share some snippets (sentences, paragraphs, events) that stood out. Below, you’ll find pieces of wisdom and advice from each of his letters spanning the years 1997 to 2020 (his last one).

I would like for the post to mainly reflect Bezos’ writing, and thus I’ll keep my commentary to a minimum. That being said, I would like to highlight one fascinating duality that stood out to me through reading all these letters back to back (which I recommend is the best way to do it). Across the letters there was an interplay between evolution and constants. By evolution, not only do I refer to the flourishing of Amazon as a business and stakeholder in the global economy, but also to Jeff as a founder and leader. The letters overall trended from being focused on business updates (with some small snippets on values) to core emphasis on key business lines and their virtuous cycle interplay (with more knowledge and best practice sharing) to the teachings of philosophy, culture, and meaning. However, alongside this evolution, there were also constants — the values that Amazon and Bezos centered on: relentless customer focus, long-term thinking, courage to take chances, and never forgetting that it is still Day 1.

Hopefully you enjoy them like I did.

1997

“We will continue to focus on hiring and retaining versatile and talented employees, and continue to weight their compensation to stock options rather than cash. We know our success will be largely affected by our ability to attract and retain a motivated employee base, each of whom must think like, and therefore must actually be, an owner.”

“To be certain, a big part of the challenge for us will lie not in finding new ways to expand our business, but in prioritizing our investments.”

1998

Cultivating a culture that does not rest on its laurels, that has relentless customer focus.

“But there is 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 are the ones with whom we have a relationship, and they are the ones to whom we owe a great obligation.”

1999

The concept of creating the Amazon virtuous cycle is integral to their long-term strategy. The interplay between their components allows for cross-subsidization, long-term decision making, and leading customer satisfaction, among other things.

“So, as we expand our offering, we create a virtuous cycle for the whole business. The more frequently customers visit our store, the less time, energy, and marketing investment is required to get them to come back again. In sight, in mind.”

Reads a lot like blockchain to me…

“We are doubly-blessed. We have a market-size unconstrained opportunity in an area where the underlying foundational technology we employ improves every day. That is not normal.”

2000

I found this year’s letter particularly relevant to the tech market environment today. Impressive to see Bezos’ thinking in those times (the letter was written in 2001 for the year of 2000).

“Ouch. It’s been a brutal year for many in the capital markets and certainly for Amazon.com shareholders. As of this writing, our shares are down more than 80% from when I wrote you last year. Nevertheless, by almost any measure, Amazon.com the company is in a stronger position now than at any time in its past.”

Investor humility and admission of some bull market mistakes. Very pertinent to today. The “land rush” metaphor is similar to the rush experienced in 2021.

“Many of you have heard me talk about the ‘‘bold bets’’ that we as a company have made and will continue to make — these bold bets have included everything from our investment in digital and wireless technologies, to our decision to invest in smaller e-commerce companies, including living.com and Pets.com, both of which shut down operations in 2000. We were significant shareholders in both and lost a significant amount of money on both. We made these investments because we knew we wouldn’t ourselves be entering these particular categories any time soon, and we believed passionately in the ‘‘land rush’’ metaphor for the Internet. Indeed, that metaphor was an extraordinarily useful decision aid for several years starting in 1994, but we now believe its usefulness largely faded away over the last couple of years. In retrospect, we significantly underestimated how much time would be available to enter these categories and underestimated how difficult it would be for single-category e-commerce companies to achieve the scale necessary to succeed.”

Queue in Gate’s Law: “Most people overestimate what they can achieve in a year and underestimate what they can achieve in ten years.” Even the best do it…

“We still believe that some 15% of retail commerce may ultimately move online.”

2001

Alongside cashflows, shares outstanding is the second pillar of creating shareholder value.

“Limiting share count means more cash flow per share and more long-term value for owners. Our current objective is to target net dilution from employee stock options (grants net of cancellations) to an average of 3% per year over the next five years, although in any given year it might be higher or lower.”

2002

Relentless customer focus.

“In this year’s American Customer Satisfaction Index, the most authoritative study of customer satisfaction, Amazon.com scored an 88, the highest score ever recorded — not just online, not just in retailing — but the highest score ever recorded in any service industry.

2003

The ownership mentality.

Long-term thinking is both a requirement and an outcome of true ownership. Owners are different from tenants.”

“Our pricing strategy does not attempt to maximize margin percentages, but instead seeks to drive maximum value for customers and thereby create a much larger bottom line — in the long term.”

2004

“Our ultimate financial measure, and the one we most want to drive over the long-term, is free cash flow per share.”

2005

Sometimes you won’t have all the information, but you need to make a decision. Judgement can be the secret sauce to some of the best CEOs.

“As you would expect, however, not all of our important decisions can be made in this enviable, math-based way. Sometimes we have little or no historical data to guide us and proactive experimentation is impossible, impractical, or tantamount to a decision to proceed. Though data, analysis, and math play a role, the prime ingredient in these decisions is judgment.

Sometimes calls go against numbers, which can be short-term focused.

“We’ve made similar judgments around Free Super Saver Shipping and Amazon Prime, both of which are expensive in the short term and — we believe — important and valuable in the long term.”

Controversial decisions can be the instigators of true innovation and thus value creation.

“Math-based decisions command wide agreement, whereas judgment-based decisions are rightly debated and often controversial, at least until put into practice and demonstrated. Any institution unwilling to endure controversy must limit itself to decisions of the first type. In our view, doing so would not only limit controversy — it would also significantly limit innovation and long-term value creation.”

2006

First mention of AWS.

“Amazon Web Services is another example. With AWS, we’re building a new business focused on a new customer set … software developers. We currently offer ten different web services and have built a community of over 240,000 registered developers. We’re targeting broad needs universally faced by developers, such as storage and compute capacity — areas in which developers have asked for help, and in which we have deep expertise from scaling Amazon.com over the last twelve years. We’re well positioned to do it, it’s highly differentiated, and it can be a significant, financially attractive business over time.”

“In some large companies, it might be difficult to grow new businesses from tiny seeds because of the patience and nurturing required. In my view, Amazon’s culture is unusually supportive of small businesses with big potential, and I believe that’s a source of competitive advantage.

Real long-term vision shines through in this very matter-of-fact description of business line growth.

“In our experience, if a new business enjoys runaway success, it can only begin to be meaningful to the overall company economics in something like three to seven years. We’ve seen those time frames with our international businesses, our earlier non-media businesses, and our third party seller businesses.”

2007

First mention of Kindle. This year’s letter shares some thoughtful content on Kindle, its product design process, and its significance to Amazon and its corporate identity.

“November 19, 2007, was a special day. After three years of work, we introduced Amazon Kindle to our customers.”

2008

Maintain the long-term thinking, even in the darkest of times.

In this turbulent global economy, our fundamental approach remains the same. 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 and iteration required for invention, and it frees us to pioneer in unexplored spaces.”

Energized by finding opportunities to improve and become more effective.

“The good news for shareowners is that we see much opportunity for improvement in that regard. Everywhere we look (and we all look), we find what experienced Japanese manufacturers would call “muda” or waste. I find this incredibly energizing.”

2009

The Amazon senior leadership mentality.

“Senior leaders that are new to Amazon are often surprised by how little time we spend discussing actual financial results or debating projected financial outputs. To be clear, we take these financial outputs seriously, but we believe that focusing our energy on the controllable inputs to our business is the most effective way to maximize financial outputs over time. Our annual goal setting process begins in the fall, and concludes early in the new year after we’ve completed our peak holiday quarter.”

2010

Amazon, a federated system of services, exhibiting modularity as well as interdependence.

Our technologies are almost exclusively implemented as services: bits of logic that encapsulate the data they operate on and provide hardened interfaces as the only way to access their functionality. This approach reduces side effects and allows services to evolve at their own pace without impacting the other components of the overall system. Service-oriented architecture — or SOA — is the fundamental building abstraction for Amazon technologies.”

Technological innovation is fundamental to Amazon’s DNA and existence.

“All the effort we put into technology might not matter that much if we kept technology off to the side in some sort of R&D department, but we don’t take that approach. Technology infuses all of our teams, all of our processes, our decision-making, and our approach to innovation in each of our businesses. It is deeply integrated into everything we do.”

2011

Illustration of Amazon as infrastructure which enables other micro economies to evolve on top of it. Fat protocol thesis, perhaps?

“Invention comes in many forms and at many scales. The most radical and transformative of inventions are often those that empower others to unleash their creativity — to pursue their dreams. That’s a big part of what’s going on with Amazon Web Services, Fulfillment by Amazon, and Kindle Direct Publishing. With AWS, FBA, and KDP, we are creating powerful self-service platforms that allow thousands of people to boldly experiment and accomplish things that would otherwise be impossible or impractical.”

Enabling others to innovate and create value.

“I am emphasizing the self-service nature of these platforms because it’s important for a reason I think is somewhat non-obvious: even well-meaning gatekeepers slow innovation. When a platform is self-service, even the improbable ideas can get tried, because there’s no expert gatekeeper ready to say “that will never work!” And guess what — many of those improbable ideas do work, and society is the beneficiary of that diversity.”

2012

Showing some affinity to Ben Graham.

““In the short run, the market is a voting machine but in the long run, it is a weighing machine.” We don’t celebrate a 10% increase in the stock price like we celebrate excellent customer experience. We aren’t 10% smarter when that happens and conversely aren’t 10% dumber when the stock goes the other way. We want to be weighed, and we’re always working to build a heavier company.”

2013

Empowering employees and decentralizing the ability to innovate.

“This decentralized distribution of invention throughout the company — not limited to the company’s senior leaders — is the only way to get robust, high-throughput innovation. What we’re doing is challenging and fun — we get to work in the future.”

Many business leaders fail to innovate because the risks are too high. Failure must be tolerated if one is to go for the fences.

Failure comes part and parcel with invention. It’s not optional. We understand that and believe in failing early and iterating until we get it right. When this process works, it means our failures are relatively small in size (most experiments can start small), and when we hit on something that is really working for customers, we double-down on it with hopes to turn it into an even bigger success. However, it’s not always as clean as that. Inventing is messy, and over time, it’s certain that we’ll fail at some big bets too.”

2014

What defines a great business opportunity.

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, and it’s durable in time — with the potential to endure for decades. When you find one of these, don’t just swipe right, get married.”

“I believe AWS is one of those dreamy business offerings that can be serving customers and earning financial returns for many years into the future. Why am I optimistic? For one thing, the size of the opportunity is big, ultimately encompassing global spend on servers, networking, datacenters, infrastructure software, databases, data warehouses, and more. Similar to the way I think about Amazon retail, for all practical purposes, I believe AWS is market-size unconstrained.”

2015

The importance of corporate culture and how it comes to evolve.

“A word about corporate cultures: for better or for worse, they are enduring, stable, hard to change. They can be a source of advantage or disadvantage. You can write down your corporate culture, but when you do so, you’re discovering it, uncovering it — not creating it. It is created slowly over time by the people and by events — by the stories of past success and failure that become a deep part of the company lore. If it’s a distinctive culture, it will fit certain people like a custom-made glove. The reason cultures are so stable in time is because people self-select.”

Understanding asymmetry and experimentation. This is the math behind innovation.

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 runs 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.”

The methodology of decision making (more on this in 2016).

“Some decisions are consequential and irreversible or nearly irreversible — one-way doors — and these decisions must be made methodically, carefully, slowly, with great deliberation and consultation. If you walk through and don’t like what you see on the other side, you can’t get back to where you were before. We can call these Type 1 decisions. But most decisions aren’t like that — they are changeable, reversible — they’re two-way doors. If you’ve made a suboptimal Type 2 decision, you don’t have to live with the consequences for that long. You can reopen the door and go back through. Type 2 decisions can and should be made quickly by high judgment individuals or small groups.

“As organizations get larger, there seems to be a tendency to use the heavy-weight Type 1 decision-making process on most decisions, including many Type 2 decisions. The end result of this is slowness, unthoughtful risk aversion, failure to experiment sufficiently, and consequently diminished invention. We’ll have to figure out how to fight that tendency.”

2016

Day 1 vs. Day 2. This runs deep in Amazon’s core operating logic and corporate culture.

“Day 2 is stasis. Followed by irrelevance. Followed by excruciating, painful decline. Followed by death. And that is why it is always Day 1. […] Here’s a starter pack of essentials for Day 1 defense: customer obsession, a skeptical view of proxies, the eager adoption of external trends, and high-velocity decision making.

The psychology of customers.

“There are many advantages to a customer-centric approach, but here’s the big one: customers are always beautifully, wonderfully dissatisfied, even when they report being happy and business is great. Even when they don’t yet know it, customers want something better, and your desire to delight customers will drive you to invent on their behalf. No customer ever asked Amazon to create the Prime membership program, but it sure turns out they wanted it, and I could give you many such examples.”

The science of decision making. One cannot wait to have all the information for the world moves fast. Bad decision outcomes can be improved by having the flexibility to course correct.

“Second, most decisions should probably be made with somewhere around 70% of the information you wish you had. If you wait for 90%, in most cases, you’re probably being slow. Plus, either way, you need to be 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.

“Fourth, recognize true misalignment issues early and escalate them immediately. Sometimes teams have different objectives and fundamentally different views. They are not aligned. No amount of discussion, no number of meetings will resolve that deep misalignment. Without escalation, the default dispute resolution mechanism for this scenario is exhaustion.”

2017

High standards, a core component of the Amazon fabric.

“What do you need to achieve high standards in a particular domain area? First, you have to be able to recognize what good looks like in that domain. Second, you must have realistic expectations for how hard it should be (how much work it will take) to achieve that result — the scope.”

“Perhaps a little less obvious: people are drawn to high standards — they help with recruiting and retention. More subtle: a culture of high standards is protective of all the “invisible” but crucial work that goes on in every company. I’m talking about the work that no one sees. The work that gets done when no one is watching. In a high standards culture, doing that work well is its own reward — it’s part of what it means to be a professional.”

2018

A builder’s mentality.

“From very early on in Amazon’s life, we knew we wanted to create a culture of builders — people who are curious, explorers. They like to invent. Even when they’re experts, they are “fresh” with a beginner’s mind. They see the way we do things as just the way we do things now. A builder’s mentality helps us approach big, hard-to-solve opportunities with a humble conviction that success can come through iteration: invent, launch, reinvent, relaunch, start over, rinse, repeat, again and again. They know the path to success is anything but straight.”

The magnitude of failures must expand with the size of the company. Normally, management teams feel the inverse — the bigger they get, the less failures they feel pressured to have.

“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. Amazon will be experimenting at the right scale for a company of our size if we occasionally have multibillion-dollar failures.”

2019

On sustainability.

We’ve also committed to reaching 80% renewable energy by 2024 and 100% renewable energy by 2030. (The team is actually pushing to get to 100% by 2025 and has a challenging but credible plan to pull that off.) Globally, Amazon has 86 solar and wind projects that have the capacity to generate over 2,300 MW and deliver more than 6.3 million MWh of energy annually — enough to power more than 580,000 U.S. homes.”

Job creation and global responsibility.

Over the last decade, no company has created more jobs than Amazon. Amazon directly employs 840,000 workers worldwide, including over 590,000 in the U.S., 115,000 in Europe, and 95,000 in Asia.”

2020

The philosophy of success.

“If you want to be successful in business (in life, actually), you have to create more than you consume. Your goal should be to create value for everyone you interact with. Any business that doesn’t create value for those it touches, even if it appears successful on the surface, isn’t long for this world. It’s on the way out.”

Combatting the social gravity of similarity. Be unique.

“We all know that distinctiveness — originality — is valuable. We are all taught to “be yourself.” What I’m really asking you to do is to embrace and be realistic about 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.

There is plenty more in the letters themselves. Please find a repository below.

Repository of Annual Letters:

Disclosure:* This blog series is strictly personal/ educational and is not investment advice nor a solicitation to buy or sell any assets. It does not represent any views from where the author is working — all views, opinions, and arguments are the author’s. Please always do your own research.*

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