A History of Amazon’s Shareholder Letters

This weekend there were a lot of great tweets and articles about Jeff Bezos’ annual shareholder letter about high standards and the value of writing. Although there was a lot of great conversations about it, there was an ironic miss in that Jeff talks about deep thoughts translated into written word, yet most analyses came out within a day and lacked deeper perspective. That got me thinking about binge reading all of the shareholder letters starting from the beginning to see how the Amazon story has evolved from Jeff’s perspective. My notes here are things that jumped out at me with the benefit of hindsight and I will not pretend that this going to be a great piece of writing, although I still welcome your feedback. Before we get started I should call out that I don’t work at Amazon but I do own a few shares and too many Prime boxes show up at my house regularly.

Brief summaries of all of the letters is still a lot of reading so here is a TLDR version with the full summaries afterwards. The letters follow multiyear themes that I categorized as:

  • Early growth years (1997 – 2000)
  • Operational years (2001 – 2002)
  • Being a shareholder (2003 – 2005)
  • New seeds of growth (2006 – 2007)
  • Recession part 2 (2008 – 2009)
  • Amazon as a Service (2010 – 2011)
  • Customer obsession (2012 – 2013)
  • Amazon 2.0 (2014 – 2015)
  • Culture of success (2016 – 2017)

Regardless of the business environment he stayed focused on essentially the same prioritized themes for two decades but made refinements as the technologies and business environment changed.

So if you are interested in longer form content, here is a brief tour of Amazon through the shareholder letter.

Early Growth Years

1997 Letter to Shareholders (Link)

This is a popular letter so I won’t spend a lot of time summarizing it. Key things to note is that he lays out the core principles around customer obsession, Day 1, prioritizing cash flows, big bold bets, transparency in decision making and long-term thinking.

1998 Letter to Shareholders (Link)

Amazon is still a small company that is growing rapidly and is learning how to seize the internet opportunity. With a $1 billion run rate, 6.2 million customers, 200,000+ shareholders and an almost 4 fold increase in employees to 2,100 it is a delicate time for a startup. Here Jeff explains how to hire the right kind of people for long-term growth.

1999 Letter to Shareholders (Link)

Jeff explains what a shareholder gets by owning Amazon shares and the 6 goals for the future. What I like about this letter is that after 4.5 years Amazon has built the underlying infrastructure that will be responsible for future growth. In ending he touches on a future where increased bandwidth will make it possible to improve the shopping experience for people at home and an increase in non-PC devices accessing the internet wirelessly.

2000 Letter to Shareholders (Link)

Like all tech companies at the time, Amazon’s stock is getting rocked in the capital markets and is down 80% since the previous year. What is most telling about this letter is the distinct difference between the performance of the company and its publicly traded stock. He makes it clear that there won’t be any medium sized internet companies because of the benefits of scale. In his justification on why e-commerce would survive he highlights how Moore’s Law will make it easier for Amazon to serve more customers while keeping costs fixed.

Some interesting points:

  • Amazon had 20 million customers up from 14 million the previous year.
  • They helped Toys R Us sell $125 million of toys in Q4 of 2000. As I purchased some stuff from the liquidation sale I wondered why Toys R Us didn’t use the early learning of this time to become the dominant toy seller online instead of giving the investors dividends.
  • Amazon got an 84 rating on the American Customer Satisfaction Index, the highest of any service company ever to this point.

Operational Years

2001 Letter to Shareholders (Link)

Customer obsession and long-term shareholder value is the focus of this letter. What I like most about this letter is how he breaks down the economics of the business where he discusses 4 years of investing for growth followed by 2 years of cost reduction and now being at the point of reaccelerating growth while controlling costs. This is not an easy thing to do and most companies were just thinking about how to survive. That is when Jeff talks about the customer focused investments: launched “Look Inside the Book”, tools to prevent people from accidentally buying the same thing twice, and adding self-serve capabilities for customers. Shareholders are told that by keeping costs fixed while serving more customers they can expect more cash per share into the future. Overall this is a concise letter considering how much ground it covers.

2002 Letter to Shareholders (Link)

Trading real estate for technology was the great insight. Since Amazon is a virtual presence rather than a physical store they are able to do something that is a paradox for a physical store, offer a great customer experience and lower prices at the same time. The reason Amazon was able to do this is because they rethought what the customer experience should be like instead of just applying the physical retail experience to online. My favorite nugget is the following line that shows that the dream of immediate delivery with low prices was being thought of in 2002. “[Y]ou may find reasons to shop in the physical world—for instance, if you need something immediately—but, if you do so, you’ll be paying a premium. If you want to save money and time, you’ll do better by shopping at amazon.com.”

Being a Shareholder

2003 Letter to Shareholders (Link)

Running a business as a long-term owner requires enduring short-term issues for a longer-term benefit to the business. The example that Jeff Bezos provides that I like is around the Instant Order Update feature that flags if you purchased something already. It reduced sales by a statistically significant amount yet the positive impact for customers works out over the long-run. Again in this letter he calls out the ability to scale investment in features over increasingly larger groups of people provides a cost advantage. My feeling is that Jeff is educating shareholders that being a tech company has advantages. It is easy to believe that in 2018 but I am assuming it was an important message in 2003.

2004 Letter to Shareholders (Link)

2004’s letter is all about free cash flow (FCF). If you are not familiar with this term, the cash need to run the business (cash flow from operations) minus cash investment (cash flow for investments) equals FCF. Sometimes accounting earnings can be manipulated but cash tends to be pretty clear.

2005 Letter to Shareholders (Link)

Similar to 2004, this letter aims to explain how Amazon makes decisions. As is almost cliche in 2018 Amazon is a data driven organization but there is also humility in acknowledging that some decisions cannot be made with existing data and in those cases they will opt for what is best for the customer. A tidbit that I noticed is that in a point about how frequently their inventory turns over (14) it was  significantly lower than in a previous annual report where it was 19. I am not sure if this is due to holding more inventory or other factors but it caught my attention.

New Seeds of Growth

2006 Letter to Shareholders (Link)

In 2006 it is clear that Amazon is dominate when it comes to e-commerce so where will the future growth come from? Jeff discusses planting seeds for large differentiated ideas that will grow into the future billion dollars businesses and he mentions two. Fulfillment by Amazon where retailers can use web service APIs to manage inventory in Amazon fulfillment centers. Second is Amazon Web Services (AWS). Although in hindsight we know AWS will have a huge impact on how software is delivered, what I find most interesting is that this is the first time that Amazon the company is framed as a true platform for others.

2007 Letter to Shareholders (Link)

Continuing with the innovation theme Kindle is introduced. What I like about this post is the first principles approach to creating the Kindle. In recognizing that what people enjoy most about books is getting engrossed in the author’s writing and not the physical book, Amazon kept that part while adding improvements that are possible with a digital device. This letter is also the first time the term “cloud” is used along with the quotation marks.

Recession Part 2

2008 Letter to Shareholders (Link)

Jeff Bezos has clearly been battle tested from the dot-com fallout and seems bolder going into the great recession of 2008. Besides his themes of investing for the long-term, Kindle, AWS, cash flows and customer obsession; there are two things that are appropriate for the time. One is working backwards from the customer which leads to creating the right product/service regardless of the current capabilities of the organization. Creating the Kindle hardware is an example of this. The other is “muda” or corporate waste and how to keep cost under control which will be important in the coming years.

2009 Letter to Shareholders (Link)

During the first recession the shareholder letters focused on educating the reader on how Amazon operated. This letter returns to this approach. After discussing the great things Amazon has accomplished it goes into goal setting. What is interesting about the goal setting process is that it is very close to their values with 360 of 452 goals directly impacting customer experience with the words revenue and free cash flow only showing up 8 and 4 times respectively.

Amazon as a Service

2010 Letter to Shareholders (Link)

To date this letter has to be the nerdiest SEC filing I have read in my life and I have read filings from all of the major technology companies. It opens by stating “[r]andom forests, naïve Bayesian estimators, RESTful services, gossip protocols, eventual consistency, data sharding, anti-entropy, Byzantine quorum, erasure coding, vector clocks … walk into certain Amazon meetings, and you may momentarily think you’ve stumbled into a computer science lecture.” Machine learning and neural networks are also mentioned later on. Making this even odder is that there is no focus on customer obsession. My guess is that this letter is directly targeted at Wall Street letting them know that even with the recession Amazon will be investing heavily in technology bets that will directly impact free cash flows in the future.

2011 Letter to Shareholders (Link)

2011’s letter feels like the perfect sequel to tie up the loose ends of the 2010 letter. Amazon has transitioned from a platform to help customers to a platform that supports people to build businesses and express themselves. While describing AWS, Fulfillment by Amazon and the Kindle Direct Publishing platform, the emphasis is on being self-service because it allows innovation to happen resulting in more diversity of successful ideas. Also as a sign of the times there is a strong emphasis on how people are able to make a living using these platforms even as other job prospects were disappearing.

Customer Obsession

2012 Letter to Shareholders (Link)

Customer obsession returns Amazon focusing on doing things to help customers proactively. For example, how Prime keeps adding services even though there is no competitor pressure to do so. Key insight is that it is better to continuously increase benefits to customers and have them trust you than to wait for competitor pressure to do so.

2013 Letter to Shareholders (Link)

Employees become a larger part of the narrative including breaking ground for new buildings in Seattle for their headquarters which should help with attracting and retaining employees. Amazon is really starting to innovate at this stage and in this letter Jeff mentions that failing fast and iterating is the model they are taking.

Amazon 2.0

2014 Letter to Shareholders (Link)

Dreamy businesses have 4 characteristics: customers love it, they can grow to be large, have strong returns on capital and are durable. The identified businesses with these characteristics are: Marketplace, Prime, and AWS.

2015 Letter to Shareholders (Link)

Culture is the core theme of this letter. AWS reached $10 billion revenue faster than amazon.com and it might appear like they got there in different ways but it is actually similar. Amazon aims to have an inventive culture and with that includes a tolerance to risk. Also with the possibility of outsized returns taking as many chances as possible increases the odds of success. Inventiveness is not just limited to products in services but also how they approach benefits to their warehouse employees. One sign that a company is operating at a significantly larger scale is when culture becomes a larger part of the narrative.

Culture of Success

2016 Letter to Shareholders (Link)

This post shows Bezos realization that as a large successful company it is important to keep everyone hungry and fighting like it is day 1. Many of the themes that were raised in the 2017 letter to shareholders were also present in this one. Some key points:

  • True Customer Obsession – customers are alway subconsciously dissatisfied and that presents an opportunity for customers.
  • Resist proxies – that take the form of process, surveys, research and other factors that prevent you from truly understanding customers of a product. It is important to have a vision for helping customers.
  • Embrace external trends – which are normally obvious if you are keeping your eyes open and fighting them can often lead to the death of your company. In this letter he talks extensively about machine learning and artificial intelligence.
  • High velocity decision making – is that big companies make high quality decisions but the problem is that they make the decisions slowly. Important ways around this are don’t use one size fits all decision making process, decide when you have roughly 70% of the information, disagree & commit, and when there is true misalignment it needs to be escalated and addressed immediately.

2017 Letter to Shareholders (Link)

How to achieve high standards is the theme of this letter. Although it is day 1 for Amazon, when the focus is so heavily about culture it is a recognition that the company is at the top so it is important that it makes the right moves to stay there. High standards are teachable and are domain specific. Recognizing the scope for achieving high standards is important so that people are realistic about getting there. I do agree with Jeff that high standards are fun and once you are in a team of all-stars it is hard to work in another type of organization. Wrapping up the letter is a list of the notable achievements that shows the various businesses that Amazon is in.


There it is, a summary of 2 decades of letters to shareholders starting from the beginning to the end. Similar to reading the Berkshire Hathaway letters many insights become apparent. The biggest takeaway is maintaining the consistency of the goals while adapting to the environment and life stage of the company.

Talk to you soon,

Orville | Twitter: @orville_m

Numbers & Narratives: Amazon buys Whole Foods and gets options

It often seems like technology company deals are so ugly that only the bankers could love them. That is why it was refreshing to see a deal that makes sense on a lot of levels. Reading a lot of the news reports I feel that there is a deeper narrative at play that has largely been glossed over. So here is a quick summary of the great options that this deal provides Amazon.

In the short-term this deal gives Amazon a power position over their competitors in food delivery. Instacart for example uses Whole Foods stores to get groceries and deliver them to customers. Assuming this deal continues, Amazon will benefit by getting a cut of the Instacart transactions. You can think of this as the Amazon tax. If Instacart starts making more money, Amazon can just raise prices via Whole Foods to get a larger cut of Instacart’s business. Instacart could also decide to move on to another grocer but Whole Foods has unique food selection. Plus, Amazon has a history of letting others user their infrastructure (e.g. AWS, fulfillment centers) and might prefer continually getting money from Instacart transactions rather than kicking them out. This deal also has short-term implications for Amazon’s current partnerships. Here in the greater Seattle area Amazon works with PCC which is another grocery store. Amazon can continue to work with PCC and use their ownership of Whole Foods as leverage in future negotiations. However, PCC will most likely be relegated to support burstable demand when the Whole Foods stores don’t have enough supply or are too busy. From a retail perspective, I wonder if Prime will enable Whole Foods to lose their “Whole Paycheck” reputation by using Prime as a driver of revenue in physical retail while lowering prices in the actual store. This is similar to Costco’s model.

Another interesting option is the stores being the fulfillment centers for groceries and perishable goods. Amazon has 99.4 million square feet of fulfillment centers (this also includes data centers which Amazon bundles in this number) in North America (source) and with Whole Foods they will now have an additional 17.8 million square feet spread across 456 stores in the USA, Canada and Europe (source). Whole Foods stores are known for being in prime locations in urban areas providing ideal locations for Amazon to reach customers in densely populated areas. These areas have higher costs and are not the type of places where a frugal retailer would open a fulfillment center. Closer locations to densely populated areas give Amazon the opportunity to provide other goods more easily to customers in 2 hours or less. Proximity is critical and the grocery store makes having a mini urban fulfillment center a profitable endeavor and not just a cost center. The more stuff you can get in this timeframe, the less likely you will be to go to the store, which leads to buying more stuff from Amazon and the flywheel will pick up speed. Amazon arrives at my door so often now I am starting recognize some of the drivers.

In the long run this is where we can see some of the more futuristic scenarios like Amazon Go. Amazon Go uses artificial intelligence so customers can grab what they need and go. As sexy as these scenarios are unless the technology is ready for prime time it is unlikely this was a strong driver for the deal. According to Amazon’s 8-K, they will be paying $13.7 billion which will be paid for in debt so any efficiency from AI won’t make this deal payoff right away.

Speaking of money, when you look at Amazon’s financials it makes sense that they would borrow the money. With $15.4 billion in cash at the end of the last quarter it highlights that Amazon is a technology company that has the financials of a retailer. Whole Foods free cash flow of $400 million last year is also not a spigot of cash that will make this deal a quick payoff either. Some argue that Amazon got Whole Foods for free because Amazon’s market capitalization increased by $11.2 billion today. This is a cash deal so the currency comparison in this case is apple and oranges unless they are going to have some secondary offerings. More importantly, Amazon has never been overly concerned about profits and this time should not be any different.

The reason why this deal makes sense in my opinion is really about the short, medium and long term optionality that sets them up for success regardless of how the food delivery industry turns out. It is for those reasons that I feel that Amazon truly made a strategic purchase in acquiring Whole Foods (pending regulatory approval of course).


Talk to you soon,

Orville | Twitter: @orville_m



Creating and Sustaining Profitable Growth

Clayton Christensen always has interesting strategy papers.  I came across this presentation that has some useful information for those who are focused on bringing disruptive technologies to market.  Some items might be considered contrarian.  For example, when searching for the right business model “good money is impatient for profit, but patient for growth.” (Slide 26)


Talk to you soon,

Orville | Twitter: @orville_m

What makes a technology game changing?

It often feels like I can’t read about a technology without hearing that it is game changing.  I personally love that technologists are always trying to push the boundaries of what has been done before but is everything really game changing?  Furthermore, if everything was game changing then we would have more new multi-billion dollar companies than we could keep track of.  So to provide some guidance, I often remember something a Senior Director at Microsoft once said.

Note: I currently work for Microsoft although the opinions expressed here are my own and do not reflect my employer.

Innovative Business Models


Search engines have been around from the earliest days of the Web.  Conventional wisdom was that search results should not be polluted with advertisements.  Google found a way to make advertisements relevant for searchers while also making them a must have for online businesses.  This market making opportunity became a fountain of money for Google.  Furthermore, the network effects from having the searchers and advertisers has proven to be a competitive advantage that is difficult for others to overcome.

Partner Ecosystems


It is almost cliché to discuss creating platforms in the software business.  Often startups try to create the platform before they have users.  The original king of software platforms has to be Microsoft Windows.  When most computer systems were closed and had different integration methods, Microsoft created the standard software platform with Windows.  This decision created an ecosystem around Windows meaning that to use the most common applications (the old term before we started saying “apps”) you had to have Windows.  Even in the mobile era Windows is still critical for most people to accomplish their computing needs.

Innovative User Experiences

User experiences are continuously changing so I’m referring to a significant change in user behavior.  When I was an undergraduate I created a secure MP3 format assuming one day people would pay for music.  Although I was proud of my project, Apple clearly saw a larger opportunity.  At that time people logged into their favorite peer-to-peer application and searched for songs.  Sometimes the songs were mislabeled, poor quality or were a virus.  Then getting the songs onto a MP3 device was another headache.  Apple created an end-to-end model using iTunes to get quality songs with less effort and then syncing with iPods for portability.  They took care of getting the songs legally in a more efficient manner.  iPhone and iPad followed this model creating digital content strategy that is being used by other companies and grew Apple’s value considerably.


So there it is.  A criteria for determining if a technology is ground breaking.  It should be noted that these things are clearer in hindsight.  It will be interesting 10 years from now to look back and see which companies would be on this list.

Talk to you soon,

Orville | Twitter: @orville_m

Facebook Valuation: Some Context Behind the Numbers


Over the past week there have been numerous articles, blog posts, news reports and conversations about Facebook being worth $50 billion.  Some say it is too high while other say it could be a bargain.  The one thing that is common is that there is not a lot of information available but there is a lot of speculation.  However, with the little bit that is known the valuation could be put in a better context.

The Fundamentals

It is estimated that Facebook’s net income for 2010 was up to $500 million (extrapolated from reports of their first 9 months of $355 million) on $2 billion revenue.  That would make Facebook’s P/E ratio 100.  This is significantly higher than other public internet companies like Google (25) and Yahoo (22).  If it were treated like a fixed income security it would yield 1%.  3-year Treasury Bonds (my proxy for the risk free rate) are yielding 0.98% (1/7/2011) so Facebook would not provide a great return for the additional risk of an early stage company with little financial disclosure.

From a fundamental perspective it makes sense why fundamental investors would want to unfriend Facebook.  But is this really the right way to value a growing internet company that has unprecedented reach?

What Investors are Really Buying???

Growth… but what does that mean?  With the deep level of user engagement and potential profit these users represent there are other metrics that could be used to value Facebook.  Long-term value of users would give a better perspective of how much Facebook should be worth.  At between 500 – 600 million users, the latest valuation would represent $83 – $100 per user.  A key question is can the company earn at least this much for each user over their lifetime with the service.  In 2010 earnings on average was $1/user on revenue of $4/user.  It is well known that making money is not a priority for Facebook at this time so it will be interesting to see how quickly they can grow earnings per user, because the users won’t be around for 100 years to recoup the money. Smile

There is also the question of how many more users are there who could join Facebook in the future.  Current stats show that 2 billion people are on the internet so there is still a lot of upside for growing the number of users.  User count could theoretically double which is crazy to think of.  I would guess that the incremental cost of adding users would be cheaper than the first few hundred million as they have economies of scale.

Overall there is room for Facebook to grow revenue, earnings and users but at the current valuation they will have to execute really well to justify the valuation.

How Does Goldman Sachs Fit Into This???


Goldman Sachs’ (GS) investment provides credibility to the $50 billion valuation but there are also a lot of benefits for Goldman as well.  Direct ownership of Facebook stock gives GS the upside of Facebook stock when it goes public and the ability to earn fees from others who want the stock so badly they will pay fees to invest in the Facebook special purpose investment vehicle.  Assuming Facebook matures to a similar market cap as Google, GS shares could increase 3-4x in the future.

Yet the real benefit are the intangibles.  Similar to the British Petroleum deal in the 1990s, GS proves that it can move a large block of shares for an in demand company.  It also gives it favorable access to a company that is likely to become increasingly important in the technology field.  Secondary offerings, M&A and advisory work all carry future fees.  Plus the additional access in the social media space will improve their institutional knowledge making it easier to make money from proprietary investing, research and seeking new business.

Final Thoughts

No doubt about it, Facebook’s user base and valuation are growing quickly.  Ideally if you are “investing” it is better to get more details so you can do some due diligence.  However, if you have a few million to “speculate” think about why you are buying the stock, look at the information you have in a greater context and then make your decision.  Value is different for everyone so you have to make your own call on value.  There are several more techniques, that could have been used for this analysis as well.

Talk to you soon,

Orville | Twitter: @orville_m

Phone App Pricing Beyond $0.99

Originally posted: 4/20/2010 at http://blogs.msdn.com/b/orville/archive/2010/04/20/phone-app-pricing-beyond-0-99.aspx


As a buyer of phone apps this is a blog post that I may one day regret but it is worth writing.  I have often wondered why most phone applications sell for $0.99 or less including free.  There are probably several reasons for this but my feeling is that most developers just follow the common price of other apps.  Developers who create compelling apps should be able have profitable marketplace success so they can build even more successful apps.  I know that a lot of apps are free to get broad distribution and are funded by ads.  Ad-supported business model is a good one but I want to provide alternative pricing strategy for developers to consider.  In this post I will write about a different way to set a price for apps.

Let’s start with the issues with some common pricing strategies.  Some of the most common pricing strategies that I have heard of include matching the competition and “cost-plus.”  Both of these options have faults.  Matching the price of the competition does not reflect the value of your app.  If the competition has a better app no one will purchase your app at the sane price.  However, if you have a better app it will not get as much money as it could have gotten and will also leave the impression of being of similar quality to the competition.  Cost plus some “fixed return percentage” as a pricing strategy is not driven by customer value and could result in an overly expensive price.  Phone app development is primarily has fixed costs and would require a clairvoyant sense of how many apps will be sold to correctly determine the return percentage.

When setting a price for an app one should focus on the value it provides customers.  Even if the developer’s focus is not on making a lot of money it is still important to understand how customers will value their app if it is going to be successful.  There are a few steps for determining the value of the app to customers:

  1. Identify your customer.  This sounds obvious but it is important to recognize who will buy the app.  Note that there can be more than one customer group, all with their own needs.
  2. Assess the app’s value to customers.  Do some customers find more value in your app than others?  Are there a few things you can do to make your app more appealing?
  3. What takes away value from your app?  External factors will impact how valuable your app is to customers.  Availability of substitutes, learning curve, alternatives to spending more time on the phone, etc.

When these 3 steps are combined you have a better estimate of how much you should charge for your app.  As an example, we will use an imaginary game “Foo.”  Foo is enjoyed by both casual and hardcore gamers.  Hardcore gamers are willing to pay for advanced levels while casual gamers are not.  For the casual gamers they can get a trial version while the hardcore gamers will pay for a more advanced game.  Sometimes the phone app may be free but there is a cost for a service that powers it.

Even though this is a basic introduction to pricing strategy I hope this helps you determine the right price for your app.

Talk to you soon,

Orville | Twitter: @orville_m