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.

Conclusion

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

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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)

http://www.slideshare.net/lionzshare/clayton-christensen-world-innovation-forum

Talk to you soon,

Orville | Twitter: @orville_m