[part 3]

also it was hard to pick a name because even then in 1994 most of the good domain names were gone already so amazon.com people was people considered to be early but actually it was not that early in this race the mosaic communications which would later become Netscape had already been started several months before Wired magazine had already started a hot wired Halsey miner had already started seen at these things were happening very very quickly so let's see try to actually pick the more interesting anecdotes here well we found a house that could serve as the first business and it had a garage and it seemed the right thing to do since there's a history of startups and garages this wasn't fully legitimate because it was a converted enclosed garage but I considered it somewhat legitimate because it wasn't insulated and so it was cold in there and to solve the cold problem the owners of the house we were just renting this house had had installed a big pot-bellied stove right in the center of this garage this converted garage later when we got the fifth person moving into this small what was it had been a two-car garage we had to move the pot-bellied stove out and the thing must have weighed 800 pounds and it was not those were not impressive offices and so when we had meetings with third parties the most convenient place to have the meetings was a little cafe just down the street only about a mile away the only and it's not really a problem but the interesting thing about this cafe is that it was inside a Barnes and Noble store so in fact we did do all of our early third party meetings at Barnes & Noble the only other interesting thing from that first office is that again by the time we got about five people there wasn't enough electricity in that garage because it just had one circuit breaker serving the whole garage we had the place full of computers and other equipment and so we had then taken long extension cords and run them from every room in the house into the garage so we're siphoning the entire houses power into the garage to the point where you know my wife couldn't turn on a hairdryer I couldn't vacuum the living room anything like that happened all the computers would turn off so we were really getting to a place where we needed to move to a real office to finish up our software development and we did that this this was a small office actually about a thousand square feet of office space and we had also our first we built our first warehouse space it's about 400 square feet in the basement of this ability was actually the color tile building I'm in sort of an industrial section of Seattle and I remember the day before we launched we had everything set up and we had shelves from the warehouse and there were no notebooks because we were using at that time an almost in time inventory technique we would ordered from wholesalers after customers ordered from us whole stairs would deliver to us in big boxes and we'd break him down to ship him out in small boxes well one of our programmers I remember was looking at this little tiny 400 square foot warehouse that we had set up the day before we opened he said I can't figure out if this is incredibly optimistic or hopelessly inadequate and I'd looked at him I said yeah you're right and so we in fact we believed that it was going to be incredibly optimistic we had very low expectations for starting off and thought it would take a long long time for consumer habit to adopt buying online at all and in fact we felt so strongly about this that we were trying to convince these wholesalers to make smaller shipments to us they had what seems to be a very small minimum shipment size which was 10 books you had to order at least 10 books but we were convinced it would take months and months to get to ten books a day that we would be selling so we wanted it to even that we said what can we pay like a $20 fee or whatever to get one book they said no no we didn't want to just go buy him at Barnes & Noble because we wanted to actually test and exercise our systems and so on so we found a loophole it was a great loophole turns out that with both of the wholesalers we were using at that time that you just had to order ten books if you ordered ten books but nine of them were books that they didn't happen to have in stock they would ship you the one book and so we figured out that there was this both of them sensibly carried this particular obscure book on lichens but but they didn't have it so so we tested all of our systems by ordering one book and the nine copies of this Lycan book well so we did looking at this hopelessly inadequate or incredibly optimistic space we launched shortly after that comment was made and an amazing thing happened three days after launching we got an email message from one of the founders of Yahoo who at the time Yahoo was still it was a very small company they probably had four or five people at that time and the and the guy said wow I saw your website I think it's incredibly cool and I'd like to put it on the yahoo what's cool list which at that time was the most trafficked web page on the internet and still you know yahoo of course the most trafficked site I'm not even sure if they have the what school page anymore things have changed a lot in the near past but but and we sort of sat around and he said but you know you're going to get a lot of traffic and do you want to wait you know if this isn't the right time to send all these people to you let me know and we can do it in a month or whenever you want very informal today to get Yahoo to do something like that you'd have to pay them tens of millions of dollars but then it was it really was just an email exchange so we sat around eating Chinese food there about seven of seven maybe nine of us in the company at this point and in the office of discussing whether or not we were ready to have sort of as she'll who was our vice president ultimate still is now our chief technology officer I said at the time that it might be a bit like taking a sip from a firehose and I thought that was right and we sort of sat around we talked about for five minutes and said yeah let's do it so we did and we had programmed a bell to ring every time we got an order because it was very exciting to get an order and basically every computer terminal in the which you're only about nine but everybody is computer terminal would ring when we got an order and a little thing would pop up interrupting whatever you're doing showing the contents of the order and what had happened and and a big chair would go out well as soon as this yahoo thing hit all of a sudden the Bell became extremely annoying and so we quickly unprogrammed that and instead somebody wrote a little script that we could run at any time we wanted to see you know what the sales had been in the last hour or the last five minutes the thing got used a lot in the first few days and so anyway this were still you know compared to what kinds of levels of business exceed Amazon a common on the Internet in general today very very small but they were huge compared to what our expectations had been and in fact everybody in the company every single programmer all nine of us were shipping and packing books out of this four hundred square foot thing we were trying to figure out how we were going to get enough bandwidth to actually hire more people to do this while doing it literally working until midnight every night shipping out you know 100 200 300 packages a day and we had not planned perfectly we didn't even have packing tables in this little 400 square foot warehouse so this was all done on our hands and knees on a cement floor and I remember we got used to it so quickly that two weeks later when we actually got packing tables moved into that space we thought wow this packing tables are really good this is a great idea so let's see at that time and still for the next couple we've been in five different locations now and in just you know about about three years so that's either poor planning or unusual growth whichever way you want to think about it and in our first couple of warehouses we used to now we use a logistics technique we reprogram to our computer systems called random style but before we'd had this really cool less efficient but very cool technique where we as we got the books in we put them directly into bins that were by customer order so you could wander through the warehouse and literally see you know look at any grouping of books and that would be a customer's order so you could see what people were buying in combination it was very interesting and there a couple of interesting vignettes from that one one is that we saw that I walked through one day and I saw this order that was a hundred and one ways to make love to your husband a hundred and one ways to make love to your wife was a three book order and the third book was a Hawaii vacation planning guide and I looked at this order I said I think we know what's going on here so so somewhere around this point we had gone through a couple of warehouses we were still a very very small company in the scheme of companies but starting to actually be noticed online we had a revenue run rate of about five million dollars a year and we were featured on the front page of The Wall Street Journal and in the lead story and which was was a good good thing and a bad thing it was good because it generated a lot of exposure for the company and you have to keep in mind that our first year we didn't spend a dollar on advertising it was all anybody found out about us it was either through word of mouth or through PR so PR was important to us and in fact since then we spent a significant amount of money on advertising but but word of mouth is still the largest source of our customers again it being so powerful online but but having this article was good because it generate lots of awareness and we got lots of new customers as a result of this article and then those people you know if we treated them right did become evangelist for us it was bad also because when you get a big article like that it's not just your customers who read it but so your competitors and one of the things that that was the wake-up call whereas the sort of the 2300 percent a year growth and web usage and our wake-up call that Wall Street Journal article was Barnes and Noble's wake-up call so we which was basically that was May of I guess 96 it took them about a year from that point to launch a website which they launched back in May of this past year and they launched that website which is a very reasonable website in it's not as good as amazon.com in any important respect but it is it is a good first effort and we were it pays as Annie Grove has told countless audiences to be paranoid and as I was discussing with one of what we had dinner earlier tonight with a few of the people in the audience and and it pays to be humble and paranoid hard to be actually paranoid enough if you're not humble and we were very worried about what amazon.com I mean sort of what Barnes & Noble would be able to do with their purchasing power and their brand name we decided instantly that we weren't going to let the purchasing power get in the way so we were going to fund any purchasing power difference so we would have the same prices no matter if our margins were lower and then we would adopt a strategy of get big fast so that we could eventually level the playing field in terms of purchasing power and that became a consistent focus of ours that we've articulated now to Wall Street and everybody else and it's actually at this point quite a well understood strategy the I would say but the interesting thing of course is the Barnes Noble launched their website about five days or so before our initial public offering in I'm sure a complete coincidence of timing but it but it didn't it didn't upset anything even though at the time it was very interesting because there were several pundits and in particular one in particular who was making the lecture circuit talking about now the Barnes novel was here was going to be Amazon toast instead of amazon.com and this was actually we even found this very funny it is an amusing thing to say but we were worried and we didn't know exactly what to expect we knew that we were going to remain customer obsessed that our mantra became was interesting too one of the things I was most worried about is that Arizona comm for 2 years had been a company with virtually no competition at this point we already had over 300 employees and so we were sort of I was I didn't know whether all the employees were ready for competition and whether you know in in very in previous jobs and so on people had always been in competitive environments and it was a competitive group of people but we let our mantra be that we were going to obsess over our customers and not our competitors so we would watch our competitors learn from them see what things they're doing good for customers would copy those things as much as we can but we were never going to obsess over them and that became our watchword and it's actually worked very well since Barnes & Noble launched their site we've gone from having revenue run rate of about 60 million dollars a year to a revenue run rate of having 260 million dollars a year this has happened in in just 10 months we have also gone from having 340 thousand customers to having over one and a half million customers in that same period of time and I am convinced that I mean it there that there are two things a company like Amazon a comp can only compete against a much larger company if you really do offer a better service we know by anecdotal evidence focus groups and quantitative research that there are three things that are important to our customers selection ease-of-use and convenience and price and so every day we work on making sure that each of those three things are better at amazon.com and they are anywhere else and we have a saying that people ask me sometimes are your customers loyal to you and I say absolutely right up until the second that somebody else offers them a better service and so we work on that very hard and and then I think the thing that makes it work for us is the