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In Amazon's 1997 annual report, Jeff Bezos introduced his company to Wall Street with a letter. I'm going to quote from it because he has sent it out multiple times since the first shareholder letter. But it's interesting to go back to the year 1997 and listen to the vision and look at what's happened since then. ♪
This letter to shareholders has become Amazon lore. It's so famous, Bezos actually sends it out every single year. He wrote, Amazon.com passed many milestones in 1997. By year end, we had served more than one and a half million customers, yielding 800 million... This begins like a fairly generic letter to Wall Street, but pretty quickly, it turns into something else. Remember, this
This was back in the late 90s. Amazon was still small relative to today.
Jeff Bezos already had these big, grand ideas. And he wasn't scared to lay them out for Wall Street, even if they seemed risky. He had vision, he had leadership, he had fearlessness, some might say recklessness. But he understood the math and he understood business models. So he wasn't just a guy with a big idea, he was a person with a big idea that understood how to turn it into a business. And he also had the ability to see around corners.
This is Mary Meeker. Back in the 90s, she was one of the first Wall Street analysts to pay serious attention to Internet companies. And she saw something special in this little company that sold books online. In that letter by Bezos, the first subsection has this title. It's all about the long term.
The letter says, because of our emphasis on the long term, we may make decisions and weigh trade-offs differently than some companies. And it goes on. We will continue to make investment decisions in light of long-term market leadership considerations rather than short-term profitability considerations.
Basically, what Bezos is saying is Amazon is not going to be profitable for a long time. That thinking was so out of the box at that time. It was very nonconformist. So how was Amazon so different from the start? The ideas in this letter would become the centerpiece of Amazon's relationship with Wall Street for the next two decades.
A relationship so unique that it gave Amazon a competitive advantage over nearly every company that came before it. I'm Jason Del Rey, and this is Land of the Giants, The Rise of Amazon. On this episode, how Amazon and Jeff Bezos built that relationship with Wall Street and then capitalized on it to the maximum. Amazon turned a business with no profits into a Wall Street darling.
You're going to hear this story from people who helped create that relationship and who were literally in the room at the very start of it. Try for a minute to forget the Amazon of today. Let's go back to the mid-90s. Google didn't even exist. Mark Zuckerberg, he was a preteen.
And the Ha companies? I was involved in the IPO of Netscape and was involved in covering America Online. Here's Mary Meeker again. This is a browser. This is an America Online five and a quarter inch floppy disk. You can put that in your computer and then you can connect with your friends on your personal computer. These days, Meeker is a venture capitalist, but she started her career as a Wall Street analyst.
She became famous as one of the earliest supporters of tech companies, so much so that she earned the nickname Queen of the Internet. Each year, she delivers a presentation on internet trends, and people rush to check it out.
That began in 1995, when she wrote her first internet report. And we were trying to figure out what were the underpinnings, what is the internet, what might it become? The report listed Amazon.com as one of the coolest commerce sites on the internet. Seriously, the report used the word coolest. Meeker met Jeff Bezos soon afterwards at Amazon's Seattle warehouse.
The company had only just started selling books at the time. And Jeff took me on a tour of the warehouse, which was a large room with gray metal racks filled with a bunch of books. It was certainly a ragtag operation in a part of town where the rents were really low.
And on the impression side, Jeff seemed to have that combination of missionary zeal and he had a lot of showmanship. By 1997, that zeal and showmanship would become widely apparent. In his first letter to shareholders, Bezos expressed an unusual degree of candor. Unlike most other CEOs, he didn't promise to deliver on the typical expectations of Wall Street.
He wrote that the, quote, fundamental measure of our success will be the shareholder value we create over the long term. What he's saying is, hey, Wall Street, don't expect immediate profits. We're going to build value over time. And he warned, this strategy is not without risk. Bezos was banking on what he believed about the Internet and e-commerce, that it had the potential to be way bigger than anything before it.
And he was putting forward a vision for how to think not just about Amazon, but about the Internet, too. In 1997, you could just cold call Jeff Bezos. I actually do not remember when or how I cold called Jeff, but I'm pretty sure I just called him and scheduled a meeting and went up and saw him.
Bill Gurley is a venture capitalist who's famous in Silicon Valley for investing in companies like Uber and Stitch Fix before they got big. Back in the 90s, Gurley was a Wall Street analyst. He was researching young companies to help investors figure out who was going to be the next big thing. There was this feeling that, you know, the internet was just going to unleash so many new companies and so much wealth creation that...
that it was, you know, the beginning of everyone getting giddy. Jeff Bezos and Amazon landed firmly on Gurley's radar. His intelligence and his clarity of thought around how big this opportunity was and how he wanted to attack it was certainly differentiating.
And so Gurley became fascinated by Amazon. So did his colleagues, investment bankers at a new internet-focused division of Deutsche Bank. They wanted to represent Amazon in its upcoming IPO. In most companies, I'd say, let's say there's typically a bake-off, which is a day that's set aside where the different banks come in to try and win the IPO business. Let's back up for a moment. ♪
It's 1997, and Bezos has decided it's time to take Amazon public. He wants to raise money for his ambitious expansion plans. But the IPO is also a branding move, a way to show customers and competitors that Amazon is here to stay. So he needs to find a bank to underwrite the IPO, basically to convince Wall Street to take a chance on a little online bookseller.
And Bill Gurley's team wants that business. Of course, banks make tons of money underwriting IPOs. But first, they have to beat out some serious competition. The competing banks prepared to pitch the Amazon bigwigs. It was held at Kleiner Perkins offices on Sand Hill Road.
And I think there were three firms that presented, but I can't know for sure. What we do know is that Gurley's team, called Deutsche Morgan Grenfell, was relatively new. So it could be risky for Amazon to choose them over a more established bank, which would have a bigger network of investors to pitch to. But Deutsche Morgan Grenfell had one big advantage, its lead banker, a guy named Frank Quattrone.
He was a big shot who was already famous for his work with tech companies. Frank and I had some long conversations about how he would, you know, move me to Silicon Valley and introduce me to, you know, a whole bunch of people. There was a lot of motivation for me to do this.
Another advantage Gurley's team had came courtesy of his executive assistant. My executive assistant at the time, Juliet Wilson, came up with this idea that we should bind our pitch book as a book. And I think we finished getting the deck together at like
2:00 a.m. or something, and she drove to San Francisco and had it bound in a book. And this is especially frustrating for bankers because they like to trade slides out kind of on the way over to the meeting. They're known for that. And so we had to have it all, you know, right to be able to put it in a book.
And you actually, I think you still have that pitch book and we might. I'm holding it as we speak. Oh, how does it feel? It's still in good shape. Okay. The book had a blue cover with the old Amazon.com logo on the front. I don't know if you remember this, but it was an A with what was supposed to be the Amazon River running through it. And part of the book said this, Amazon's the internet home run we've all been waiting for.
Yep. A little bit of sucking up, too. So these three banks pitched Amazon, and Amazon ended up choosing Quattrone and Gurley's firm to lead the IPO, despite the risks. It certainly speaks to...
Bezos' willingness to be contrarian or non-traditional, but I think that's the kind of person Bezos is, right? Like he said, oh, that kind of stuff doesn't matter. I want the right people working on this. So already, Jeff Bezos was showing Wall Street that he was unusual. He was also stubborn.
Case in point, he knew exactly what he wanted Amazon's share price to be at its IPO. I remember the pricing call the night before where there was this wrangling back and forth of over a dollar, which in retrospect seems kind of silly, but...
you know, Jeff felt very strongly and he won that argument. I remember that. He wanted the IPO share price to be higher or lower? A dollar higher, yeah. Yeah, that seems like, at this point, laughable. Yes.
It's all Wall Street history now. No wonder Bill Gurley wanted to keep a piece of it. There's two things that I have in front of me. One of them is the pitch book. And the second thing I'm looking at is what's my initiation of coverage, which is the very first research report I wrote on Amazon. It was titled The Quintessential Wave Rider. I had come up with this idea.
the theme that the internet was going to unleash all these different businesses that could ride on the waves of the internet success. And I was making the argument that this was the most obvious and best example of that. That looks pretty good today. Yeah.
The company went public in May of 1997. May 15th, to be exact. The market capitalization was $440 million. I'm rounding the numbers. Today, it's nearly a trillion. Amazon is now worth nearly $1 trillion. That means today, Amazon's market cap, adjusted for inflation, is about 1,400 times larger than it was back in 1997.
That might sound great, but Mary Meeker, the queen of the internet who we heard from earlier, says it indicates something else. The difference over that period of time shows the degree of skepticism about the business. So from the moment Amazon caught the attention of Wall Street and then became a public company, it had to fight the skeptics. That's coming up after a break.
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On September 28th, the Global Citizen Festival will gather thousands of people who took action to end extreme poverty. Watch Post Malone, Doja Cat, Lisa, Jelly Roll, and Raul Alejandro as they take the stage with world leaders and activists to defeat poverty, defend the planet, and demand equity. Download the Global Citizen app to watch live. Learn more at globalcitizen.org.
In Amazon's battle against the Wall Street skeptics, Jeff Bezos had a crucial partner, a woman named Joy Covey. She was tenacious and hyper-intelligent. That's Bill Gurley again. Bezos hired Covey in 1996 to be Amazon's first chief financial officer. By the way, some people say she actually co-authored that famous shareholder letter.
Here's how Mary Meeker describes her. The CFO and the fundraiser and the sanity checker to Jeff, whip smart. Covey's background is incredible. She dropped out of high school at 15, but somehow graduated college at 19, then CPA, MBA, and law degree. Bezos saw in her someone whose skills fit alongside his own.
Mary Meeker became friends with her, and she says this combo of Bezos and Covey was unmatched in what she calls intellectual horsepower. One was the hardcore visionary in Jeff, and one was the person who was trying to keep it all as stable as possible. And they are both adventurers.
You know, the first to go down a mountain or the first to try a new food in a foreign country. You know, they both are let-it-rip kind of people. Colby is essential to this story because it was her job to explain Bezos' vision in the language of Wall Street to fight the skeptics. She just was an incredible breath of fresh air that was in this exciting, new, fast-moving environment.
Yet by the same token, sort of was really grounded in these really important core finance principles. This is Michael Mobison. He's now director of research at Blue Mountain Capital Management. Back in the late 90s, when he met Joey Colvey, he was chief U.S. investment strategist at Credit Suisse First Boston.
In this role, he sometimes got to know new public companies and the people who ran them. My first conversations with Joy Covey, she felt like she was much more inspired by Warren Buffett and Charlie Munger than the latest tech, you know, sort of icon. And so I got the sense right from the beginning that they were very grounded in many of these principles that were sort of the more traditional Midwestern cash flows, long-term.
So there are a few things we should unpack here. First of all, free cash flow. It's a metric used to judge a company's health and value. And Covey and Bezos believed it was a better indicator for Amazon than traditional profit. I could spend a whole separate episode on the why. But the thing you need to know here is that by highlighting free cash flow, Amazon could suggest to Wall Street that the company was doing well, even when it wasn't showing profits.
The second thing to unpack is the idea of focusing on the long term. This was really unusual for Wall Street at the time. For comparison, take the most dominant bookseller back then, Barnes & Noble. In its annual report the same year Bezos wrote that letter, it even called out Amazon. It didn't name the company, but it didn't have to.
The Barnes & Noble CEO poked fun at new companies who focus on the, quote, fashionable idea of entrepreneurial vision. He writes, profit models replace profits, and planning for the present is viewed as an ill-conceived notion. Well, he says, I respectfully disagree. Even today, it's still common for public companies to prioritize the short term.
Here's Michael Mobison again. I think there's a lot of public companies feel to some degree beholden to Wall Street's expectations. It's almost like a dance back and forth with the Wall Street folks. And, you know, I think – and to some degree being held accountable is all fine. I think what becomes problematic is when companies start to make decisions –
that serve the optics to achieve certain financial objectives, whatever, and don't build value. Amazon focused entirely on building value without apology.
And Joey Covey was able to deliver that message to Wall Street in a way that at least some investors could get behind. I thought it was quite different. And I think just nobody was doing that at that time, or very few companies were doing it at the time. Why was that? What were companies doing instead? And was Wall Street largely rewarding them for something else? I mean, this is probably going to be, you know, in the history is one of the great
bubbles, right? So there was certainly that psychological overlay to this. I think there are a fair number of entrepreneurs that probably started companies and launched companies to sell them to make lots of money rather than build an enduring business or franchise.
It's true. A lot of people got rich that way in the dot-com bubble of the late 90s. But Bezos and Covey were playing a different game. Essentially, they wanted to invest the cash Amazon made into new initiatives instead of letting it drop to the bottom line. And Amazon was making lots of investments. For example, in 1999 alone, Amazon opened five warehouses, including the one in Coffeyville that we talked about in a previous episode.
and then it filled them with inventory. It's a lot to spend up front, but it let the company grow its sales for several more years.
My colleague Kara Swisher interviewed Covey back in 1999 for The Wall Street Journal. I did, and this is what she said to me. I learned that it does no good to tell people what they want to hear in order to get them to buy the stock. So I've repeated again and again that this is for the long term and we are building an enduring company. I don't think you can get more clear than that. Joy Covey left Amazon in the year 2000.
Tragically, in 2013, she died in a biking accident. She was only 50 years old. At her funeral, Jeff Bezos said, quote, Now that Amazon is worth almost a trillion dollars, it's easy to see that the company's gambles paid off. But it was not easy getting there.
Wall Street wasn't always okay with Amazon's approach. Its first decade as a public company was, at best, a roller coaster. Amazon lost $6 million, then $31 million, then $125 million, then $1999, $720 million. Here's Mary Meeker again. The losses were a lot bigger than expected, and the stock performance was bad. If you look at a lifetime stock chart for the decade after the IPO, it was basically a disaster. Let's start in 1998. ♪
Only one year after raising $54 million in its IPO, Amazon once again needed cash. One common way to raise money after an IPO would be to sell more shares. But Joy Covey, the CFO, didn't want to do that. Making more stock available would mean current shareholders would suddenly own less of the company. So Covey came up with a different plan, something that had never been done before by an internet company.
She set out to raise money through a bond offering, essentially a loan. But Amazon's credit rating was poor. That's because credit agencies were worried about its relatively small pile of cash and its risky strategy. And so... This stuff was literally called junk at the time. It was labeled a junk bond.
Amazon would have to promise a pretty high interest rate in order to entice investors. There was a lot of skepticism. And if it worked, it would be the first kind of offering ever for an internet company. Joy loved the idea and she proceeded and she intentionally did it when Jeff was traveling on a family vacation far away outside of the United States.
because she thought that, appropriately, that Jeff would be distracting in the process and wouldn't be analytical enough in the discussions and people would get scared. And she thought she could do it on her own. Jeff Bezos? Not analytical enough? Investors in fixed income securities are risk-off kind of people, meaning they're very, very cautious. And when you are considering putting capital to work where you want a distinct return...
and you're investing in a fixed income security, you don't want someone sitting across the table who will talk about, we'll do whatever it takes to make the customer happy.
And that's the kind of thing that Jeff would do. And it's not that it was wrong. It's just that she was presenting things in a way that were much more in the language of the investors that were interested in that kind of asset. Covey succeeded with the junk bond offering. Amazon ended up raising hundreds of millions of dollars. But there was more trouble to come.
In May of 1999, the magazine Barron's published a feature about Amazon with a now notorious headline. The media dubbed the company Amazon.bomb. Amazon.bomb. And there were a lot of haters. And then Amazon's stock price plummeted. It fell 94% from its peak in 1999 to its bottom in 2001. The internet bubble had burst.
Here's Bill Gurley again, the analyst who worked on the Amazon IPO. That moment in time was a very defining moment for the company.
as they brought in their losses. And that was the peak loss period for the company. They laid off people for the first time. The losses just kept continuing. There was an analyst that was making the argument they were going to go bankrupt. Now that the internet bubble had burst, companies built on the World Wide Web seemed a lot less promising, especially ones that were burning tons of cash and not generating profits.
But Amazon survived. One way it did that was by raising even more cash through more bond offerings. Another way was by proving that even if it wasn't turning a profit, it sure could do other things well. If we knew in 1996 and 1997 how much money Amazon would ultimately lose, I'm not sure we would have believed in the business.
But those losses were offset by very, very strong user growth and customer growth and repeat customer buying and very strong revenue growth. With those indicators, Amazon could reassure Wall Street, trust us. We said we're in this for the long term, and we meant it.
Amazon also benefited from investors who still believed in the potential of the internet, just like Jeff Bezos. And one more point. Amazon was savvy about when to throw Wall Street a bone. There were periods where...
I think the street would have doubts about whether Jeff would ever show profitability or whether he could or not. And I even heard a story which I can't, I don't know if it's true, but it's a fun story in case it might be true, where management came to him one time and said, "Can we just stop hiring for 90 days so that we can deliver some profitability to the street and prove to them what's capable of?" And so I always had this vision in my mind that
Whenever the street would doubt that they would just make a decision to kind of, in a particular earnings period, say, here, let me show you what this thing can really do. And with very tiny shifts in spending patterns, all of a sudden deliver massive amounts of cash flow and everybody go, whoa. And then they'd go back to trusting. And he'd go back to investing the profits. So let's jump forward in time, past the early days.
If you look at a graph of Amazon's stock price and you follow that jagged line, you'll see a big drop in 2008 when the Great Recession hit. The stock price dropped 60%. After that, the line tilts mostly upwards. And then you get to 2015 and that upward diagonal, it shoots up more steeply and to the right. That jump, it was actually caused by a side business inside Amazon.
I think Jeff launching AWS is clearly the most remarkable accomplishment as a public company. AWS is Amazon Web Services, a so-called cloud computing business.
Companies and government agencies use AWS to lease data storage or processing capabilities rather than buying their own servers. Try and imagine, you know, another example of a company launching a business that is seemingly so far afield from what they're doing and then have that turn into, you know, a multi-billion dollar juggernaut. Like, I don't know of another example.
Amazon actually launched AWS back in 2006. But here's what happened in 2015. Amazon started reporting the financials of AWS separately from the rest of the business. And it turned out, AWS makes so much freaking money.
Wall Street loved it. And that was a real growth engine for the business. And people had not appreciated what was driving all the losses and the slowing growth. And then that was the point, I think, when people finally realized that this is a stool with many legs. And this is an entrepreneur who is fighting this fight for the long term. Last year, AWS brought in nearly $26 billion in revenue.
It was more profitable than Amazon's entire North America retail business, even though that business is much, much bigger. So AWS provides a cushion for Amazon to keep prices low and try new things. Since mid-2015, Amazon has been profitable in every single quarter. So that risky approach Jeff Bezos promised from the start, it paid off.
He once said to me, he said, you know, this is pretty easy. If I do an experiment and it fails, I shut it down and I deliver more earnings to Wall Street so they win. If it works, then we have a new business and a new business opportunity. And Wall Street likes that as well. So experimenting just makes sense.
It's hard to know for sure, but it seems unlikely that Amazon could ever have created something as huge and unrelated as AWS if early investors had judged it on profits. So while competitors like Barnes & Noble, Walmart, and Target tried to show Wall Street quarterly profits, Amazon took advantage of this and ran. I asked Mary Meeker about this, since she has such a long view on tech companies and Wall Street. You know, there's this...
sort of broad idea among some people that Amazon has been treated much differently by Wall Street over the years than the vast majority of public companies. Well, I think investors didn't treat it differently for the first 10 to 12 years. There were not a lot of believers. There was a lot of skepticism. And 10 years as a public company,
goes from a fledgling startup to the market leader in online retailing that becomes profitable. And then you realize, well, they're actually not going to show me their profitability. They're going to barely be profitable, but they're going to reinvest their profits rapidly into new innovative products. And then you see them go from
books to music to jewelry to toys to AWS to Alexa to advertising on the platform to acquiring Zappos to acquiring Twitch to acquiring Ring, you go, "Okay, so I see the growth. I see the lifetime value of the customers rising.
And I think that Jeff and the team earned the right to get a bit of a hall pass because their innovation kept coming along at a very rapid clip. A bit of a hall pass that made Jeff Bezos the richest person in the world. This has been great for Amazon and for a few other companies who've been successful in replicating a similar playbook.
Talk about the long term, spend all your money to grow, and basically tell Wall Street not to worry too much about profits. For now. So who else has followed the playbook? Bill Gurley mentioned Netflix and Salesforce. Meeker brought up Alibaba.
There's a whole new breed of Internet companies who think they can play the same game, too. But perhaps without a business model or a leader like Bezos to back it up. You've had a lot of mimicry, right? A large number of people have written a letter now. And most of these people see the point he made about long-term success.
And they use that letter basically to tell Wall Street, hey, I'm going to do whatever I want. If you don't want to come along, you know, then you shouldn't buy the stock. They literally have that tone.
And while he does say, you know, we're going to invest for the long term, he then goes on to mention all this other stuff about why he's running the business on the behalf of the shareholders and he's looking after their best interest. And that second part's missing from most of these others. So I think it's partially tonal.
In that he's literally saying to them, I understand why you would own the stock and here's how I'm going to work to drive appreciation over time. And obviously he's delivered on that, right? Over two decades now. In that shareholder letter from more than 20 years ago, Bezos wrote this. We are working to build something important, something that matters to our customers, something that we can all tell our grandchildren about.
Such things aren't meant to be easy. Amazon convinced investors to believe in the potential of what the company could look like in the future. Two decades later, the future is here. Amazon is now dominant in industries ranging from online retail to cloud computing. But is it too dominant? That's on the next episode of Land of the Giants.
Rebecca Sinanis is our show's producer. Allison McAdam is our editor. Gautam Shrikashen engineered this episode. Brandon McFarlane composed our theme. Golda Arthur is the show's senior producer. Art Chung is our showrunner. Nishat Kerwa is the show's executive producer.
I'm Jason Del Rey, and I'm back next week with a new episode. In the meantime, subscribe and listen on Apple Podcasts or your favorite podcast app. And let us know what you think. Our email address is landofthegiants at voxmedia.com. You can also talk to us on Twitter. We're at Recode. Land of the Giants is a production of Recode and the Vox Media Podcast Network.