Jeff Bezos - 24 Shareholder Letters with 24 Lessons - 2009-2014 - Part 3
During the financial crisis, Amazon's relentlessly focused on its customers, growing its customer base with more services, lower prices, and has been able to improve its fundamentals.
Amazon’s revenue, free cash flow, and customer number steadily increased even during the financial crisis. While the world was in agony, Bezos and the people from Amazon created services and offerings that were far superior to anything else in the market. They grew at a time when global consumption came to a halt.
2009 Shareholder Letter - Customer Obsession
Amazon focuses on low prices, fast delivery, more selection, and reducing cost structure. 2009 was amidst the financial crisis in which company after the company went bankrupt due to halting spending.
For the first time, Bezos brags about Amazon and how to foundation consisting of low prices, fast delivery, more selection, and reduced cost allowed them to escape from the financial crisis unscraped.
Net sales increased 28%, FCF increased 114%, Amazon Prime has 50% more immediate shipping items, 21 new product categories, acquisition of Zappos, and much more.
Amazon web services expanded to Europe and northern California and planned to expand to Asia-pacific. The Kindle now contains 460,000 books.
Key Learning: A company that's only concerned about revenue, margins, and financials, is fighting for survival. A customer-obsessed company wants to create more value for customers and attract a larger user base.
Bezos mentioned the goals-setting process at Amazon and the priorities within these meetings. Within 452 goals that Amazon set, the leaders within Amazon use the word revenue only eight times and free cash flow four times. They don't use net income, gross profit, or operating profit once. All goals are about customer experience and how to make it better.
Amazon remains relentlessly customer-focused.
2010 Shareholder Letter - Amazon as a Service
Amazon's whole cloud architecture for its warehouses and AWS is based on a service-oriented architecture. Amazon's e-commerce consists of hundreds of these services that work together.
To enable Amazon's global system to work, it uses the concept of eventual consistency. This means that Amazon relaxed synchronization requirements to achieve ultra-scale properties to data update management.
Amazon's differentiation (in 2010!!) for data processing and decision problems is based on many autonomously running machine learning algorithms that can self-heal and improve over time.
Key Learning: A service-oriented architecture has profound benefits. It allows a company to add and remove services and features without disrupting the system as a whole.
Whispersync is one innovation by Amazon that syncs users' devices with all notes, highlights, and bookmarks. Whispersync is a replicated data storage system with applications defined for conflict resolution that must and can deal with device isolation lasting weeks or longer.
2011 Shareholder Letter - AWS, FBA, and KDP
AWS - Amazon Web Service, FBA - Fulfillment by Amazon, and KDP - Kindle Direct Publishing are all services offered by Amazon that disrupted their industries.
These services "empower others to unleash their creativity - pursue their dreams."
Key Learning: Don't mimic the status quo. The Kindle doesn't try to be a book or a normal bookstore. It's a window to an online library that connects with all your other devices and allows readers and creators to connect—same within industries. A new company must differentiate itself, create new value, and build a competitive advantage, which creates shareholder value.
AWS disrupted and established the cloud industry (as we know it today) by offering pay per use, a services-first architecture, and obsessing over customers from individual developers to enterprises. The ability to scale and adapt to customer requirements differentiates AWS from any other vendor. Amazon's service-oriented architecture showed itself in AWS, where it created hundreds of services for users to use in their applications.
FBA disrupted the logistics and delivery industry. FBA allowed tons of third-party sellers to join the internet e-commerce business and store, package, deliver, and sell their products conveniently through Amazon's logistics network. But that's not the main disrupting feature; Amazon disrupted the industry by creating FBA on its service-oriented architecture. This allowed sellers to learn about customer behavior, write their own scripts using FBA APIs, and implement all of it on their websites.
KDP disrupted the publishing industry. It allowed authors to publish for Kindle immediately, outmatched the royalties within the industry, and removed entry barriers for new authors. Classic publishing houses cannot match KDP as it has little to no overhead costs, which means that books published on Kindle can be much cheaper and still allow Authors to earn more than with classic publishing houses.
2012 Shareholder Letter - Customer-Centric
In business, there are two ways of working.
1. Customer-centric
or
2. Competitor-centric
Both have pros and cons, but being customer-centric means that a company proactively pursues the best scenario for its customers. The company doesn't wait for peer pressure to innovate and improve.
Key Learning: A company should be proactive and not reactive. Proactive means that a company innovates and focuses on the customer, not its competitors.
The best way to create shareholder value is by focusing on the customer and guiding efficiency directly towards the consumer by lowering prices.
This focus is also clear when we look at the Kindle. The hardware of the Kindle is not interesting for Amazon. The Kindle is just a way to strengthen its ecosystem in the future, to add more value to a Prime membership.
2013 Shareholder Letter - A Tour through Amazon
In this year's letter, Bezos makes a tour through Amazon's ecosystem. For customers to access this ecosystem is as easy as subscribing to a Prime membership. Amazon is adding value to the membership wherever it can and within industries in which it can create competitive advantages through its scale, brand, and presence. Here are a few examples of the membership perks:
Key Learning: There are many ways to create customer value and establish dreamy business offerings. Amazon is the result of many small pieces. Differently from products like Windows or the iPhone, Amazon is greater than the sum of its parts.
2014 Shareholder Letter - Dreamy Business Offer
This year, Bezos explains Amazon's business segments, services, and how they paint the whole Amazon picture. The core of the letter is about dreamy business offerings.
Key Learning: A dreamy business offering has at least four aspects:
Customers love it
It can grow to a very large size
It has strong returns on capital
It's durable in time - potential to endure decades
Amazon has three dreamy business offerings: Marketplace, Prime, and AWS.
The culture Bezos created within Amazon is to seek other dreamy business offerings. Find them through experimentation, trial, and error. Amazon's culture of failure empowers its people to take high-risk and high-reward opportunities and invest long term.
Conclusion
A company that’s just looking left and right to see what its competitors are doing generates average and in most cases below-average returns for its shareholders.
Innovative companies are customer-centric. They innovate, adapt, and change the rules of the industry to provide their customers with superior products and services. This intrinsic motivation is a competitive edge and looks way beyond any immediate financial metric.
As an investor, it’s crucial to invest in companies that want the best for their customers, not for their investors. Customer-satisfaction brings new customers, which increases returns, provides a competitive edge and results in superior returns for shareholders.