#85 | Amazon's 3 Pillars of Success

In 1994, Jeff Bezos saw a number that changed everything: the web was growing at 2,300% per year. He walked away from a high-paying Wall Street career to start an online bookstore.

In this episode of the Dutch Investors Podcast, we explore the psychology behind Amazon’s ascent from a garage to a global powerhouse. We break down the three permanent pillars that make the company an unassailable moat.

Learn why Amazon bets on the things that never change, and how you can apply these timeless lessons to your own portfolio.

Transcript

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It's 1994. Imagine a 30-year-old Wall Street executive named Jeff. He's sitting in a swanky office at D.E. Shaw, a firm basically filled with the smartest people on the planet, looking at a computer screen. This is the early days of the web, right? He sees a number that feels like a total glitch in the matrix almost. The World Wide Web is growing at 2300% per year. Now, most people back then they saw the internet as this weird playground for academics or niche hobby for nerds. But Bezos saw something different. He saw this wave. So he goes to his boss, David Shaw, and says, Look, I want to start an online bookstore. His boss, being a pretty smart guy as well, takes him for this long two-hour walk through Central Park and basically says, Jeff, this sounds like a killer idea for someone who doesn't already have a high-paying fancy job like yours. So Bezos has to make a choice. Looking back, he used what he calls a regret minimization framework. He literally projects himself forward to the age of 80 and asks himself, When I'm 80, am I going to care that I walked away from my 1994 Wall Street bonus? And his answer was a plain no. But he knew it would haunt him until the end of his days if he didn't dive into this thing called the internet and just try it. So what does he do? Well, you guessed it? He quits. He packs up a Chevy Blazer, his former wife Mackenzie takes the wheel and they head for Seattle. And this is my favorite part. While she's driving across the country, Jeff is in the passenger seat. Furiously typing out a business plan on its laptop for a company he almost named Relentless. In fact, if you type relentless.com into your browser right now, it still redirects you to Amazon. So how did we get from that car, from a garage, with desks made out of$60 wooden doors from Home Depot to a company that basically powers the modern world? How did a bookstore become the everything store? This is the story of Amazon. But if you really dig into the pages of The Everything Store by Brad Stone, you realize it's more of a story about psychology. It's about a company that understood something profound. While technology moves at the speed of light, human nature is basically fixed. People will always want the lowest price. They'll always want something cheaper. They'll always want faster delivery. Today we're breaking down the three permanent pillars that made them a monster. The day one culture, the unstoppable flywheel, and the invisible infrastructure. If you ever visit Amazon's headquarters in Seattle, the main building isn't named after a founder or a tech term. It's named Day One. And it's not just a fancy name, but it's also a warning for employees. In his 2016 shareholder letter, Bezos wrote that day two is stasis, followed by irrelevance, followed by excruciating painful decline, followed by death. So how do you keep a trillion-dollar company from getting old and slow? You build a culture that values long-term thinking over everything else. In the book Working Backwards, former executives Colin Breyer and Bill Carr explain that Amazon literally operates differently than any other company. For example, they don't use PowerPoints or any presentations for that matter. Think about that for a second. No slides. Bezos realized bullet points are where good ideas go to die. They hide weak logic behind flashy graphics and well-written slides. Instead, they write six pages. These are full-blown documents. And when a meeting starts, everyone sits in total silence for just 20 minutes and reads. And it forces a level of clarity and transparency that most corporations completely lack. But also they have this bar raiser program for hiring. They bring in an objective person from a completely different department to interview you. And their only job is to ensure that every single person hired is better than the average of the current team. It's a mechanism to stop the day two, rot before it even starts. And as Beezel says, to invent, you have to experiment. And if you know in advance that it's going to work, it's not an experiment. Now let's talk about the engine behind Amazon. And this is the part where investors usually get excited. Back in the early 2000s, Beezel sat down with Jim Collins, the guy who wrote Good to Great, and they sketched a circle on a napkin. You can call this the flywheel. It's a virtual cycle. And once it starts spinning, it's almost impossible to stop. And it looks like this. 1. You lower prices which creates a better customer experience. 2. That experience drives more traffic to the site. 3. That traffic attracts third-party sellers who want to reach those people. 4. More sellers means a bigger selection. And 5. A bigger selection makes the customer experience even better. But here is the secret that legendary investor Neek Sleep picked up on. He calls it scale economy shared. Most companies, when they get big and their costs go down, they keep the extra profit to make Wall Street happy. Amazon does quite the opposite. They take those savings and they hand them back to the customer through lower prices or prime shipping. And this makes the flywheel spin even faster. And faster. It creates this mode where the bigger Amazon gets, the harder it is for anyone else to even try and compete. And as Morgan Hausell points out in Same As Ever, Amazon bet the entire farm on the fact that customers will never ask for higher prices or slower delivery. They bet on the things that never change. The brilliant chapter in this whole saga has to be AWS. It's a classic story of turning a scar into a skyscraper. Around 2003, Amazon had a mess on their hands. Their internal computer systems were a total disaster. Different teams couldn't even talk to each other's databases. So they spent years building a standardized automated way for their own developers to get the computing power they needed. And then they had this day one epiphany. Wait a minute, they thought, if we need this, every other business on Earth is going to need it too. And they turned an internal cost, basically the plumbing of their website, into a service they could sell. And today, AWS is the profit engine for the entire company. And as an investor, you have to love switching costs. Once a company like Netflix or Airbnb builds its entire digital life on AWS, moving to a competitor is like trying to change the foundation of a skyscraper while people are still living on the 50th floor. It creates such a high-margin sticky cash flow that can fund all their other day one experiments, from Alexa to satellites. As we bring this story to a close, let's pull out three timeless lessons you can actually use for your own thinking and portfolio. Lesson 1. Bet on what stays the same. Technology is a moving target, but human desire for speed, price and selection is permanent, something Amazon figured out very early on. Lesson 2. Look for a flywheel. Find those rare companies that share their success with their customers. That's how you build an unassailable mode. Other examples could be Heiko, Costco, or WISE. Lesson 3. Culture is a strategy. If a company can't explain its ideas in a clear written narrative, they probably haven't thought them through. Culture will determine the outcome of a business. A good culture will thrive, making employees happier, more productive. Thinking out of the box, Amazon's journey from a garage to a global icon wasn't a straight line. It was a messy series of experiments, dropping over 90% along the way. Think about the Firephone. It was an absolute flop. But because they stayed in day one, they were able to take those lessons from those failures and turn them into the successes of the Kindle or Alexa or Advertising. So, your call to action this week, go back and read that 1997 Amazon shareholder letter. It's the genesis of this whole story. Then look at the companies you own and ask yourself: do they have the same clarity of mission? Or have they already slipped into the slow death of day two? Now you know the story of Amazon.