good evening and welcome to the annual a be dick lecture on entrepreneurship at Lake Forest College Lake Forest College 32 miles north of Chicago was established in 1857 as a private co-educational liberal arts college Lake Forest College engages our eleven hundred and fifty students in the breadth of the liberal arts and the depth of the traditional disciplines Lake Forest College draws its students from 43 states and 44 foreign countries faculty at Lake Forest College know their students by name and encourage students to read critically reason analytically and above all to think for themselves the Alfred Blake DIC endowment recognizes the long-standing connection between the dick family Lake Forest College and our community and it is a particular pleasure to note that members of the dick family are in attendance this evening our distinguished speaker this evening validates three key words that are hallmarks of contemporary culture and they are risk strategy and technology Jeffrey T Jeffrey P Bezos likes to tell his story this way he has always been interested in anything that can be revolutionized by computers upon learning about the dramatic increase in the use of the internet he focused on creating a new way to retail the worldwide web unique ability to deliver incredible amounts of information quickly from this came a well calculated business strategy that culminated in the founding of seattle-based amazon.com just four years ago it is also important to share the observation offered by a correspondent writing for The Wall Street Journal mr. Bezos they wrote has quietly built a fast growing business where the world's mightiest merchants mainly have racked up failures amazon.com has pinpointed one of the few products that people really want to buy online ebooks Jeff Bezos is a Phi Beta Kappa graduate class of 1986 of Princeton University he earned a Bachelor of Science degree summa laude with majors in electrical engineering and computer science now just before we begin I wish to warmly acknowledge the presence this evening of Jeff Bezos is aunt and uncle Nonie and David Brock members of Lake Forest College class of 1966 the fact is that they had something to do with attracting him to our campus this evening [Applause] and it is with great pleasure that Lake Forest College welcomes as this year's a be dick lecturer on entrepreneurship the founder and CEO of amazon.com Jeffrey P Bezos who will discuss building earth's biggest bookstore welcome [Applause] well thank you it's a great pleasure to be here thank you for the very nice introduction the the same Wall Street Journal correspondent that you mentioned said so many nice things in that article that actually forgave him for also noting in the very same article that I have thinning hair receding hairline so there you have it I I actually can't resist at any gathering like this even though it's anecdotal and there's a huge bias and the crowd of people who come but how many people here have been to amazon.com because raise your hands does anybody bought anything at amazon.com yeah okay that's that's not bad thank you we really appreciate that and and after the lecture I invite those people to come to me and get a handshake of thanks and also I'd love to hear how we can improve the customer experience for you I can tell you a little bit about amazon.com a little bit of the story of sort of how it came to be the company was conceived in the spring of 1994 I came across a startling fact in the Spree 94 web usage was growing at 2,300 percent a year I have to keep in mind that human beings aren't good at understanding exponential growth it's just not something we see in our everyday life but things don't grow this fast outside of petri dishes it just doesn't happen and when I saw this I said okay what's a business plan that might make sense in the context of that growth and made a list of 20 different products that you might be able to sell online I was looking for the first best product and I chose ebooks for lots of different reasons but one primary reason and that is that there are more items in the book space and there are items in any other category by far there are over 3 million different books worldwide in all languages the number two product category in that regard is music they're about 300,000 active music CDs and when you have this huge catalogue of products you can build something online that you just can't build any other way the largest physical bookstores are the largest super stores and these are huge stores often converted from holding alleys and movie theaters can you only carry about a hundred and seventy five thousand titles there only a few that large and in our online catalog we're able to list over two and a half million different titles and give people access to those titles and being able to do something online that you can't do in any other way is important it's all about the the fundamental tenant of building any business which is creating value proposition for the customer and online especially three years ago but even today and for the next several years the value proposition that you have to build for customers is incredibly large and that's because the web is a pain to use today we've all experienced the modem hang-ups and the browsers crash and there all sorts of inconveniences websites are slow modem speeds are slow so if you're going to get people to use a website in today's environment you have to offer them overwhelming compensation for this primitive infant technology and I would claim that that compensation has to be so strong that it's basically that the same is saying you can only do things online today that simply can't be done any other way and that's why this huge number of products look like a winning combination online there was the note there's no other way to have a two and a half million title bookstore you can't do it in a physical store but you also can't do it in a print catalog if you were to print the amazon.com catalog it would be the size of more than 40 New York City phone books so the the it's also very important when planning a business like this I think to sort of look at what is the brand promise that you're going to make to customers and the brand promise that you make has to actually coincide and very very closely with the things that you can deliver the kind of an important but sometimes overlooked component I think and and and in our case that led to the name of of amazon.com it's a mistake versus biggest river Earth's biggest bookstore and we wanted to use this large selection to be able to build an authoritative store authoritative means of a few things authoritative selection authoritative prices and authoritative information about books so that you can make a purchase decision and the internet allowed us to do all those things we could have more selection we could also have lower prices because we don't have to have retail real estate and high-traffic areas that's very expensive inventory in those spaces is very expensive we get to inventory our books and very low-cost warehouse space it's also possible to have more information online about products than you could ever have in a physical shopping environment so you can really build an authoritative store and just for those of you who don't read National Geographic nearly often enough the Amazon River is ten times the size of the Mississippi River in terms of volume of water that flows through it and are these great pictures every decade or so in National Geographic where they superimpose a cross-section of the Amazon in a cross-section of the mississippi and mississippi looks like a little creek so we opened the store in July of 1995 almost three years ago now after doing about a year of software development and the store has grown very rapidly there at this point we are our sales are about the equivalent of 50 of those big chain super stores and the interesting thing is that we opened the equivalent of twelve of those super stores in just the last three months so things are growing fast we ship looks regularly to over a hundred and sixty different countries in our first 30 days of being open we shipped books to more than 45 countries in all 50 states there are some interesting stories about the international so for example we ship for orders a day at least to Bulgaria every day and to show you the sort of the exhibit is even though Bulgaria they only have the equivalent of 41 lines of bandwidth coming in to the whole country that's a significant amazon.com has about 60 times as much bandwidth as Bulgaria coming into our into our one company we also had you know people it's very difficult to get English language books outside the US about 22% of our sales are outside the US and we had and people will go to great lengths because people want access to information they want access to things that that help them and educate themselves and so on we had an order from Romania and the person didn't have a credit card which is the most common way that the that we get paid and this was the most unusual way that we had ever gotten paid the person sent us cash which we don't encourage and they and they sent it from all the way from Romania it was US currency but it was very interesting they had taken two crisp $100 bills and folded them up into a tiny little package and it opened up the door of a floppy disk and put the money inside a floppy disk and then they mailed us the floppy disk with a note on the cover of the floppy disk it said the customs inspectors steal the money but they don't read English it's inside the floppy disk and sure enough our erstwhile accounts receivable people pried open the floppy disk and there was $200 person got their books and it's a happy ending the the I believe that the primary success factor for amazon.com has been an obsession over the customer and a focus on customer service this is clearly important in any business but especially important online and the reason for this is that word-of-mouth is incredibly powerful online if you make a customer unhappy on the internet they won't tell five friends they will tell 5,000 friends on Usenet newsgroups and listservs and so on likewise of course if you can make a customer happy by meeting or exceeding their expectations they can also tell 5,000 people and therefore you know be evangelist for you they can use the Internet as a megaphone so it's very important to do the things that you actually are going to claim to do and what this means we see is the balance of power has shifted away from the merchants and toward the consumer which is a great thing I think for every involved and it's even great for the merchants as long as the merchant realizes it one of the statistics that we track most carefully at M song comm because we believe that this is so important is our the fraction of orders we were saving receive every day that are from repeat customers and that numbers consistently gone up and it's now over 58% of our orders that we receive every day even in the context of a very rapid new customer growth one of the great things too online is that the customers help you figure out what you're doing wrong and how to do things better email is this great medium for receiving feedback because somehow email turns off that little piece of everyone's brain that causes them to mostly be polite so what happens is you know if you go into a restaurant and have a bad meal very rarely you're trying to have a good time ever go into the kitchen grab the chef's by the scruff of the neck and say you know you really shouldn't be cooking but online with email that will happen in a heartbeat and the and we've benefited greatly from that and have I believe from the in the three years that we've actually been doing business I suspect we've received more feedback both positive and negative people helping us improve our service then probably most business establishments have received in the last 20 years just very briefly since a lot of you have actually visited our website and notice under great we're doing let me just briefly hit on some of the key features of amazon.com we do have two and a half million titles and that is something at all these things we try to package the other things that you can't do without the internet because that's where you'll create real value two and a half million titles we try to focus on convenience so we have something called one-click shopping this is a new feature we just launched a few months ago that's been very successful and it allows repeat customers to literally order with one click of the mouse this when we did focus groups and tested this new feature before launching it the biggest problem was that people didn't really think they had finished the order so we had to actually change the surrounding this thing so that it's not only to say thank you for your order but in parentheses it now says yes it really did place an order this works because we keep the shipping address on file we keep the credit card number on file something that you can do online that's very difficult to do in any other way because we have the low cost we have not having retail real estate and because also the efficiencies the the personnel efficiencies are very high of doing business this way we generate for example more than three hundred thousand dollars a year in revenue per operating employee today even though we're still inefficient in honing our techniques compared to physical bookstores that generate about ninety five thousand dollars a year in operating revenue per employee now because of that we can afford to charge lower prices and basically what ends up happening is we offer best seller level discounts but instead of on the 65 New York Times best sellers on four hundred thousand bestsellers we change our website every day and the reason we do that is to encourage people to come back and we're happy always when people come to our website even if they don't buy anything because you know occasionally they will so one of the interesting things about the book space and every business environment is different and every industry is different is that people don't just shop for books for convenience they don't shop for them just because they need them it's actually an incredibly fun thing to do and people many people will spend two hours on a Sunday afternoon in a book store there are other products that aren't like this at all so for example pharmaceuticals you know nobody browses the preparation age counter you go in you go out you're done you want that to be a painless experience so that wasn't meant to be funny but I mean well and but but we do work very hard and we'll never make amazon.com fun and engaging in the same ways the great physical bookstores are you'll never be able to hear the bindings creak and smell the books and have tasty lattes and soft sofas at amazon.com but we can do completely different things we'll blow people away and make the experience an engaging and fun one I'll talk about some of the stuff that we can do in the future a little later one of the things that's that we've done it's been much commented on and I think has been very important is we let regular old customers review books turns out our customers are very smart and the reviews are extremely helpful to other customers in terms of making purchasing decisions and I'm also convinced that there's a little piece in the human brain that can immediately tell by reading somebody else's writing whether the person is smart or crazy within like the first five words so you can actually weed out the the reviews that you don't want to pay attention to really well - it's one of the things that surprises people sometimes upsets publishers and authors is that we let people into negative reviews and they say why do you do this you're you only make money if you sell the books why don't you read out the negative reviews and the reason is because our we're taking a different approach of trying to sell all books we want to make every book available the good the bad and the ugly and when you're doing that you actually have an obligation if you're gonna make the shopping environment one that's actually conducive to shopping so sort of let truth loose and that's what we try to do with the customer reviews so we do actually remove reviews that are off topic or even if they're funny we also we let for example authors review their own work so they can say I'm the author and click here if you're the author and you can review this book and we scan all of these we have a team of people who does this and matches them up and we have to have the email address and we can verify things with the publisher so on but occasionally things slipped through we did have God review the Bible we there were a couple of other amusing things we let's see who was in a Karen burrow it was was very very upset that Jane Austen had gotten to miniseries that was so what is the name of the the write the contemporary of Jane Austen who was her jealous of her all the time it slipped my mind right now yeah that yeah it's Bronte thinking that's my wife speaking of saving me yet once again and the the anyway she was she also reviewed one of her own works and said I just can't believe it that Jane Austen getting to miniseries in a full-length motion picture in one year so but even those funny ones we take away we should probably post them on a special page that would be a fun thing to do finally what people don't see sort of behind the scenes at Amazon accom you can see a lot of things on the website but you can't see the stuff that the software development all the effort that goes into the back end tools amazon.com is very much a technology company in fact I think of us in many ways as sort of a small AI company artificial intelligence is something that's gotten a bad rap there are some good reasons for that and some bad reasons one of the bad reasons is that once the AI guys work really hard and accomplish something it's not AI anymore it's just a parlor trick and what's interesting is there's some very simple but sophisticated techniques that are working well to help people discover things online like collaborative filtering I'll talk a little more about that in a minute but this is all subterranean so we're starting to do things on our site now that aren't very visible like customize the homepage for particular customers using their past activity and their stated preferences to guide us and you don't even notice this unless you sit right next to someone and see that their version of amazon.com is slightly different from yours we've just started doing this this is something we've wanted to do forever and the goal is to make the perfect store for everybody we don't have to have the average store for the mythical average customer we've also worked hard on all the customer service tools the things that process electronic mail if you're doing business in a a mail-order company for example you could there are dozens of off-the-shelf systems you can buy to handle inbound phone calls into a call center and so on we get thousands of email messages from our customers every day and there aren't any great off-the-shelf inbound email Center of software packages yet there will be so we've had to write our own in fact about 85% of all of our software development to date has actually gone into the back-end systems that are completely invisible to customers the logistics systems that handle two and a half million different items and six different availability categories early on we looked at could we buy a software package that would do the logistics for us the problem is that if you look at the available packages that are built for mail or companies they typically have just two availability categories in stock and backordered we actually have six because we have books that are shipped within 24 hours two to three days one to two weeks four to six weeks not yet published shipped when available and when we're out of print shipped within one to three months if we can find it at all so some of this stuff just has to be done done the hard way we've also done one more thing that I think is interesting and enough to mention which is our amazon.com Associates Program the they're actually several other places doing this now but at the time I believe it was new and the idea was let's make it possible let's use the inherent features of the web to make it possible for any website no matter how big or how small to have its own bookstore in association with amazon.com and today we have over 30,000 of these associated Amazon account associates out there on the web ranging in size from on the big side AOL excite Yahoo Netscape AltaVista Geocities to the small so somewhere in the middle dr. Ruth Westheimer sells sex-education books from her website through amazon.com to the very tiny mite one of my favorites actually a website that bills itself as the web's now mind you the webs out the world's the web's oldest and best place to buy meteorites you can indeed find everything on the web if you look hard enough and now they can sell meteorite books along with with this it's interesting because it's a win win win it's a win for the associate because we pay them a share of revenues pay them 15% of revenues for all the books that they sell it's a win for our customer because they now have in many cases a specialized website like the meteorite one or one on yellow Labradors and so on that put these books in an editorial context you know we can't say with editorial authority that this is the Bible of Labrador Retrievers but there's a website out there that can say that and finally it's a it's a win for a camera who I did already it's a win for us yeah it's also a win for us and the reason is that we get new customers this way and these sites help us with branding so what I'd like to do now is sort of go back in time so we have we have over a thousand employees now which startles me to no end because three and a half years ago we had seven and so things and I want to sort of walk you through some of the just really kind of little anecdotes about amazon.com there from the very from the very beginning in 1994 when I came across this fact that the web was growing at 2,300 percent a year I was working on Wall Street very specialized kind of investment bank called a quantitative hedge fund the company called de Shah and I when I decided I was gonna go do this crazy thing I went and told my boss and he said no hmm let's go for a walk so we were on a two-hour walk in Central Park and he actually thought it was a good idea some very smart guys names David Shaw is one of the few people I know who has a fully developed left brain a fluid oaf right brain just a super smart guy and he said this is a great idea but it would be a better idea for somebody who didn't already have a good job and and that was actually a compelling argument to me and so I went away he convinced me to think about it for two more days and it was very hard to make that decision and until I found the right framework in which to make the decision I think because I know there are a lot of people who are interested in entrepreneurial activities out there I think this could be useful is that it's the right framework for me anyway to make the kind of decision was a regret minimization framework so I projected myself into the future and I'm 80 years old and I'm looking back on my life what do I want to have done at that point one of them minimized all the regrets that I have and I knew that when I was 80 there was no chance that I would regret having locked away from my 1994 Wall Street bonus or knew that kind of thing I wouldn't even remember that but I did think there was a chance that I might regret not having participated somehow and this thing that I thought was going to be very exciting called the Internet and and I also knew that if I tried and failed I wouldn't regret that so once I thought about it that way it become became incredibly easy to make that decision it's also easy for me because my wife who's sitting right here so supportive and and also beautiful thankfully she's not geographically tied to particular area so we were able to pick up and move to the best place to do amazon.com which turned out to be to be Seattle but there's actually a story there so when you get bored of these anecdotes let me know and I will stop but the when somebody's growing 2,300 cent a year you have to move fast a sense of urgency becomes your most valuable asset and and so we did do that I I wanted to turn out it was the problem of where to locate amazon.com was highly constrained by three factors it had to be in an area with a large pool of technical talent it had to be in a place a small state because only the residents of the state where you have what they call Nexus have to do you only have to charge those customers sales tax so I wouldn't want to be in California and so on bigger states and and and finally it had to be nearby a major book wholesaler turns out the largest book warehouse in the world is in Roseburg Oregon so I was doing this analysis and I had tons of statistics about cities all over the country even I can tell you to this day that they're about three thousand flights a week out of the Seattle Airport which makes it sort of a medium sized hub so and that was you know these there's like more minor considerations but you but trying to make this decision the problem was I hadn't quite made an arrow down to four cities Portland Oregon Seattle Boulder and Lake Tahoe and the Nevada side of the border and the movers were here and they had packed up our stuff and they wanted to know where to take it so I told him just head west and call us tomorrow and we'll tell you and that's what they did and so and my wife drove it to Seattle and I tapped out the first draft of the business plan in the car on the way there I also called our attorney I called a friend in Seattle and said can you recommend an attorney and retain an attorney by cell phone and had that person set up bank accounts and so on so that those were all ready by the time we got there had him incorporate the company and of course he's got it in software so what should the name of the company be she need for the incorporation night it was very clever I had already thought of this I knew he was going to ask her that question and so without even missing a beat I said Cadabra Cadabra Inc like abracadabra well I instantly knew that was an incredibly dumb name because he came back to me right away with cadaver no no not cadaver Cadabra and he's like cadaver Ivano so anyway the company was incorporated as Cadabra Inc right there and three months later was changed to amazon.com a name that actually the entire a section of the dictionary was perused turns out that things are always listed online in the order and almost always an alphabetical order so kind of like the yellow pages where you get the triple-a auto repair phenomenon you start to see that in fact we do have a competitor or a small competitor online called like triple A one books or something like that so it was that's 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 word of mouth and it's that 58% of repeat customers every day the the 50% orders from repeat customers those people are our evangelists and help us sign up new customers let's see the I would say they're the most interesting thing though is I firmly believe this is day one this is a time when we know very little about e-commerce and very little about a merchandising there's a huge amount to be done if you look at the kinds of things we'll be working on in the near future we're gonna work on geographical expansion so we want to make it possible for people to buy a Japanese language book anywhere in the world for people to buy a German language book anywhere in the world just as we now do that for American books we're also working on product expansions so we want to leverage our customer base our competencies and our brand name into products like music and videos if you search you stat news groups you'll find at least once a week somebody will ask the question who's the amazon.com of music and we're desperate to say we are and so far we can't say that so so those are two of the things we work on but I think one of the most interesting things is this notion I spoke about earlier which is redecorating the store for each and every individual customer this is the future of effect we've stopped calling it ecommerce and started calling an emergent icing because commerce is the simple find it buy it ship it sort of be a action a merchandising is much more about customer behavior online in the physical world there are all sorts of interesting things that are understood about customer behavior so something called the hard right for example you walk into a store 90% of customers turn right that's why the cash registers are used on the left merchandise on the right there are a whole bunch of of those kinds of things nobody knows what those things are online and we view amazon.com is an experimental laboratory to try and figure out some of those things at the same time we can use advanced technology and we are as I said starting to do this now to not only understand our products on a product by product individual basis but to understand our customers on a customer by customer individualized basis so that we can the goal is to enhance the discovery process the goal is to make it you know discovery is an incredibly powerful motivator for people all of us like to discover things and when you walk into a bookstore and you serendipitously stumble across something that blows you away and say wow I really want to read this book that's very powerful all of us have read half a dozen books in our lives that have made a major impact on us in some way and I would posit that there are 500 books in the amazon.com catalog right now that could have that same sort of impact on you if you could only find them and I believe that we can use advanced technology to dramatically improve the odds that you can find those books because we'll not just let readers find books but we'll let books find readers and you know with what really is the case is that we know 2% about all this stuff that we will know ten years from now this is absolutely the Kittyhawk era of e-commerce and emergent izing and I thank you for listening to me and I am happy to take questions if there are any [Applause] and asking questions will you please rise and will you please state your name as well thank you speak into the boom yes I'm Dave too only question about other businesses that you think are relevant for commerce on the Internet beyond just records and music in some way in the future there are certainly a lot of other businesses that besides those three that are even in the near future going to be very successful online computer hardware and computer software sales are going to be a big deal a lot of companies are using the Internet very effectively not to sell necessarily sell things but to save significant amounts of money Federal Express is a great example with their package tracking website they have many fewer calls to their 1-800 number attracting packages so there are a lot of opportunities for many many companies to offer customer self-service the interesting thing is if you look at all the studies customers prefer self-service when it's done properly to being helped by somebody else because they have control over the situation I think that I may have this slightly wrong but I know the hotel industry does satisfaction surveys every year and I believe Embassy Suites always gets the highest customer service ratings even though they don't have any they just let everybody know you have your own coffeepot and your own things and and people love that Michael McCaskey when I visit amazon.com and I start to look at a review of a particular book you bring up suggestions for three other books and I wonder in what direction you'll be able to take that as the artificial intelligence component becomes more sophisticated I know some of the things I'd like you to be able to do but I'm curious about you know where you think it's going to be in four years or ten years or choose a time frame and by the way please come find me afterwards and tell me what you think we should do the there are huge possibilities for this one of the techniques that's being used today we're using on our website it's called collaborative filtering and the way collaborative filtering works is basically it looks for your affinity group so if we have something called instant recommendations it looks at the books that you've bought in the past from amazon.com and then it finds other customers who've bought the same books and then it looks for the things that does that group of customers have bought that you haven't and it recommends those things to you so it's basically looking for people who have the same tastes or interests that you do and then using them as a guide to what we should recommend to you there are other techniques that can be used people think that neural networks are going to be valuable in this space there are other simpler but sometimes the simple things work best just simple statistical techniques that can be used there are genetic algorithms that can be used it's you know these are a lot of this what's going to be done is a lot of experimentation and we're gonna find out what works best you mentioned you list 2.5 million books on your website but really only about 1.5 million are in print currently could you mention how amazon.com goes about finding those remaining million books for those who should have no order them if you look at the catalogue there are two and a half million books about 200,000 bestsellers we actually inventory ourselves in our own warehouses between 200,000 and 400,000 we go to a network of about a dozen different wholesalers to get those books between 400,000 and 1.5 million we go to over 20,000 different publishers directly to get those and then between 1.5 million and 2.5 million are out of print books and we use a network of search services there are companies that have specialized for years this actually isn't even a isn't a new industry it's just something that the Internet is allowing people to access more easily that we tap into those people search for the books there are two basic ways that this has traditionally been done one way you charge the customer search fee and the other way you you don't but you mark up the book we do the second thing and when and we actually promise to keep looking forever so we keep it on the search list we reinitiated every once in a while and you know so it's theoretically possible that you could put in an order and you know seven years later we'd email you and say you know we did find your book there are some interesting stories about out of print books found but I won't go into those good evening my name is Howard sanderman and I was wondering how do you infuse your employees with your entrepreneurial spirit and vision in essence especially in a growing company that's gone from seven to 1,000 employees so in essence how do you cultivate internal entrepreneurship or intrapreneurship definitely not claimed to have sort of a secret recipe for doing that some of it is self reinforcing so when a company is doing well and it's growing rapidly that naturally tends to excite everybody in the company I also think that corporate cultures are incredibly important and they're one thing that that can never be copied competitors can never copy a culture and the unfortunate thing I think for businesses and entrepreneurs is that you can set out from the very beginning with a particular culture that you want to form in mind as we did we are watch phrase for that was intense and friendly and we always talked about it in the sense that you have to be intense and in fact if you ever had to give up friendly in order to have intense we would do that so if we needed to be intense and combative we'd do that before we be not intense but but so you can start out with the way you want things to be and then really your early employees become the the you know the the beginning that you carry around they carry around the flame of what your culture begins so I think mostly it's a blend of sort of 30% what you set it out set out for it to be 30% who your employees your early employees happen to be and 40% random chance and the and the bad thing about the random chance part is that once it's set you've got it there's really no way to change a corporate culture you talked about about your how being customer obsessed is one of your key strategies that was wondering what other strategies you're going to need to break into the music industry our biggest disadvantage is that we don't have a first mover advantage in that space and amazon.com itself has demonstrated the first mover advantages on the internet are incredibly powerful and on in the music space companies like CD now and in 2k have the first mover advantage what we have is a customer base of more than a million and a half people who we have pulled know that many of them will buy music from us and that customer base is much larger than any other internet retailer any in any space so the the strategy really is to leverage that customer base leverage the brand name which we worked very hard to associate with high quality service low prices and ease of use an authoritative selection so those are the kinds of things that you'll see us do to try and be successful in that space and there are no guarantees whatsoever that we'll be able to do it Brad Bradford you have any anecdotal things on people who've been unhappy and wanted to send stuff back or if there's everybody been happy I would love to give you an anecdote like that but there just aren't any no there are many in fact often times when I speak I carry around a few of those messages because the more hostile ones are actually funny I mean there's always a good reason for why the person is so upset but it's a good you know sort of cheap way to get a laugh from the audience but I've gotten email messages from customers and all capital letters and upset for various reasons the one that springs to mind is a customer who was extremely unhappy that he had spent a large amount of time hours and hours filling his shopping basket and then he but he wasn't quite ready to purchase the books so his online electronic shopping basket amazona calm and then after 30 days had passed we if there's no activity on account for 30 days we clear out the shopping basket which he thought was an incredibly stupid policy and actually we have changed I think it's at the disk space actually isn't that costly kind of probably was a stupid policy and and he also thought that we should at least have warned him also probably a good point but he wasn't polite in his message I can assure you and and but but we did apologize and we actually went back through our logs our HTTP logs which are these huge massive files and found his shopping basket and sort of like raw data form and sent it to him which made him very happy but you know there are countless stories like that where did you see where do you see yourself in five years can continue to be a pioneer in electronic commerce electronic merchandising there are lots and lots of stories of companies that were pioneers and then disappeared from the face of the earth visicalc is a great one that you know that entrepreneurs should have nightmares over if their business was taken away by Lotus and then of course the same thing happened to Lotus when Microsoft took their business away so we are gonna work like crazy to expand not to defend the territory we have now because I think that strategy wouldn't work what happens if you just do that is that this is a scale business this is a business that only works in large size because of the their large fixed costs and the in very low variable costs and so what you need to do is have a business of a sufficient size so that you have right purchasing power and the brand name that's self-sustaining and really I think if we work on that combined with the discovery technology that I was talking about earlier if we can do those two things in the next five years that will be a huge success and in Amazon a comment we'll all be able to be very proud of ourselves Margaret Nugent given what you were saying about the people who are carrying the flame at the beginning and how critical they are could you talk a little bit about who you selected those seven people who were in that garage and whether they've evolved with the company or left all the original employees only one has left and he his wife finished her doctorate and they had to move across the country the basically when we are looking for people we're looking for intense hard-working smart people who want to be part of what we're doing so passion is a part of it just plain old smarts you know sort of high IQ brainy people we really like that and Mille who can hire other great people you know when I interview somebody I actually spend about a third of the interview asking questions designed to ascertain whether or not they can hire great people so it's sort of the third of the meta interview and that different businesses have different criteria but in this business we've reached an interesting inflection point where I would say 70% of the risk now to amazon.com is execution risk so it's inside the company it's you know our ability to stumble where we've basically gotten past the point where 70 to 80 percent of the risk was external and where we needed a huge amount of luck to get to where we are now now all we need is a clear consistent vision and the ability to execute on it very very well at high speed and that second piece comes from having large numbers of talented employees with lots of executive bandwidth to help guide them and so you know individuals do not win we're very lucky we have the unarguably the most talented venture capitalists in the United States on our boards a guy named John doar and John is very well the time talks about the fact that teams win individuals don't and we have built a great management team and a great group of people underneath that and if you look at companies like Microsoft that's the main way that they've won - if you look at all their assets that got more than 10 billion dollars in cash in the bank they've got an operating system which is a virtual stranglehold on the industry and I would say all of those things are great but the thing that really makes them such an awesome competitor and the reason that they have the position they have today is because they don't just have Bill Gates they have 40 people at the top of that company who are smart and dedicated and hardworking and if you look down below that sort of incredibly deep executive team they've got more people that are waiting in the wings to take on that kind of responsibility so we're trying to build that kind of team at amazon.com we've got a great start and we do have a thousand entrepreneurs at amazon.com there are lots of my name is Mary long there are a number of discussions eyes going on about the future of the book now that there's the computer I'm wondering what your thoughts are on that and also relatedly I guess what with the growth of the super stores the borders and Barnes and Nobles they've really had an impact on I think on publishing in some ways and with no deals with the publishers what kind of an impact are you heavy on publishing and in books ok great questions well impact I'm terrible first of all terrible multi-part questions so if I forget one of the parts while answering the other I'll you just remind me the impact on publishers is especially Amazon accounts impact is especially positive on small and independent presses the reason is that this extensive catalog the ability to that the internet gives us infinite shelf space so that we can actually merchandize to a worldwide audience titles that otherwise simply could not and cannot get distribution in physical bookstores so that has been a positive impact the second thing has been reduction returns turns out most people don't know this but 38% of all books that get shipped out from serves into the retail distribution channel are eventually returned to the publishers as unsold merchandise that's an incredible statistic and amazon.com returns to publishers less than four percent because of our centralized distribution model your first question what's the future of the book I firmly believe that at some point the vast majority of books will be in electronic form I also believe that's a long way in the future and the thing that holds you know many more than ten years in the future and the reason that that gets held back today is that paper is just the world's best display device it turns out that today with the state of the art in display devices dead trees just make the best display devices they're higher resolution they're portable high contrast and so some day computer displays will catch up with that and then I think electronic books will be extremely successful [Music] hi my name is Wil price I'm just wondering what you're doing to drive consumer behavior or access to technology in terms of growth avenues that's something you're actively trying to work on or as you know the inherent growth in the industry sufficient to cater to - right now well we don't we aren't trying to grow the internet what we target the customers that we target with our advertising and our other promotional activities are already online and they're heavy book buyers so at this stage of the game we're not trying to convince people who aren't online to come online we're also not trying to convince people who don't read to read we will save that for a future more glorious day Hart Rogers you spoke about regret minimization do you have other advice for people contemplating moving into entrepreneurship from the normal track yeah I do I think that I almost have started a company straight out of school and I would say there are many examples of people who've done that successfully some very high-profile examples of people who done that successfully I actually buys people not to do that I almost did it who knows how it would have worked out but I think I've benefited tremendously from working at a couple of best practices companies that were very entrepreneurial and were fairly small at the time that I did it and I did that for about ten years and I believe that the experience of doing that and working with people like David Shaw at Dijon Co were just unbelievably helpful to me in terms of being prepared to do this I think it just dramatically increases your odds and when you're doing things like this the problem with being an entrepreneur and undertaking a business initiative is that companies don't fail quickly if they failed fast that'll be okay because then you could you know you could try 20 times but in fact they take years and years to fail it you know if you look at the failure statistics of startup companies very rare do they fail in the first year - it's usually seven eight nine years so it means that you're dedicating a significant percentage of your life to this thing and you really want to make sure you've optimized you know maximize the odds that you're going to be able to succeed I'm Kitty Lansing I'm curious about what percentage of the books you sell are children's books because I think of children's books as seen as being so dependent on illustrations and how do you ease your way you see getting around that yeah well the direct answer to your question is we don't disclose any breakdowns on sales we're competitors I can't actually tell you what percentage of our sales are children's books but what I can't tell you is that the strategy we've taken with children's books is it turns out with children's books people just want to be parents are mostly shopping for children none we're in friends of parents and so on adults shopping for children and they basically want to be told what to buy so in other things people know because you're buying for yourself you know what you want but when you're buying something for a four-year-old guidance is very much appreciated and that's the way that we merchandise children's books online [Music] John McKinnon I'm curious to know how Amazon's gonna respond to some of the large strategic relationships that Barnes and Noble is building with say America Online or CNN well and really if you look at the large relationships that have been built online all the significant ones are actually build with amazon.com so you know this is one of the one of the advantages of being a first mover we have multi-year exclusive agreements with five of the top six web sites including AOL Barnes Noble has an exclusive agreement with aol's proprietary network we have an exclusive agreement with AOL comm aol.com where we have a permanent homepage banner for example is the single most visited web page on the internet so and you know it literally it's if you if you take the pc meter data which is to where the Nielsen service or the internet and look at the top six web sites we have exclusive multi-year arrangements with all of them vault with all five of the top six the one that's not there it's Microsoft they don't have a relationship with anybody we're gonna bring this to a the formal part of our program to a conclusion although I'm sure mr. Bezos will be glad to chat with people informally for a few moments I want to thank you for coming a long way this afternoon to be with us and it's made this year's a be dick lecture at Lake Forest College a truly memorable experience and we'll be looking for you [Applause]
