Bezos’s 1998 Shareholder Letter: Fear Customers, Not Competitors

#BezosShareholderLetter1998 To our shareholders, customers, and employees: Over the past three and a half years, we have served a cumulative 6.2 million customers. In 1998, revenue of $1 billion reached $1 billion (1997 revenue grew eightfold to $147 million). Amazon launched music, video, and gifts in the United States, and our UK and German websites went live. We also launched Amazon.com Auctions, a secondhand marketplace. We expect the next three and a half years to be even more remarkable. We are building an online platform where tens of millions of users can browse at leisure and buy whatever they want: anything they can imagine. [Fragment in the Chinese source: 分] If we execute our plan well, this truly is a new beginning for the internet, especially for Amazon.com. Given our experience so far, it may be hard to believe, but we think the opportunities and challenges ahead will be unprecedented. We must make conscious, careful choices, some of which may look bold or even unconventional. Some may work, but many will certainly prove mistaken. /Looking back at 1998/ Keeping our heads down and serving customers brought substantial progress this year: * Sales rose from $148 million in 1997 to $610 million, a 313% increase. * Cumulative customer accounts grew from 1.5 million to 6.2 million, also an increase of about 300%. * Despite the large increase in customers, the repeat-purchase rate rose only from 58% in last year’s fourth quarter to 64% in the same period this year. * Our main category expansion—music—led the market after its first quarter. * Amazon.co.uk and Amazon.de, built on Amazon’s brand and technology, generated fourth-quarter sales in the UK and Germany four times those of the third quarter, directly capturing their online book markets. * After music, we began selling video—the translator believes this means discs—and gifts in November. We became the largest online video retailer. * In the fourth quarter of 1998, 25% of sales came from the UK, Germany, music, video, and gifts, all newly introduced services. * We significantly improved the user experience, introducing patented one-click purchasing, Gift Click, store-wide sales rankings, and instant recommendations. Revenue and customer growth in 1998, and the continued strong performance into ’19, largely depended on expanding our infrastructure. Here are the key points: * Our workforce grew from 600 to 2,100 in 1998. As in the previous year, we strengthened the management team again. * We established distribution and customer-service centers in the UK and Germany. In early 1999, we built a highly mechanized distribution center in Fernley, Nevada, covering approximately 323,000 square meters. This new center nearly doubled our distribution capacity and enabled faster delivery. * Inventory rose from $9 million at the beginning of the year to $30 million, making customers’ preferred products available whenever they wanted them and allowing us to save costs by purchasing directly from manufacturers. * Following our May 1998 high-yield-debt offering and early-1999 convertible-debt offering, our cash and financing—“cash and investment balance”—reached about $1.5 billion. This provides strong financial support and strategic flexibility. /Our users/ We are committed to building the world’s most customer-centric company. We firmly believe our customers are perceptive and intelligent, and that a brand’s image comes from what we actually do. Customers tell us they choose and recommend Amazon.com because of our selection, easy-to-use interface, low prices, and excellent service. (**Translator’s note: The following is my favorite passage.**) But we cannot let up at all. I repeatedly remind employees to wake up each day with a sense of fear—not of competitors, but of our customers. Our customers made Amazon what it is today. They have built a strong relationship with us, and we have an absolute obligation to them. They will remain loyal until another company provides better service. We must keep improving, experimenting, and innovating in everything we do. We love leading the way; it is in our DNA. That is a good thing, because that instinct keeps us succeeding. Our sustained investment in innovation and customer experience sets us apart, and we are enormously proud of it. We believe our 1998 achievements reflect this: our music and video offerings and UK and German stores, like our US bookstore, are the best evidence. /Work hard, have fun, and make history/ Without extraordinary colleagues, we could never have achieved so much in the rapidly changing internet world. Making history really is as difficult as its reputation suggests, even a little history. We now have 2,100 motivated, intelligent, hardworking employees who put customers first. As I said last year, high hiring standards have always been, and will remain, one of the most important factors in Amazon.com’s success. In hiring discussions, we ask decision-makers to consider three questions before extending an offer: * *Do you admire this person?* Think of people you admire: you can surely learn from them. Personally, I have always tried to work only with people I respect, and I urge colleagues to be equally demanding. Life is, after all, as brief and beautiful as summer flowers. (“Life is definitely too short to do otherwise.” Although my translation is quite poetic, I am including the original sentence because it is so well written.) * *Will this person raise the team’s average level?* We must try to reduce increasing entropy—“We want to fight entropy.” Our standards must keep rising. I want everyone, five years from now, to look back and feel lucky: “Wow, I’m glad I joined five years ago. Hiring standards are so high now!” * *In what area is this person a superstar?* Many people have distinctive strengths and interests that make the workplace more interesting, even if unrelated to their jobs. I remember a woman who was the 1978 national spelling champion. How much fun it would be to catch her in the hallway and challenge her to spell “onomatopoeia”! /New Year goals for 1999/ We believe e-commerce has tremendous prospects and that 1999 will be a very important year. Although Amazon.com has established a leading position, competition will remain fierce. We will invest aggressively in infrastructure capable of supporting a multibillion-dollar company serving tens of millions of users efficiently and well. Such investment brings substantial associated risks, but we maintain that building the best end-to-end customer experience offers shareholders the lowest-risk approach to creating long-term value. Our plans for ’99 should therefore come as no surprise: Distribution capacity—we will build a platform that meets every customer’s needs and can retrieve goods rapidly from a vast inventory. Systems capacity—we will expand our systems to support rapid growth. The systems team has a major task: expand; reorganize systems to support billions in revenue and tens of millions of users; provide system-level support for new categories and future innovation; and improve execution quality and efficiency. Throughout these improvements, it must keep the existing billion-dollar, eight-million-user business operating without a hitch, 24/7. Brand promise—Amazon.com remains young and small compared with major retail groups. We must build broad, strong customer relationships at this critical time. Broader products and services—in 1999, we will keep broadening our existing range and adding new varieties. Amazon.com Auctions—the translator’s note calls it a secondhand platform—is our latest service. If you have not tried it, open our website immediately and click the Auctions tab. Customers can both bid and sell. Sellers can put their products in front of eight million experienced online shoppers. Bench strength and processes—new products, services, regions, acquisitions, and business models have made our business extraordinarily complex. We must invest more in team building, processes, communication, and employee training. Developing steadily in this way is one of the most challenging elements of our plan. Amazon.com has made great strides over recent years, but we still have so much to learn. We remain optimistic, vigilant, and somewhat anxious. Challenges include powerful competitors, greater decision-making risks as the business grows, and substantial resources needed to match that growth. What I most want to say in this letter was already said in last year’s, which detailed our long-term strategy. Because we have many new shareholders—we printed 13,000 letters last year and will print at least 200,000 this year—we have attached last year’s letter. (Translator’s note: I am not attaching it; please find it in my notes.) I recommend the section “It’s All About Long Term.” You may want to read it several times to confirm that we are the kind of company you want to invest in. As we said then, we do not claim our philosophy is correct; it is simply ours! Our thanks to customers and shareholders, and to the tireless people beside me who work passionately every day to build this remarkable, enduring company. Jeffery P. Bezos (Translated into Chinese by Vinchent)