Amazon letters to shareholders

I am always amazed by the candid approach taken by Warren Buffett in reporting Berkshire Hathaway’s performance to his loyal crowd of shareholders, stakeholders and worshippers (me included!), and I had always wondered if someone was to emulate Warren in this particular aspect.

Many hedge-fund managers, as I come to find, report very candidly what lessons they learned, what companies they bought and their investment philosophy to their partners/investors. By doing this they allow people like me to “coattail” on their thinking and experience. This is one big reason why I think the “good side” of the investment industry attracts the type of crowd that always “give” rather than “take”. They share knowledge willingly and in a transparent and no-score-kept manner.

This culture of “giving” and candid reporting extends to many operators in the business world, far outside of the investment circle of the superinvestors and their disciples….

…Jeff Bezos is one of the operators who embraces wholeheartedly this culture.

The below is a collection of business lessons and wisdom from the king of the Amazonians. I have attached here his full letters to shareholders from 1997 to 2016 ( Amazon letters to shareholders ) I hope you would enjoy reading them as much as I did:

  • When forced to choose between optimizing the appearance of our GAAP accounting and maximizing the present value of future cash flows, we’ll take the cash flows. – 1997 letter

 

  • When I interview people I tell them, “You can work long, hard, or smart, but at Amazon.com you can’t choose two out of three” – 1997 letter

 

  • We hold as axiomatic that customers are perceptive and smart, and that brand image follows reality and not the other way around. – 1998 letter

 

  • We consider them (customers) to be loyal to us – right up until the second that someone else offers them a better service. – 1998 letter

 

  • As the famed investor Benjamin Graham said, ‘‘in the short term, the stock market is a voting machine; in the long term, it’s a weighing machine.’’ Clearly there was a lot of voting going on in the boom year of ’99—and much less weighing. We’re a company that wants to be weighed, and over time, we will be—over the long term, all companies are. In the meantime, we have our heads down working to build a heavier and heavier company. – 2000 letter

 

  • Long-term thinking is both a requirement and an outcome of true ownership. Owners are different from tenants. I know of a couple who rented out their house, and the family who moved in nailed their Christmas tree to the hardwood floors instead of using a tree stand. Expedient, I suppose, and admittedly these were particularly bad tenants, but no owner would be so short-sighted. Similarly, many investors are effectively short-term tenants, turning their portfolios so quickly they are really just renting the stocks that they temporarily “own.” – 2003 letter

 

  • But we cannot numerically estimate the effect that consistently lowering prices will have on our business over five years or ten years or more. Our judgment is that relentlessly returning efficiency improvements and scale economies to customers in the form of lower prices creates a virtuous cycle that leads over the long term to a much larger dollar amount of free cash flow, and thereby to a much more valuable Amazon.com. – 2005 letter

 

  • We started by setting ourselves the admittedly audacious goal of improving upon the physical book. We did not choose that goal lightly. Anything that has persisted in roughly the same form and resisted change for 500 years is unlikely to be improved easily. At the beginning of our design process, we identified what we believe is the book’s most important feature. It disappears. When you read a book, you don’t notice the paper and the ink and the glue and the stitching. All of that dissolves, and what remains is the author’s world. – 2007 letter

 

  • Lately, networked tools such as desktop computers, laptops, cell phones and PDAs have changed us too. They’ve shifted us more toward information snacking, and I would argue toward shorter attention spans. I value my BlackBerry—I’m convinced it makes me more productive—but I don’t want to read a three-hundred-page document on it. Nor do I want to read something hundreds of pages long on my desktop computer or my laptop. As I’ve already mentioned in this letter, people do more of what’s convenient and friction-free. If our tools make information snacking easier, we’ll shift more toward information snacking and away from long-form reading. Kindle is purpose-built for long-form reading. We hope Kindle and its successors may gradually and incrementally move us over years into a world with longer spans of attention, providing a counterbalance to the recent proliferation of info-snacking tools. – 2007 letter

 

  • Seek instant gratification – or the elusive promise of it – and chances are you’ll find a crowd there ahead of you. – 2008 letter

 

  • In our retail business, we have strong conviction that customers value low prices, vast selection, and fast, convenient delivery and that these needs will remain stable over time. It is difficult for us to imagine that ten years from now, customers will want higher prices, less selection, or slower delivery. Our belief in the durability of these pillars is what gives us the confidence required to invest in strengthening them – 2008

 

  • Listen to customers, but don’t just listen to customers – also invent on their behalf – 2009 letter

 

  • Service-oriented architecture — or SOA — is the fundamental building abstraction for Amazon technologies. Our e-commerce platform is composed of a federation of hundreds of software services that work in concert to deliver functionality ranging from recommendations to order fulfilment to inventory tracking. For example, to construct a product detail page for a customer visiting Amazon.com, our software calls on between 200 and 300 services to present a highly personalized experience for that customer. – 2010 letter

 

  • To paraphrase Arthur C. Clarke, like any sufficiently advanced technology, it’s indistinguishable from magic. – 2010 letter

 

  • We have unshakeable conviction that the long-term interests of shareowners are perfectly aligned with the interests of customers. – 2010 letter

 

  • Invention comes in many forms and at many scales. The most radical and transformative of inventions are often those that empower others to unleash their creativity – to pursue their – 2011 letter

 

  • I am emphasizing the self-service nature of these platforms because it’s important for a reason I think is somewhat non-obvious: even well-meaning gatekeepers slow innovation. When a platform is self-service, even the improbable ideas can get tried, because there’s no expert gatekeeper ready to say “that will never work!” And guess what – many of those improbable ideas do work, and society is the beneficiary of that diversity. – 2011 letter

 

  • One advantage – perhaps a somewhat subtle one – of a customer-driven focus is that it aids a certain type of proactivity. When we’re at our best, we don’t wait for external pressures. – 2012 letter

 

  • The second program is called Pay to Quit. It was invented by the clever people at Zappos, and the Amazon fulfilment centres have been iterating on it. Pay to Quit is pretty simple. Once a year, we offer to pay our associates to quit. The first year the offer is made, it’s for $2,000. Then it goes up one thousand dollars a year until it reaches $5,000. The headline on the offer is “Please Don’t Take This Offer.” We hope they don’t take the offer; we want them to stay. Why do we make this offer? The goal is to encourage folks to take a moment and think about what they really want. In the long-run, an employee staying somewhere they don’t want to be isn’t healthy for the employee or the company. – 2013 letter

 

  • Failure comes part and parcel with invention. It’s not optional. We understand that and believe in failing early and iterating until we get it right. – 2013 letter

 

  • A dreamy business offering has at least four characteristics. Customers love it, it can grow to very large size, it has strong returns on capital, and it’s durable in time – with the potential to endure for decades. When you find one of these, don’t just swipe right, get married. – 2014 letter

 

  • Enterprises are dependent on IT – it’s mission critical. So, the proposition, “I can save you a significant amount on your annual IT bill and my service is almost as good as what you have now,” won’t get too many customers. What customers really want in this arena is “better and faster,” and if “better and faster” can come with a side dish of cost savings, terrific. But the cost savings is the gravy, not the steak. – 2014 letter

 

  • I believe AWS is one of those dreamy business offerings that can be serving customers and earning financial returns for many years into the future. Why am I optimistic? For one thing, the size of the opportunity is big, ultimately encompassing global spend on servers, networking, datacenters, infrastructure software, databases, data warehouses, and more. Similar to the way I think about Amazon retail, for all practical purposes, I believe AWS is market-size unconstrained. Second, its current leadership position (which is significant) is a strong ongoing advantage. We work hard – very hard – to make AWS as easy to use as possible. Even so, it’s still a necessarily complex set of tools with rich functionality and a non-trivial learning curve. Once you’ve become proficient at building complex systems with AWS, you do not want to have to learn a new set of tools and APIs assuming the set you already understand works for you. This is in no way something we can rest on, but if we continue to serve our customers in a truly outstanding way, they will have a rational preference to stick with us. In addition, also because of our leadership position, we now have thousands of what are effectively AWS ambassadors roaming the world. Software developers changing jobs, moving from one company to another, become our best sales people: “We used AWS where I used to work, and we should consider it here. I think we’d get more done.” It’s a good sign that proficiency with AWS and its services is already something software developers are adding to their resumes. Finally, I’m optimistic that AWS will have strong returns on capital. This is one we as a team examine because AWS is capital intensive. The good news is we like what we see when we do these analyses. Structurally, AWS is far less capital intensive than the mode it’s replacing – do-it-yourself datacenters – which have low utilization rates, almost always below 20%. Pooling of workloads across customers gives AWS much higher utilization rates, and correspondingly higher capital efficiency. Further, once again our leadership position helps: scale economies can provide us a relative advantage on capital efficiency. We’ll continue to watch and shape the business for good returns on capital. – 2014 letter

 

  • There is a connection between these two businesses (Amazon Retail and Amazon Web Services). Under the surface, the two are not so different after all. They share a distinctive organizational culture that cares deeply about and acts with conviction on a small number of principles. I’m talking about customer obsession rather than competitor obsession, eagerness to invent and pioneer, willingness to fail, the patience to think long-term, and the taking of professional pride in operational excellence. Through that lens, AWS and Amazon retail are very similar indeed. – 2015 letter

 

  • One area where I think we are especially distinctive is failure. I believe we are the best place in the world to fail (we have plenty of practice!), and failure and invention are inseparable twins. – 2015 letter

 

  • “Jeff, what does Day 2 look like?” That’s a question I just got at our most recent all-hands meeting. I’ve been reminding people that it’s Day 1 for a couple of decades. I work in an Amazon building named Day 1, and when I moved buildings, I took the name with me. I spend time thinking about this topic. “Day 2 is stasis. Followed by irrelevance. Followed by excruciating, painful decline. Followed by death. And that is why it is always Day 1.” – 2016 letter

 

  • It’s always worth asking, do we own the process or does the process own us? In a Day 2 company, you might find it’s the second. – 2016 letter

 

  • Day 2 companies make high-quality decisions, but they make high-quality decisions slowly. To keep the energy and dynamism of Day 1, you have to somehow make high-quality, high-velocity – 2016 letter

 

  • Second, most decisions should probably be made with somewhere around 70% of the information you wish you had. If you wait for 90%, in most cases, you’re probably being slow – 2016 letter

 

  • As always, I attach a copy of our original 1997 letter. It remains Day 1. – 2016 letter

 

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