by Brad Stone
After three days of exhaustive searching, at two o’clock in the morning, Rachmeler was sitting, spent and dejected, in a private office. Suddenly, the door flew open. A colleague danced in, and Rachmeler briefly wondered if she was dreaming. Then she noticed that the woman was leading a conga line of other workers and that they were jubilantly holding above their heads the missing box of Jigglypuffs.
When the 1999 holiday season ended, employees and executives of Amazon could finally take a breather. Sales were up 95 percent over the previous year, and the company had attracted three million new customers, exceeding twenty million registered accounts. Jeff Bezos was named Time’s Person of the Year, one of the youngest ever, and credited as “the king of cybercommerce.”9 It was an incredible validation for Amazon and its mission.
The company had stumbled and would write off $39 million in unsold toys. Still, thanks to herculean efforts up and down the ranks, there were no obvious disasters or disappointments for customers. Meanwhile, the websites of rivals like Toys “R” Us and Macy’s barely survived their first major holiday season and were plagued by customer complaints, bad press, and even an investigation by the Federal Trade Commission into unfulfilled promises made to shoppers.10
In January, after everyone recovered and many took well-deserved vacations, Amazon held its annual holiday costume party. Warren Jenson, the new chief financial officer, bought a few dozen Barbie dolls on Amazon and sewed them onto a sweater. He darkly joked that he was dressed as excess inventory. Harrison Miller thought it was only kind of funny.
Amazon had battled chaos and lived to fight another day. But it had come closer to the precipice than anyone knew. Its internal accounting was in disarray; rapid growth had led to misplaced and stolen inventory, which made it impossible to close the books on the company’s fourth quarter. Accountant Jason Child was working for Amazon’s German operation at the time but was called back to Seattle to take over as comptroller and tackle the problem. “It was the craziest quarter in Amazon’s history,” he says. The company sought outside help and hired a consultant through Ernst and Young. He came in, took a good look at the bedlam for a few weeks, and quit. Child and his colleagues had barely closed the books when the quarter ended in late January.
Now Amazon’s board had to deal with the leadership crisis. There were complaints about Galli, who was clearly agitating to be CEO, and Bezos, who many employees felt was not taking the time to cultivate other leaders, listen to their issues, or invest in their personal growth. John Doerr quietly phoned many of the company’s senior executives to get their take on the boiling tensions in the management team. To adjudicate the matter, he turned to a Silicon Valley legend, a former Columbia University football coach named Bill Campbell.
An amiable former Apple exec and the chief executive of Intuit in the mid-1990s, Campbell had a reputation for being an astute listener who could parachute into difficult corporate situations and get executives to confront their own shortcomings. Steve Jobs considered him a confidant and got him to join the Apple board when Jobs returned to the helm of that company in 1997. At Amazon, Campbell’s stated mission was to help Galli play nicely with others. He commuted between Silicon Valley and Seattle for a few weeks, sitting quietly in executive meetings and talking privately with Amazon managers about the metastasizing leadership problems.
Several Amazon executives from that time believe that Campbell was also given another, more secret mandate by the board: To see if Bezos should be persuaded to step aside and let Galli take over as chief executive. This was consistent with the overall philosophy in Silicon Valley at the time, which was to bring in “adult supervision” to execute the plans of a visionary founder. Meg Whitman had taken over at eBay; a Motorola executive named Tim Koogle had replaced founder Jerry Yang at Yahoo. The Amazon board saw Amazon’s egregious spending and widening losses and heard from other executives that Bezos was impetuous and controlling. They were naturally worried that the goose who laid the golden egg might be about to crack the egg in half.
Board members, including Cook, Doerr, and Alberg, deny they ever seriously considered asking Bezos to step aside, and in any case, it would have been fruitless if Bezos resisted, since he controlled a majority of the company. But Campbell himself revealingly described his role at Amazon this way in an interview with Forbes magazine in 2011: “Jeff Bezos at Amazon—I visited them early on to see if they needed a CEO and I was like, ‘Why would you ever replace him?’ He’s out of his mind, so brilliant about what he does.”11
Regardless, Campbell concluded Galli was unnaturally focused on issues of compensation and on perks like private planes, and he saw that employees were loyal to Bezos. He sagely recommended to the board members that they stick with their founder.
Galli says that the final decision to leave Amazon was his own. Before he joined the company, he had read the book Odyssey: Pepsi to Apple, by John Sculley, who had joined Apple as CEO in the mid-1980s and then ousted Steve Jobs in a boardroom coup. “Before I went out there, I promised myself and my family that I would never do to Jeff what Sculley did to Steve Jobs,” Galli says. “I just felt like Jeff was falling in love more and more with his vision and what the company could be. I could anticipate it was not going to work. He wanted to have a more hands-on role. I’m just not a great number two. It’s not in my DNA.”
In July of 2000, Galli left Amazon for the top job at a startup called VerticalNet, which perished soon after in the dot-com bust. Within a few months, he moved over to Newell Rubbermaid, a troubled consumer-goods company, where he managed four turbulent years of layoffs and declining stock prices. He later became CEO of the Asian manufacturer Techtronic Industries, which makes the Dirt Devil and Hoover vacuums. He has since presided over six years of growth.
After Galli left Amazon, the board tried to pair Bezos with another chief operating officer. Peter Neupert, the former Microsoft executive who ran Drugstore.com, sat in on S Team meetings for a few months. But Neupert and Bezos couldn’t agree on a way to collaborate permanently, and Bezos was coming to recognize that he enjoyed being needed by colleagues and engaged in the details and that he wanted to be an active chief executive. “He decided to spend the next umpteen years of his life building the company, as opposed to gradually withdrawing to pursue other interests,” says Tom Alberg.
The Galli experiment and all of the misadventures from that year would leave permanent scars on Amazon. As of this writing, the company has not given another executive the formal title of president or chief operating officer. Amazon wouldn’t make another significant acquisition for years, and when it did, Bezos carefully considered the lessons from his reckless binge.
As a new millennium dawned, Amazon stood on the precipice. It was on track to lose more than a billion dollars in 2000, just as the sunny optimism over the dot-com economy morphed into dark pessimism. As he had been doing over and over since the company’s very first days, Bezos would have to persuade everyone that Amazon could survive the cyclone of debt and losses that it had created for itself during a singularly feverish time.
CHAPTER 4
Milliravi
The turmoil in Amazon’s management during the company’s frenzied years of expansion was only the start of a much longer test of faith. In 2000 and 2001, the years commonly thought of as the dot-com bust, investors, the general public, and many of his employees fell out of love with Bezos. Most observers not only dismissed the company’s prospects but also began to doubt its chances of survival. Amazon stock, which since its IPO had moved primarily in one direction—up—topped out at $107 and would head steadily down over the next twenty-one months. It was a stunning fall from grace.
There were several immediate reasons for the stock market’s reversal. The excesses of the dot-com boom had begun to wear on investors. Companies without actual business models were raising hundreds of millions of dollars, rushing to go public, and seeing their stock prices roar into the stratosphere despite unsound financial footing. In March o
f 2000, a critical cover story in Barron’s pointed out the self-destructive rate at which Web companies like Amazon were burning through their venture capital. The dot-com boom had been built largely on faith that the market would give these young, unprofitable companies plenty of room to mature; the Barron’s story reinforced fears that a day of reckoning was coming. The NASDAQ peaked on March 10, then wobbled and began to spiral downward.
The outbreak of negative sentiment toward Internet companies in general would be nudged along by other events over the course of the next two years, like the collapse of Enron and the 9/11 terrorist attacks. But the underlying reality was that many investors decided to doff their rose-colored glasses and look at Internet companies more pragmatically. And those companies included Amazon.
While other dot-coms merged or perished, Amazon survived through a combination of conviction, improvisation, and luck. Early in 2000, Warren Jenson, the fiscally conservative new chief financial officer from Delta and, before that, the NBC division of General Electric, decided that the company needed a stronger cash position as a hedge against the possibility that nervous suppliers might ask to be paid more quickly for the products Amazon sold. Ruth Porat, co-head of Morgan Stanley’s global-technology group, advised him to tap into the European market, and so in February, Amazon sold $672 million in convertible bonds to overseas investors. This time, with the stock market fluctuating and the global economy tipping into recession, the process wasn’t as easy as the previous fund-raising had been. Amazon was forced to offer a far more generous 6.9 percent interest rate and flexible conversion terms—another sign that times were changing. The deal was completed just a month before the crash of the stock market, after which it became exceedingly difficult for any company to raise money. Without that cushion, Amazon would almost certainly have faced the prospect of insolvency over the next year.
At the same time, rising investor skepticism and the pleadings of nervous senior executives finally convinced Bezos to shift gears. Instead of Get Big Fast, the company adopted a new operating mantra: Get Our House in Order. The watchwords were discipline, efficiency, and eliminating waste. The company had exploded from 1,500 employees in 1998 to 7,600 at the beginning of 2000, and now, even Bezos agreed, it needed to take a breath. The rollout of new product categories slowed, and Amazon shifted its infrastructure to technology based on the free operating system Linux. It also began a concerted effort to improve efficiency in its far-flung distribution centers. “The company got creative because it had to,” says Warren Jenson.
Yet the dot-com collapse took a heavy toll inside the company. Employees had agreed to work tirelessly and sacrifice holidays with their families in exchange for the possibility of fantastic wealth. The cratering stock price cleaved the company in two. Employees who had joined early were still fabulously rich (though they were also exhausted). Many who had joined more recently held stock options that were now worthless.
Even top managers grew disillusioned. Three senior executives recall meeting privately in a conference room that year to write a list of all of Bezos’s successes and failures on a whiteboard. The latter column included Auctions, zShops, the investments in other dot-coms, and most of Amazon’s acquisitions. It was far longer than the first column, which at that time appeared to be limited to books, music, and DVDs. The future of the new toys, tools, and electronics categories was still in question.
But through it all, Bezos never showed anxiety or appeared to worry about the wild swings in public sentiment. “We were all running around the halls with our hair on fire thinking, What are we going to do?” says Mark Britto, a senior vice president. But not Jeff. “I have never seen anyone so calm in the eye of a storm. Ice water runs through his veins,” Britto says.
In the span of the next two turbulent years, Bezos redefined Amazon for the rapidly changing times. During this period, he met with two retailing legends who would focus his attention on the power of everyday low prices. He would start to think differently about conventional advertising and look for a way to mitigate the costs and inconveniences of shipping products through the mail. He would also show what was becoming a characteristic volatility, lashing out at executives who failed to meet his improbably high standards. The Amazon we know today, with all of its attributes and idiosyncrasies, is in many ways a product of the obstacles Bezos and Amazon navigated during the dot-com crash, a response to the widespread lack of faith in the company and its leadership.
In the midst of all this, Bezos burned out many of his top executives and saw a dramatic exodus from the company. But Amazon escaped the downdraft that sucked hundreds of other similarly overcapitalized dot-coms and telecoms to their deaths. He proved a lot of people wrong.
“Up until that point, I had seen Jeff only at one speed, the go-go speed of grow at all costs. I had not seen him drive toward profitability and efficiency,” says Scott Cook, the Intuit founder and an Amazon board member during that time. “Most execs, particularly first-time CEOs who get good at one thing, can only dance what they know how to dance.
“Frankly, I didn’t think he could do it.”
In June of 2000, with Amazon’s stock price headed downward along with the rest of the NASDAQ, Bezos first heard the name Ravi Suria. A native of Madras, India, and the son of a schoolteacher, Suria came to the United States to attend the University of Toledo and earned an MBA from the school of business at Tulane University. At the start of 2000, he was a new and unknown twenty-eight-year-old convertible-bond analyst at the investment bank Lehman Brothers, working in a small office on the fourteenth floor of the World Financial Center.1 By the end of that year, he was one of the most frequently mentioned analysts on Wall Street and the unlikely nemesis of Jeff Bezos and Amazon.
For the first five years of his career, at Paine Webber and then at Lehman, Suria wrote about esoteric subjects like the overcapitalization of telecommunications companies and biotechnology firms. After raising its third high-profile round of debt and losing Joe Galli, its chief operating officer, Amazon demanded Suria’s attention. Working from Amazon’s latest quarterly earnings release, Suria analyzed the heavy losses of the previous holiday season and concluded that the company was in trouble, and in a widely disseminated research report, he predicted doom.
“From a bond perspective, we find the credit extremely weak and deteriorating,” he wrote in what would be the first of several scathing reports on Amazon over the next eight months. Suria said that investors should avoid Amazon debt at all costs and that the company had shown an “exceedingly high degree of ineptitude” in areas like distribution. The haymaker was this: “We believe that the company will run out of cash within the next four quarters, unless it manages to pull another financing rabbit out of its rather magical hat.”
The prediction generated sensational headlines around the world (New York Post: “Analyst Finally Tells the Truth about Dot-Coms”2). Already freaked by the market’s initial decline, investors dropped Amazon, and its stock fell by another 20 percent.
Inside Amazon, Suria’s report hit a nerve. Bill Curry, Amazon’s chief publicist at the time, called the report “hogwash.” Bezos expanded on that assessment when he spoke to the Washington Post, saying that it was “pure unadulterated hogwash.”3
Suria’s analysis was, in the narrowest sense and with the benefit of hindsight, incorrect. With the additional capital from the bond raise in Europe, Amazon had nearly a billion dollars in cash and securities, enough to cover all of its outstanding accounts with suppliers. Moreover, the company’s negative-working-capital model would continue to generate cash from sales to fund its operations. Amazon was also well along in the process of cutting costs.
The real danger for Amazon was that the Lehman report might turn into a self-fulfilling prophecy. If Suria’s predictions spooked suppliers into going on the equivalent of a bank run and demanding immediate payment from Amazon for their products, Amazon’s expenses might rise. If Suria frightened customers and they turned away from Amazon
because they believed, from the ubiquitous news coverage, that the Internet was only a fad, Amazon’s revenue growth could go down. Then it really could be in trouble. In other words, the danger for Amazon was that in their wrongness, Suria and other Wall Street bears might prove themselves right. “The most anxiety-inducing thing about it was that the risk was a function of the perception and not the reality,” says Russ Grandinetti, Amazon’s treasurer at the time.
Which is why Amazon’s damage-control response was unusually emphatic. In early summer, Jenson and Grandinetti crisscrossed the United States and Europe, meeting with big suppliers and giving presentations on the financial health of the company. “Even the facts were guilty until proven innocent for a short period of time,” Grandinetti says.
In one trip, Grandinetti and Jenson flew to Nashville to reassure the board of Ingram that Amazon was on sound financial footing. “Look, we believe in you guys. We like what you’re doing,” John Ingram, its president, told the Amazon executives while his mother, Martha Ingram, the company’s chairman, looked on. “But if you go down, we go down. If we’re wrong about you, it’s not ‘oh, shucks.’ We have such a concentration of our receivables from Amazon that we will be in trouble too.”
With Amazon’s reputation and brand getting battered in the media, Bezos began a charm offensive. Suddenly, he was everywhere—on CNBC, in interviews with print journalists, talking to investors—asserting that Suria was incorrect and that Amazon’s fundamentals were fine. At the time, I was the Silicon Valley reporter for Newsweek magazine, and I spoke to both Bezos and Jenson that summer. “The biggest message here is, his cash flow prediction is wrong. It’s just completely wrong,” Bezos told me in the first of our dozen or so conversations over the next decade.
