There’s an independent bookstore about five blocks from my apartment, and I often walk there to buy books. The staff recommendations are always interesting, and it’s fun to browse the store’s carefully selected inventory. There are readings and book clubs on most nights of the week, which makes this bookstore the physical hub of a literary scene. But my walks are often bookended, so to speak, by visits to Amazon.com. I check in before the visit to search Amazon’s vast catalog, to make sure I know how to spell the author’s name and what the book’s cover looks like. And if I’m looking for an older book, the local store often can’t even get it from their warehouses, so I go back to Amazon to order it for myself. It’s almost always five or ten dollars cheaper on Amazon anyway. No one beats Amazon on price or selection. This is by design.
Amazon began with books, but it’s much more than a bookstore. It’s the massively dominant internet shopping website, with a catalog of consumer goods that’s definitive in many categories and rapidly growing in most others, from fine art to industrial and scientific supplies. Amazon’s Kindle is the main platform for e-books, and Amazon competes with Apple and Netflix to sell music, television, and movies over the Internet. The average user may not realize that Amazon also found a significant revenue stream by coming up with an ingenious way to sell server time in its data centers to other companies. Pinterest, Netflix, and Spotify use Amazon’s data centers to help run their highly-trafficked websites, and countless small technology start-ups find it simpler and cheaper to rent server space from Amazon than to buy and maintain their own hardware. Amazon is also researching robotics, both to further automate its warehouses and to try to replace delivery trucks with automatic helicopters.
The story of how this powerful company grew out of a scrappy online bookstore is not a simple one, but it’s well told in business journalist Brad Stone’s new book, The Everything Store: Jeff Bezos and the Age of Amazon. Stone draws a wealth of detail from interviews with hundreds of Amazon employees and industry observers. Some of the very minor details have been disputed by eyewitnesses, via reviews on the book’s Amazon page, but this is what you might expect from recollections of heady times two decades past. If there’s a weakness in the book, it’s Stone’s occasionally intrusive interest in the personal life of Amazon’s founder and CEO, Jeff Bezos: specifically, in the circumstances of his adoption. Knowing the identity of Bezos’s birth father doesn’t shed any light on the company Bezos built. Overall, Stone is less than worshipful, faulting Bezos for extreme frugality, for a tendency to micromanage, and for having a bit of a temper. Even so, anecdote after anecdote portrays Bezos as a man of uncommon intelligence and clarity of thought.
Bezos began with an intuition of the power of online commerce—a store whose checkout counters are everywhere and whose exits are nowhere—and moved from New York City to Seattle to start his company, which first put up its website in 1995. But once the technical framework for online shopping was in place, Bezos and his team still had to learn how to run a modern retail operation. Amazon’s early years were frenetic, full of expensive improvised solutions to daunting logistical problems. During the 1999 holiday season, Amazon acquired hard-to-find Pokémon toys by making large orders from Toys “R” Us’s online store. Toys “R” Us didn’t realize that the orders were coming from a competitor in time to put a stop to them. These improvisations were mostly invisible to customers, but they were not a sustainable way to run a business.
Bezos studied major retail chains in order to understand what kind of distribution operation he would need to build. The modern master of retail is Wal-Mart, even today a much larger and more profitable company than Amazon. The Wal-Mart strategy, which is described repeatedly in The Everything Store, starts with the lowest prices possible. Low prices, rather than advertising, design, or prestige, attract customers. More customers make more purchases, so the store places larger orders with suppliers. Larger orders give the store bargaining power with their suppliers, and they can demand lower prices. Bringing things back around to the beginning of the cycle, the store uses its lower wholesale costs to once again lower prices for customers. There are other retail strategies: Apple, for example, became a fantastically profitable company by using sophisticated product design and cultural prestige to attract customers. But most big-box stores build ambitiously, keep prices low, and wait patiently for new lines of revenue to grow to the point of profitability.
The low-margin approach has its fervent defenders. They argue that it’s unquestionably good for customers, who get their purchases more cheaply and more quickly than ever before. The best example of Amazon’s success with this method is “Amazon Prime,” a program that, for an annual subscription fee, offers two-day shipping on purchases, plus streaming television, free e-books, and other perks. Initially, many Amazon executives thought Prime was a terrible, money-losing proposition, but Bezos insisted on the experiment (“almost alone,” Stone reports). It turned out to be a major success: customers enjoyed having things show up on their doorstep only a day or two after they’d clicked “Buy” and ended up making larger orders across multiple categories. For the customer, the process is so smooth that it sometimes feels like something out of science fiction.
Behind the scenes, though, things aren’t always so smooth. Stone draws back a curtain on the tough low-wage work done by the employees in the warehouses, the aggressive negotiations with suppliers, and the Machiavellian tactics brought to bear in buying smaller companies. One of the most interesting sections of the book has to do with a company called Quidsi, a startup whose site Diapers.com had outpaced Amazon and Wal-Mart in baby-care products. Both Wal-Mart and Amazon wanted to acquire the company. At one point, Amazon wrong-footed the Quidsi founders by meeting with them at Amazon headquarters—and then announcing a program called “Amazon Moms” while Quidsi’s top team was sequestered in Amazon’s conference rooms. That incident alone didn’t win the battle for Amazon, but Stone quotes one anonymous source as saying that Amazon had “an absolute willingness to torch the landscape around them to emerge the winner.” Perhaps someone could run a large low-margin business without these rough tendencies, but they seem to be part of Amazon’s nature.
So how does low-margin retail affect us customers? Here, a big part of the magic comes from algorithmic analysis of customer behavior. Amazon records every click and analyzes every purchase. If someone viewed this, are they likely to buy that? It was back in the bookstore days that Amazon’s executives compared the effectiveness of written advertisements with recommendation algorithms and found that their computers could do a better job pointing customers to interesting items than their copywriters could. So they fired or reassigned the copywriters and let the algorithms take over. Amazon’s recommendations are very useful when I’m browsing by topic or category. The price of this usefulness, however, is that my interests and curiosities go into a database, probably forever. Amazon has a level of surveillance that most of us would find incredibly creepy in a physical store: imagine a robot following you from aisle to aisle at the grocery store, noting everything you look at or touch. But that’s what it takes for a computer to give good recommendations.
My local bookstore, on the other hand, knows almost nothing about me. The people there can’t anticipate my particular interests and whims. When I ask them to order a book for me, I see the wrinkles in the system. The clerk doesn’t know the author, so I spell the name out. The clerk can’t find it with one supplier, so she has to check with another. We don’t always find what I want, and when we do find it, I have to pay more than Amazon would charge me. It’s simply not as efficient.
So why do I make such a point of going there? First, Amazon feels like magic, but it’s not. There are low-wage workers in the warehouses, frustrated suppliers, remote data centers sucking down huge amounts of power, and plenty of other extremely well-hidden costs. Second, the local store is embedded in the community in a way that Amazon can never be, and it’s good to have a place to gather. Such a place reflects the tastes and interests of my neighbors, so I’ll see books that Amazon’s algorithms would never present to me. The Amazon experience is tuned to my interests, but the store is tuned to a larger culture that I care about. I think of the extra cost of a book as a tax that supports this culture. Some things are worth paying for.