Takeaways from Amazon's 1997 Letter to Shareholders
Takeaways from Amazon's 1997 Letter to Shareholders
The company has grown tremendously since its official "Day 1" thirty years ago, but many of the principles in its letter to shareholders are still worth revisiting.
A shareholder letter is annually written by a firm’s CEO or top executives, in order to update shareholders on the firm’s visions, goals, operations, and progress during that year.1
For Amazon, which was founded 30 years ago in July 1994, the first of these letters was written by founder Jeffrey Bezos in 1997, the year in which the company went public on the Nasdaq.2
Some of the key takeaways from the letter, as well as their relation to present-day trends, are highlighted as follows:
Cultivating market leadership through customer obsession and a Day 1 mindset, even in the face of competition
Customer value
In 1997, Amazon’s primary business was still as an online bookseller. Bezos highlighted how Amazon was able to bring customers value through:
more variety than what is possible in physical stores, through an inventory that had risen to 200,000 titles at the end of the year
ease of use, through search functionality
access, through an online store open 24/7 for the entire year
new features, such as gift cards, 1-click shopping, reviews, recommendation features, etc.
price reduction
The power of customer trust for market leadership
As further evidence of how Amazon prioritizes customer satisfaction and trust, Bezos also asserted that “word of mouth remains the most powerful customer acquisition tool we have,” and “repeat purchases and word of mouth have combined to make Amazon.com the market leader in online bookselling.”
Indeed, in 1997, the company’s sales grew by 838%, from $15.7 million in 1996 to $147.8 million, and cumulative customer customer accounts grew by 738% from 180,000 to 1,510,000.
Beyond these immediate statistics, however, the letter emphasized that such metrics - especially customer and revenue growth, the degree to which customers purchase on a repeat basis, and brand strength - are important for cultivating market leadership. Market leadership can then further reinforce higher revenue, profitability, capital velocity, and stronger returns on invested capital.
Day 1 for Amazon and the Internet
That being said, Bezos acknowledged both the potential and challenges of the growing online commerce market. Seeing “substantial opportunity,” he noted that it is still Day 1 - a common term at Amazon used to describe the curiosity, nimbleness, and experimentation at young companies - for both Amazon and the Internet.3 While the space in 1995 had been characterized by saving customers time and money, in the future, it would also include personalization that accelerates the “very process of discovery.”
Competition
While this customer-centric approach takes precedence, given the rapid evolution of the competitive landscape, he also recognized the potential threat of “established franchise leaders” and the resulting need for investment and execution to compete.
Looking towards the long term: balancing growth with cost-consciousness, and expansion with prioritization
On cost-consciousness and scale
Bezos acknowledged that as a young company, Amazon was a “business incurring net losses,” requiring a “cost-conscious” and “lean” culture. Nevertheless, he asserted that the company would “prioritize growth” - as “scale is central to achieving the potential of our business model.” For example, that year, the company grew its employee base from 158 to 614 and distribution center capacity from 50,000 to 285,000 square feet.
On solidifying existing products and expanding to new offerings
Furthermore, with a more long-term perspective, Bezos articulated Amazon’s goal to “move quickly to solidify and extend our current position while we begin to pursue the online commerce opportunities in other areas.” Specifically, this included adding new product offerings - such as music - as well as improving current offerings, such as reducing delivery times and tailoring customer experiences for overseas customers.
On bold investments and prioritization
Bezos also declared that the company would err on the side of boldness over timidity when investing in opportunities with significant probability of gaining market leadership. That being said, he admitted that while some will pay off, others will be not - however, they will not be failures, but rather learning lessons, implying that they are still worthwhile and justified. On a more practical note, he recognized that need to “measure our programs and the effectiveness of our investments” and ultimately increase or abandon investments in each product accordingly. Succinctly put, the challenge for Amazon would be not in expansion, but rather in prioritization.
High standards, sense of impact, and financial ownership for employees
High standards and sense of impact
Even beyond product and business strategy decisions, Bezos claimed that “the single most important element of Amazon.com's success” would be a high bar for hiring. Specifically, he would directly tell interviewees that “You can work long, hard, or smart, but at Amazon.com you can't choose two out of three.” However, Bezos equally drew attention to the underlying value of such efforts to build “something important” that “we can all tell our grandchildren about,” and “such things aren’t meant to be easy.”
Financial ownership
This focus on employees working towards products and a purpose of importance to customers - and the company as a whole - also translated to compensation at the company. Bezos stated that he would weight “compensation to stock options rather than cash,” based on the notion that in order to attract and retain motivated employees, employees must “think like, and therefore must actually be, an owner.”
Transparent communication to shareholders
In light of the above substantive points, Bezos’ sense of conviction and transparency with his shareholders - who are reading the letter and may want to “confirm that [Amazon’s approach] is consistent with [their] investment philosophy” - is equally remarkable.
Bezos unequivocally conveyed his commitment to “long-term market leadership” as opposed to “short-term profitability considerations or short-term Wall Street reactions.” In doing so, he implicitly acknowledged that some company decisions may seem unreasonable or risky to investors in the short term, but reassured them that such decisions would not be alarming, as they would be for the sake of the long term.
Along the way, he promised a sense of inclusion - that Amazon “will share our strategic thought processes with you when we make bold choices (to the extent competitive pressures allow), so that you may evaluate for yourselves whether we are making rational long-term leadership investments.”
Simultaneously, he was humble in acknowledging that the above may not be “the ‘right’ investment philosophy, but it's ours,” and that was clearly reason enough for him to stand by it.
Present-day trends
Since 1997, the company has significantly expanded, undergone leadership changes - notably with Andy Jassy starting as president and CEO in 2021, and faced a variety of challenges and successes. Nevertheless, many of the letter’s principles continue to resonate with the company at large, provide an overarching framework through which to contextualize its new initiatives and terminology, and are echoed by a variety of industry leaders.
For example:
Day 1 mindset
Leadership Principles4
e.g. Customer Obsession, Ownership
Company description
“Amazon is guided by four principles: customer obsession rather than competitor focus, passion for invention, commitment to operational excellence, and long-term thinking. Amazon strives to be Earth’s most customer-centric company, Earth’s best employer, and Earth’s safest place to work.”5
Industry-wide trends in Agile development and Lean methodologies for customer research and iterative innovation
The Lean Startup by Eric Ries (2011), which combines “lean manufacturing, design thinking, customer development, and agile development” and “represents a new approach to creating continuous innovation”
Products and investments
Continued stronghold in e-commerce
Amazon contributing to 37.6% of e-commerce sales, the highest market share of all e-commerce companies6
Broader range of offerings
Amazon Store, Devices and Services, Amazon Web Services, Delivery and Logistics, and Entertainment7
Prioritization
Allocation of financial and human resources calibrated based on industry trends and company results
Market Leadership
AWS having 31% market share in the cloud infrastructure market in 20248
Capitalizing on the “flywheel effect” - small wins creating momentum that lead to more wins9
Amazon Prime Day 2024 generating record-breaking sales, partly from Amazon’s own consumer products
“Members also took advantage of incredible savings on Amazon devices, subscriptions for Amazon Music Unlimited, Kindle Unlimited, Audible, and Amazon Fresh and Whole Foods Market grocery delivery, plus food delivery from Grubhub+”10
High impact and ownership for employees
Importance of Employee Ownership in Driving Results
Highlighted in the context of startups, in Peter Thiel’s Zero to One: Notes on Startups (2014), a #1 Best Seller and #1 Best Seller in Economic Policy and Development on Amazon.com11
“Equity is the one form of compensation that can effectively orient people toward creating value in the future.”
“Equity can’t create perfect incentives, but it’s the best way for a founder to keep everyone in the company broadly aligned.”
Embracing missions that are “something important,” that “we can all tell our grandchildren about,” that are “not meant to be easy”
Continued communication with stakeholders
The 1997 shareholder letter remains included in each subsequent annual letter, as a reminder of the company’s original values and mission.14
An example of how companies can remain connected with strategic thinking
In his popular Harvard Business Review article “What is Strategy,” Michael E. Porter gave the following advice as to how companies can “reconnect with strategy”:15
“A company’s history can also be instructive. What was the vision of the founder? What were the products and customers that made the company? Looking backward, one can reexamine the original strategy to see if it is still valid. Can the historical positioning be implemented in a modern way, one consistent with today’s technologies and practices? This sort of thinking may lead to a commitment to renew the strategy and may challenge the organization to recover its distinctiveness. Such a challenge can be galvanizing and can instill the confidence to make the needed trade-offs.”
Thus, as one of the world’s largest companies celebrates its 30 year anniversary, it is more important than ever before to revisit and reflect upon its journey. Ultimately, it will be up to existing and aspirational leaders and employees to not only be inspired, but actively consider how to incorporate or adapt these original principles for their upcoming pursuits.
Thiel, P., & Masters, B. 1. (2014). Zero to one: notes on startups, or how to build the future. Unabridged.