2015 Letter to Shareholders

This year, Amazon became the fastest company ever to reach $100 billion in annual sales.¹ (Fact note 1)Fact · 1Known at the timeAmazon’s 2015 annual report shows total net sales of $107,006 million for 2015, of which AWS was $7,880 million, up 70%. The memo claims Amazon was the fastest company ever to reach $100 billion. We have not found an independent source for that comparison.SourcesAmazon investor relations2015 Annual Report2016Amazon investor relations2015 Letter to ShareholdersApr 2016 Also this year, Amazon Web Services is reaching $10 billion in annual sales … doing so at a pace even faster than Amazon achieved that milestone.

[ … ] Not shown: Two dissimilar businesses grown under one roof, and luck.

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.

[ … ] Not shown: Why corporate cultures are stable: people self-select.

The world, thankfully, is full of many high-performing, highly distinctive corporate cultures. We never claim that our approach is the right one – just that it’s ours² (Editorial note 2)Editorial · 2Known at the timeThe line restates the 1997 letter, which this letter reprints and which declined to call its investment philosophy the right one, “but it’s ours”. In 1997 it filtered shareholders; here it filters people. Saying a culture fits some and not others makes the culture easier to defend, and harder to criticise from inside.SourceAmazon investor relations2015 Letter to ShareholdersApr 2016 – and over the last two decades, we’ve collected a large group of like-minded people. Folks who find our approach energizing and meaningful.

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!)³ (Fact note 3)Fact · 3With hindsightThe failures this letter names, Auctions and zShops, came before Marketplace launched “over 15 years ago”. Bezos named another three years later. His 2018 letter says: “While the Fire phone was a failure, we were able to take our learnings (as well as the developers) and accelerate our efforts building Echo and Alexa.” It adds that Amazon should expect to “occasionally have multibillion-dollar failures”.SourcesAmazon investor relations2015 Letter to ShareholdersApr 2016Amazon investor relations2018 Letter to Shareholders2019, and failure and invention are inseparable twins. To invent you have to experiment, and if you know in advance that it’s going to work, it’s not an experiment. Most large organizations embrace the idea of invention, but are not willing to suffer the string of failed experiments necessary to get there. Outsized returns often come from betting against conventional wisdom, and conventional wisdom is usually right. Given a ten percent chance of a 100 times payoff, you should take that bet every time.⁴ (Editorial note 4)Editorial · 4Known at the timeThis puts a number on the 1997 promise that “Some of these investments will pay off, others will not”. The arithmetic is sound only if the firm can carry nine losses in a row and the bets are independent. A company with $107,006 million of annual sales can; a start-up often cannot. The rule is advice for the large company the letter describes, not a general one.SourcesAmazon investor relations2015 Letter to ShareholdersApr 2016Amazon investor relations2015 Annual Report2016 But you’re still going to be wrong nine times out of ten.

[ … ] Not shown: Baseball versus business: a long-tailed distribution of returns.

AWS, Marketplace and Prime are all examples of bold bets at Amazon that worked, and we’re fortunate to have those three big pillars.

[ … ] Not shown: What only large companies can build.

Used well, our scale enables us to build services for customers that we could otherwise never even contemplate. But also, if we’re not vigilant and thoughtful, size could slow us down and diminish our inventiveness.

[ … ] Not shown: Highlights from Prime, Prime Now, Prime Video and Prime Day.

We took two big swings and missed – with Auctions and zShops – before we launched Marketplace over 15 years ago. We learned from our failures and stayed stubborn on the vision, and today close to 50% of units sold on Amazon are sold by third-party sellers.⁵ (Fact note 5)Fact · 5With hindsightBezos’ 2018 letter gives the third-party share of physical gross merchandise sales as 51% in 2015 and 58% in 2018: “Third-party sellers are kicking our first party butt. Badly.” That is a share of sales value, not of units, so it does not test this sentence directly.SourceAmazon investor relations2018 Letter to Shareholders2019

[ … ] Not shown: Seller programmes, lending, cross-border selling, India and AWS growth.

Many characterized AWS as a bold – and unusual – bet when we started. “What does this have to do with selling books?” We could have stuck to the knitting. I’m glad we didn’t. Or did we? Maybe the knitting has as much to do with our approach as the arena.⁶ (Editorial note 6)Editorial · 6Known at the timeThis is the letter’s core argument. It redefines Amazon’s core competence as a way of working rather than a market, which licenses entry into any arena where that way of working applies. The trade-off is that the claim cannot be falsified in advance: any new business can be called the knitting.

[ … ] Not shown: AWS teams, customers, pricing and cloud adoption.

Invention Machine

We want to be a large company that’s also an invention machine.

[ … ] Not shown: Combining scale with start-up speed; traps for large organisations.

One common pitfall for large organizations – one that hurts speed and inventiveness – is “one-size-fits-all” decision making.

Some decisions are consequential and irreversible or nearly irreversible – one-way doors – and these decisions must be made methodically, carefully, slowly, with great deliberation and consultation. If you walk through and don’t like what you see on the other side, you can’t get back to where you were before. We can call these Type 1 decisions. But most decisions aren’t like that – they are changeable, reversible – they’re two-way doors. If you’ve made a suboptimal Type 2 decision, you don’t have to live with the consequences for that long. You can reopen the door and go back through. Type 2 decisions can and should be made quickly by high judgment individuals or small groups.⁷ (Fact note 7)Fact · 7With hindsightBezos returned to the rule a year later. His 2016 letter says “never use a one-size-fits-all decision-making process” and “I wrote about this in more detail in last year’s letter”, then adds that most decisions should be made with “somewhere around 70% of the information you wish you had”, and the phrase “disagree and commit”. Neither letter reports a measure of decision speed.SourceAmazon investor relations2016 Letter to Shareholders2017

As organizations get larger, there seems to be a tendency to use the heavy-weight Type 1 decision-making process on most decisions, including many Type 2 decisions. The end result of this is slowness, unthoughtful risk aversion, failure to experiment sufficiently, and consequently diminished invention.

[ … ] Not shown: One sentence omitted; the footnote to this passage follows.

The opposite situation is less interesting and there is undoubtedly some survivorship bias.⁸ (Editorial note 8)Editorial · 8Known at the timeIn a footnote, Bezos concedes the evidence is biased: companies that make the opposite error die before anyone studies them. The letter also gives no test for telling the two doors apart, or for who decides which kind a decision is. That classification is where the rule succeeds or fails.SourceAmazon investor relations2015 Letter to ShareholdersApr 2016 Any companies that habitually use the light-weight Type 2 decision-making process to make Type 1 decisions go extinct before they get large.

[ … ] Not shown: Avoiding other large-organisation maladies; growth to over 230,000 staff.

Two years ago we set a long-term goal to use 100% renewable energy across our global AWS infrastructure.⁹ (Fact note 9)Fact · 9With hindsightAmazon’s 2023 sustainability report says “the electricity AWS uses is matched with 100% renewable energy—a goal that Amazon, including AWS, achieved in 2023.” The goal here was to use renewable energy; the report measures matching.SourceAmazon2023 Amazon Sustainability Report2024

[ … ] Not shown: Wind and solar farms; packaging; employee programmes; thanks.

As always, I attach a copy of our original 1997 letter. Our approach remains the same, and it’s still Day 1.