2018 Letter to Shareholders

Something strange and remarkable has happened over the last 20 years. Take a look at these numbers:

[ … ] Not shown: A table of yearly percentages, 1999 to 2018.

The percentages represent the share of physical gross merchandise sales sold on Amazon by independent third-party sellers – mostly small- and medium-sized businesses – as opposed to Amazon retail’s own first party sales. Third-party sales have grown from 3% of the total to 58%.¹ (Fact note 1)Fact · 1With hindsightThe letter claims third-party sellers reached 58% of physical gross merchandise sales in 2018, up from 3% in 1999. We have not found an independent source for the figure, which is Amazon’s own. Later letters use other bases. Bezos’ 2020 letter says small and medium-sized businesses “make up close to 60% of our retail sales”; Andy Jassy’s 2022 letter says third-party sellers account “for 60% of our unit sales”.SourcesAmazon2018 Letter to Shareholders11 Apr 2019Amazon investor relations2020 Annual Report2021Amazon investor relations2022 Annual Report2023 To put it bluntly:

Third-party sellers are kicking our first party butt. Badly.

[ … ] Not shown: First-party and third-party growth rates, an eBay comparison, seller tools.

But of great importance are Fulfillment by Amazon and the Prime membership program. In combination, these two programs meaningfully improved the customer experience of buying from independent sellers.² (Fact note 2)Fact · 2With hindsightIn September 2023 the FTC and 17 state attorneys general sued Amazon. Among other things they allege Amazon conditions sellers’ ability to obtain Prime eligibility on their use of its “costly fulfillment service”. The letter presents the same link between Fulfillment by Amazon and Prime as a benefit to sellers; Jassy’s 2023 letter says FBA is “typically about 70% less expensive” than sellers doing it themselves. The suit makes allegations; these sources do not show its outcome.SourcesFederal Trade Commission (Internet Archive copy)FTC Sues Amazon for Illegally Maintaining Monopoly Power26 Sep 2023Amazon investor relations2023 Annual Report2024

[ … ] Not shown: The financial risk and internal debate behind both programmes.

Intuition, curiosity, and the power of wandering

[ … ] Not shown: A culture of builders; efficiency versus guided wandering.

Wandering is an essential counter-balance to efficiency.³ (Editorial note 3)Editorial · 3Known at the timeThis is the letter’s argument in one line: a large company should fund work that cannot be planned, alongside work that can. Bezos names the two modes and says both are needed, but gives no rule for how much to spend on wandering or when to stop. The failures he names, the Fire phone and the early machine-learning tools, are each told as steps towards a later success, Echo and SageMaker, so the letter never shows a bet that simply lost. You need to employ both. The outsized discoveries – the “non-linear” ones – are highly likely to require wandering.

[ … ] Not shown: Listening to AWS customers, and inventing on their behalf.

AWS itself – as a whole – is an example. No one asked for AWS. No one. Turns out the world was in fact ready and hungry for an offering like AWS but didn’t know it. We had a hunch, followed our curiosity, took the necessary financial risks, and began building – reworking, experimenting, and iterating countless times as we proceeded.

[ … ] Not shown: DynamoDB, Aurora, specialised databases and SageMaker.

And customers are responding to our customer-centric wandering and listening – AWS is now a $30 billion annual run rate business and growing fast.⁴ (Fact note 4)Fact · 4With hindsightAWS kept growing. Amazon’s 2021 annual report gives AWS net sales of $35,026 million in 2019 and $62,202 million in 2021. Jassy’s 2023 letter says AWS revenue grew 13% “from $80B to $91B” that year, after growth of 37% in 2021.SourcesAmazon investor relations2021 Annual Report2022Amazon investor relations2023 Annual Report2024

Imagining the impossible

Amazon today remains a small player in global retail.⁵ (Editorial note 5)Editorial · 5With hindsightMeasured against all retail, online and offline, Amazon is small, and the letter chooses that frame. Regulators later chose a narrower one: the FTC’s 2023 complaint alleges monopoly power in “the online superstore market that serves shoppers and the market for online marketplace services purchased by sellers”. Which market counts is the argument, and the letter takes a side early.SourceFederal Trade Commission (Internet Archive copy)FTC Sues Amazon for Illegally Maintaining Monopoly Power26 Sep 2023 We represent a low single-digit percentage of the retail market, and there are much larger retailers in every country where we operate.

[ … ] Not shown: Offline retail, and building checkout-free Amazon Go stores.

We now have 10 stores in Chicago, San Francisco, and Seattle⁶ (Fact note 6)Fact · 6With hindsightIn March 2023 Amazon said it would close eight Amazon Go stores in Seattle, San Francisco and New York. A spokesperson told TechCrunch the company still operated “more than 20 Amazon Go stores across the U.S.”SourceTechCrunchAmazon to close eight Amazon Go stores in Seattle, San Francisco and New York7 Mar 2023, and are excited about the future.

Failure needs to scale too

As a company grows, everything needs to scale, including the size of your failed experiments. If the size of your failures isn’t growing, you’re not going to be inventing at a size that can actually move the needle. Amazon will be experimenting at the right scale for a company of our size if we occasionally have multibillion-dollar failures.⁷ (Fact note 7)Fact · 7With hindsightAmazon has since named businesses it shut, though not what they cost. Jassy’s 2022 letter says Amazon stopped pursuing “physical store concepts like our Bookstores and 4 Star stores, closed our Amazon Fabric and Amazon Care efforts, and moved on from some newer devices”. Neither that letter nor the others we read gives a dollar figure for any failure.SourceAmazon investor relations2022 Annual Report2023 Of course, we won’t undertake such experiments cavalierly. We will work hard to make them good bets, but not all good bets will ultimately pay out. This kind of large-scale risk taking is part of the service we as a large company can provide to our customers and to society. The good news for shareowners is that a single big winning bet can more than cover the cost of many losers.

Development of the Fire phone and Echo was started around the same time. 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.⁸ (Fact note 8)Fact · 8With hindsightJassy told the same story in his first letter as CEO: “The phone was unsuccessful”, but Amazon “learned valuable lessons from this failure that have served us well in devices like Echo and FireTV.” His next letter reports moving on from some newer devices “where we didn’t see a path to meaningful returns.”SourcesAmazon investor relations2021 Annual Report2022Amazon investor relations2022 Annual Report2023

[ … ] Not shown: Origins of Echo and Alexa in machine learning and the cloud.

No customer was asking for Echo. This was definitely us wandering. Market research doesn’t help.

[ … ] Not shown: Alexa adoption figures, and investing in employees.

Last year, we raised our minimum wage to $15-an-hour for all full-time, part-time, temporary, and seasonal employees across the U.S. This wage hike benefitted more than 250,000 Amazon employees, as well as over 100,000 seasonal employees who worked at Amazon sites across the country last holiday.

[ … ] Not shown: Why Amazon raised wages.

Today I challenge our top retail competitors (you know who you are!) to match our employee benefits and our $15 minimum wage.⁹ (Fact note 9)Fact · 9With hindsightBezos’ 2020 letter cites a study by economists at UC Berkeley and Brandeis which, he writes, found that Amazon’s raise “resulted in a 4.7% increase in the average hourly wage among other employers in the same labor market.” Jassy’s 2021 letter says Amazon’s “average starting hourly salary is currently over $18.” Neither letter says whether the top retail competitors matched the $15.SourcesAmazon investor relations2020 Annual Report2021Amazon investor relations2021 Annual Report2022 Do it! Better yet, go to $16 and throw the gauntlet back at us. It’s a kind of competition that will benefit everyone.

[ … ] Not shown: Training programmes, education pledges, thanks, and the 1997 letter.