Bezos’s 2006 Shareholder Letter: How Large Companies Nurture Small Seeds

#BezosShareholderLetter2006 The 2005 shareholder letter discussed how Amazon incubates startups internally, looking beyond their initially small size to assess future potential, customer needs, and genuine differentiation. (Bezos explains in the letter that Amazon does not operate physical stores because it has not yet found a sufficiently differentiated approach.) It is also the first shareholder letter to use AWS as an example of a new business. Of course, AWS has since become Amazon's most important business. As we grow, we will maintain this culture of embracing new businesses. We will act with discipline, watching expected returns, potential scale, and whether the business creates differentiated experiences customers value. We will not always be right or succeed, but we will be selective, work hard, and patiently incubate these businesses. ----- To our shareholders: At Amazon.com's current scale, planting a seed that can grow into a new business requires rules, patience, and an environment that supports growth. Our existing businesses are well-rooted young trees. They are growing, earning high returns on capital, and developing within their respective market segments. These characteristics set a high bar for new businesses. Before investing in a new business, we must ensure it can produce sufficient returns on capital for shareholders and grow large enough to become a meaningful part of the company. We must also believe the customer problem is currently underserved and that we can change that market. Otherwise, scaling the business will be difficult. People often ask, “When will you open physical stores?” This is an expansion opportunity we have rejected. It meets only one of the tests above: the potential scale of a store network is attractive. But we do not know how to achieve high returns at low cost through physical stores. Physical retail is a sophisticated, long-established industry that is already well served. We do not believe we can offer a genuinely fresh improvement in the customer experience. When you see us enter a new business, those tests have been met. Our acquisition of Joyo in China is a first step into the world's most populous country. E-commerce there is still at a very early stage, and I see an excellent opportunity. Shoes, apparel, and groceries are categories where we can build at scale, earn high returns, and improve the customer experience. Fulfillment by Amazon is a set of web-service interfaces that turns our 12 million square meters of fulfillment infrastructure into a giant, sophisticated computer peripheral. Pay us 45 cents per square meter each month and you can store your products in our network. Online, you can notify us that inventory is arriving, tell us how to pick and pack it, and specify where to ship it. You never need to speak to us directly. This is a differentiated service that can become large and generate high returns. Amazon Web Services (AWS) is another example. It serves a new customer group: software developers. We now offer more than ten web-service interfaces and have built a community of over 24,000 registered developers. We address common needs such as storage and computing performance, areas that trouble many developers and in which Amazon has accumulated considerable experience through rapid expansion. This is something we should do: differentiated, capable of scale, and potentially profitable. In many large companies, growing new businesses from small seeds can be difficult because it requires so much patience and nurturing. In my view, Amazon's culture is unusually supportive of small projects with great potential. I believe that is a source of competitive advantage. Like other companies, our culture comes not only from our intentions but also from our history. We are young, but we have experience nurturing small seeds into large trees. Many colleagues have watched seeds worth tens of millions of dollars grow into businesses worth billions. That firsthand experience, and the culture it produced, helps us launch businesses from scratch. The culture requires differentiation and growth potential, not great size at birth. I still remember our excitement when online book revenue passed 10 million in 1996. We had every reason to celebrate: we had gone from zero to 10 million! Today, when an internal venture reaches 10 million, it changes the whole company from 10 billion to 10.01 billion. Executives running multibillion-dollar businesses could easily scoff at that amount. But they do not. They remain excited to see seeds sprout and email teams to congratulate them. That is wonderful, and I am proud it belongs to our culture. In our experience, even a rapidly growing new business needs at least three to seven years to become meaningful to the company as a whole. That was true of our international business, early non-media businesses, and third-party seller businesses. Today, global sales represent 45%, non-media 34%, and third-party sales 28% of sales. We would be delighted if our new seeds achieved similar success. It has been some time since we celebrated passing 10 million. As we grow, we will maintain a culture that embraces new businesses. We will proceed with discipline, focusing on expected returns, potential scale, and differentiation customers value. We will not always be right or succeed, but we will be selective, work hard, and nurture these businesses patiently. As always, I attach our first shareholder letter from 1997. You will see that our worldview and approach have not changed. Thank you very much for your encouragement and support. Jeffrey P. Bezos (Chinese translation by Vinchent)