Why (and How) Amazon Created the Kindle and Changed the Book Industry Forever
In this exclusive excerpt from the book 'Working Backwards,' longtime Amazon execs reveal how the company dealt with massive disruption ... and transformed itself as a result.
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It was the fall of 2003, which were consequential days for both Apple and Amazon. Only two years earlier, Apple released its first iPod and Amazon turned a quarterly profit for the first time. Now Steve was inviting Jeff, me (Colin), and another Amazon colleague down to Cupertino for a chat.
We arrived and were ushered into a nondescript conference room with a Windows PC and two platters of takeout sushi. Everyone chatted about the state of the music industry while doing some serious damage to the food. After dabbing his mouth with a napkin, Jobs segued into the real purpose of the meeting: He announced that Apple had just finished building its first Windows application. He calmly and confidently told us that even though it was Apple's first attempt to build a Windows application, he thought it was the best Windows application anyone had ever built. He then personally gave us a demo of the soon-to-be-launched iTunes for Windows.
During the demo, Jobs talked about how this move would transform the music industry. Up until this point, if you wanted to buy digital music from Apple, you needed a Mac, which made up less than 10 percent of the home computer market. Apple's first foray into building software on the competing Windows platform showed how serious it was about the digital music market. Now anyone with a computer would be able to purchase digital music from Apple.
Steve said that CDs — which Amazon sold many of — would go the way of other outdated music formats like the cassette tape. His next comment could be construed as either a matter-of-fact statement, an attempt to elicit an angry retort, or an attempt to goad Jeff into making a bad business decision by acting impulsively. He said, "Amazon has a decent chance of being the last place to buy CDs. The business will be high-margin but small. You'll be able to charge a premium for CDs, since they'll be hard to find." Jeff did not take the bait. We were their guests, and the rest of the meeting was uneventful. But we all knew that being the exclusive seller of antique CDs did not sound like an appealing business model for Amazon.
Remember, this was 2003. The shift to digital had just begun. No one wanted to get in too early with a product that did not yet have a market. But no one wanted to miss the moment, either, and be unable to catch up. We knew that we'd need to invent our way out of this dilemma by obsessing over what the best customer experience would be in this new paradigm.
Did that meeting with Steve Jobs impact Jeff's thinking? Only Jeff can speak to that. All we can say is what Jeff did and did not do afterward. What he didn't do (and what many companies would have done) was to kick off an all-hands-on-deck project to combat this competitive threat, issue a press release claiming how this new service would win the day, and race to build a copycat digital music service. What he did do was take his time, process what he learned, and form a plan that revolutionized the company — and did the exact opposite of chasing Apple into the music-selling business.
This is the story of the creation of the Kindle.
We were there to help it happen: Colin started at Amazon in 1998, Bill joined in 1999, and we spent decades as senior executives working with Jeff. In developing the Kindle, we learned a critical lesson in business longevity — and in what it takes to define the change around you.
A few months after that meeting with Steve Jobs, in January 2004, Jeff made his first move. He put Steve Kessel, Amazon's VP of media retail, in charge of the company's digital business. This seemed strange at first. Steve Kessel had been overseeing sales of physical books, music, video, and more — a core component of Amazon's business. The company's digital media business, meanwhile, consisted of a new "search inside the book" feature, plus an e-books team of roughly five people, which generated a few million dollars in annual revenue and had no real prospects for growth.
But there was wisdom here. Jeff wasn't making a "what" decision; he made a "who" and "how" decision. This is an incredibly important difference. He did not jump straight to focusing on what product to build, which seems like the straightest line from A to B. Instead, the choices Jeff made suggested — even then! — that he believed the scale of the opportunity was large and that the scope of the work required to achieve success was equally large and complex. He focused first on how to organize the team and who was the right leader to achieve the right result.
Steve asked me (Bill) to join him in this new division, leading the digital media business team. I was hesitant. But then Steve explained Jeff's thinking: Amazon was at an important crossroads, and now was the time to act.
Though the physical media business was growing, we all understood that over time it would decline in popularity and importance as the media business shifted to digital. In the beginning of that year, 2004, Apple announced that it had sold a total of more than two million iPods — and the proliferation of shared digital music files online had already prompted a decline in sales of music CDs. It seemed only a matter of time before sales of physical books and DVDs would decline as well, replaced by digital downloads.
Jeff was a student of history and regularly reminded us that if a company didn't or couldn't change and adapt to meet shifting consumer needs, it was doomed. "You don't want to become Kodak," he would say, referring to the once-mighty photography giant that had missed the turn from film to digital. We weren't going to sit back and wait for that to happen to Amazon.
Conceptually, I understood and accepted this history lesson. What I didn't get was why Steve and I had to change jobs and build up a whole new organization. Why couldn't we manage digital media as part of what we were already doing? After all, we would be working with the same partners and suppliers. The media had to come from somewhere, and that somewhere was media companies: book publishers, record companies, and motion picture studios. I already managed the co-op marketing relationships with those companies, so it made sense that we should do this within the same organization and build off the knowledge and success of our strong team. Otherwise, Amazon would have two different groups in the company responsible for business relationships with partners and suppliers.
But Jeff felt that if we tried to manage digital media as a part of the physical media business, it would never be a priority. The bigger business carried the company, after all, and would always get the most attention. Steve told me that getting digital right was highly important to Jeff, and he wanted Steve to focus on nothing else. Steve wanted me to join him and help him create the new business.
A separate digital media organization would prove to be the right thing for the company, and one of the best things ever to happen for my career. I said yes.
Now we had a mission — to build a business selling digital books, music, and video. But how? We spent roughly six months researching the digital media landscape and learned some key things. First, music: With piracy rapidly killing the CD business and Apple selling millions of songs on iTunes to millions of iPod customers, the record companies were eager for us to jump in fast so they would have more retailers to deal with — not just Apple. Second, e-books: A marketplace existed already, but it was small, publishers weren't investing in it, and they only released a small catalog of e-books at the same high prices as hardcovers. And finally, digital movies and TV: Content creators were risk-averse, and they weren't interested in licensing shows or movies to digital service providers like Amazon.
The music business really seemed to be calling. In December 2004, Jeff, Steve, and I attended Music 2.0, a digital music industry conference at the Hilton hotel in Universal City. We listened to a number of speakers, one of whom was Larry Kenswil, a senior executive at Universal Music, who spoke about the current state of the digital music business, which at that time was divided into two camps. In one camp were services like Napster that facilitated free file sharing. By itself in the other camp was Apple, selling songs to load onto the iPod for 99 cents each. Larry was eager for more big tech companies to enter the business, as that would mean more revenue for Universal Music. He obviously knew that we were in the audience, because he made a few comments pointed directly at Jeff, effectively dissing Amazon for not being in the digital music space and prodding us to jump in fast.
One of the decisions we had to make in that first year was whether to build a business or to buy a company already operating in that space. We had many meetings with Jeff where Steve and I would present our ideas for our music product or a company we might acquire. Each time we had these meetings, Jeff would reject what he saw as copycat thinking, emphasizing again and again that it had to offer a truly unique value proposition for the customer. He would frequently describe the two fundamental approaches that each company must choose between when developing new products and services. We could be a fast follower — i.e., make a close copy of successful products that other companies had built—or we could invent a new product on behalf of our customers. He said that either approach was valid but that he wanted Amazon to be a company that invents. In other words, as he also emphasized, people like the exec who'd baited him at the digital music conference wouldn't drive our process. He didn't want to simply build copycat versions of products like the iPod and the iTunes store, nor did he care about making a PR splash by announcing to the public that Amazon had arrived in the digital business. He chose the path of invention because true invention leads to greater long-term value for customers and shareholders.
My team and I quickly learned that invention is a more challenging path than fast following. The road map for fast following is relatively clear — you simply study what your competitor has built and make a copy. But there's no road map for invention. It requires you to bushwhack and forge into uncharted terrain, scout out a variety of possible product ideas, and build the roads yourself.
Jeff zeroed in on the fundamental difference between the digital media retail business and our existing physical media retail business. Our competitive advantage in physical media was based on having the broadest selection of items available on a single website. But this could not be a competitive advantage in digital media, where the barrier to entry was pretty low. Any company, whether a well-funded startup or an established enterprise, could match our offering. In those days, while it took time and it wasn't easy, any company could build an e-book store or a 99 cent music download store, where they offered the same breadth and depth of books and songs as every other digital download store. We couldn't meet Jeff's requirement that our digital business have a distinct and differentiated offering just on selection and aggregation.
The digital world also undercut another one of our advantages. Compared to other retailers, we'd been able to offer consistently low prices in part because of our lower cost structure. (Which is to say, we had no stores.) But that wasn't a factor in digital. The process and costs associated with hosting and serving digital files were basically the same whether you were Amazon, Google, Apple, or a startup. There was no known fundamental difference that would allow one company to gain a competitive advantage and win over the long term by having lower digital media operating costs and passing those savings on to the consumer in the form of lower digital media prices.
Early on, Jeff drew a version of this picture on the whiteboard to make his point clear:
He explained that there was an important difference in the digital media value chain, as well. In physical retail, Amazon operated at the middle of the value chain. We added value by sourcing and aggregating a vast selection of goods, tens of millions of them, on a single website and delivering them quickly and cheaply to customers.
To win in digital, because those physical retail value-adds were not advantages, we needed to identify other parts of the value chain where we could differentiate and serve customers well. He told Steve that this meant moving out of the middle and venturing out to either end of the value chain. On one end was content, where the value creators were book authors, filmmakers, TV producers, publishers, record companies, and movie studios. On the other end were distribution and consumption of content. For us that meant focusing on applications and devices that consumers used to read, watch, or listen to content, just as Apple had already done with iTunes and the iPod.
This all made sense. But there was a problem: Our core competencies did not extend to either end of the value chain.
Steve did not let this get in the way. In one of our meetings, he said that a typical company that wanted to grow would take stock of its existing capabilities and ask, "What can we do next with our skill set?" He emphasized that Amazon's approach was always to start from the customer and work backwards. We would figure out what the customers' needs were and then ask ourselves, "Do we have the skills necessary to build something that meets those needs? If not, how can we build or acquire them?"
That's what led us to our big idea.
So there we were: stuck in the middle, with Amazon's historic advantages suddenly looking like disadvantages. We had to do more than just serve things that others could serve, too. And although we had started this journey because of digital music, Jeff ultimately decided that there was a bigger opportunity elsewhere. It was e-books.
There were multiple reasons for this. Music may have been the first category to move to digital in the marketplace, but Apple had a big head start, and we hadn't conceived of a music device or service idea that was compelling enough to make a big investment in. Video had not gone digital yet, which seemed like an opportunity, but the barriers were just too high. Getting the rights from studios would be difficult, and most consumers didn't have internet fast enough to stream massive video files.
But e-books were a different story. Books were still the single largest category at Amazon and the one most associated with the company. Also, the e-book business as a whole was tiny; there was no good way to read books on a device other than a PC (and reading on a PC was definitely not a good experience). Based on the success of iTunes/iPod for music, we believed that customers would want the e-book equivalent: an app paired with a mobile device that offered consumers any book ever written, available at a low price, that they could buy, download, and start reading in seconds.
When we worked backwards from the customers' needs with digital books, it became apparent that we needed to invent a device ourselves, even though it might take years, and even though we had no experience in hardware. As Jeff would say, "What could possibly be more important than reinventing the book itself?"
I'll be honest: At the beginning, this didn't make sense to me. "We're an e-commerce company, not a hardware company!" I would insist. I thought we should partner with third-party equipment companies that were good at designing and building hardware and stick to what we knew: e-commerce. I kept telling Steve that he knew nothing about hardware — he wasn't a gadget guy, and his ancient Volvo didn't even have a car stereo!
But Steve countered well. He reminded me that we'd developed and stress-tested many ideas, and it was clear that, to deliver a book buying and reading experience that would delight customers, we needed to build an e-book store and a reader that was deeply integrated with a reading device. Through our research, we knew that relying on third parties, while operationally and financially less risky, was much riskier from the point of view of customer experience. If we start with the customer and work backwards, then the most logical conclusion is that we need to create our own devices.
The second point he made was that, like any company at a crossroads, if you decide that the long-term success and survival of the company is predicated on having a specific capability you do not have today, then the company must have a plan to build or buy it. If we wanted to ensure a great customer experience that was differentiated on the far end of the value chain, we couldn't outsource the project. We had to do it ourselves.
So we got going, knowing it wouldn't be easy but that the potential rewards were great. In September 2004, Steve hired Gregg Zehr, a Silicon Valley veteran who had been a VP of hardware engineering at Palm Computing and Apple. He set up a separate office in Silicon Valley, not Seattle, in order to tap into the Silicon Valley technical talent pool. In parallel, two experienced and trusted Amazon engineering VPs established and hired software engineering teams in Seattle to build the cloud or back-end systems. In April 2005, we acquired Mobipocket, a small company based in France that had built a software application for viewing and reading books on PCs and mobile devices.
At some point, early in the process, a name for the device emerged: Kindle.
By the middle of 2005, it became clear that this project was taking much longer and consuming more funds than we had anticipated. During one finance team review, there was a heated discussion about the surprising ramp-up in expenses. At some point in the debate, someone asked Jeff point-blank, "How much more money are you willing to invest in Kindle?"
As I remember the scene, Jeff calmly turned to our CFO, Tom Szkutak, smiled, shrugged his shoulders, and asked the rhetorical question, "How much money do we have?"
That was his way of signaling the strategic importance of Kindle and assuring the team that he was not putting the company at risk with the size of the investment. In Jeff's view, it was way too early to give up on the project.
We all know what happened next. The Kindle debuted to the world in 2007, four years after that sushi meeting with Steve Jobs. It sold out in less than six hours. Amazon was never the same.
→ From Working Backwards: Insights, Stories, and Secrets from Inside Amazon, by Colin Bryar and Bill Carr. Copyright © 2021 by the authors and reprinted by permission of St. Martin's Publishing Group.