“It's All About the Long Term”; that’s how Jeff Bezos headed the philosophical section of his first annual letter to shareholders. It came out in March 1998, three months after Amazon.com Inc. (AMZN, Financial) had completed its first year as a public company.
“We believe that a fundamental measure of our success will be the shareholder value we create over the long term.”
As he explained in a 2011 interview with Wired magazine, Bezos had in mind a five- to seven-year time horizon, not a three-year horizon. Why? He went on to say that if you work with a three-year horizon, you must compete against “a lot of people.” On the other hand, if you invest with a seven-year horizon, you will be competing with just a fraction of the number competing on a three-year horizon.
In other words, he expected to gain a competitive advantage by simply looking further forward than the managers of other companies. There are also more options for what he calls “endeavors” that would be impossible with a three-year outlook. Think of all the technological inventions, both powering the Amazon platform and in consumer electronics. His analogy is that of planting seeds and waiting for them to grow.
A writer at VentureBeat noted in 2011 that the company operated without a profit for its first six years (1995 to 2001). Impatient investors complained when it did show its first profit in the fourth quarter of 2001, because it was only $5 million on more than a billion dollars in revenue. Devindra Harawar went on to point out that they were proven wrong as Amazon went on to achieve great success.
The success of that patience and persistence shows up in this GuruFocus chart: it shows Amazon’s capital expenditures in green and its net income in blue:
Many managers would agree with Bezos that it’s best not to focus on quarterly results, but the CEO has taken that a step further. In an interview with CNBC in May 2017, he said the results of each quarter are baked in about three years earlier. To doubly emphasize the point, he noted that he was then (in 2017) working on a quarter that will happen in 2020: “Next quarter for all practical purposes is done already and it has probably been done for a couple of years.”
In the quotation at the beginning of this article, there is emphasis not only on the long term, but also equal emphasis on shareholder value: “We believe that a fundamental measure of our success will be the shareholder value we create over the long term.”
While its helpful to parse the two subjects within one sentence, there is no competition between them. Bezos sees them in a holistic sense: they are part of a broader integration:
“This value will be a direct result of our ability to extend and solidify our current market leadership position. The stronger our market leadership, the more powerful our economic model. Market leadership can translate directly to higher revenue, higher profitability, greater capital velocity, and correspondingly stronger returns on invested capital.”
Bezos would go on to write in his 2012 letter: “I think long-term thinking squares the circle. Proactively delighting customers earns trust, which earns more business from those customers, even in new business arenas. Take a long-term view, and the interests of customers and shareholders align.”
In other words, he believes his company can create a virtuous circle. That is, a situation in which customer trust leads to more orders and revenue from them. That in turn creates increasing profits for shareholders, which in turn means more resources for taking care of customers.
Being a tech guy also means quantifying those lofty principles. Bezos says in the 1997 letter that Amazon measures itself against market leadership metrics:
- Customer growth.
- Revenue growth.
- Repeat business.
- Strength of the brand.
And how did Amazon do on those metrics in 1997? Very well, he reported at the end of the letter:
- The number of customers grew from 180,000 to 1,510,000, up 738%.
- Sales/revenue popped from $15.7 million to $147.8 million, up 838%.
- Repeat customers increased from 46% in fourth-quarter 1996 to 58% in fourth-quarter 2017.
- Brand strength: Audience reach increased and web-ranking went from 90th to 20th. It also set up long-term relationships with many big online entities (most of which have now disappeared).
Notably absent from that 1997 list of accomplishments is a reference to earnings and other information that less-patient shareholders would seek out.
Finally, in the long-term section, he wrote: “Because of our emphasis on the long term, we may make decisions and weigh tradeoffs differently than some companies.”
That re-emphasizes the message that first you build a customer-centric business, build a platform on which to serve them and grow in the future, and then reap the rewards. Happy customers lead to happy shareholders.
In that context, it’s important to think of Bezos’ message in the milieu of the late 1990s, the days of the dot-com bubble. Lots of money floating into and around the stock markets, investors willing to ignore simple fundamentals and more. Exciting valuations were reached as dot-com companies—then new and exotic—went public; some of these new companies had not yet generated revenue or profits and, in some cases, went to market with little more than ambitious but unproven business plans.
On the surface, Amazon looked a bit like that in 1997. It might well have suffered or even gone broke, as so many new tech companies did when the bubble burst.
One of the reasons Amazon survived is undoubtedly its long-term vision. Where others saw opportunities for quick and big profits, Bezos and Amazon saw far richer opportunities were possible through patience and persistence. They were willing to sacrifice immediate gains for a much bigger prize.
The long-term perspective paid off for Bezos, Amazon, customers and shareholders alike.
Disclosure: I do not own shares in any of the companies listed, and do not expect to buy any in the next 72 hours.
