Introduction by Werner Vogels:

The segment starts with a humorous piece of advice from Werner Vogels, CTO of Amazon, advising aspiring CTOs not to work for CEOs with computer science degrees because “you do not get away with anything.” This serves as an introduction to Jeff Bezos, the CEO of Amazon.

Winning When Customers Win:

Werner Vogels recalls a significant principle Jeff Bezos had mentioned in a previous keynote about Kindle Fire: “We should only win when our customers win.” Vogels asks Bezos to elaborate on this concept, particularly in relation to Amazon Web Services (AWS).

Amazon’s Business Model Alignment:

Bezos explains that Amazon sells its Kindle devices near break-even, making money only when customers actually use the device. This aligns the company’s interests with that of the customers: Amazon doesn’t profit unless the customer finds value in the product. He argues that this arrangement promotes beneficial behavior within Amazon, such as not forcing customers into an “upgrade treadmill.”

Similarities Between Kindle and AWS:

Bezos further states that this business philosophy extends to AWS, which operates on a pay-as-you-go basis. AWS is not incented to make people overbuy hardware or operate at low utilization rates. Again, the focus is on providing real value to the customer, aligning Amazon’s interests with theirs.

Surprising Customers by Lowering Bills:

In closing, Vogels notes that customers are often surprised when Amazon helps them lower their AWS bills. This is contrary to the practice of other vendors and further emphasizes Amazon’s commitment to aligning its interests with those of its customers.

This conversation reveals the core business philosophy of Amazon—creating alignment between the company’s interests and those of its customers, not just for the sake of short-term profits but for long-term mutual benefit.

Focus on Timeless Principles:

Jeff Bezos emphasizes the importance of focusing on what won’t change over the next 10 years, as opposed to what will change. Building a strategy around timeless needs allows for long-term planning. In the retail sector, these principles are low prices, fast delivery, and a vast selection. These are the elements that will always be important to customers and thus deserve heavy investment.

AWS’s Core Values:

Bezos extends this concept to Amazon Web Services (AWS), stating that core values such as reliability, affordable pricing, and quick innovation are unlikely to become less important over time. Businesses often overlook these fundamental principles, but maintaining a grip on them allows for continuous improvement of customer service.

Innovation as a Culture:

Bezos outlines two crucial types of company cultures: the pioneer culture and the conqueror culture. The pioneer culture focuses on customer needs and explores innovative solutions. It’s essential to recruit people with a mindset that aligns with innovation and willingness to explore new avenues.

Willingness to Fail and Be Misunderstood:

To foster innovation, a company must be willing to fail and be misunderstood for extended periods. Critics might misunderstand new methods in comparison to traditional ones. A willingness to face criticism allows for a higher rate of experimentation, which in turn increases the rate of successful innovation.

Role of AWS in Business Experimentation:

Bezos points out that AWS enables faster experimentation for companies. By streamlining operations like development environment setup, AWS empowers companies to perform more experiments in a shorter amount of time, thus enhancing their ability to innovate.

Rate of Experimentation:

Finally, Bezos argues that the number of experiments a company can run per year is directly proportional to its inventiveness. AWS has been a catalyst in increasing this rate for many businesses, as evidenced by examples like News International, which drastically reduced its development environment setup time.

These points collectively outline a holistic approach to business strategy and innovation, emphasizing the importance of focusing on timeless principles, fostering a culture of innovation, and leveraging technology to accelerate the rate of successful experiments.

Surprise in AWS Growth:

Jeff Bezos reveals that the biggest surprise with AWS (Amazon Web Services) has been its rapid growth rate, particularly among enterprises, government, and educational institutions. While he was optimistic about attracting startup companies, the adoption by these larger entities has exceeded his expectations.

Customer-Focused Innovations:

Bezos reaffirms Amazon’s commitment to being customer-focused in both retail and AWS sectors. He suggests that innovations are driven by customer needs, and the aim is to offer what customers find valuable rather than what is easy to provide.

Power of Information:

Bezos talks about the societal trend of customers having access to near-perfect information, accelerated by the internet. This has empowered customers to easily compare prices and services. Platforms like blogs, discussion boards, and social media further contribute to this transparency.

Shift in Marketing Dynamics:

Bezos indicates a shift in the balance of power from service providers to consumers. He notes that companies used to allocate 30% of effort in building a product and 70% in marketing. Now, the balance has flipped. Due to the availability of near-perfect information, consumers are more informed, reducing the need for aggressive marketing.

Business Model Adaptation:

Bezos warns that companies relying on customers being misinformed or incompletely informed will struggle in the current environment. Embracing the empowered consumer is not just beneficial for society, but also crucial for businesses to adapt and thrive.

AWS’s Customer Focus and Competitive Edge:

Jeff Bezos states that AWS (Amazon Web Services) has succeeded not because of a large sales force but because of the quality of its products and services. AWS has managed to invert the traditional 70-30 rule of focusing on infrastructure over the customer. This customer-centric approach has contributed significantly to AWS’s leadership position.

Importance of Lean Principles:

Lean manufacturing principles, particularly the concept of waste elimination, are significant within AWS and the broader Amazon ecosystem. Bezos emphasizes the idea of defect reduction and not allowing defects to travel downstream in any process, borrowed from Japanese manufacturing techniques. This principle, he asserts, is vital to being efficient and customer-focused.

Data-Driven Infrastructure Management:

Bezos describes an often underappreciated benefit of AWS: it enables application developers to understand which inner loops are driving costs. Traditional data centers do not provide this level of transparency, but AWS’s approach helps reduce costs significantly by offering information that developers can use to improve efficiency.

Andon Cord Philosophy in Amazon:

Bezos discusses the application of Toyota’s Andon Cord principle, which allows any factory worker to halt production if they spot a defect. This approach initially may result in frequent stops but ultimately reduces defects closer to their source. He explains that Amazon uses a similar principle in their customer service and fulfillment centers to eliminate defects and prevent them from moving downstream.

Real-World Application and Training:

Bezos shares an anecdote about his experience in customer service training, a program that all senior Amazon staff must undergo every other year. The training aims to ensure that top management remains connected to customer concerns and upholds the lean principles of defect detection and elimination.

The central theme running through Bezos’s comments is the essential role of customer-focused innovation, lean principles, and the availability of actionable data in AWS’s and Amazon’s successes.

Customer Service and Lean Thinking:

Jeff Bezos discusses the importance of lean principles in Amazon’s operations, particularly in customer service. He introduces a system inspired by Toyota’s Andon Cord, which allows any customer service agent to pull a product off Amazon’s website if it’s problematic. This system improves communication between customer service agents and fulfillment centers, aiming to stop defects from moving downstream.

Importance of Data in Lean Systems:

Bezos emphasizes the crucial role data plays in operating leanly. In traditional data centers, developers are insulated from how their code consumes resources. However, AWS (Amazon Web Services) provides metrics that help developers understand which parts of their code are resource-intensive, thus facilitating defect reduction and cost management.

Low Margin, High Volume Business:

Bezos discusses the challenges of running a low-margin, high-volume business, both in retail and AWS. High margins can “cover a lot of sins,” allowing companies to operate inefficiently. However, operating at low margins requires efficiency and aligns better with customer interests, forcing Amazon to continuously find ways to operate leanly.

Contrast with High Margin Businesses:

Bezos mentions that high-margin businesses do not have to be as focused on efficiency and lean operations. They can afford to be less rigorous due to the ‘safety net’ provided by high margins. Despite sometimes daydreaming about running a high-margin business, Bezos suggests that low-margin operation keeps a company aligned with customer needs and forces it to innovate and be efficient.

Continuous Learning and Improvement:

Bezos also shares anecdotes from his experiences with lean manufacturing consultants, highlighting the ongoing journey of improvement. For example, rather than just cleaning up a dirty fulfillment center, Bezos was advised to eliminate the source of the dirt, encapsulating the proactive mindset required in lean operations.

Summary:

Bezos’ discussion revolves around the role of lean principles in running a customer-focused, low-margin, high-volume business. He explains that lean thinking, when effectively implemented, not only improves operational efficiency but also better aligns the business with the customers’ needs.

Stability and Change in Entrepreneurship:

Jeff Bezos states that the core principles of entrepreneurship have remained largely stable over time. However, he acknowledges that the pace of change, particularly in the internet domain, has accelerated since Amazon’s inception 18 years ago.

Entrepreneurial Risk Management:

Contrary to popular belief, Bezos argues that good entrepreneurs are not risk seekers; they are risk mitigators. Starting a company is inherently risky, and the goal in the early stages is to systematically eliminate these risks. Over time, as the company becomes more robust, it can afford to take more risks again.

Impact of AWS:

Amazon Web Services (AWS) has been instrumental in accelerating experimentation and reducing the need for capital in the entrepreneurial ecosystem. Bezos points out that the democratization of tools by AWS allows entrepreneurs to realize projects without significant venture capital, upsetting the traditional VC model.

Future of Venture Capital:

While VCs initially saw AWS as a threat to their investment strategy, they have adapted and now see it as an opportunity to invest in a greater number of companies. Bezos humorously remarks that VCs will adapt and find new opportunities despite changes in the landscape.

Internal Corporate Entrepreneurship:

Bezos also notes that AWS is not just empowering standalone entrepreneurs; it is also fostering a culture of entrepreneurship within existing companies, suggesting that we are still in the early phases of understanding the full impact of AWS in this area.

Entrepreneurship in Enterprises:

Jeff Bezos agrees with Eric Ries’ definition that startups are organizations that develop new products or services under conditions of extreme uncertainty. Bezos acknowledges that enterprises today are also operating under similar conditions of uncertainty, reinforcing the idea that entrepreneurial qualities are essential for both startups and established enterprises.

AWS for Diverse Customers:

When asked if AWS can cater to both startups and enterprises, Bezos affirms that it can, providing an “existence proof” that includes not just startups and enterprises but also governmental and educational organizations. He attributes this wide applicability to the universal needs of these different parties: low costs, reliability, and a fast-evolving set of APIs and services.

Competition and Collaboration on AWS:

Bezos responds to the query about whether Netflix, a competitor to Amazon’s Prime Instant Video, should be concerned about both services using AWS. He firmly states that there should be no concerns, emphasizing that AWS provides the same level of quality service to Netflix as it does to Amazon Retail.

Standardization in AWS:

The aim of AWS is to standardize the layer of technology services it provides, which benefits all customers, including Amazon Retail. Bezos argues against customization, stating that standard solutions often perform better than customized ones, drawing an analogy with home theater systems.

Impartiality in Service:

Bezos makes it clear that AWS doesn’t favor any customer, even if it’s Amazon.com. This impartiality is essential for maintaining the service’s reputation and ensuring it meets the needs of a broad array of clients.

10,000-Year Clock:

Jeff Bezos discusses the 10,000-year clock, a project he is working on with a team including its creator, Danny Hillis. Located in West Texas, this monumental clock aims to encourage long-term thinking. It features advanced engineering to track Earth’s orbit deviations and other factors over the course of 10,000 years. The clock has “anniversary chambers,” each with its own animation that occurs at various intervals—yearly to once every 10,000 years. It’s a symbol to emphasize the importance of long-term planning and thinking for humanity.

Impact of Time Horizons:

Bezos expands on how altering the time horizon of a challenge can change the feasibility and approach to problem-solving. For instance, trying to solve world hunger in five years seems daunting, but stretching the timeframe to 100 years allows for the development of conditions for such a change to occur. This emphasis on time horizons also reflects Bezos’ belief that humanity needs to start thinking longer term due to our increasing technological sophistication.

Space Endeavors with Blue Origin:

Jeff Bezos outlines his work with Blue Origin, a company focused on developing a reusable vertical takeoff and landing space vehicle. The aim is to make space travel more accessible and affordable, addressing its current problems of being too expensive and too dangerous. The choice for vertical landing is justified by its scalability, especially when compared to wing-based landing systems.

Role of Computation in Space Research:

Bezos mentions how Blue Origin utilizes AWS (Amazon Web Services) for heavy-duty computing. They particularly engage in computational fluid dynamics calculations. Using AWS allows them to significantly reduce computation times, improving the efficiency of their engineering efforts.

Entrepreneurial Advice:

In concluding, Jeff Bezos offers two key pieces of advice for aspiring entrepreneurs. First, he suggests focusing on what you’re passionate about, as this passion will often lead to the creation of better products. Second, he advocates for a customer-centric approach, stating that starting with the customer and working backwards is pivotal for business success.

The talk captures Bezos’ multifaceted interests, ranging from promoting long-term thinking for humanity to the complexities of space exploration and entrepreneurial wisdom.