Amazon may be firing on all cylinders, but Chief Executive Jeff Bezos realizes not all of its efforts will see success, warning investors in the company's annual shareholder letter of the potential for multi-billion dollar failures.
"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," Bezo wrote in the letter. "Amazon will be experimenting at the right scale for a company of our size if we occasionally have multibillion-dollar failures. 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."
Bezos pointed to the Fire Phone and Echo speaker as two examples of its risk-taking. Both started development at the same time but while the Fire was a failure it enabled the company to learn and apply its newfound knowledge to build out the Echo speaker and Alexa, its popular voice-activated digital assistant. When Amazon began development of Echo, it was a departure for the eCommerce giant and uncharted territory. There wasn't any market research back in 2013 to gauge the interest on the part of consumers for a voice-activated speaker, yet Amazon forged ahead. Since the first generation of the Echo was rolled out, Amazon has sold more than 100 million Alexa-enabled devices. There are now more than 150 different products available with Alexa built in.
Expanding on the theme of taking risks, Bezos highlighted how Amazon's third-party sellers are doing much better on its platform than its first-party business. Sales of first-party business have grown to $117 billion in 2018 from $1.6 billion in 1999 at a compound annual growth rate of 25 percent. Third-party sales reached $160 billion in 2018, up from $0.1 billion in 1999 and growing at a compound annual growth rate of 52 percent.
"We helped independent sellers compete against our first-party business by investing in and offering them the very best selling tools we could imagine and build," wrote the Amazon CEO, pointing to Fulfillment by Amazon and Prime membership as two programs that improved the customer experience for buying from independent sellers. "We invested in both of these programs at significant financial risk and after much internal debate. We had to continue investing significantly over time as we experimented with different ideas and iterations. We could not foresee with certainty what those programs would eventually look like, let alone whether they would succeed, but they were pushed forward with intuition and heart, and nourished with optimism."
Bezos ended his letter challenging other retailers to match Amazon's employee benefits and its minimum wage of $15 an hour. That move has benefited more than 250,000 U.S.-based Amazon employees and more than 100,000 seasonal employees who worked during last year's holiday season. "Today I challenge our top retail competitors (you know who you are!) to match our employee benefits and our $15 minimum wage. Do it! Better yet, go to $16 and throw the gauntlet back at us. It’s a kind of competition that will benefit everyone," wrote the executive.