محکومیتهای مصلحتی

CHAPTER 10

Expedient Convictions

The spectacular rise of Amazon’s visibility and market power in the wake of the great recession brought the company more frequently into the public eye, but the attention was not always flattering. During the years 2010 and 2011, the company battled a growing chorus of critics over its avoidance of collecting state sales tax, the mechanics behind two of its large acquisitions, its move into the business of publishing books (in competition with its own suppliers), and what appeared to be its systematic disregard for the pricing policies of major manufacturers. Almost overnight, the company that viewed itself as the perennial underdog now seemed to many like a remote and often arrogant giant who was trying to play by his own set of rules.

Bezos (and the few Jeff Bots that Amazon allowed to speak in public) perfected an attitude of bemused perplexity when addressing criticisms. Bezos often said that Amazon had a “willingness to be misunderstood,” which was an impressive piece of rhetorical jujitsu—the implication being that its opponents just didn’t understand the company.1 Bezos also deflected attacks by claiming that Amazon was a missionary company, not a mercenary one. That dichotomy originated with now former board member John Doerr, who formulated it after reading his partner Randy Komisar’s 2001 business-philosophy book The Monk and the Riddle. Missionaries have righteous goals and are trying to make the world a better place. Mercenaries are out for money and power and will run over anyone who gets in the way. To Bezos, at least, there was no doubt where Amazon fell. “I would take a missionary over a mercenary any day,” he liked to say. “One of those great paradoxes is that it’s usually the missionaries who end up making more money anyway.”2

Amazon spokespeople approached these controversies with simple, direct points that they repeated over and over, rarely veering into the uncomfortable details of the company’s aggressive tactics. The arguments had the advantage of being completely rational while also serving Amazon’s strategic interests. And it was these expedient convictions that, to varying degrees, helped steer Amazon through the period of its greatest public scrutiny yet.

While the recession was in many ways a gift to Amazon, the deteriorating finances of local governments in the United States and Europe prompted a new fight over the collection of sales tax—the legal avoidance of which was one of the company’s biggest tactical advantages. It was a high-stakes battle where there were more than two sides, no one played it entirely straight, and Amazon’s deeply held convictions just happened to be conveniently expedient for its own long-term interests.

Beginning in late 2007, when governor of New York Eliot Spitzer introduced a proposal to raise millions of dollars by expanding the definition of what constituted a taxable presence in his state, Amazon was faced with the disconcerting possibility that its long exemption from adding 5 to 10 percent in sales tax onto the prices of most of its products—which had shaped its earliest decisions about where to conduct operations and place its headquarters—was about to end.

Spitzer’s proposal flopped, at first. He withdrew it the day after introducing it, amid his own slumping approval ratings and a backlash over what his budget director said was concern that residents might consider the bill a tax increase.3 But New York State had a $4.3 billion budget gap that desperately needed to be filled. The following February, a month before Spitzer’s political career imploded in a prostitution scandal, Spitzer reintroduced the bill. David Paterson, his successor, embraced the proposal, and in April it was passed by the state legislature in Albany.

The law cleverly eluded a 1992 Supreme Court ruling, Quill v. North Carolina, stipulating that only those merchants who had a physical presence or nexus, like a storefront or an office, in a state had to collect sales tax there. (Technically, the tax was still due for online purchases, but customers were supposed to pay it themselves.) The New York law specified that an affiliate website that took a commission for passing customers on to an online retailer was an agent of that retailer, and thus the retailer officially had a presence in that affiliate’s state. By this ruling, if a Yankees-fan website in New York made money every time a visitor clicked a link on its pages and bought former manager Joe Torre’s memoir on Amazon.com, then Seattle-based Amazon had an official storefront in New York and so had to collect sales tax on all purchases made in that state.

Amazon was not amused. The New York law went into effect over the summer of 2008 and, along with Overstock.com, another retailer, it sued in state court—and lost. Publicly, the company complained that state-by-state tax collection was complex and impractical. “There are currently about seventy-six hundred different jurisdictions in the country that tax, including things like snow-removal and mosquito-abatement districts,” says Paul Misener, Amazon’s vice president of global public policy and the public face of its tax battles.

Amazon had avoided sales-tax collection for years with various clever tricks. In states where it had fulfillment centers or other offices, like Lab126, it skirted the definition of what constituted a physical presence by classifying those facilities as wholly owned subsidiaries that earned no revenue. For example, the fulfillment center in Fernley, Nevada, operated as an independent entity called Amazon.com.nvdc, Inc. These arrangements were unlikely to hold up under direct scrutiny, but Amazon had carefully negotiated with each state when opening its facilities, securing hands-off treatment in exchange for the company’s generating new jobs and economic activity. Bezos considered his exemption from collecting sales tax to be an enormous strategic advantage and brought a libertarian’s earnestness to what he believed was a battle over principle. “We’re not actually benefiting from any services that those states provide locally, so it’s not fair that we should be obligated to be their tax collection agent since we’re not getting any of the services,” he said at a shareholder meeting in 2008.

Bezos also thought his exemption from collecting sales tax was a big benefit for customers, and the prospect of losing it triggered his apoplectic reaction to raising prices. He had good reason to be worried about the effects of sales-tax collection. When New York passed its Internet sales-tax law, Amazon’s sales in New York State dropped 10 percent over the next quarter, according to a person familiar with Amazon’s finances at the time.

New York’s law spread like a bad cold. Similarly cash-strapped states like Illinois, North Carolina, Hawaii, Rhode Island, and Texas tried the same bank-shot approach of declaring that affiliate websites constituted nexuses. In response, Amazon borrowed a hardnosed tactic that Overstock had used in New York and severed ties with its affiliates in each state. These sites were often run by bloggers and other entrepreneurs who needed their affiliate commissions, and they were angered to find themselves wedged between a cash-starved state government on one side and an online giant belligerently clinging to a blatant tax loophole on the other.

The affiliates were not the only victims at this stage of the sales-tax fight. Vadim Tsypin was an Amazon engineer who often worked from his home in Quebec, Canada. In late 2007, around the time Eliot Spitzer was proposing his tax bill and Amazon’s lawyers were growing more anxious, Tsypin’s manager showed him the company’s restrictive Canada policy, which declared that Amazon had no employees working in that country. His manager allegedly told Tsypin they had to cover up his history of working from home and, according to court documents, said that “Amazon can have multimillion-dollar problems. If we have even one employee on the ground there, it is a big violation of U.S. and Canadian law.”

Tsypin refused to alter his old time sheets and evaluations, believing that it wouldn’t stand up to scrutiny. He claimed that his Amazon bosses then started to harass him into quitting, which led to his getting sick (“constant migraine headaches and frequent seizure-like blackouts”) and taking a medical leave of absence. In 2010, he sued Amazon in King County Superior Court for wrongful termination, breach of contract, emotional distress, and negligent hiring—and he lost. The judge acknowledged Tsypin’s condition was work related but said the claims were not strong enough to impose a civil liability.

Large companies like Amazon are frequent targets of wrongful-termination claims. But Vadim Tsypin’s case was unusual because it grew out of Amazon’s own growing sales-tax anxieties and because the discovery phase brought Amazon’s extensive tax-avoidance playbook into the public record. Dozens of pages of internal company rulebooks, flowcharts, and maps were filed with the King County Superior Court on Third Avenue in downtown Seattle. Together, they revealed a fascinating portrait of a company desperately contorting itself to accommodate a rapidly shifting tax climate.

The guidelines approached the surreal. Amazon employees had to seek approval to attend trade shows and were told to avoid activities that involved promoting the sale of any products on the Amazon website while on the road. They couldn’t blog or talk to the press without permission, had to avoid renting any property on trips, and couldn’t place orders on Amazon from the company’s computers. They could sign contracts with other companies, such as suppliers who were offering their goods for sale on the site, only in Seattle.

Then the seemingly arbitrary partitions in the company’s corporate structure became even more important. Traveling employees working for Amazon’s North American retail organization were told to say they worked for a company called Amazon Services, not Amazon.com, and to carry business cards to that effect. According to one document, they were instructed to say, “I’m with Amazon Services, the operator of the www.amazon.com website and provider of e-commerce solutions and services, and I’m here to gather information about the latest industry developments and trends,” if they were ever queried by the media regarding their attendance at a trade show.

Color-coded maps were widely distributed to employees at headquarters in Seattle. Travel to green states like Michigan was okay, but orange states like California required special clearance so that the legal department could track the cumulative number of days Amazon employees spent there. Travel to red states, like Texas, New Jersey, and Massachusetts, required employees to complete an intensive seventeen-item questionnaire about the trip that was designed to determine whether they would make the company vulnerable to sales-tax collection efforts (number 16: “Will you be holding a raffle?”). Amazon lawyers then either nixed the trip altogether or obtained a private letter ruling from that state spelling out its specific treatment of that particular situation.

There was little internal discussion by management on whether it was right or wrong or if it was affecting morale among employees, according to senior employees at the time. It was just strategy, a way to preserve a significant tax advantage that enabled the company to offer comparatively low prices. “The economic outlook for many states is bleak,” read one early 2010 internal tax memo to employees that was filed in the Vadim Tsypin case record. “As a result, states are pursuing taxpayers more aggressively than before. Amazon’s recent public experiences with New York and Texas provide timely and pertinent examples of the heightened risk. That’s why our attention to nexus-related issues are more important than ever.”4

That same year, 2010, fully alerted to the urgency of combating the Amazon threat, Walmart, Target, Best Buy, Home Depot, and Sears put aside their traditional enmities to join forces in an unusual coalition.5 They jointly backed a new organization called the Alliance for Main Street Fairness, which shrouded itself in populist language and—somehow managing to conceal the dripping irony—touted the importance of preserving the vitality of small mom-and-pop retailers. The organization employed a team of well-financed lobbyists who set up a sophisticated website and ran print and television ads around the country. The CEOs of all these big retailers monitored the campaign closely. Mike Duke, Walmart’s CEO, requested frequent briefings on the sales-tax fight, according to two lobbyists involved in the battle.

Amazon fought the sales-tax expansion aggressively, soliciting cooperation from politicians by deploying both carrot and stick in the area where they might feel it most—jobs. In Texas in 2011, the legislature passed a bill that would force online retailers with distribution facilities in the state to collect sales tax, and Amazon threatened to close its fulfillment center outside Dallas, fire hundreds of local workers, and scrap plans to build other facilities in the state. Texas governor Rick Perry promptly vetoed the bill. In South Carolina, Amazon won an exemption on a new law by using the same threats, and it agreed to send customers e-mails helpfully reminding them they were supposed to pay sales tax on their own. In Tennessee, legislators agreed to delay a bill when Amazon offered to build three new fulfillment centers in the state.

During these skirmishes, Bezos advocated for a federal bill that simplified the sales tax code and imposed it over the entire e-commerce industry. (This had the advantage of being a highly unlikely scenario, considering the political deadlock gripping Washington, DC, at the time.) “If I say to customers, ‘We’re not required to collect sales tax, the Constitution is crystal clear that states cannot force out-of-state retailers to collect sales tax and cannot interfere in interstate commerce, but we’re going to do it voluntarily anyway,’ that isn’t tenable,” Bezos told me in a 2011 interview. “Customers would rightly protest. The way this has to work is you either have to amend the Constitution or you have to pass federal legislation.”

The fight came to a dramatic head in 2012. Amazon surrendered in Texas, South Carolina, Pennsylvania, and Tennessee, negotiating accommodations that allowed it to stay tax-free for a few more years in exchange for putting new fulfillment centers in each state. In California, the most populous state, where the company apparently thought it could stave off the inevitable, Amazon girded itself for a fight. After the state legislature passed its sales-tax bill, Amazon engineered a campaign to overturn the law with a ballot measure and spent $5.25 million gathering signatures and running radio advertisements. Observers projected the company would have to spend over $50 million to see the fight through to the end.6

It quickly became evident that such a battle would be expensive, bitterly contested—and vicious. The Alliance for Main Street Fairness carpet-bombed the state with anti-Amazon advertisements, and editorial writers and bloggers largely sided with the big-box chains. “Amazon’s attempt to avoid sales tax is one more sad example of the short-term thinking that rules American business,” blogged Web evangelist Tim O’Reilly, knowing just how to push the buttons of Bezos, who prided himself on long-term thinking.7 Inside Amazon, it was increasingly clear that the company was being fitted for the black hat of the bad guy. At the same time, Amazon was preparing to confront Apple in the high-stakes tablet market with the Kindle Fire. Colleagues insisted to Bezos that Amazon could not afford to see its brand tarnished at such a critical juncture.

So that fall, Amazon reversed course and reached an agreement with California: the company would drop its ballot measure in exchange for one more tax-free Christmas season, and it promised to build new fulfillment centers outside San Francisco and Los Angeles.8 Soon after, Paul Misener testified before the Senate Commerce Science and Transportation Committee and reiterated Amazon’s support for a federal bill—as did Amazon’s unlikely new bedfellows in the sales-tax battle, Best Buy, Target, and Walmart. Now eBay, another combatant in the sales-tax wars, stood alone in trying to protect its smallest merchants, like the stay-at-home mother bringing in extra money by selling handmade mosaics. It advocated that the law should not apply to businesses with fewer than fifty employees or less than $10 million in annual sales, though most of the proposed national sales-tax bills put the exemption at less than $1 million. As of this writing, a national sales-tax-collection bill has not yet passed both houses of Congress.

Amazon was losing a sizable advantage, but Bezos, ever the farsighted chess player, was compensating by cultivating new ones. Amazon’s new fulfillment centers would be close to large cities, allowing for the possibility of next-day or same-day delivery and the wider rollout of its grocery business, Amazon Fresh. Amazon also expanded its test of Amazon Lockers—large, orange locked cabinets placed in supermarkets, drugstores, and chains like Radio Shack that customers could have their Amazon packages shipped to if they liked.

As the era of tax-free online purchases was ending in many states, the true architect of Amazon’s tax strategy and chief of its eighty-person tax department, an attorney named Robert Comfort, stepped out of the shadows. Comfort, a Princeton alumnus who joined Amazon in 2000, had spent more than a decade employing every trick in the book, and inventing many new ones, to minimize the company’s tax burden. He created its controversial tax structure in Europe, funneling sales through entities in Luxembourg, which has a famously low tax rate. In 2012, this arcane tax structure nearly collapsed amid a wave of populist European anger directed at Amazon and other U.S. companies, including Google, who were trying to minimize their overseas tax burden.

Comfort announced his retirement and left Amazon in early 2012, just as the taxman was catching up with the company. (He has since taken a new job—a titular position as Seattle’s honorary consul for the Grand Duchy of Luxembourg.)

And for the first time in its history, Amazon would have to fight its offline rivals on a level playing field.

There is a clandestine group inside Amazon with a name seemingly drawn from a James Bond film: Competitive Intelligence. The group, which since 2007 has operated within the finance department under longtime executives Tim Stone and Jason Warnick, buys large volumes of products from competitors and measures the quality and speed of their services. Its mandate is to investigate whether any rival is doing a better job than Amazon and then present the data to a committee that usually includes Bezos, Jeff Wilke, and Diego Piacentini, who ensure that the company addresses any emerging threat and catches up quickly.

In the late 2000s, Competitive Intelligence began tracking a rival with a difficult to pronounce name and a strong rapport with female shoppers. Quidsi (quid si is Latin for “what if”) was a New Jersey company known for its website Diapers.com. Grammar-school friends Marc Lore and Vinit Bharara founded the startup in 2005 to allow sleep-deprived caregivers to painlessly schedule recurring shipments of vital supplies. By 2008, the company had expanded into selling all of the necessary survival gear for new parents, including baby wipes, infant formula, clothes, and strollers.

Dragging screaming children to the store is a well-known parental hassle, but Amazon didn’t start selling diapers until a year after Diapers.com, and neither Walmart.com nor Target.com was investing significantly in the category. Back when the dark clouds of the dot-com bust still hung over the e-commerce industry, retailers felt that they wouldn’t make any money shipping big, bulky, low-margin products like jumbo packs of Huggies Snug and Dry to people’s front doors.

Lore and Bharara made it work by customizing their distribution system for baby gear. Quidsi’s fulfillment centers, designed by former Boeing operations manager Scott Hilton, used software to match every order with the smallest possible shipping box (there were twenty-three sizes available), minimizing excess weight and thus reducing the per-order shipping cost. (Amazon, which had to match box sizes to a much larger selection of products, was not as adept at this.) Quidsi selected warehouses outside major population centers to take advantage of inexpensive ground-shipping rates and was able to promise free overnight shipping in two-thirds of the country. The Quidsi founders studied Amazon closely and idolized Jeff Bezos, referring to him in private conversation as “sensei.”9

Moms got hooked on the seemingly magical appearance of diapers on their doorsteps and enthusiastically told friends about Diapers.com. Several venture-capital firms, including Accel Partners, a backer of Facebook, bought into the possibility that Lore and Bharara had identified a weakness in Amazon’s armor, and they pumped over $50 million into the company. Around this time, Jeff Bezos and his business-development team, as well as Amazon’s counterparts at Walmart, started to pay attention.

Executives and official representatives from Amazon, Quidsi, and Walmart have all declined to discuss the ensuing scuffle in detail. Jeff Blackburn, Amazon’s mergers and acquisitions chief, said Quidsi was similar to Zappos, a “stubbornly independent company building an extremely flexible franchise.” He also said that everything Amazon subsequently did in the diapers market was planned beforehand and was unrelated to competing with Quidsi.

The story that follows has been pieced together from the recollections of insiders at all three companies. They spoke anonymously and with a significant amount of trepidation, given the strength of Amazon’s and Walmart’s strict nondisclosure agreements and the possibility of legal consequences for them for speaking publically about it.

In 2009, Blackburn ominously informed the Quidsi cofounders over an introductory lunch that the e-commerce giant was getting ready to invest in the category and that the startup should think seriously about selling to Amazon. Lore and Bharara replied that they wanted to remain private and build an independent company. Blackburn told the Quidsi founders that they should call him if they ever reconsidered.

Soon after, Quidsi noticed Amazon dropping prices up to 30 percent on diapers and other baby products. As an experiment, Quidsi execs manipulated their prices and then watched as Amazon’s website changed its prices accordingly. Amazon’s famous pricing bots were lasered in on Diapers.com.

Quidsi fared well under Amazon’s assault, at least at first. It didn’t try to match Amazon’s low prices but capitalized on the strength of its brand and continued to reap the benefits of strong word of mouth. It also used its trusting relationship with customers and its expertise in fulfillment to open two new websites, Soap.com for home goods and BeautyBar.com for makeup. But after a while, the heated competition began to take a toll on the company. Quidsi had grown from nothing to $300 million in annual sales in just a few years, but with Amazon focusing on the category, revenue growth started to slow. Investors were reluctant to furnish Quidsi with additional capital, and the company was not yet mature enough for an IPO. For the first time, Lore and Bharara had to think about selling.

At around this point, Walmart was looking for ways to make up the ground they’d lost to Amazon, and the retailer was shaking up its online division. Walmart vice chairman Eduardo Castro-Wright took over Walmart.com, and one of his first calls was to Marc Lore at Diapers.com to initiate acquisition talks. Lore said that Quidsi wanted a chance to get “Zappos money”—$900 million, which included bonuses spread out over many years tied to performance goals. Walmart agreed in principle and started due diligence. Mike Duke, Walmart’s CEO, even visited a Diapers.com fulfillment center in New Jersey. However, the subsequent formal offer from Bentonville was well under the requested amount.

So Lore picked up the phone and called Amazon. On September 14, 2010, Lore and Bharara traveled to Seattle to pitch Jeff Bezos on acquiring Quidsi. While they were in that early-morning meeting with Bezos, Amazon sent out a press release introducing a new service called Amazon Mom. It was a sweet deal for new parents: they could get up to a year’s worth of free two-day Prime shipping (a program that usually cost $79 to join), and there was a wealth of other perks available, including an additional 30 percent off the already-discounted diapers, if they signed up for regular monthly deliveries of diapers as part of a service called Subscribe and Save. Back in New Jersey, Quidsi employees desperately tried to call their founders to discuss a public response to Amazon Mom. It was no accident that they couldn’t reach them. They were sitting blithely unaware in a meeting in Amazon’s own offices.

Quidsi could now taste its own blood. That month, Diapers.com listed a case of Pampers at forty-five dollars; Amazon priced it at thirty-nine dollars, and Amazon Mom customers with Subscribe and Save could get a case for less than thirty dollars.10 At one point, Quidsi executives took what they knew about shipping rates, factored in Procter and Gamble’s wholesale prices, and calculated that Amazon was on track to lose $100 million over three months in the diapers category alone.

Inside Amazon, Bezos had rationalized these moves as being in the company’s long-term interest of delighting its customers and building its consumables business. He told business-development vice president Peter Krawiec not to spend over a certain amount to buy Quidsi but to make sure that Amazon did not, under any circumstances, lose the deal to Walmart.

As a result of Bezos’s meeting with Lore and Bharara, Amazon now had an exclusive three-week period to study Quidsi’s financial results and come up with a proposal. At the end of that period, Krawiec offered Quidsi $540 million and said that this was a “stretch price.” Knowing that Walmart hovered on the sidelines, he gave Quidsi a window of forty-eight hours to respond and made it clear that if the founders didn’t take the offer, the heightened competition would continue.

Walmart should have had a natural advantage in this fight. Jim Breyer, the managing partner at one of Quidsi’s venture-capital backers, Accel, was also on the Walmart board of directors. But Walmart was caught flat-footed. By the time Walmart upped its offer to $600 million, Quidsi had tentatively accepted the Amazon term sheet. Mike Duke called and left messages for several Quidsi board members, imploring them not to sell to Amazon. Those messages were then transcribed and sent to Seattle, since Amazon had stipulated in the preliminary term sheet that Quidsi was required to turn over information about any subsequent offers.

When Amazon executives learned of Walmart’s counterbid, they ratcheted up the pressure even further, threatening the Quidsi founders that “sensei,” being such a furious competitor, would drive diaper prices to zero if they went with Walmart. The Quidsi board convened to discuss the Amazon proposal and the possibility of letting it expire and then resuming negotiations with Walmart. But by then, Bezos’s Khrushchev-like willingness to take the e-commerce equivalent of the thermonuclear option in the diaper price war made Quidsi worried that it would be exposed and vulnerable if something went wrong during the consummation of a shotgun marriage to Walmart. So the Quidsi executives stuck with Amazon, largely out of fear. The deal was announced on November 8, 2010.

The money-losing Amazon Mom program was obviously introduced to help dead-end Diapers.com and force a sale, and if anyone at the time had doubts about that, those doubts were quickly dispelled by Amazon’s subsequent actions.

A month after it announced the acquisition of Quidsi, Amazon closed the program to new members. But by then the Federal Trade Commission was reviewing the deal, and a few weeks after it closed the program, Amazon reversed course and reopened it, though with much smaller discounts.

The Federal Trade Commission scrutinized the acquisition for four and a half months, going beyond the standard review to the second-request phase, where companies must provide more information about a transaction. The deal raised a host of red flags, according to an FTC official familiar with the review. A significant head-to-head competition and the subsequent merger had led to the demise of a major player in the category. But the deal was eventually approved, in part because it did not result in a monopoly. There was a plethora of other companies, like Costco and Target, that sold diapers both online and offline.

Bezos had won again, neutralizing an incipient competitor and filling another set of shelves in his everything store. Like Zappos, Quidsi was permitted to operate independently within Amazon (from New Jersey), and soon it expanded into pet supplies with Wag.com and toys with Yoyo.com. Walmart had missed the chance to acquire a talented team of entrepreneurs who had gone toe to toe with Amazon in a key product category. And insiders were once again left with their mouths agape, marveling at how Bezos had ruthlessly engineered another acquisition by driving his target off a cliff. Says one observer who had a seat close to the battle, “They have an absolute willingness to torch the landscape around them to emerge the winner.”

Anxiety over Amazon isn’t restricted to New Jersey, Las Vegas, and other American places. The industrial city of Solingen, Germany, halfway between Düsseldorf and Cologne, is famous for the production of high-quality razors and knives. The local blacksmith trade dates back two millennia, and today the city is the seat of the European knife industry and home to renowned brands like Wüsthof, a two-hundred-year-old firm that’s been run by seven successive generations of the Wüsthof family. In the 1960s, Wolfgang Wüsthof introduced the company’s high-end products to North America, riding a bus from town to town with a suitcase full of knives. Forty years later, his grandnephew Harald Wüsthof took over the firm and started selling to chains like Williams-Sonoma and Macy’s. Then, in the early 2000s, Wüsthof began supplying its wares to Amazon.com.

Over the course of its fifty years in America, Wüsthof has established itself as a premium brand, winning frequent commendations from the likes of Consumer Reports and Cook’s Illustrated. For that reason it can charge a hundred and twenty-five dollars for an eight-inch hollow-ground cook’s knife made of high-carbon laser-tested steel, even though similar-size kitchen knives sell for twenty dollars each at Target. Maintaining that lofty price is vital for a company that employs hundreds of skilled artisans in its factory but that competes in a category full of inferior products that, to an untrained eye, all look roughly the same.

Which is why Amazon’s five-year association with Wüsthof—like its relationship with so many brands and manufacturers around the world—has been about as bloody as an actual knife fight.

Manufacturers are not allowed to enforce retail prices for their products. But they can decide which retailers to sell to, and one way they wield that power is by setting price floors with a tool called MAP, or minimum advertised price. MAP requires offline retailers like Walmart to stay above a certain price threshold in their circulars and newspaper ads. Online retailers have a higher burden. Their product pages are considered advertisements, so they have to set their promoted prices at or above MAP or else face the manufacturer’s wrath and risk the firm’s limiting the number of products allocated or withdrawing them altogether.

Over its first few years selling Wüsthof knives, Amazon respected the German firm’s pricing wishes. Amazon was a good partner, placing large orders as its traffic grew and settling its bills on time. It quickly became Wüsthof’s top online retailer and second-largest U.S. seller overall, after Williams-Sonoma. Then tensions in the relationship emerged. As Amazon pricing-bot software got better at scouring the Web and finding and matching low prices elsewhere, Amazon repeatedly violated Wüsthof’s MAP requirements, selling products like the $125 Grand Prix chef’s knife for $109. Wüsthof felt it needed MAP to defend the value of its brand and protect the small independent knife shops that were responsible for about a quarter of the company’s sales and were not capable of matching such discounts. “These are the guys that built my brand,” says René Arnold, the CFO of Wüsthof-Trident of America. “Amazon cannot sell a new knife. They can’t explain it like a store.”

Wüsthof finally stopped allocating products to Amazon in 2006. “It was painful for us,” Arnold says. “Those were lost sales, at least in the short term. But we believed our product and our brand were stronger than the brand of our distributors.” For the next three years—until 2009, when Wüsthof changed its mind and initiated part two of its tortured relationship with Amazon—Wüsthof knives were absent from the shelves of the everything store.

Companies that make things and companies that sell them have waged versions of this battle for centuries. With its commitment to everyday low prices and the ingenious marriage of direct retail with a third-party marketplace, Amazon has taken these historic tensions to a new level. Like Sam Walton, Bezos sees it as his company’s mission to drive inefficiencies out of the supply chain and deliver the lowest possible price to its customers. Amazon executives view MAPs and similar techniques as the last vestiges of an old way of doing business, gimmicks that inefficient companies use to protect their bloated margins. Amazon has come up with countless workarounds, including a technique called hide the price. In some cases, when Amazon breaks MAP, it doesn’t list the price on its product page. A customer can see the low price only when he places the item in his shopping cart.

It’s an inelegant solution, driven by Amazon’s age-old desire to have the lowest prices anywhere and the novel ability of its pricing algorithms to quickly match any major seller that goes lower. “We know it’s in the customer’s best interest that we have a cost structure that allows us to match competitors and be known for low prices,” says Jeff Wilke. “That’s our objective.” Wilke acknowledges that not everyone is happy with this approach but says Amazon is consistent about it and that manufacturers should understand that it is the nature of the Internet itself—not just Amazon—that allows customers to easily find the lowest price.

“If vendors or brands leave Amazon, they will eventually come back,” Wilke predicts, because “customers trust Amazon to be great providers of information and customer reviews about a vast selection of products. If you have customers ready to buy, and if you have a chance to tell them about your product, what brand ultimately doesn’t want that?”

Dyson, the British vacuum maker, is one example of a brand that appears to treat Amazon with caution. It sold on Amazon for years and then an irate Sir James Dyson, its founder, visited Amazon’s offices personally to vent his frustrations over repeated violations of MAP. “Sir James said he trusted us with his brand and we had violated that trust,” says Kerry Morris, a former senior buyer who hosted Dyson on that memorable visit. Dyson pulled its vacuums from Amazon in 2011, though some models are still sold on the Amazon Marketplace by approved third-party merchants. Over the past few years, companies such as Sony and Black and Decker have taken turns yanking various products from the site. Apple in particular keeps Amazon on a tight leash, giving it a limited supply of iPods but no iPads or iPhones.

Amazon’s booming marketplace is a primary source of tension between Amazon and other companies. Over the holiday months in 2012, 39 percent of products sold on Amazon were brokered over its third-party marketplace, up from 36 percent the year before. The company said that over two million third-party sellers worldwide used Amazon Marketplace and that they sold 40 percent more products in 2012 than in 2011.11 The Marketplace business is a profitable one for the company, since it takes a flat 6 to 15 percent commission on each sale and does not bear the expense of buying and holding the inventory.

Some of the retailers who sell via the Amazon Marketplace seem to have a schizophrenic relationship with the company, particularly if they have no unique and sustainable selling point, such as an exclusive on a particular product. Amazon closely monitors what they sell, notices any briskly selling items, and often starts selling those products itself. By paying Amazon commissions and helping it source hot products, retailers on the Amazon Marketplace are in effect aiding their most ferocious competitor.

In 2003, Michael Ross was chief executive of Figleaves.com, a London-based online lingerie and swimwear site that sold popular sports bras made by the British brand Shock Absorber. Figleaves had Amazon’s attention early on. To promote the company’s debut in the United States on Amazon’s Marketplace, Ross helped arrange a lopsided exhibition tennis match between Jeff Bezos and Shock Absorber’s celebrity endorser Anna Kournikova.

Figleaves sold its wares on Amazon’s Marketplace for a few years but left unhappily at the end of 2008. By then, Amazon.com was carrying a wide assortment of Shock Absorber bras and swimsuits, and Figleaves was selling very little on the site. “In a world where consumers had limited choice, you needed to compete for locations,” says Ross, who went on to cofound eCommera, a British e-commerce advisory firm. “But in a world where consumers have unlimited choice, you need to compete for attention. And this requires something more than selling other people’s products.”

Even sellers who thrive in Amazon’s Marketplace tend to regard it warily. GreenCupboards, a seller of environmentally responsible products, like eco-friendly laundry detergents and pet supplies, has built a sixty-person company almost entirely via Amazon, despite the fact that founder Josh Neblett says that Marketplace enables “a race to zero.” His company is constantly competing with other sellers and with Amazon’s own retail organization to provide the lowest possible price and to capture the “buy box”—to be the default seller of a particular product on the site. That furious price competition tends to drive prices down and eliminate profit margin. As a result, GreenCupboards has had to get more Amazon-like to survive. Neblett says the company has gotten better at sourcing hot new products, locking up exclusives, and building a lean organization. “I’ve just always considered it a game and we are figuring out how to best play it,” he says.

Still, as Wilke says, some of the companies that disavow selling on Amazon ultimately return, irresistibly drawn to its 200 million active customers and brisk sales. Amazon’s own employees have compared third-party selling on the site to heroin addiction—sellers get a sudden euphoric rush and a lingering high as sales explode, then progress to addiction and self-destruction when Amazon starts gutting the sellers’ margins and undercutting them on price. Sellers “know they should not be taking the heroin, but they cannot stop taking the heroin,” says Kerry Morris, the former Amazon buyer. “They push and bitch and complain and threaten until they finally see they have to cut themselves off.”

Wüsthof, the German knife maker, had its relapse in 2009, after an intensive courtship by Amazon that included promises of obedience in regard to the manufacturer’s suggested price. The company reallocated product to the online retailer, but the earlier pattern repeated itself; for example, Wüsthof’s gourmet twelve-piece knife set, with a MAP of $199, showed up on the site at $179. René Arnold, the CFO, was overwhelmed with complaints from his other retail partners, whose prices remained 10 percent higher. These small shop owners either lost sales to Amazon or were forced by their customers to match Amazon’s price. In their angry calls to Arnold, they threatened to lower their retail prices as well, and now it was easy for Arnold and his colleagues to envision a day when all these retailers would start demanding lower wholesale prices on Wüsthof knives, cutting into the company’s profit margins. The economics of its traditional-manufacturing operation in Germany would no longer make sense.

When Arnold complained, his counterpart at Amazon, a merchandising manager named Kevin Bates, responded that the company was merely finding and matching lower prices on the Web and in its third-party Marketplace. Arnold argued that many of those sellers were not authorized retailers and urged Amazon not to match them. Bates said that he was required to—Amazon always matched the lowest price.

Arnold was frustrated. He was monitoring Amazon’s third-party Marketplace and tracking several unfamiliar low-priced sellers, including one called Great Deals Now Online. This mysterious entity always seemed to have Wüsthof knives for sale, yet Arnold had no idea who they were, and Amazon provided no way to contact them. “He might know someone who has gotten a hold of surplus product, or he might have someone working at Bed, Bath and Beyond stealing from the distribution center,” says Arnold. “Customers would never give their credit card to this guy, but because he’s on the Amazon platform, they figure he’s clean, he must be good.” Arnold felt that Amazon’s own Marketplace was enabling the destructive discounting that its retail business was using as an excuse to undercut MAP.

In 2011, Wüsthof decided, again, to end its relationship with Amazon. To help explain to his bosses why Wüsthof was cutting off one of its best sales channels, René Arnold requested a meeting with Amazon and brought Harald Wüsthof over from Germany. Wüsthof, in his mid-forties with wavy, white hair and an avuncular smile, has quite possibly never in his life been photographed without a sharp blade in his hands.

The meeting, at Amazon’s offices in Seattle, was tense. Kevin Bates was joined by his boss Dan Joy, a director of hard-line categories like kitchen and dining. Bates and Joy seemed genuinely surprised to hear that Wüsthof was walking away and vowed to acquire Wüsthof knives through the gray market. They also threatened the company, as Arnold recalls, saying that every time a customer searched on Amazon for the Wüsthof brand, Amazon would show advertisements for competitors like J. A. Henckels, another knife company based in Solingen, and Victorinox, maker of Swiss army knives.

Wüsthof and Arnold were shocked by the fierceness of Amazon’s stance and held firm on their decision to withdraw. “Anyone can sell more Wüsthof at half the price. It’s easy,” Arnold says. “But if you start selling at the lower price, maybe you have a heyday for a few years, but within two or three years you drive a two-hundred-year-old family business into a wall. We had to protect our brand. That was the main decision point. So we pulled out.”

At a kitchen-and-bath trade show in Chicago the following spring, Arnold was surprised to receive an outpouring of support from sympathetic vendors who were also tussling with Amazon over issues like MAPs and mysterious third-party sellers. Meanwhile, Amazon followed through on its threats to show ads for Wüsthof rivals. In mid-2012, an enterprising Amazon buyer somehow managed to get someone at Wüsthof headquarters in Germany to ship him a large crate of knives meant to go to Dubai. That supply lasted about six weeks.

By the end of 2012, an Amazon merchandising representative began courting Wüsthof once more, begging the company to reconsider. The knife maker declined. But here’s the kicker: Customers can still find a decent selection of Wüsthof knives on Amazon from a handful of third-party sellers and even from Amazon itself. In 2010, Amazon started a unit called Warehouse Deals. The unit buys refurbished and used products and sells them in the Amazon Marketplace and on the Web at Warehousedeals.com. The goal of the project, according to an executive who worked on it, is to become the largest liquidator on the planet. These products are often advertised as “good as new”—a package of diapers with a tear in the shrink wrap, for example—and Amazon is not required to sell them at MAP.

As of this writing, Warehouse Deals has a selection of more than sixty Wüsthof products at steep discounts. Third-party merchants, mostly other authorized Wüsthof retailers, also sell their knives on Amazon, often through Fulfillment by Amazon, which allows the products to qualify for Prime shipping. So even when partners flee, the groundwork that Amazon has laid ensures that the hallowed shelves of the everything store are never completely bare.

Back in the anxious years after the dot-com bust, when Wüsthof was still happily selling its knives on Amazon.com, Jeff Bezos was tracking a firm he viewed as a potentially dangerous new rival: Netflix. At the time, Amazon was making a little extra money by inserting paper advertisements into its delivery boxes, and Bezos himself received a package that contained a flyer for the DVD-rental firm. He brought the flyer into a meeting and said irritably of the managers running the advertising program, “Is it easy for them to ruin the company or do they have to work at it?”

Bezos was clearly nervous about Netflix’s gathering momentum. With its recognizable red envelopes and late-fee-slaying DVD-by-mail program, it was forging a bond with customers and a strong brand in movies, a key media category. Bezos’s lieutenants met with CEO Reed Hastings several times during Netflix’s formative years but they always reported back that Hastings was “painfully uninterested” in selling, according to one Amazon business-development exec. Hastings himself says that Amazon was never truly serious about an acquisition of Netflix because “the basic operating rhythms” of the DVD-rental space, which required multiple small fulfillment centers to send discs out and then receive them back, were so different from Amazon’s core retail business. “It made no sense for them to be an aggressive bidder because it didn’t really leverage their strengths,” he says.

Like everyone else, Amazon executives knew that the days of selling and shipping physical DVDs were numbered, but they wanted to be prepared and well positioned for whatever came next. So Amazon opened DVD-rental services in the United Kingdom and Germany, with the idea that it would learn the rental business and establish its brand in markets that Netflix had not yet entered. But local companies were ahead there too, and the cost to acquire new customers was higher than Amazon had anticipated. In February 2008, Amazon seemingly waved the white flag of surrender, selling those divisions to a larger competitor, Lovefilm, in exchange for about $90 million in stock and a 32 percent ownership position in the European firm. Jeff Blackburn says that by then Amazon suspected there was little future for the rental model and that “we sold them the DVD business because they seemed to be overvaluing it.”

Lovefilm was a kind of Frankenstein corporate creation, the combination of numerous Netflix clones that had gradually merged with one other and come to control a majority of the British and German rental market. As a result, it had many shareholders (including several prominent venture-capital firms), a large board of directors, and plenty of conflicting internal opinions about its strategic moves. Amazon became the largest shareholder after the deal and later consolidated its grip on the startup when another investor, the European venture-capital firm Arts Alliance, sold the company a 10 percent stake. Greg Greeley, the former finance executive who was running Amazon’s European operation, joined the Lovefilm board. As it is wont to do, Amazon watched from the sidelines, learned, and patiently waited for an opening.

By early 2009, the home-video market was inexorably tilting toward streaming movies online and away from sending discs in the mail. Like Netflix, Lovefilm planned to transition to video on demand. It had arranged streaming deals with movie studios like Warner Brothers and put access to its catalog on devices like Sony’s PlayStation 3. But the company needed additional capital to execute such a shift in its business, so that year it hired the investment bank Jefferies and started entertaining acquisition and investment offers.

While private equity firms like Silver Lake Partners expressed interest, Google was the most prominent bidder for Lovefilm. The search giant’s executive team was developing a plan over the summer of 2009 to acquire both Lovefilm and Netflix and add a significant new focus that was unrelated to its core advertising business. Nikesh Arora and David Lawee, business-development executives at Google, had several meetings with people at both companies that year and produced a preliminary letter of Google’s intent to buy Lovefilm for two hundred million pounds (about three hundred million dollars), according to three people with knowledge of the offer. But these efforts ultimately fizzled; there was opposition from Google’s YouTube division and fear that the company might be able to acquire one streaming-video business but not the other.

That left Lovefilm still in need of additional capital. So over the summer of 2010, the company’s executives decided to pursue an initial public offering. Then Amazon decided it wanted to buy Lovefilm, and everything changed.

Amazon had watched the explosion in popularity of Internet-connected Blu-ray players and video-game consoles in its own electronics store and knew it had to get off the sidelines. Its incipient streaming service, Amazon Video on Demand, was the successor to an overly complicated video download store called Amazon Unbox, which required users to download entire movies to their PCs or TiVo set-top boxes before they could start watching. The streaming service (which did not require downloads) was showing early promise but the company still lagged behind Apple and Hulu in the online-video market. Buying Lovefilm would give it a beachhead in Europe. “They went from having a financial interest, where they thought they might make a financial return on their investment, to a strategic interest,” says Dharmash Mistry, a former partner at the London venture-capital firm Balderton Capital and a Lovefilm board member. “They wanted to own the asset.”

Now the Lovefilm board members would witness the same ruthless tactics observed by the founders of Zappos and Quidsi. Amazon pointed out, quite sensibly, that Lovefilm needed to invest hundreds of millions to acquire content and hold off deep-pocketed rivals like the massive cable conglomerate BSkyB and, when it finally entered the European market, Netflix. Amazon also argued that Lovefilm needed to invest in its long-term prospects and should not spend time and money gussying itself up for the conservative public markets in Europe, which would want to see profits before an IPO. The best path forward was for Lovefilm to sell itself to Amazon. It was more Bezos-style expedient conviction—the arguments had the advantage of being completely rational while also serving Amazon’s own strategic interests.

In the midst of this debate, Amazon found a technical way to prevent a Lovefilm IPO. If the company was going to free up stock to sell to the public, it needed to amend its own bylaws, or articles of association—and as the largest shareholder, Amazon could block this change. It effectively had a veto over an IPO, and Amazon made it clear that it was not going to authorize or publicly endorse the move, according to multiple board members and people close to the company. This was an enormous problem. Potential investors were likely to balk if the company’s biggest shareholder was not visibly showing its support for the offering.

Lovefilm executives had several meetings with attorneys to try to find a way to extricate themselves from the situation. They also attempted to entice other potential acquirers, hoping to spark a bidding war, but without success. Everyone saw that Amazon was squatting over the asset.

Though Lovefilm was a prestigious European company with a strong brand and solid momentum, Amazon offered an opening bid of a hundred and fifty million pounds, the very bottom of Lovefilm’s price range. With no alternatives, Lovefilm started negotiating. In the protracted discussions that followed, Amazon characteristically argued every point, such as compensation packages for management and the timing of escrow payments. Lovefilm’s attorneys were astonished at the intractable positions taken by Amazon’s negotiators. The talks lasted more than seven months, and the acquisition was finally announced in January 2011. Amazon ended up paying close to two hundred million pounds, or about three hundred million dollars—roughly the same amount Google had offered despite the fact that Lovefilm had expanded its subscriber base and its digital catalog of movies in the intervening year and a half.

Amazon now had a strong foothold in the European video market just as it unveiled its most serious play for the living room. A month after it announced the purchase of Lovefilm, the company introduced a video-streaming service for Amazon Prime in the United States. Members of the two-day shipping service could watch for free a selection of movies and television shows, a catalog that would grow steadily over the next few years as Amazon inked deals with content providers such as CBS, NBC Universal, Viacom, and the pay-TV channel Epix.

Inside the company, Bezos rationalized the giveaway by saying that it sustained and even complemented the seventy-nine-dollar fee for Prime at a time when customers were buying fewer DVDs. But Prime Instant Video played another role. Amazon was now providing, as a supplementary perk, something Reed Hastings and his colleagues at Netflix priced at five to eight dollars a month. The service exerted direct pressure on a key rival and worked to prevent it from appropriating an important section of the everything store. Amazon too would offer films and TV shows in any form that customers could possibly want—all with the click of a button.

To Jeff Bezos, perhaps the only thing more sacrosanct than offering customers these kinds of choices was selling them products and services at the lowest possible prices. But in the fractious world of book publishing, Amazon, it seemed in early 2011, was losing its ability to set low prices. That March, Random House, the largest book publisher in the United States, followed the other big publishers and adopted the agency pricing model, which allowed them to set their own price for e-books and remit a 30 percent commission to retailers. Amazon executives had spent considerable time pleading in vain with their Random House counterparts to stick with the wholesale model. Bezos now no longer had control over a key part of the customer experience for some of the biggest books in the world.

With no stark price advantage and increased competition from Barnes & Noble’s Nook, Apple’s iBookstore, and the Toronto-based startup Kobo, Amazon’s e-book market share fell from 90 percent in 2010 to around 60 percent in 2012. “For the first time, a level playing field was going to get forced on Amazon,” says James Gray, the former chief strategy officer of the Ingram Content Group. Amazon executives “were basically spitting blood and nails.”

Amazon felt major book publishers were limiting its ability to experiment with new digital formats. For example, the Kindle 2 was introduced with a novel text-to-speech function that read books aloud in a robotic male or female voice. Roy Blount Jr., the president of the Authors Guild, led a protest against the feature, writing an editorial for the New York Times that argued authors were not getting paid for audio rights.12 Amazon backed off and allowed publishers and authors to enable the feature for specific titles; many declined.

Book publishers were refusing to play by Amazon’s rules. So Amazon decided to reinvent the rulebook. It started a New York–based publishing imprint with the lofty ambition to publish bestselling books by big-name authors—the bread-and-butter of New York’s two-century-old book industry.

In April of 2011, a month after Random House moved to the agency model, an Amazon recruiter sent e-mails to several accomplished editors at New York publishing houses. She was looking for someone to launch and oversee an imprint that “will focus on the acquisition of original commercially oriented fiction and non-fiction with the goal of becoming bestsellers,” according to the e-mail. “This imprint will be supported with a large budget and its success will directly impact the success of Amazon’s overall business.” Most of the e-mail’s recipients politely declined the offer, so Kindle vice president Jeff Belle asked the man who’d been steering him toward possible recruits if he himself might be interested in the job. “Well, the thought had crossed my mind,” replied Larry Kirshbaum, a literary agent and, before that, the head of Time Warner’s book division.

Kirshbaum, sixty-seven at the time, was the ultimate insider, widely known and, until then, almost universally liked. He had a well-honed instinct for big, mass-culture books and an intuitive feel for survival inside large corporations. When AOL acquired Time Warner in 2000, he directed the staff of Warner Books to wear I Heart AOL T-shirts and made a video of everyone standing around a piano singing “Unforgettable” (the company had just published Natalie Cole’s autobiography). He was thinking about e-books—and losing money on them—long before almost anyone else in the industry.

Kirshbaum reentered a very different environment than the one he had left in 2005 when he departed AOL Time Warner to become an agent. Animosity toward Amazon had become a defining fact of life in the book business. So he was considered by many of his former peers to be a defector, someone who had gone over to the dark side, a sentiment they did not hesitate to express to him, sometimes in pointed terms.

“There have been a few brickbats I’ve had to duck,” Kirshbaum says, “but I have a message I really believe in, which is that we’re trying to innovate in ways that can help everybody. We are trying to create a tide that will lift all boats.” He points to the industry’s similarly negative reaction to Barnes & Noble’s acquisition of the publisher Sterling back in 2003, which raised the same fear that a powerful retailer was trying to monopolize the attention of readers. “We all worried the sun wasn’t going to come up the next day, but it did,” he says. Of Amazon, he says, “We certainly want to be a major player, but there are thousands of publishers and millions of books. I think it’s a little bit of a stretch to say we are cornering the market.”

Kirshbaum’s bosses in Seattle sounded a similarly conciliatory note. “Our entire publishing business is an in-house laboratory that allows us to experiment toward the goal of finding new and interesting ways to connect authors and readers,” Jeff Belle told me for a Businessweek cover story on Amazon Publishing in early 2012. “It’s not our intention to become Random House or Simon & Schuster or HarperCollins. I think people have a hard time believing that.”13

Amazon executives charged that the book publishers were irrationally consumed with the possibility of their own demise and noted that resisting changes, like paperback books and discount superstores, was something of a hallmark for the industry. And when it came to fielding questions on the topic, Amazon executives perfected a sort of passive-aggressive perplexity, insisting that the media was overplaying the issue and giving it undue attention—sometimes with explanations that compounded and confirmed publishers’ concerns. “The iceman was a really important part of weekly American culture for years and his purpose was to keep your food from spoiling,” says Donald Katz, the founder and chief executive of Amazon’s Audible subsidiary. “But when refrigerators were invented, it was not about what the iceman thought, nor did anyone spend a lot of time writing about it.”

Book publishers needed only to listen to Jeff Bezos himself to have their fears stoked. Amazon’s founder repeatedly suggested he had little reverence for the old “gatekeepers” of the media, whose business models were forged during the analogue age and whose function it was to review content and then subjectively decide what the public got to consume. This was to be a new age of creative surplus, where it was easy for anyone to create something, find an audience, and allow the market to determine the proper economic reward. “Even well meaning gatekeepers slow innovation,” Bezos wrote in his 2011 letter to shareholders. “When a platform is self-service, even the improbable ideas can get tried, because there’s no expert gatekeeper ready to say ‘that will never work!’ And guess what—many of those improbable ideas do work, and society is the beneficiary of that diversity.”

A few weeks after that letter was published, Bezos told Thomas Friedman of the New York Times, “I see the elimination of gatekeepers everywhere.” In case there was any doubt about the nature of Bezos’s convictions, Friedman then imagined a publishing world that includes “just an author, who gets most of the royalties, and Amazon and the reader.”14

“At least it’s all out in the open now,” one well-known book agent said at the time.

A kind of industrywide immune response then kicked in. The book world rejected Amazon’s new publishing efforts en masse. Barnes & Noble and most independent bookstores refused to stock Amazon’s books, and New York–based media and publishing executives widely scoffed at the preliminary efforts of Kirshbaum and his fledgling editorial team. Their $800,000 acquisition of a memoir by actress and director Penny Marshall, for example, was targeted for particular ridicule and later sold poorly.

Meanwhile, Amazon continued to experiment with new e-book formats and push the boundaries of publishers’ and authors’ tolerance. It introduced the Kindle Single, a novella-length e-book format, and the Prime Lending Library, which allowed Prime members who owned a Kindle reading device to borrow one digital book a month for free. But Amazon included the books of many mid-tier publishers in its lending catalog without asking for permission, reasoning that it had purchased those books at wholesale and thus believed it could set any retail price it wished (including, in this case, zero). In the imbroglio that ensued, the Authors Guild called the lending library “an exercise of brute economic power,” and Amazon backed off.15

Bezos and colleagues dismissed the early challenges Kirshbaum’s New York division faced and said they would gauge its success over the long term. They were likely positioning their direct-publishing efforts for a future where electronic books made up a majority of the publishing market and where chains like Barnes & Noble might not exist in their present form. In that world, Amazon alone will still be standing, publishing not just scrappy new writers but prominent brand-name authors as well. And Larry Kirshbaum could once again be one of the most popular—and possibly one of the only—publishing guys left in New York City.

In December of 2011, as if seeking a fitting conclusion to a year filled with controversy over sales tax, acquisitions, MAPs, and the economics of electronic books, Amazon ran a ham-fisted promotion of its price-comparison application for smartphones. The app allowed users to take pictures or scan the bar codes of products in local stores and compare those prices with Amazon’s. On December 10, Amazon offered a discount of up to fifteen dollars to anyone who used the application to buy online instead of in a store. Although certain categories, like books, were exempt, the move stirred up an avalanche of criticism.

Senator Olympia Snowe called the promotion “anti-competitive” and “an attack on Main Street businesses that employ workers in our communities.” An employee of Powell’s Books in Portland, Oregon, created an Occupy Amazon page on Facebook. An Amazon spokesperson noted that the application was meant primarily for comparing the prices of big retail chains, but it didn’t matter. The critics piled on, charging that Amazon was using its customers to spy on competitors’ prices and was siphoning away the sales of mom-and-pop merchants. “I first attributed Amazon’s price-comparison app to arrogance and malevolence, but there’s also something bizarrely clumsy and wrong-footed about it,” wrote the novelist Richard Russo in a scathing editorial for the New York Times.16

The conflagration over the price-checking app diminished quickly. But it raised larger questions: Would Amazon continue to be viewed as an innovative and value-creating company that existed to serve and delight its customers, or would it increasingly be seen as a monolith that merely transferred dollars out of the accounts of other companies and local communities and into its own gilded coffers?

During these years of conflict, Jeff Bezos sat down to consider this very question. When Amazon became a company with $100 billion in sales, he wondered, how could it be loved and not feared? As he regularly does, Bezos wrote up his thoughts in a memo and distributed it to his top executives at an S Team retreat. I received a copy through a person close to the company who wished to remain anonymous. The memo, which Bezos titled Amazon.love, lays out a vision for how the Amazon founder wants his company to conduct itself and be perceived by the world. It reflects Bezos’s values and determination, and perhaps even his blind spots.

“Some big companies develop ardent fan bases, are widely loved by their customers, and are even perceived as cool,” he wrote. “For different reasons, in different ways and to different degrees, companies like Apple, Nike, Disney, Google, Whole Foods, Costco and even UPS strike me as examples of large companies that are well-liked by their customers.” On the other end of spectrum, he added, companies like Walmart, Microsoft, Goldman Sachs, and ExxonMobil tended to be feared.

Bezos postulated that this second set of companies was viewed, perhaps unfairly, as engaging in exploitative behavior. He wondered why Microsoft’s large base of users had never come out in any significant way to defend the company against its critics and speculated that perhaps customers were simply not satisfied with its products. He theorized that UPS, though not particularly inventive, was blessed by having the unsympathetic U.S. Postal Service as a competitor; Walmart had to deal with a “plethora of sympathetic competitors” in the small downtown stores that competed with it.

But Bezos was dissatisfied with that simplistic conclusion and applied his usual analytical sensibility to parse out why some companies were loved and others feared.

Rudeness is not cool.

Defeating tiny guys is not cool.

Close-following is not cool.

Young is cool.

Risk taking is cool.

Winning is cool.

Polite is cool.

Defeating bigger, unsympathetic guys is cool.

Inventing is cool.

Explorers are cool.

Conquerors are not cool.

Obsessing over competitors is not cool.

Empowering others is cool.

Capturing all the value only for the company is not cool.

Leadership is cool.

Conviction is cool.

Straightforwardness is cool.

Pandering to the crowd is not cool.

Hypocrisy is not cool.

Authenticity is cool.

Thinking big is cool.

The unexpected is cool.

Missionaries are cool.

Mercenaries are not cool.

On an attached spreadsheet, Bezos listed seventeen attributes, including polite, reliable, risk taking, and thinks big, and he ranked a dozen companies on each particular characteristic. His methodology was highly subjective, he conceded, but his conclusions, laid out at the end of the Amazon.love memo, were aimed at increasing Amazon’s odds of standing out among the loved companies. Being polite and reliable or customer-obsessed was not sufficient. Being perceived as inventive, as an explorer rather than a conqueror, was critically important. “I actually believe the four ‘unloved’ companies are inventive as a matter of substance. But they are not perceived as inventors and pioneers. It is not enough to be inventive—that pioneering spirit must also come across and be perceivable by the customer base,” he wrote.

“I propose that one outcome from this offsite could be to assign a more thorough analysis of this topic to a thoughtful VP,” Bezos concluded. “We may be able to find actionable tasks that will increase our odds of being a stand out in that first group of companies. Sounds worthy to me!”