Bezos On Innovation's founder discusses his approach to innovationboth how to do it and how to stay focused when critics question high-risk projects
Brian Smale

When a photographer recently directed (AMZN) founder Jeff Bezos to close his mouth during a shoot, the grinning chief executive didn't miss a beat. "Now that I've heard many times!" he said, letting loose one of his famous room-filling laughs.

Bezos has heard worse, of course. For nearly half of Amazon's 13-year history, he's been in Wall Street's doghouse, largely because he's insisted on massive spending to build the capacity that supports new services. While many Web companies were roaring back to life between 2004 and 2006, Amazon's stock fell from more than 50 to as low as 26.

But Bezos seems to be having the last laugh. Not only has Amazon emerged as the undisputed e-commerce champ, but the CEO has embarked on the most ambitious new growth initiatives in the company's history. The plan to sell access to Amazon's vaunted computing infrastructure has taken off with startups and recently with some corporations. Meanwhile, he insists the Kindle, a device unveiled last fall for reading electronic books, could be big enough to matter for the $14 billion company.

Bezos recently talked with BusinessWeek Senior Writer Peter Burrows at Amazon's Seattle headquarters about his approach to innovation—both how to do it and how to stay focused when critics question high-risk projects.

Q: Few CEOs have taken as much flak as you have for spending on innovation, in both good times and bad. What's your philosophy?A: My view is there's no bad time to innovate. You should be doing it when times are good and when times are tough—and you want to be doing it around things that your customers care about. For us, it's such a deep-seated belief, I'm not sure we have a choice.

Q: The company has a reputation for frugality. Does that apply to the way you innovate?A: I think frugality drives innovation, just like other constraints do. One of the only ways to get out of a tight box is to invent your way out. When we were [first] trying to acquire customers, we didn't have money to spend on ad budgets. So we created the associates program, [which lets] any Web site link to us, and we give them a revenue share. We invented one-click shopping so we could make check-out faster. Those things didn't require big budgets. They required thoughtfulness and focus on the customer.

Q: You seem able to ignore criticism from Wall Street, the press, and others about your investments in innovation.A: I believe you have to be willing to be misunderstood if you're going to innovate. That's actually a serious point. If you're going to do something that's never been done before—which is basically what innovation is—people are going to misunderstand it just because it's new.

Q: But don't you have an obligation to keep the stock from sinking?A: We don't claim that our long-term approach is the right approach. We just claim it's ours. Our approach has been to be as clear as we can be about what kind of company we are and let investors choose.

Q: Do you ever check in with long-term shareholders regarding strategy?A: We'll discuss it with the board but we won't go to outside investors. One of the nice things now is that we have enough scale that we can do quite large experiments without it having significant impact on our short-term financials. Over the last three years the company has done very well financially at the same time we've been investing in Kindle and Web services—and all that was sort of beneath the covers.

Q: Academics say Amazon excels at different kinds of innovation—from creating new ways of doing business to making small changes that improve the online store. Now comes Kindle, your first hardware product. How do you balance these approaches?A: There is a ton of fine-grained innovation that happens on a daily basis.

That kind is super important—things that make our operations more efficient and lower cost so we can afford to offer lower prices to our customers. But there is a spectrum, and at the other end is large-scale innovation like Kindle and Web services and Amazon Prime [a membership program that offers free shipping]. With large-scale innovation, you have to set a very high bar. You don't get to do too many of those [initiatives] per unit of time. You have to be really selective.

Q: Every company claims to be customer-focused. Why do you think so few are able to pull it off?A: Companies get skills-focused, instead of customer-needs focused. When [companies] think about extending their business into some new area, the first question is "why should we do that—we don't have any skills in that area." That approach puts a finite lifetime on a company, because the world changes, and what used to be cutting-edge skills have turned into something your customers may not need anymore. A much more stable strategy is to start with "what do my customers need?" Then do an inventory of the gaps in your skills. Kindle is a great example. If we set our strategy by what our skills happen to be rather than by what our customers need, we never would have done it. We had to go out and hire people who know how to build hardware devices and create a whole new competency for the company.

Q: How do you build a culture that is comfortable sticking with ambitious, controversial initiatives?A: We have three all-hands meetings a year, and I'll tell people that if the stock is up 30% this month, please don't feel you are 30% smarter. Because when the stock is down 30% a month from now, it's not going to feel that good to feel 30% dumber. When the Internet bubble burst, our stock went from over 100 a share to a low right after September 11 of 6. Throughout that entire period, the fundamentals of the business continuously improved. You can see the stock price going in the opposite direction of the fundamentals. So it wasn't that worrisome to us.

Q: Does that mean that dealing with the whipsaws on Wall Street have not been a management problem for you?A: Not really. It's like trying to get people to be long-term-oriented. Also, people who want to pioneer and find new ways of doing things know there are going to be ups and downs, that there will be profound moments of success and failure. And that's O.K. It's not an experiment if you know it's going to work.

Q: Amazon director John Doerr thinks Kindle can work and grow into a $1 billion business.A: Well, there are a lot of people who read. Is there the potential to make that a meaningful business? I believe there is. The onus is on us to continue to execute well. We've been working on this for three years.

Q: In those three years, did you ever consider killing it?A: Not at all. I remember one meeting where one of our executives said to me, "So how much are you prepared to spend on Kindle, anyway?" I looked at him and said, "How much do we have?"

Q: Did you mean it?A: Sure! The key is to pick things that you think are really important, and then focus on them.

Q: Do you feel vindicated, given how well the company is doing now?A: No. I've taken plenty of criticism, but it's always been about our stock price and never about our customer experience. After the bubble burst, I would sit down with our harshest critics, and at the end of the meeting they would say, "I'm a huge customer." You know that when your harshest critics are among your best customers, you can't be doing that badly.

Return to Inside Innovation Table of Contents

    Before it's here, it's on the Bloomberg Terminal.