Amazon’s 1997 Letter to Shareholders

The situation

Amazon went public in May 1997, less than three years after Jeff Bezos founded it as an online bookstore. Its numbers for the year were the kind that excite growth investors and worry everyone else. The letter reports revenue of $147.8 million, up 838 percent from $15.7 million the year before. Cumulative customer accounts grew from 180,000 to more than 1.5 million. Employees grew from 158 to 614. And the company was losing money, with every intention of continuing to do so while it built warehouses, systems and new product lines.

A public company answers to shareholders who can sell at any moment and who often judge management by quarterly earnings. Bezos faced a basic problem of trust: how to keep investors from forcing the company to optimise for next quarter.

What the letter argues

The letter’s central section is headed “It’s All About the Long Term.” It begins: “We believe that a fundamental measure of our success will be the shareholder value we create over the long term.” It then lists nine commitments describing how Amazon will make decisions. Several are worth reading closely.

The first commitment is to keep focusing relentlessly on customers.

On investment: Amazon will “make investment decisions in light of long-term market leadership considerations rather than short-term profitability considerations or short-term Wall Street reactions.”

On risk: “We will make bold rather than timid investment decisions where we see a sufficient probability of gaining market leadership advantages.” The letter adds that some of these investments will pay off and others will not, and that the company will learn from either outcome.

On measurement, Amazon promises to judge its programmes analytically and to drop those that do not earn acceptable returns.

On accounting: “When forced to choose between optimizing the appearance of our GAAP accounting and maximizing the present value of future cash flows, we’ll take the cash flows.”

On cost and people, the letter promises to spend wisely and keep a lean culture, and calls a high hiring bar “the single most important element” of the company’s success.

The letter also contains a phrase that became a company slogan: “this is Day 1 for the Internet and, if we execute well, for Amazon.com.”

The decision it carried

The letter is a pre-commitment. It tells shareholders, before the decisions are made, how Amazon will choose when growth and profit conflict, and it invites investors who disagree to leave. It also commits management: having written the principles down, the company would be judged against them.

The alternatives were familiar. Amazon could have managed for steady quarterly earnings, as most public companies tried to. It could have avoided stating its trade-offs, leaving each loss to be explained after the fact. Or it could have stayed private longer.

What happened

Amazon kept the commitments in ways that are visible from the outside. It spent heavily on fulfilment and technology for years, with thin or negative profits. It launched businesses that looked unrelated to retail. Its 2015 letter describes how “many characterized AWS as a bold – and unusual – bet when we started,” and reports that AWS was by then used by more than a million customers. The same letter notes that Amazon “took two big swings and missed – with Auctions and zShops” before Marketplace succeeded, and that close to 50 percent of units sold on Amazon were by then sold by third-party sellers. Prime, launched in 2005, followed the same logic of investing in customer value ahead of profit.

Every annual letter since has ended with a copy of the 1997 letter attached. The 2015 letter closes: “Our approach remains the same, and it’s still Day 1.” Amazon became one of the largest companies in the world.

How to read it as a product manager

The letter is a model for writing down decision principles.

It states trade-offs, not virtues. “We focus on customers” is a virtue anyone can claim. “We will choose cash flow over the appearance of our accounts” is a trade-off with a cost, which is why it is credible.

It names the metric. By preferring free cash flow over reported earnings, the letter tells everyone which number Amazon will manage, and which it will let look bad. Product teams can apply the same discipline: name the metric, and name the attractive metrics you will deliberately ignore.

It commits to failure in advance. Saying publicly that some bold investments will not pay off makes it easier to make them, and easier to stop them.

It repeats itself. Attaching the letter every year turns a one-time statement into an institution. Principles that are restated become culture; principles that are written once become wall decorations.

What the letter leaves out, and what is contested

The letter is written from the point of view of shareholders and customers. It says little about employees beyond the hiring bar and the remark that “you can work long, hard, or smart, but at Amazon.com you can’t choose two out of three,” and later debates about working conditions in Amazon’s warehouses are outside its frame. It is also fair to note survivorship: many companies made similar long-term promises in the late 1990s and did not survive the dot-com crash. The letter’s principles were necessary for Amazon’s path but not sufficient; execution and timing mattered as much.

The decision, examined closely

What triggered it

The letter was Amazon’s first chance to speak to public shareholders in its own voice. It was written at a moment when the company’s growth was undeniable and its losses were growing too, and when the first serious competitors, including large traditional booksellers moving online, were arriving. Bezos needed shareholders to understand that the losses were a choice before they concluded they were a failure.

The constraints

Public companies are judged by numbers that are easy to compare, especially quarterly earnings. Amazon’s strategy depended on investments whose payoff would arrive years later and could not be proven in advance. The letter could not promise results; it could only promise a way of deciding.

What the author was optimising for

The letter optimises for the long-term value of the company, measured as future free cash flow, and for the freedom to pursue it. Each commitment either protects that freedom (long-term investment decisions, preferring cash flow to accounting appearance) or makes it credible (analytical measurement, frugality, a high hiring bar). The combination matters: a promise to invest boldly would have been reckless without the promise to measure and abandon what does not work.

Second-order effects

By attaching the letter to every annual letter, Amazon turned a statement into a ritual and a recruiting tool. It shaped which investors held the stock and how managers inside the company argued for projects. Its language, especially “Day 1,” became part of Amazon’s culture. It also set a template that many founders later copied in their own public letters, often with less consistency.

The counterfactual

Without the letter, Amazon might have faced stronger pressure to show profits during the dot-com crash of 2000 and 2001, when its share price fell steeply and its survival was questioned. The letter did not prevent the crash, but it gave management a documented strategy to point to. Whether Amazon would have survived without it is impossible to know; that it made the hardest years easier to defend is a reasonable judgement.

Sources and limitations

Quotations come from Amazon’s own copy of the letter and from its 2015 letter as published by Amazon’s investor relations site. Financial figures are those stated in the letters. The exact publication date of the 1997 letter is not given in the sources consulted, so this page shows it as the letter on 1997, published with that year’s annual report. The assessment of how consistently Amazon followed the letter is the author’s interpretation.