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The news that Zappos, "a service company that just happens to sell shoes," would be purchased by Amazon.com (Nasdaq: AMZN ) filled me with mixed emotions.
Part of me was happy for Zappos CEO Tony Hsieh, who has built a service monopoly from essentially the soles up, growing sales from $1.6 million in 2000 to more than $1 billion in 2008. Part of me was sad to see Zappos fall as an independent, private company -- quashing my dream of watching the biggest corporate experiment in customer happiness eventually go public. Nonetheless, I believe Amazon's biggest purchase to date will prove more significant than anyone currently imagines.
Sequoia gets the boot
Hsieh didn't need the money. At age 24, he sold his Internet advertiser network, LinkExchange, to Microsoft (Nasdaq: MSFT ) for a cool $265 million. Less than a year later, Hsieh was lured into serving as an advisor to ShoeSite.com -- a seemingly bad Internet idea to sell shoes online, sight unseen. Hsieh got past thinking the venture was yet another Pets.com idea, and became attracted to both the $40 billion retail shoe market and the opportunity to build a business around a unique company culture and an almost fanatical devotion to customer service.
Citing two unnamed sources close to the company, the private equity news blog PEHub.com reported that lead VC investor Sequoia Capital was pushing for a sale, while Hsieh desired to stay independent. Tension in the relationship became apparent when Sequoia demanded that every one of its portfolio companies cut expenses and become cash flow-positive; to comply, Zappos subsequently laid off 8% of its employees. Hsieh was clearly not pleased with such mandates.
"We want to align ourselves," Hsieh said in explaining the sale, "with a shareholder and partner that thinks really long term (like we do at Zappos), as well as do what's in the best interest of our existing shareholders and investors."
In short, it seems that Sequoia's impatience has become Amazon.com's gain. Amazon, Zappos, and Netflix (Nasdaq: NFLX ) have long stood out as the Internet's titans of customer satisfaction, and according to Hsieh, the Zappos acquisition might just spread more of the shoe-seller's famous corporate culture to its new parent.
Let's just hope the Amazon-Zappos alliance turns out better than eBay's (Nasdaq: EBAY ) purchase of a private 25% stake in Craigslist.org. That relationship has since soured, with both parties ending up in court.
Amazon is not eBay, but public companies do have a way of disappointing partners and breaking promises. Berkshire Hathaway (NYSE: BRK-A ) , under the direction of Warren Buffett, is one of the few companies known for leaving its acquisitions to run themselves. Even Google (Nasdaq: GOOG ) , which professes to "do no evil," has engulfed, starved, or simply axed acquisitions that failed to gain traction.
Still, Hsieh is no dummy, and I doubt he'd agree to such a deal without a certain degree of confidence in his own company's future. Most people may mistakenly overlook this purchase, but I think it's a game-changer for e-commerce, and a reaffirmation that customer service can be a real competitive advantage. In short, my shoes are off to Zappos and Amazon alike.