Why Amazon.com CEO Jeff Bezos Embraces Failure

Using the Fire Phone as a prime example, Amazon CEO Jeff Bezos sheds light on his view of using failed experiments to gain market share.

Steve Symington
Steve Symington
Dec 10, 2014 at 11:48AM
Technology and Telecom

For many companies, suffering a nine-figure inventory charge related to a failed product would be a catastrophic event. But for Amazon.com (NASDAQ:AMZN) CEO Jeff Bezos, it's just another day at office.

The folks at Amazon barely blinked last quarter when the company took a $170 million writedown related to its much-maligned Fire Phone. In fact, that charge wasn't even mentioned in Amazon's earnings press release, but rather contained in its subsequent Form 10-Q filing with the SEC. And, no, it's not as though Amazon was simply hoping investors wouldn't notice. It's that in the broad scheme of things, Bezos thinks it's relatively insignificant. 

In a recent interview with Business Insider, Amazon CEO Jeff Bezos practically guaranteed that more Fire Phones are on the way, insisting that it's "going to take many iterations" to determine whether the project is truly a failure.

Failure is always an option
To better understand Bezos' perspective, consider his comments surrounding that claim.

Immediately beforehand, Bezos offered several examples to shed light on how Amazon has always done business. That notably includes Amazon Auctions, which he laments "didn't work out very well." But out of Auctions morphed zShops, which also failed. Then finally, out of zShops came Amazon Marketplace, which became its third-party seller business and now accounts for over 40% of the total units sold on Amazon.com. What at first looked like a massive failure is now an enormous success. 

More comparable along the hardware lines, Bezos went on to note that the Kindle is now on its seventh generation and reminded investors that the company has had trouble keeping up with early demand for products such as Fire TV, the Fire TV stick, and Amazon Echo. To be fair, unlike the crowded smartphone industry, those are all innovative creations operating in relatively young markets, so it may not be entirely appropriate to place the Fire Phone in the same bucket.

But does that mean investors can look forward to more big writedowns? Probably not. As Bezos stated, Amazon has generally erred on the side of caution by not producing enough of its hit hardware products. So the next time(s) around, you can be sure Amazon will be much more careful about managing Fire Phone inventories and learning from its previous failure.

One thing Bezos will never do
That also doesn't mean Amazon is done making -- and potentially failing at -- other big bets. Bezos elaborated on the relative insignificance of last quarter's $170 million charge with one caveat:

I've made billions of dollars of failures at Amazon.com. [...] None of those things are fun, but they also don't matter. Companies that don't continue to experiment and don't embrace failure, they eventually get in the desperate position where the only thing they can do is make a Hail Mary bet at the end of their corporate existence. Whereas companies that are making bets all along, even big bets -- but not "bet the company" bets, I don't believe in "bet the company" bets. That's when you're desperate. That's the last thing you can do. [emphasis mine]

That last point is arguably the most significant: However bold or costly Amazon's investment decisions might seem, Bezos will never allow them to occur should they threaten the company as a whole. So keeping in mind that Amazon is likely to be much more careful with the Fire Phone going forward, you can be sure it won't be allowed to run Amazon into the ground.

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The funny thing is, this thought process isn't even remotely new for Amazon. Back in his first letter to shareholders in 1997, Bezos wrote: "We will make bold rather than timid investment decisions where we see a sufficient probability of gaining market leadership advantages. Some of these investments will pay off, others will not, and we will have learned another valuable lesson in either case."

In the end, the first-gen Fire Phone's failure is a horrifying example of the "others will not" category. But astute long-term investors know all too well that the propensity to both embrace and learn from that failure is exactly what made Amazon the thriving business we know today.