Disclaimer: I do not speak for my employer (Grab); these opinions are my own. Also, the timing of this post right before re:invent is coincidence. I like AWS and will be attending!
I want to share a story with you guys. I’ve been meaning to tell it for about 20 years, which I personally think is some pretty impressive procrastination. But it’s still relevant today, dripping with juicy learnings.
This is the story of the first time Jeff Bezos got something spectacularly wrong, and why, and what happened afterwards, and what we can learn from it. It’s also the story of how Jack Ma tackled exactly the same problem a few years later, and got it right, and why, and what we can learn from that too.
I think it’s a pretty good story. I can never figure out why companies don’t tell their failure stories more openly. There’s so much to learn from each other.
For this particular story, I don’t have all the details; probably nobody does. I may get a few things slightly wrong. I wouldn’t treat this post as historical record, so much as a way to get some life lessons from guys like Jack and Jeff, without having to spend as much tuition money as they did.
Here is what happened, near as I can tell.
Part 1: Mr. Tooth
I’m going to go out on a limb and venture a guess that you’ve never heard of Mr. Tooth. He looks like this:
It’s pretty goddamn hard to find a picture of Mr. Tooth these days. A Google search for “amazon auctions mr tooth” will give you nothing. I had to use the Wayback Machine, and even that took quite some time because his little life was so short.
Mr. Tooth wasn’t purged from the internet through some vengeful move by Amazon to hide all traces of their embarrassment, were such a thing even possible without a Streisandian rebound. No, the simple truth is that Mr. Tooth was so ineffectual that nobody ever bothered to remember him.
When I started at Amazon back in December 1998, it was a crazy time. A historic time. There was an electricity in the air, and it wasn’t just the smoke from the bar below us, there in the old Columbia building on 3rd avenue across from the Scaryaki joint and the needle exchange. Everyone could feel history being made, and the center of the fire was Jeff himself, who even back then, for a company of maybe 100 people (sans ops), was already a cult figure with protected access.
Because back then, Jeff had never been wrong about anything. Certainly not in any big, meaningful way. Everything he launched was pure gold. First he launched Books, and I mean, who the hell would have ever guessed that an internet bookstore would catch fire like that? And then a successful launch of Music, taking aim at record stores, and then DVD/Video, taking aim at Blockbuster.
Back in 1998–1999, every single launch of a new tab (remember they had tabs back then?) was a huge event. Eric Benson’s dog Rufus always got to press the launch button, and we’d always launch at midnight so that there would be a big press release in the morning (and also in case there were hiccups with the site), and it was just nuts how everything Jeff did looked like it was going to topple an established industry.
I can’t remember exactly, but I seem to recall that we launched the Amazon Japan site shortly after BMVD (books, music, video, dvd), and it was also a huge success, noteworthy because gosh, it was Japan. First time we had to deal with localization, different regulations, different supply chain, different consumer patterns, and so on. Still a big success. Because Jeff was Always Right™.
Secret Project: The first whiffs of failure
Sometime in that first month or two, I heard about a secret project, whispered in hushed tones. And it really was a secret project, at least insofar as such as thing could be accomplished in a tiny office of 100 people on two floors.
It was so secret that they had forked the code base for the retail site. The site’s web server was called Obidos, named for the town near the fastest part of the Amazon river, and they had forked (copied) it and fittingly named it Varzea, after a big swamp. They also cherry-picked some of the top engineers to go work on Varzea, also in total secrecy.
I’ll pause here and get Life Lesson #1 out of the way, which is: Secret projects are stupid. Forking your code base is also stupid. I don’t think I need to offer a lot of justification for either of these, so let’s just move on. This life lesson isn’t the big meal; it’s just a little side snack.
The whispered secret project? Amazon was gonna kill eBay. The plan was to build an entire auctions site from scratch, fill it with some sweet seed-content like rare collector baseball cards from Sotheby’s, offer an ironclad guarantee (“we’ll refund you if our sellers screw up”), and then pounce. Boom, bam, the tab launches, the eBay sellers all pack up their shops and leave eBay en masse, all the eBay customers stampede over as well, and eBay is left sitting there wondering what hit them.
Great plan, eh? Well, of course we can laugh in hindsight, especially after a few drinks. Honestly, even at the time it should have been obvious that it would never work, because it’s not as if eBay was the world’s first network effect.
But Jeff had never been wrong before. And nobody had truly believed that his little bookstore was going to be so big, until it grew like a cat-5 storm and proved everyone wrong wrong wrong. I remember my tiny graduating CS class at the University of Washington in early 1995, with everyone looking for jobs at big tech companies like DEC and IBM and the upstart Microsoft. One of our classmates told us that she was going to work for this internet bookstore, and I remember feeling so sad for her. We felt like she had decided to throw away all her fancy training and become a librarian, or a nun, or something. She was employee #11.
By 1998, post-IPO, Jeff had cleared up any doubts as to whether his bookstore would succeed. Every time he tried something crazy-ambitious, he wound up being right. So when Jeff said that they were gonna kill eBay (this was back before the US government sued Microsoft and everyone learned not to say you’re killing your competitors), people believed him. They just straight-up had faith. Amazon had a cult-like culture at the time, a speak-no-dissent mentality, where discussion of failure simply wasn’t allowed, perhaps because people superstitiously believed that saying it might make it come true? I don’t know. This has happened at other places too. Google+ was like that, back in the day.
I don’t know why Amazon Auctions had a mascot named Mr. Tooth. That tidbit is nearly lost to history. Paul Kotas would probably know. My hunch is that Jeff came up with it himself. There’s really nothing wrong with Mr. Tooth as a mascot. He wasn’t a bad idea. No. The bad idea was Amazon Auctions.
Because you can’t beat a network effect with a nearly-identical network.
Amazon Auctions wasn’t fundamentally different from eBay. Sure, it was a little cleaner-looking, which is unsurprising given that eBay’s site always looked like someone threw up all over it. And Amazon had established enough brand trust that the refund guarantee was legit. I have no doubt that everyone believed it.
But Amazon Auctions was a direct competitor to eBay, which meant that in order for it to be successful, people were going to have to leave eBay.
And that, dear friends, did NOT happen. Amazon Auctions was a spectacular flop. Put in modern-day terms, it was about as successful as Google+. And for the same exact reason!
The problem is that there are certain ecosystems that exhibit what’s called a network effect, in which the system naturally reinforces itself through a feedback loop, and it causes an almost magnetic attraction back into the system.
In eBay’s network, the buyers go where the sellers are (for variety), and the sellers go where the buyers are (for reach), and it winds up being self-reinforcing. Buyers are busy people, so they would visit Amazon’s Auctions site, not find what they wanted, and they’d head straight back to eBay. Sellers have more time on their hands, and some of them did in fact try out Amazon Auctions. But they weren’t getting bites, so they started decorating their sites to point back to eBay, where they were forced to keep most of their inventory because the all buyers were there.
In practice, the only way to get everyone moved over to an identical network would be to do it all at once, and of course that’s logistically impossible.
So Life Lesson #2, and this one is pretty goddamn important, is: Don’t try to beat a network by making a clone with improvements. It ain’t gonna work. There is too much gravitational inertia in the original network; nobody is incentivized to leave it.
There are some approaches that will work, and we’re going to explore two of them: Jeff’s and Jack’s. Both approaches require you to get into an entirely different market and build a network there. You can’t beat a strong network head-on, but you can flank it.
Part 2: Amazon zShops (Lesson: Keep trying!)
If you’re trying to choose a direction for your business, and you’re up against a network effect, then you should consider that market to be locked up. You should instead start looking for another, related market to enter, and then you can sneak up on the original market from the side. And there is always a related market.
As a self-serving but relevant segue, I’ll mention that back in 2011 when I wrote my Platforms Rant, it was actually part 2 of an 11-part series I’d planned, every part being a different way to crap all over Google+, because yes, it was a bad idea in at least ten unique dimensions. (The 11th post was going to be the wrap-up where I begged them to just kill the damn thing.)
The first post in that series, which I managed to keep internal because I used corp Blogger, was about Real Names being a huge obstacle to adoption. Platforms was second, and then I had one planned about comment threads: how reddit was able to have 80,000 comments in a thread that grandmas were reading, whereas in Google+, Google engineers would start complaining when the thread reached 50 comments. And so on. 8 more rants lost to the ages, because I got a little too drunk and couldn’t figure out how to use G+ and somehow posted to my external account.
Basically I had been gearing up to argue that Google needed to go into a completely separate market to be able to compete with Facebook. Reddit was looking like a nice ripe market, because back then they were small. Plus they were content-first rather than people-first, which meant they were fundamentally different from Facebook. And reddit never really did figure out how to turn themselves into a social network. So I wanted Google to do a social version of reddit.
That approach wouldn’t work today; reddit’s network of content creators and readers is too big now. Would it have worked back in 2011? Who knows! But it sure as hell would have had a better chance than Google+ did. Because G+ was directly competing with FB’s massive network, whereas reddit was a related market that Google could have entered: reddit was clearly doing something right, but they were also small enough back then that someone of Google’s size might have competed with them successfully.
Going after related markets was Bezos’ next step, after it had become clear that Amazon Auctions was going nowhere. He called the first sequel Amazon zShops. I’m not sure what the zShops meant. My hunch is that Jeff likes to equate Amazon with “A through Z” (meaning “we have everything”), hence the orange A→Z arrow in their logo. So the ‘z’ in zShops may have referred to the product being the long-tail of pocket lint that winds up being sold on consumer-to-consumer (C2C) marketplaces.
Jeff puts a lot of thought into his product designs and marketing. That stuff matters. Unfortunately, though, even the best marketing isn’t strong enough to beat an entrenched network effect. Little Mr. Tooth had gone up against Mr. 800-lb Gorilla, lost the battle, and was soon to be yanked out.
Here is what Amazon’s tabs looked like after zShops launched, circa 2001:
Note that Auctions is still there, so it hasn’t been killed off yet. And there are a bunch of other tabs, stuff they launched while they were iterating on the auction problem. Fun to look back at this stuff. Tabs were such a dumb idea. They’re always a dumb idea. You hear that, web browsers and IDEs? Tabs don’t scale! Lists are how you scale user interfaces. M-x list-buffers!
In any case, what exactly was zShops? How was it different from Auctions? Well, I’m going off 20-year-old memories here. I seem to remember that they got rid of bidding and developed a way for sellers to create storefront pages, with the idea being that sellers would be like miniature Amazon tabs, selling whatever each seller specializes in.
Not a bad idea, right? Well… actually it was a bad idea, for the same reason as Amazon Auctions. It was a bad idea because eBay already had storefronts by then, or at worst they could just add it as a feature. zShops had no defensible differentiators from eBay.
But before we continue the saga, let’s stop and get Life Lesson #3 out of the way: Don’t give up on a good idea. Despite the swift and embarrassing failure of Amazon Auctions, Jeff Bezos never gave up. This is probably the most important thing I ever learned from him, and I learned a lot from him.
It didn’t matter that zShops was doomed, because at a higher level, what was happening was that Bezos was finally innovating. Amazon Auctions? Definitely not innovation. Amazon Auctions was smug tail light chasing, a strategy which at many companies remains popular to this day. But zShops was the beginnings of Bezos trying to do something unique. And although it wasn’t unique enough, it was an important step in the evolution of an idea: The idea that eBay hadn’t got it 100% right for everyone, and that surely there must be some part of the C2C market that was being underserved. Jeff set out to find it, through exploratory innovation.
Contrast this approach with Google’s, which went something like this: Try something quickly, see if it succeeds, and if not, abandon it forever and MOVE ON. This strategy started with Eric Schmidt and “let 1000 flowers bloom”, a philosophy that Google ran with through Eric’s tenure as CEO. The core idea was that you need to “generate luck” by doing a whole bunch of stuff, and eventually some of it will get lucky.
A key problem with Eric’s approach is that it needed more scale than even Google could generate. In order to generate luck, you don’t need a thousand ideas, you need a million of them.
Eric used to tell us that he was the worst person to come up with ideas, because being an old rich white guy (Note: I’m paraphrasing a bit), he was completely un-representative of what trends might take off with young people. Fair enough! But another key problem with Eric’s approach to innovation is that Google engineers weren’t representative either. It turns out that coming up with a brand-new billion-dollar product idea is pretty hard, and it’s easier to get there by acquiring successful startups.
Jeff Bezos and Steve Jobs had something in common, different from Eric, which is that they were confident enough to believe that if they had a great idea, and they got it wrong the first time, that the idea was still a good one. Their implementation might have been wrong, but they kept hammering at it, changing its shape, until it was right.
Just be aware that you should expect to wind up in a completely different market by the time you’ve found a successful implementation. To beat a network effect, you need a different product in a related market that hasn’t been locked up yet.
Part 3: Bezos’ C2C Triumph
I’ve buried the lede pretty hard at this point, but it’s time for the big reveal: Jeff eventually succeeded wildly in C2C. It just didn’t look anything like Amazon Auctions.
My memory is hazy, but there may have been another round of innovation after zShops before Jeff hit on something that worked. That eventual thing was Single Detail Page, which is when you go look at some item on Amazon’s retail site, and it says, “new and used”, giving you the option of buying it from a third-party seller. Heck, it’s not even C2C anymore, although that line blurs even in eBay, with big sellers being real businesses in their own right, making them more B2C than C2C.
zShops had failed because it was still trying to compete with eBay, inasmuch as they had sellers, storefronts, transaction fees, and the same basic customer experience as eBay. So zShops sellers would just decorate their pages with a bunch of eBay logos and links to their storefronts over on eBay. This overall similarity caused no end of customer confusion. Many customers thought they were buying from eBay, and that eBay and Amazon were the same company, and it was always a huge struggle for Amazon’s customer service.
But Single Detail Page (SDP) was another beast entirely. SDP wasn’t going after eBay customers; it was going after Amazon customers. This was an ideal market: a large, captive (or at least receptive) audience of people who have expressed their purchasing intent by navigating to exactly what they want to buy. This was a new audience for C2C sellers, and there was no way for eBay to copy Amazon’s idea: SDP was a defensible innovation, sometimes called a “moat”, which leveraged Amazon’s own network effect in the retail-goods related market.
Note that SDP was able to grow incrementally. This had not been possible for Auctions or zShops, because they needed everyone (both buyers and sellers) to move over together in order to generate enough value to keep customers around. SDP had borrowed value from Amazon’s retail network. So it saw strong, steady growth. This is the leading signal that you’ve finally got your innovation right: It shows continuous incremental growth without much effort. Seems like an obvious thing, but big companies always seem to want to make up for innovation deficiencies through marketing and advertising, before they’re ready to try something else.
Did Jeff “win”? Well, eBay still does a lot of business, and they seem to have much greater long-tail variety than Amazon. So Jeff hasn’t beaten eBay yet. But he was able to invent a new market for third-party sellers on SDP, giving him a foothold in the original market (eBay) that he has gradually been growing into a stronger position.
And that, folks, is the only proven way to tackle a network effect. You make a new market, and win in that one. If you’re lucky, your network might even be able to muscle in on the other one. But before you can start that fight, you need to have your own fully-entrenched network first.
Part 4: Jack Ma does it differently
Thanks for sticking with me so far! We’re almost done.
Alibaba’s story is interesting too, because Jack Ma did beat eBay at their own game, a few years later. But I wasn’t there for it, so I don’t have colorful anecdotes for you, just the basic facts.
Also, unlike Mr. Tooth, Alibaba vs. eBay is a story that has been told plenty of times. Search for “eBay in China” to find some great write-ups of how eBay lost there.
The basic outline is that in 2004, eBay had an 85% market share in China, which amounted to an impregnable network effect. Alibaba was worried that eBay would impinge on their B2B business, and started (what appeared to be) a direct eBay competitor called TaoBao. Within 2 or 3 years they had pretty much driven eBay out of China, and in 2007 eBay finally threw in the towel and closed their doors.
At first, Jack tried a bunch of innovations to try to differentiate themselves from eBay, just as Jeff had done. eBay hadn’t tailored their offering well for the Chinese consumer, so TaoBao felt more familiar to Chinese buyers. All of Jack’s innovations were clever, and all would become helpful once the momentum started to shift away from eBay. But none of his little improvements over eBay would have been effective at starting a momentum shift, because of our Golden Rule: You can’t beat an existing network with a similar offering.
The core problem is that network-effect leaders keep a keen eye on their competition, so it’s easy for them to copy innovations from competitors, which helps protect their network. Facebook immediately responded to Google+’s big “innovation” (Circles) by adding more or less equivalent functionality, and then boom, Google+ was no longer different.
Of course, copying your competitors is normally a bad idea, because it has the side-effect of removing differentiation, forcing everyone to compete on price. You can play that game, but it’s no fun. However, if you have a lock on your market through a network effect, then copying would-be attackers is just strengthening your incumbency.
What happens when the incumbent can’t copy a new entrant’s feature? It turns out that network effects have a weak spot in their armor: Differentiators that they can’t (or won’t) copy.
Jack Ma exploited that weak spot with a feature that eBay really didn’t want to introduce: Instant messaging chat between buyers and sellers. eBay’s entire business model hinges on being able to keep buyers and sellers as separate as possible, so that they don’t collude to conduct their transaction in a separate channel and bypass the transaction fees, which is how eBay makes their money.
The consensus seems to be that it was TaoBao’s chat feature that killed eBay in China. Price-sensitive buyers and sellers flocked to TaoBao to avoid transaction fees. This gouged eBay’s network, but victory was pyrrhic: Alibaba couldn’t actually make any money off TaoBao. Put simply, they had started as eBay and finished as Craigslist, which is a completely different market. A related market!
The similarity to Craigslist didn’t end with removing transaction fees. Instant messaging also allowed haggling between the buyer and seller, which is another hallmark of Craigslist transactions. The only difference is that with Craigslist the haggling happens in person. TaoBao had found success through the creation of a fully-online equivalent of Craigslist, which (at least in China) didn’t exist at the time.
So TaoBao started up against eBay and wound up in different market. And they found the consumer rules were different in this new market. When TaoBao tried to start monetizing — initially by introducing sponsored placements via keyword bidding — their customers freaked out, and they had to back away from it. TaoBao had beaten eBay, but had they really “won”? In a way, yes. They had prevented eBay from hurting their B2B business, which if you’ll recall was Jack Ma’s original goal.
The story ends with Alibaba making money a few innovation rounds later, not with TaoBao, but in a different related market called The Mall, or (nowadays) Tmall, which was for more upscale brands. Ironically, it is what Amazon’s zShops aspired to be. Without eBay as a competitor, Alibaba had an easier time getting sellers to sign up. But TaoBao’s continued dominance in the Chinese auctions space has required TaoBao to forego monetization, because they won the space by training their customers that it should be free.
What’s the lesson here? It’s the same as the lesson we got from Jeff Bezos: To beat a network effect, you may start at point A, but you’re only going to be successful by steering to some distant point B, which will always be in a related market. And you may not know exactly where point B is until you’ve gone through several rounds of innovation. So if you’re sure you want to be in a market space, don’t give up after your first failure.
Wrap-up: Networks can still be beaten
I’ve oversimplified a fair bit; these situations are always more complicated than you can reasonably convey. Hopefully they were still useful to read about.
I think the overall takeaway here is that even though you can’t compete directly with a network effect, they can still be beaten by flanking them. The mighty eBay was toppled in China. Facebook has failed in many countries, usually because someone else beat them to market during the expansion phase. And for decades, Microsoft had a 3-way network effect between Windows (the OS), Windows app developers, and OEMs bundling Windows. But Linux has snuck in through the related server-side computing market, and has at least made enough headway that some 40% of Azure customers run Linux.
It doesn’t matter how far out your competitor is, nor how much of a lock it seems like they have on their market. You can get at them through related markets. It might take a few tries to get it right. Don’t give up. Keep innovating. Eventually you’ll hit a formula that works.
Simple, right? Then why do so many companies still try to tackle networks head-on?
You tell me.