Why did Amazon choose to open a physical bookstore, with more on the way? It’s a good question, and rendered all the more intriguing by this 2007 shareholders letter (PDF) that Yahoo dug up. In the letter, Bezos notes that he’s been asked repeatedly when Amazon is going to open a physical bookstore, and he’s always demurred—because he’s never been able to figure out a way to satisfy a four-factor test he’s established for any new business idea:

  1. We must convince ourselves that the new opportunity can generate the returns on capital our investors expected when they invested in Amazon
  2. And we must convince ourselves that the new business can grow to a scale where it can be significant in the context of our overall company.
  3. Furthermore, we must believe that the opportunity is currently underserved
  4. …and that we have the capabilities needed to bring strong customer-facing differentiation to the marketplace.

Bezos went on to add, “When you do see us enter new businesses, it’s because we believe the above tests have been passed.”

But at the time he was writing the letter, physical bookstores simply didn’t pass most of those tests.

I often get asked, “When are you going to open physical stores?” That’s an expansion opportunity we’ve resisted. It fails all but one of the tests outlined above. The potential size of a network of physical stores is exciting. However: we don’t know how to do it with low capital and high returns; physical-world retailing is a cagey and ancient business that’s already well served; and we don’t have any ideas for how to build a physical world store experience that’s meaningfully differentiated for customers.

But now it’s 9 years later, and the first bookstore is going strong with plans for a second one on the way. Bezos may not be planning one in every mall just yet, but clearly there are expansion goals in mind. So Bezos must have figured out his answers to those three missing factors. The one about differentiation we can plainly see right away—Amazon’s books-facing-out, no-price-on-the-shelves bookstores where you can use your phone to check the price on Amazon and be confident that’s exactly what you pay are like no physical bookstore we’ve seen before.

As to the other two factors, we can only guess. Locating the bookstores near Amazon warehouses might help with the low-capital, high-return issue. And as for whether or not existing stores are serving the customers well…you only need to look at how Barnes & Noble has been struggling lately to suspect that perhaps Jeff Bezos spies some opportunity with his little eye.

But on the other hand, it’s unclear whether one single bookstore (with another on the way) can be truly counted as a “new business” in any meaningful sense. Some have suggested that the purpose of the store isn’t to turn a profit in and of itself, but rather to slurp up more data on how customers shop in person to feed Amazon’s analytical monster. Perhaps some of those tests can be waived if the purpose of the new business is to earn a different kind of return than money?

But there are some tantalizing potential hints elsewhere in the letter as to what we might expect in the future. Toward the end, Bezos writes:

In our experience, if a new business enjoys runaway success, it can only begin to be meaningful to the overall company economics in something like three to seven years. We’ve seen those time frames with our international businesses, our earlier non-media businesses, and our third party seller businesses. Today, international is 45% of sales, non-media is 34% of sales, and our third party seller businesses account for 28% of our units sold. We will be happy indeed if some of the new seeds we’re planting enjoy similar successes.

How meaningful will Amazon bookstores be in three to seven years? And how many of them will be around by then? It should be pretty interesting finding out.


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