Zappos: Life after acquisition

Nov 24, 2010

Adam Lashinsky joined Fortune in 2001 and is the author of the 2012 bestseller Inside Apple. He is editorial director of the Fortune Brainstorm Tech conference and a co-chair of Fortune Global Forum. He also appears regularly on the Fox News Channel.

Tony Hsieh, CEO of the quirky online shoe retailer, on how the company has changed since it joined forces with Amazon.com.

When Amazon (amzn) acquired Zappos in 2009, CEO Tony Hsieh wrote a truly funny, clever and informative letter to his employees, which he posted on his blog, about why he and Zappos's other investors were selling out. A year later he amended the memo, essentially providing a scorecard a year down the road on whether he'd been truthful with his employees or had been trying to pull the wool over their eyes.

It appears that Hsieh's memo is the model of corporate transparency. Zappos has clung to its independence. It has maintained its culture. Its growth has accelerated. Hsieh can't share certain financial secrets anymore, but he's upfront about that. (For a good pre-acquisition look at Zappos, read Jeffrey O'Brien's profile in Fortune.)

When I interviewed Hsieh last week at the Web 2.0 Summit, he even said that Zappos continues to pay new employees to quit if they feel after their initial training that they won't be a good fit at Zappos. Oh, something has changed: The buh-bye bounty is now $3,000, up from $2,000. Hsieh says 2-3% of recruits typically take the deal, but the company has to keep raising the figure to ensure that level of participation.<!-- more -->

Still, I wondered, why did Zappos need to sell at all, other than so that Sequoia Capital and others could make money? (My Fortune colleague Dan Primack has quarreled with Hsieh in the past about Hsieh's forthrightness on this subject.) Hsieh gave some concrete examples. Amazon's balance sheet allows Zappos to make refunds more quickly, for example. Okay, then if Zappos is completely independent, what's in it for Amazon? I didn't ask Hsieh that, but presumably Amazon owns affiliate brands (just as Nike (crm) owns Hurley or Cole Haan) because the brands own a category it would take Amazon too long to replicate.

(Aside No. 1. I also interviewed the talented Susan Lyne of Gilt Groupe on the same panel, where we discussed "managing hypergrowth." Lyne gave a cogent and truthful sounding explanation of why she swapped jobs recently with Chairman Kevin Ryan, who is now Gilt's CEO. She also discussed how Gilt is expanding into new product areas like travel and local markets.)

(Aside No. 2. Are there other examples of companies that have managed to maintain a strong degree of independence inside a much larger mother ship? I ran into Babycenter.com's Tina Sharkey recently, who described how distinct her company remains within Johnson & Johnson (jnj). It's impressive.)

We posted three interviews from a one-on-one interview I did with Hsieh after the Web 2.0 panel. In one Hsieh explains why Zappos will stay with Amazon forever; In another he explains the virtues of the acquisition; In a third Hsieh goes over Zappos's unusual aversion to typical retailing techniques, such as upselling.

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