Amazon

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CASE #1- AMAZON . C O M - A B U S I N E S S H I S T O R Y1 A P P E AR AR I N -“E-C O M M E R C E M A N A G E M E N T : T EXT AND C A S E S ” B Y S AN AN D E E P K R I S H N AM AM U R T H Y( s a n d e e p @u . w a s h i n g t o n .e d u ) (L AS T U P D A T E D

ON

M A R C H 12, 2002)

Introduction

In m an y ways, Ama Ama zon.co zon.com m is perh aps th e compa compa ny th at is most clo closely sely tied with th e E-Co E-Comm mm erce phen omen on. The Seatt le, WA based compan compan y ha s grown grown from a boo book seller t o a virtu al Wal-Mar Wal-Mar t of the Web selling selling products as diverse diverse a s Music CDs, Co Cookware, okware, Toys Toys and Ga mes a nd Tools Tools and H ar dwar e. The compa compa ny ha s also grow grown n at a tremen dous dous r at e with revenues r ising ising from from abou t $150 million million in 1997 to $3.1 billio billion n in 2001. However, th e rise in revenu e ha s led to a co comm ensu ra te increase in operat ing lo losses leaving leaving th e compa ny with a la rge defic deficit. it. The compa compa ny did mak e its first first qu ar ter ly profit profit of $5.8 millio million n in t he four four th qua rt er of 2001. But , this was dwa rfed by large cum ula tive losses. losses. Its sha re price, price, as shown in Figure 1, is perh aps th e biggest symbol of of the r ise an d fall of of the d ot-co ot-coms ms . [ I n s e r t F i g u r e 1 A b o u t H e r e .] .] The pu rpose of of th is case case is to present a ba lanced an d up-to-dat up-to-dat e business history of th e compa compa ny. Background

The st ory of th e form form at ion ion of Ama Ama zon.co zon.com m is often often repea ted an d is n ow a n ur ban legend. legend. The compa compa ny was foun foun ded by Jeff Bezos, Bezos, a compu compu ter science science an d elec electr tr ical ical engineering gra gra dua te from from Prin ceton University. Bezos Bezos had moved to Seat tle after resigning as t he sen ior ior vicevice-president president at D.E.Shaw, a Wall Street investment bank . He did did not not know mu ch about the Intern et. But, he came a cross ross a stat istic istic that the Intern et was growing growing at 2300%, 2300%, which which convinced convinced him th at t his was a lar lar ge growth growth opportun ity. Not knowing knowing much m or e, he plu nged int o the world of of E-Comm E-Comm erce with with no prior prior r eta iling iling experience 2. He chose to loc locat e th e co compa ny in Sea tt le becau becau se it h ad a lar ge poo pool of of technical ta lent an d since it was close close to one of of the lar gest book book wh olesalers loc locat ed in Roseburg, Roseburg, Oregon. Oregon. Clearly, he wa s th inking of th e co compa ny a s a boo bookseller at th e beginnin beginnin g. Moreov Moreover, er, th e sales ta x laws laws for for online reta ilers ilers stat e tha t one has t o cha rge sales tax in th e stat e in which which one is inco incorporated. This means t ha t for for a ll tra nsactions nsactions from from tha t sta te th e price price would would be increa increa sed by the sa les tax ra te leading to a compet compet itive disadvan ta ge. Ther efo efore, it was logi logical cal to loc locat e in a sma ll sta te an d be

Copyright Copyright 2001 2001 Sandeep Krishna mur thy All All Right Right s Reserved. Reserved.

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un competitive mpetitive on on a smaller smaller n umber of tra nsa ctions tions ra th er th an in a big stat e such a s Ca lif liforn ia or N ew Yo York. The compa compa ny went on-line on-line in J uly 1995. 1995. The co compa ny went p ublic in May 1997. As As a sym bol of th e compa compa ny’s ny’s fru fru gality, J eff an d th e first first tea m bu ilt desks out of doors doors an d four four -by-f by-four s. The compa compa ny wa s sta rt ed in a gara ge. Ironically, Ironically, initial business m eetings were condu condu cted a t a loc local Bar nes a nd Noble store. Bezos’ Bezos’ first choice choice for for th e compa compa ny na me was Ca da bra . He quickly dr opped th is nam e when a lawyer he cont cont acted mistook mistook it fo for cadaver. He picked picked Ama zon zon because it st ar ted with th e letter A, signified signified somet somet hing big and it was ea sy to spell. spell. For h is co cont ribut ion, ion, J eff eff Bezo Bezoss was picked picked a s th e 1999 Time Time per son son of the year a t t he age of 35 mak ing him th e fo four th -youn youn gest person of of th e year. Describing wh y it choose choose Bezos, Bezos, Time ma gazine sa id, “Bezos’ “Bezos’ vision vision of th e online retailing universe was so complete, his Amazon.com site so elegant an d appealing that it becam becam e fro from m Day On e t he point point of reference reference for for an yone yone who had a nyth ing to sell online”3 . Visio Vision an d V alue

J eff eff Bezo Bezoss was one of th e few few people people to under sta nd t he special na tu re of Intern et Retailing Retailing a n d E-Comm E-Comm erce. This is how how he compa compa res E -Tailing Tailing to 4 tra ditio ditional reta iling iling Loo Look at e-reta e-reta iling. iling. The key trade th at we ma ke is that we tr ade rea l esta esta te for for technology technology.. Real esta te is th e key cost cost of physical physical r eta ilers. ilers. Th at 's why th ere's th e old old sa w: loc locat at ion, ion, locat locat ion, ion, locat locat ion. ion. Real est at e gets m ore expensive every every year , and technology technology gets gets cheap er every year . And And it gets cheaper fast.

There were r eally two element s to his visionvision1. He wan ted to build the world’ world’ss most cust cust omer-cent omer-cent ric compa ny 2. He want ed to esta blish blish a place where customers could could buy anyth ing. This is h ow h e char acterizes h is visio vision of cust cust omer -cent cent rism-5 Our goal goal is to be Ea rt h's most cust omer-cent omer-cent ric compan compan y. I will will leave leave it t o others t o say if we've we've achieved that . But why? The The a nswer is thr ee things: The first first is tha t customer-centr customer-centr ic mea ns figuring figuring out wha t your customers want by asking them, th en figur figur ing out out how to give give it it t o them, an d th en giving it to them. That's the traditional meaning of customer-centric, and we're focused focused on it. Th e second second is innovatin g on beha lf of of cust cust omer s, figurin figurin g Copyright Copyright 2001 2001 Sandeep Krishna mur thy All All Right Right s Reserved. Reserved.

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un competitive mpetitive on on a smaller smaller n umber of tra nsa ctions tions ra th er th an in a big stat e such a s Ca lif liforn ia or N ew Yo York. The compa compa ny went on-line on-line in J uly 1995. 1995. The co compa ny went p ublic in May 1997. As As a sym bol of th e compa compa ny’s ny’s fru fru gality, J eff an d th e first first tea m bu ilt desks out of doors doors an d four four -by-f by-four s. The compa compa ny wa s sta rt ed in a gara ge. Ironically, Ironically, initial business m eetings were condu condu cted a t a loc local Bar nes a nd Noble store. Bezos’ Bezos’ first choice choice for for th e compa compa ny na me was Ca da bra . He quickly dr opped th is nam e when a lawyer he cont cont acted mistook mistook it fo for cadaver. He picked picked Ama zon zon because it st ar ted with th e letter A, signified signified somet somet hing big and it was ea sy to spell. spell. For h is co cont ribut ion, ion, J eff eff Bezo Bezoss was picked picked a s th e 1999 Time Time per son son of the year a t t he age of 35 mak ing him th e fo four th -youn youn gest person of of th e year. Describing wh y it choose choose Bezos, Bezos, Time ma gazine sa id, “Bezos’ “Bezos’ vision vision of th e online retailing universe was so complete, his Amazon.com site so elegant an d appealing that it becam becam e fro from m Day On e t he point point of reference reference for for an yone yone who had a nyth ing to sell online”3 . Visio Vision an d V alue

J eff eff Bezo Bezoss was one of th e few few people people to under sta nd t he special na tu re of Intern et Retailing Retailing a n d E-Comm E-Comm erce. This is how how he compa compa res E -Tailing Tailing to 4 tra ditio ditional reta iling iling Loo Look at e-reta e-reta iling. iling. The key trade th at we ma ke is that we tr ade rea l esta esta te for for technology technology.. Real esta te is th e key cost cost of physical physical r eta ilers. ilers. Th at 's why th ere's th e old old sa w: loc locat at ion, ion, locat locat ion, ion, locat locat ion. ion. Real est at e gets m ore expensive every every year , and technology technology gets gets cheap er every year . And And it gets cheaper fast.

There were r eally two element s to his visionvision1. He wan ted to build the world’ world’ss most cust cust omer-cent omer-cent ric compa ny 2. He want ed to esta blish blish a place where customers could could buy anyth ing. This is h ow h e char acterizes h is visio vision of cust cust omer -cent cent rism-5 Our goal goal is to be Ea rt h's most cust omer-cent omer-cent ric compan compan y. I will will leave leave it t o others t o say if we've we've achieved that . But why? The The a nswer is thr ee things: The first first is tha t customer-centr customer-centr ic mea ns figuring figuring out wha t your customers want by asking them, th en figur figur ing out out how to give give it it t o them, an d th en giving it to them. That's the traditional meaning of customer-centric, and we're focused focused on it. Th e second second is innovatin g on beha lf of of cust cust omer s, figurin figurin g Copyright Copyright 2001 2001 Sandeep Krishna mur thy All All Right Right s Reserved. Reserved.

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out wh at they don't don't know they want a nd giving giving it it t o th em. The third meaning, unique to the Internet, is the idea of personalization: Redecorating th e store for for ea ch an d every individual customer. If we ha ve 10.7 10.7 millio million cust omers, as we did at th e end of th e last qua rt er, then we should should ha ve 10.7 10.7 million million stores.

Interestingly, Amazon.com recently launched a “Your Store” service, thus tr an slatin g th is visi visio on int o a rea lity. lity. He strived strived to un derstan d w ha t was u nique about about th e Intern et in devel develo oping a 6 cust omer -cent ric compa compa ny “In t he online world, world, business es ha ve the opport opport un ity to develo develop very deep relationships with customers, both through accepting preferences of customers a nd t hen observing bserving th eir pur chase behavior behavior over time, so that you you can get that individualized knowledge of the customer and use that individualized knowledge knowledge of th e customer to accelera accelera te t heir d isco iscovery process. process. If we can can do th at , then t he customer s ar e going going to feel a deep loyalty loyalty to us, because we kn ow them so well” well”..

The value ele e le men ts Amazon.co Amazon.com m sought t o deliver deliver ar e illustr illustr at ed in this 7 Bezos Bezos qu ote "Bill Bill Gat es laid it out in a ma gazine int erview. He said, "I "I buy a ll my books books a t Amazon.co Amazon.com becau becau se I'm bu sy an d it's convenient convenient . They ha ve a big selection, selection, an d t hey've been reliable." Those ar e th ree of our our four four core core va lue pr opositions: positions: convenience, selection, service. The only one he left out is price: we are the broadest discoun discoun ter s in the world in any pr oduct category. But m aybe price isn't so import import an t t o Bill Bill Gates".

Some of Bezos’ Bezos’ critics ha ve said t ha t t he ext ent of customer -cent -cent ricism of th e compa ny is about th e sam sam e as any oth oth er compan compan y. In other words, Bezos Bezos has been been seen a s genera genera ting hype and n othing mu ch. Bezos’ Bezos’ visio vision n h as been t ra nsla ted int o a lar ge cust cust omer base a nd loyalty loyalty ra te. Ama zon.co zon.com‘ m‘ss customer base h as grown grown r apidly over over th e pa st severa l years. Customer accou n ts grew from 1.5 m illio illion n in December 1997 t o 24.7 24.7 m illio illion n in December 20018 . The per cent age of repea t cust omers increased from 64% in in 1998 to 78% in 2000. In t he four four th qua rt er of 2001, Ama zon zon spen t $7 to acquire acquire a new customer customer a nd t he a vera vera ge customer customer spending was $123. In addit ion ion to customer-cent customer-cent ricism, ricism, J eff eff Bezo Bezos wan ted Ama zon.co zon.com m to be th e place where you you could could buy an ythin g an d everyth everyth ing online. online. While While the compa ny st ar ted out as th e world’ world’ss biggest biggest bookst bookst ore, it wa nt ed to beco become t he world’ world’ss bigges biggestt store in the long long ru n. The co compa ny ha s ma de some some progress along these lines by expandin g into new product categories categories such a s coo cookwa re Copyright Copyright 2001 2001 Sandeep Krishna mur thy All All Right Right s Reserved. Reserved.

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an d t ools an d also providing n ew services such a s Auctions. However, he h as conceded that this is a “multi-decade proposition”. Financial Analysis of Amazon.com

The fina ncial stat ement s of Ama zon a re shown in Tables 1, 2 and 3. Table 1 presen ts t he h istorical income st at emen ts of th e compa ny, Table 2 provides th e historical ba lance sheets a nd Table 3 provides segment -level ana lysis. [I n s e r t T a b l e s 1, 2 a n d 3 Ab o u t H e r e . ] Few highlights from the financial statementsSa les ha s grown from $147 million in 1997 to about $3.1 billion in 2001. Average growth r at e durin g this period was 141%. Gross mar gin dur ing this period ha s avera ged 21.68%. Rat io of ma rk eting expenses to sales revenu e ha s decreased from 16.33% in 1997 to 4.43% in 2001. Int erest expenses ha ve risen from $326,000 in 1997 to $139 million in th e year 2001. Loss from operations has increased from $32,595 in 1997 to $412,257 in th e year 2001. Sa les from book, mu sic an d video ha ve leveled off. But , this is a very profitable segment. On th e oth er ha nd, th e electr onics, tools and kitchen segment is growing rap idly- but it is not very pr ofitable. !

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Given it s diverse set of products a nd services, it is ha rd t o ident ify appr opria te compet itors. BN.com is frequen tly thought of as a st rong compet itor in t he books, music and video cat egories. Its operat ing stat emen t for 1998, 1999 and 2000 are a tt ached in Table 4. Note th at th e level of sales is much lower th an Ama zon. Moreover, it spent a mu ch grea ter per cent of its sales on m ar ketin g and fulfillment -nea rly 42% in th e year 2000. [I n s e r t T a b l e 4 Ab o u t H e r e .] Ama zon.com h as a lso been pr aised for its innovative finan cing str at egy using a convert ible bond issue. Pr of. Ufuk Ince from th e Un iversity of Washin gton, Bothell provides a deta iled explana tion t ha t is a tta ched a s Appendix at t he end. Books- The Entry Point

Ama zon.com st ar ted out a s an online bookseller. Indeed, to some, Ama zon.com will always be a bookseller. Selling books on th e Int ern et m ade sense at ma ny levels. To Jeff Bezos, th e ma in a dvan ta ge was selection9"Books ar e incredibly unusu al in one respect, and t hat is that th ere ar e more items in th e book category th an th ere ar e items in a ny oth er category by far. Copyright 2001 Sandeep Krishna mur thy All Right s Reserved.

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There a re m ore t ha n 3 m illion different titles available an d active in pr int worldwide. When you h ave th is huge n um ber of titles, a couple of th ings sta rt to happen. Fir st of all, you can use compu ter s to sort, sear ch a nd organ ize. Second, you can creat e a sup er-valuable customer pr oposition t ha t can only be done online, a nd t ha t is selection. There a re lots of categories where selection is proven to be importa nt : books, in par ticular, with t he book sup erst ores, but also in home const ru ction ma ter ials, with Home Depot, and toys with Toys ‘R Us. Online, you can ha ve this vast cata log of millions of titles, wher eas in th e physical world, th e largest ph ysical su perst ores ar e only about 175,000 titles, an d ther e are only thr ee tha t big".

In a ddition, as a pr oduct, books were! ! !

Ea sy to ship since they were not bulky. Low value item an d hen ce, low risk. Inform at iona l products ma king th em am ena ble to selling them via online storefronts using features such asSample cha pters Table of cont en ts Editorial r eviews Cust omer r eviews ! ! ! !

Moreover, Ama zon.com felt t ha t it could a dd ma ximal value given t he a rchaic an d inefficient str uctu re of th e $23 billion American publishing indust ry. An overview of th e str uctu re of th e indu str y is provided in Exh ibit I a nd II. [I n s e r t E x h i b i t I a n d I I Ab o u t H e r e .] The ma in feat ur es of th is publishing indust ry were10 !

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Concentr at ion a t a ll levels of th e supply cha in- publisher s, printer s, wholesalers. The top 10 publishers a ccoun ted for 20 p ercent of th e new titles, the t op 5 print ers represent 40% of the ma rket, th e largest wholesaler accoun ts for 33% of all books sh ipped. No domina nt player on th e reta il side- even No. 1 Barn es & Noble has only about 11% of th e U.S. mar ket. Pu blisher s guar an tee th e sale of all books. Retailers could simply retu rn a book if it did not sell in a pre-defined tim efra me. As a resu lt, in 1998 ret ur n ra tes of har dcover books wer e a round 32% and th ose for soft-cover books wer e about 27%. It is a hit an d miss business with ma jor fluctua tions in sales. Even th ough publishers incur th e fixed costs of book production an d editin g for a ll books, only a few ar e very su ccessful. Copyright 2001 Sandeep Krishna mur thy All Right s Reserved.

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Retailers bear t h e fixed costs of displaying the product in a brick and morta r location 11 .

The tr aditional n atu re of the publishing industry is also illustr ated in an am using an ecdote provided by J eff Bezos"The wholesalers ha d 10-book min imum order s. I tried to negotia te with t hem an d sa id, “Let u s just pa y a sm all fee, an d you wa ive the 10-book order,” an d so on. But th ey wouldn ’t go for it. So we figured out a loophole. It tu rn ed out t ha t you jus t h ad to place an order for 10 books; you didn ’t a ctua lly have to get 10 books. We foun d a n obscur e book on lichen s t ha t n one of our wholesaler s a ctua lly carried. So whenever we wan ted t o order one book, we order ed th e book we wan ted, a nd th en n ine copies of this lichen book. They would deliver t he one th at we want ed, along with a very sincere apology about not ha ving been able to fulfill the n ine copies of the lichen book order. That worked very well for exercising our systems. I’ve since talked a nd joked a t length wit h th e people at t hese compa nies about th is. They actua lly th ink it’s very funn y".

Ama zon cha nged t he t ra ditiona l book pu blishing indu str y in th e following ways!

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It redu ced book ret ur n ra tes from about 30% to 3%. Indu str y experts estima te about $100 million being spent on ret ur ns. Moreover, "A tr uly efficient su pply net work, which pr ocessed only sa leable books, could s ave over $2 billion - quite an opportu nity given t ha t in du str y profits from t he one billion t ra de books t otal a bout $4 billion t oday"12 . Reducing th is by a factor of 10 can lead t o an immen sely profitable bu siness. It r elied on t he existing distr ibution stru cture, building war ehouses only for th e top sellers an d quick moving items. As a resu lt, its invent ory tu rna round is mu ch quicker th an brick an d morta r stores. "Ph ysical bookstores m ust stock u p t o 160 days' wort h of inventory t o provide th e kind of in-store selection p eople wan t. Yet t hey mu st pa y distribut ors an d publishers 45 t o 90 days a fter th ey buy th e books--so on avera ge, th ey car ry t he costs of th ose books for u p t o four month s. Ama zon, by cont ra st, carries only 15 days' wort h of invent ory a nd is pa id immedia tely by credit car d. So it gets about a mont h's use of inter est-free money 13 ". Amazon.com pa sses on cost sa vings in t he form of pr ice red uctions t o consu mer s. Cur ren tly Ama zon offers 30% of all New York Times bestsellers, for example. Ama zon "ha s broken t he p rinciple of critical ma ss for t he book m ar ket. For th e first time, small and independent publishers a s well as au thors could pla ce th eir pr oducts dire ctly in a (on-line) store with global re ach Copyright 2001 Sandeep Krishna mur thy All Right s Reserved.

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an d with out investmen ts (except pa ying for tra nsport ing books t o Amazon.com's distribution center)"14 . The m ain compet ition t o Ama zon in th is ma rket was from bricks-and-clicks stores such as BN.com(an d Barn es and Noble). BN.com , for inst an ce, has noted the following sources of competitive advantage15 !

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Superior bra nd r ecognition of the Barn es & Noble bran d na me a nd t he secur ity from kn owing tha t th is is associated with t he 1000 reta il bookst ores na tionwide. The u se of Bar ne s & Noble's distr ibut ion cent er en ables B&N.com t o offer more t ha n 880,000 in-stock book t itles for fast delivery, represent ing th e largest sta ndin g inventory of any online bookseller. The ability to condu ct cross-ma rk eting, co-promotion an d cust omer acquisition pr ogra ms with Bertelsma nn 's U.S. book clubs a nd Bertelsma nn 's Books On line in coun tr ies includin g the U nited Kingdom, German y, Fra nce, the Neth erlands, Italy, Spain, Norway, Sweden, Ja pan a nd Chin a which pr ovide B&N.com with : (i) a ccess to millions of established book buyers; (ii) the opportunity to directly promote its online store to th is large au dience of proven bu yers; and (iii) a poten tial n ew str eam of cust omer s t ha t it will be able to acquire at a significan tly lower acquisition cost a s compa red with cust omers acquired th rough other marketing channels. Pa rt icipation in Bar nes & Noble's mem bership loyalty program , Reader s' Advan ta ge, which offers discoun ts a nd oth er ben efits t o members. F or a $25 an nu al mem bersh ip fee, part icipatin g cust omers receive 10% add itiona l discoun ts a t Bar nes & Noble stores an d 5% add itiona l discount s a t B&N.com. Cust omer sign-up benefits include a one-year subscription t o BOOK(R) ma gazine an d a free canvas tote bag. The program benefits a lso include in vita tions to member s-only events.

The compa ny also continu ed th e onslau ght on indepen dent booksellers. "Sma ll indepen dent bookst ores h ave been pounded by t wo waves of cha nge over th e past decade, redu cing th eir nu mber s from 6,500 in 1991 to 3,500 in 1998. First , the m ajor chain s intr oduced the cat egory-killer su perstores with up to 60,000 squa re feet of reta il space an d 175,000 titles in st ock. With th e addit ion of coffee sh ops, they cha nged book buying from a tr aditional r eta il activity to somet hing a kin t o an int ellectu al social out ing. In J uly 1995, Amazon.com la un ched t he second wa ve by allowing con sum ers t o browse 4.5 million t itles from t he comfort of th eir own comp ut ers 16 ". Indepen dent booksellers responded in t wo ways17 -

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In 1999, the American Booksellers Association announced BookSense.com, a Web site allowing cust omers to order books over th e Int ern et with th eir local ind ependen t bookst ore getting a comm ission on each sa le. BookSite.com allows sm all brick-an d-morta r bookst ores to ad d a n online storefront a nd with e-commerce tools and In ter net order ing to sup plement th eir invent ory.

However, it is not clear if either appr oach h as led to a credible thr eat to Amazon. The dominan ce of Ama zon in th e book ma rket wa s ma de abun dan tly clear by th e ca pitu lat ion of a ma jor comp etit or, Border s. "In April 2001, Amazon ma de an ast onishing a llian ce - with r ival Border s. For year s now the Border s Group h as sough t in va in t o offer a Web site t ha t would compet e effectively with Ama zon. Borders becam e a force in book r eta iling th an ks t o its super ior compu terized inventory man agement system dating back t o the 1970s. It never figured out how to tra nslat e its compu ter expertise into an effective Web site. In April, Bord ers elimin at ed a ll sta ff positions in Bor ders.com, a nd an noun ced t ha t Ama zon will front-end its online bookselling18 ". S hould A m azon.com h ave rem ained a bookstore?

Ama zon.com ra pidly expan ded int o a n u mber of products. Her e is a timeline for th e first few pr oduct intr oductions 19 ! ! ! !

J un e 1998: Music November 1998: DVD/Video J uly 1999: Toys an d electr onics November 1999: Home impr ovement , softwa re a nd video gam es

Its fora y into mu sic was dr am at ic. "In Ama zon's first full qua rt er selling mu sic CDs, endin g last Septem ber, it drew $14.4 m illion in s ales, qu ickly edging out two-year -old cyber-leader CDnow In c"20 . However, it is not clea r if it could tr an slate su ch su ccess int o products as dispar at e as cookware a nd hardware. The following ar gumen ts ha ve been m ade in favor of rapid diversificat ionCross selling Ama zon wa nt ed to get a great er sh ar e of each customer's overall shopping basket. They felt that they ha d already established a relationship with t he cust omer with books. All th at r ema ined was to levera ge th is tr ust in persu adin g consu mer s to buy everything else from th em. Copyright 2001 Sandeep Krishna mur thy All Right s Reserved.

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Economies of Scale Fr om a technology sta ndpoint, th e compa ny ha d alrea dy incurr ed th e fixed costs of developing softwa re for th e onlin e storefront s. Expa nd ing int o other product categories would allow the company to spread these fixed costs a cross a la rger pool of tr an sactions lead ing to greater profits. As Bezos pu t it 21 On the Internet, companies are scale businesses, characterized by high fixed cost s a nd r elat ively low var iable cost s. You can be t wo sizes: You can be big, or you can be sma ll. It's very ha rd t o be medium. A lot of medium-sized compa nies had the financing rug pulled out from un der t hem before t hey could get big. … When we open a n ew cat egory, it's basically the sa me softwa re. We get t o leverage the sam e customer base, our bra nd nam e, and the infra str ucture. It's very low-cost for u s to open a new category, wherea s to ha ve a pur e-play single-line store is very expensive. They'll end u p spen ding mu ch more on techn ology and oth er fixed costs t ha n we will just because our ear lier stores ar e alr eady covering th ose costs.

Forever Sm all Selling books a lone would not cata pult Ama zon a s th e leading E-Tailer a nd a cut ting-edge firm. They would forever be const ra ined by the sma ll ma rket th at t hey opera ted in. Moving into oth er product cat egories allowed them t o be thought of as a dominan t ret ailer as opposed to a ho-hu m business. The opera ting st at emen t of BN.com at ta ched in Ta ble 4 can be cited as evidence for th is. BN.com chose to focus it s ener gy on th e book, mu sic an d video ma rkets. As a result, its revenue is much smaller and it ma y never be as large as Ama zon. The data from Table 5 is also consistent with this. We see th at visitors to Amazon.com increased from 14 million in Ma rch 2000 t o 18 million in Ma rch 2001. On t he other ha nd, visitors to BN.com decreased from 5.4 million to 4.9 million! [I n s e r t T a b l e 5 Ab o u t H e r e .] Blessing of Wall St reet Perh aps, the m ost importa nt reason for Amazon t o diversify was tha t a t t he time it wa s a da rling of Wall Street. Skept ics were overru led by high-flying optimist s who viewed Ama zon as th e symbol of the n ew economy a nd a new way of doing business. As a resu lt, Ama zon ma de th e best use of th e opportunity. On the oth er han d, man y ar gument s have been made against expan ding into new pr oduct cat egoriesCopyright 2001 Sandeep Krishna mur thy All Right s Reserved.

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Brand Ama zon est ablished a r elationship with its first cust omer s on t he ba sis of being a bookseller. Redefining th is relationsh ip in t erm s of oth er pr odu ct cat egories is a n on-trivial task. A typical cust omer r eaction can be sta ted a s“Man y of us old cust omer s ha ve a ha rd t ime th inking of Ama zon a s a pla ce to buy a set of Polk home th eat er spea kers or a set of Calpha lon cookwar e. For me, th e Ea rt h's Biggest Bookstore moniker ha s occupied a spot in my mind since it began app earin g in those tiny bottom-of-page-one advertisements in th e New York Times”22 .

New Pr oducts Lead To New Challenges As men tioned earlier, books pr ovided cert ain u nique a dvan ta ges to Ama zon. Moving into new pr oduct a rea s pr ovided n ew challenges!

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Bulky products- Consider cookwar e items su ch a s pan s, blender s an d grills. These items are ha rd to stock, expensive to ship an d retu rn . Non-inform at iona l products- Books a re inform at iona l products t ha t lend th emselves to feat ur es such as reviews an d sample cha pter s. Except Music and Video, all oth er pr oducts Ama zon sells a re n on-inform at iona l products tha t do not have these advanta ges. As a result, th e advanta ge of selling th em online ma y be limited.

In th e consu mer electr onics bu siness, for example, Ama zon.com ha s n ot been able to buy directly from leading ma nu factur ers such a s Sony, Pan asonic an d Pioneer. As a r esult, Ama zon is forced to buy products from distr ibutors leaving it with a hefty competitive disadvan ta ge that ma y be hard t o overcome. In a ddition, selling at pr ices lower th an what the m anu facturer want ed strained relationships with such giants a s J VC23 . There ar e ma ny reasons for t his24 . In th e electr onics business, ma nu facturers ha ve a stringent set of requirements on h ow a r etailer will display an d sell th eir produ cts. Only ret ailers who pass th is ar e pronoun ced au th orized dealers. Aut horized dealers get lower prices, money for coopera tive advert ising and th e right to sell war ra nt ies. Lar ge ma nu factu rer s did not want to jeopar dize existing relationships with reta ilers by selling t hr ough Ama zon- whom t hey feared will sell at lower prices. At t he sa me t ime, some m an ufactu rers wan ted t o set u p th eir own online stores. For exam ple, Sony sells electr onics thr ough sonyst yle.com and deals with th e online coun ter par ts of esta blished players su ch a s Best Buy an d Circuit City.


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Moreover, some m an ufactur ers felt t ha t Amazon did not ha ve a long-enough history in th e business an d were tu rn ed off by its st ring of losses. Ama zon ma y ha ve appea red as too unconvent iona l for th em t o feel comfort able- e.g. Amazon’s relian ce on e-ma il as t he pr ima ry customer service tool did not please some man ufactur ers. The vital par t of th is is th at electr onics repr esent t he fastest growing part of Amazon’s bu siness while th e book, mu sic an d video port ions ha ve leveled off. As one a na lyst from Pr uden tial put it- “It ha s been our cont ent ion t ha t if th e most pr ofitable pa rt of Ama zon's busin ess is not growing, an d t he m ost un profitable pa rt of its bu siness is growing ra pidly, th e compa ny will begin to experien ce economic det eriora tion”. In th e final an alysis, th e compa ny ha s showed an inability to gra sp th e intricacies of some of the businesses it entered into. Interestingly, BN.com did n ot diversify beyond books, m usic an d videos. Competition Ama zon.com was t he de facto first-mover in the book ma rk et. But , th is was not th e case in m ost other pr oduct categories. For example, E-Tailers such as CDNow were alrea dy in p lace before Ama zon.com appea red in t he m usic category. As a r esu lt, Ama zon exposed itself to new levels of comp etit ion crea ting new vulnera bilities. In ma ny cases, esta blished players in the brick an d mortar space had a lso established a presence in th e online arena . Moreover, as brick-and-morta r stores such a s J C Penn ey and Circuit City expand ed to th e online a ren a, Amazon was faced with escalat ing levels of competition.

Cost of Complexity Amazon.com’s busin ess is not dr iven by techn ology costs alone. Rat her , its costs ar e significan tly dependen t on ha ndling of physical goods a nd inventory. As the magnitude an d variety of good increa se, th e cost of rea l esta te, labor a nd invent ory also increase25 . This increased cost dra gged the compa ny down t o some degree. T he A ssociates Program

Ama zon pioneer ed th e concept of th e a ssociat es program - wha t is n ow also referr ed to as a ffiliate program s. The basic idea her e was!

Sma ll sites would a ct a s tr affic genera tors for t he compa ny. Copyright 2001 Sandeep Krishna mur thy All Right s Reserved.

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These sites would post cont ent on t heir site with a link to Ama zon. Ea ch site would receive a comm ission of 15% for an y referred pu rcha se an d 5% for a ny other pur cha se made by th at consum er. The compa ny would benefit not only by tr affic genera tion, bu t also by bra ndin g. Since th e sma ll sites would carry a n Ama zon logo, it would enh an ce th e online pr esence of th e compan y. The compa ny pa id for th e cust omer tr affic after t he fact as opposed to tr adit iona l advertising where compa nies pay ah ead of time without kn owing th e level of tra ffic th at will ta ke pla ce.

The compa ny a lso obta ined a pat ent for its a ffiliate pr ogram 26 , which was somewha t cont roversial. The pr ogram itself ha s been qu ite successful with th e compa ny reporting signing up a t least 200,000 associates. At th is point, th e vast m ajority of E-tailers have an a ssociate program . But , once aga in since Ama zon wa s th e first t o do th is they were a ble to sign u p a lot of sma ll sites. Moving Beyond R etailing: Partnering, Auctions and the Zsh ops Initiative

In add ition to expan ding int o new pr oduct categories, Ama zon.com proceeded in two new directions. The first initiat ive was to part ner with e-ta ilers who sold products tha t Ama zon did not car ry and did not plan t o car ry. The second one wa s to host several sm all businesses as p ar t of th e Zshops initiative. J eff Bezos explained th at - “It's not a shift in th e model. It's someth ing we had a lways th ought about. For at least a year, we've been ta lking about our selves as a "platform ." It's a foun dat ion or a workben ch from which you can do a lot of th ings. In our case, it consists of custome rs, technology, e-comm erce expertise, distribution center s, an d br an d”27 . With each of th ese initiat ives, the compa ny levera ged its r eput at ion a nd minimized its r isk, but is also relinqu ished cont rol over th e consu mer experience. In a ddition, it crea ted layers of complexity and cost du e to issues of due diligence an d monitoring part ner s an d par ticipan ts in Auctions an d Zshops. Partnerships The basic idea with the pa rtn ering approach wa s to let a nother firm bear t he risk of selling products t ha t h ad u nique problems and yet sha re in th e poten tial u pside from such a ventu re. Specifically, Ama zon a cquired ownersh ip sta kes in m an y compa nies includin g: Dru gstore.com, HomeGrocer.com, Pets.com, Ashford.com, Gear.com, Audible.com, Green light .com, Living.com an d Della.com. Accord ing to various estimates, Ama zon spen t a t least $160 million in th ose investmen ts 28 . In some cases, Copyright 2001 Sandeep Krishna mur thy All Right s Reserved.

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the investment was sizeable- Ama zon owned a 46% stake in Dr ugstore.com an d 50% in P ets.com 29 . Jeff Bezos’ comm ent s on th e deal with Dr ugstore.com a re pa rt icular ly relevant 30 “Take Dr ugst ore.com a s an examp le. Tha t is a very complicat ed business, becau se you h ave to be regulat ed in a ll 50 sta tes in a very car eful way. You ha ve two payers because you pa y the $5 copay, and th e insura nce compa ny ta kes care of th e rest . That leads t o a differen t set of techn ology systems t o ma ke th at work. So, it becomes clear very quickly tha t because th ey're u p a nd ru nning a nd t hey ha ve that customer experience na iled, it would be much better for our customers to offer t hem tha t experience th an to put our ener gy an d tim e into tr ying to replicate it”.

However, these investmen ts ha ve proved to be disast rous. In most cases, the fees pa id t o Ama zon by th ese par tn ers were in th eir stock, which lost most of its value 31 . Zshops Ama zon.com got in to th e store h osting bu siness with its Zshops initiat ive. This pitted it aga inst porta ls such a s Yah oo! an d MSN. The idea can be sum ma rized as follows!

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Amazon.com pr ovides a p lace for all kind s of sma ll and m edium -sized businesses t o sell products. The compan y provides a gua ran tee tha t essentially insures th e buyer in th e event of non-delivery or t he su pply of a d efective product. Sellers a re provided a cheap wa y to sell th eir products to an alrea dy established customer base th at tru sts th e compan y. Ama zon gets a sa les presence in products th at it does not car ry.

The compa ny m ainly ma kes m oney from sellers in Zshops in t he following ways 32 !

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Listing Fees (Required) Every seller pa ys $39.99 per month to mainta in a s ma ny as 40,000 items. If th e nu mber of listings exceeds 40,000 at a ny given t ime, sellers are cha rged a $0.10 listing fee for each a dditiona l individua l listing. Merchan dising Fees (Optiona l)


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Sellers can d ra w at tent ion t o th eir listings with Amazon.com merchan dising featu res. !

zSh ops Closing Fees (Requir ed): A closing fee is assessed wh en t he item sells a t th e following ra tesIf the item sells for $0.01 - $25.00, Amazon collects a 5% closing fee. If th e item sells for $25.01 - $1,000.00, Ama zon collects $1.25 plus 2.5% of any am ount greater than $25. If the it em sells for $1,000.01 or m ore, Ama zon collects $25.63 plus 1.25% of an y am ount greater th an $1,000.

This initiative was seen a s ha ving th e following advan ta ges33 1) It increases Ama zon's invent ory possibilities a th ousa nd times over without add ing inventory cost. 2) It creat es new, event ua lly high-ma rgin revenu e strea ms in t he form of a month ly fee paid t o Ama zon for listing items on its site, an d in t he form of a tr an saction fee paid to Ama zon wh enever a listed item is sold. 3) If su ccessful, zShops could increa se th e nu mber of customer visits on Ama zon severa l fold. 4) zShops will pr ovide an other mea ns for Ama zon t o cross-pr omote item s over nu merous product lines, creat ing ta ngential sales. 5) zShops should only str ength en t he Amazon comm un ity becau se members ar e able to rat e all out side sellers an d th eir products. zShops also presen ts n ew cha llenges to the compa ny!

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If th e compa ny does not at tr act high-quality bran ds, the presen ce of th ese sellers can a tten ua te the stren gth of the bra nd an d lead to bran d confusion. It could furt her mu ddle th e an swer t o the quest ion- “What is Ama zon a nd wh at does it stan d for?” It t ak es it awa y from its core compet ence of retailing and presen ts it with ne w levels of cost a nd comp etit ion. The compa ny ta kes on t he risk of a frau dulent seller with th is approach. In a ddition, this ma y crea te ad ditiona l compet ition for th e firm. In th e words of J eff Bezos"The zShops compet e against us. I am const an tly finding toys on our site th at a zSh op is also selling, somet imes a t a lower pr ice. If you a re u sed to ha ving very str ong cont rol, th at is a t err ifying notion. But I rea lly believe you can build a more robust com pan y if you give up a bit of th at cont rol in t his organic ma rketplace "34 . Copyright 2001 Sandeep Krishna mur thy All Right s Reserved.

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Auctions On Ma rch 30, 1999 Am a zon.com an noun ced tha t it was intr oducing Amazon.com Auctions 35 . This was a bold move on t he pa rt of Ama zon t o overth row th e lar ge Int ern et au ction house- eBay. The r at iona le for Ama zon’s ent ry int o auctions wa s!

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Cross-selling: Ama zon wa nt ed to leverage its lar ge cust omer ba se and encour age t hem to become bu yers or sellers on its au ction service. EBa y’s focus wa s alm ost exclusively on sm all bus inesses (e.g. an tiqu e dealers) an d collectors. The thinking at t ha t time was tha t Amazon m ay intr oduce new kinds of buyers a nd sellers leadin g to a differen t m ar ket dynamic. Compet ition: At th is point , var iable price mecha nisms su ch a s au ctions were being projected a s th e dominan t form of E-Comm erce in t he futu re. As a r esult, a n um ber of compa nies intr oduced au ction s. Consider th e moves ma de by Ama zon’s compet itors in Ma rch 199936 o

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Pr iceLine.com, the r everse au ctioneer went public on Mar ch 30, rocketin g 57 to close at 70. eBay forged a $75 million deal with America Online on March 25 to pr omote its eBay a uctions on AOL. Cat alogue ret ailer Sha rper Im age began offering online au ctions of new a nd excess merchan dise on Ma rch 1. Compu ter E -ta iler Cyberian Out post lau nched a site on Mar ch 16.

How did Ama zon’s a ppr oach differ from pr evious efforts? Ama zon provided a money-back gua ra nt ee for pu rcha ses below $25037 . Since seller-side fra ud is a big issue with a uctions, th is was seen a s a ra dical m ove. In a ddition, Ama zon invited a group of mer cha nt s to set up sh op on its au ction site. !

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The fee stru ctu re on t he a uction side is very similar to th e Zshops fee str uctur e described previously. The biggest challenge in th is aren a wa s to find a wa y to topple the gian t, eBay. As shown in Table 6, it is safe to say th at Ama zon’s au ction vent ur e was not very successful. EBa y cont inues t o dominat e auctions. [I n s e r t T a b l e 6 Ab o u t H e r e .] Copyright 2001 Sandeep Krishna mur thy All Right s Reserved.

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International Growth

Even with out opening web sites and distribut ion cent ers a broad, Ama zon.com ha d consisten tly served a global a udience. In J uly 1995, th e cust omers of th e compa ny cam e from 45 different coun tr ies 38 . Cur ren tly, th e compan y sells to over 150 countries 39 . As shown in Table 3, in th e year 2000, about 13.8% of all revenues cam e from the Inter na tiona l market. The compa ny realized tha t by more closely tar geting some m ar kets, r evenue could be in crea sed even more. J eff Bezos pr ovided th is inter esting a necdote about being a global seller40 We got an order from somebody in Bu lgaria, an d th is person sent u s cash th rough the m ail to pay for t heir order. And t hey sent us two crisp $100 bills. And t hey pu t th ese two $100 bills inside a floppy disk. And th en t hey put a n ote on th e cover of th e floppy disk, and t hey ma iled this whole thin g to us. And t he n ote on t he cover of th e floppy disk sa id, "The m oney is inside t he floppy disk. The cust oms inspectors steal the money, but they don't read English." That shows you the effort to which people will go to be able to buy things.

As a resu lt of global inter est, in 1998, the compa ny lau nched a site in Germa ny- Ama zon.de an d a site in th e UK- Ama zon.co.uk. In each ma rket , th e focus wa s upon books, mu sic an d videos. The compa ny ad opted a n acquisition st ra tegy to achieve th is goal. It acquired two Eur opean ecomm erce sites in ea rly 1998 (Telebuch in Germ an y, and Bookpa ges in th e United Kingdom) and then relaunched them as Amazon.com-branded sites. The sites ha d loyal followings, allowing th e compa ny t o gain a cust omer ba se in th ese mar kets. To serve the ma rkets, th e compan y opened customer service cent ers in Slough, En glan d, Resenburg, German y an d in Th e Ha gue. Multilingu a l service represen ta tives were hired to serve cust omer s effectively 41 . Later, th e compa ny expanded into Fran ce42 (April 2000) an d J apa n(November 2000). With t he Fren ch, Ja panese an d Germa n stores, th e compa ny was forced to deal with crea ting cont ent in local langu ages. In a ddition, with inter na tional expan sion t he compa ny h ad to become sen sitive to local cultures. Amazon.com Technology

In t he u ltimat e an alysis, the t ru e core compet ence of Ama zon m ay be its technology an d its web site th at m an ifests it.


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First of all, Ama zon took a fun dam ent ally differen t a pproach t o developing an online store. As described by Sa lon.com's Scott Rosen berg- "F ive year s ago, ent repr eneu rs th ought th e way to duplicat e the ret ail experience online was t o build virtu al replicas of physical stores: The t heory was t ha t you h ad to orient u sers spat ially; th e Holy Grail was th e 3-D walk-th rough. Ama zon never went down t ha t pa th . Its foun der, J eff Bezos, and h is talent ed crew of site builders seemed to under sta nd from Day 1 tha t inform at ion organized th ought fully can crea te its own experience -- one en tirely different from t he fam iliar st ore geograph y of aisles and sh elves. They sta rt ed with a vast bu t bare dat abase of books in print an d kept a dding new layers of valua ble inform at ion to it"43 . Second, Amazon was a p ioneer in intr oducing new ways to enha nce the shopping experience. Here is a pa rt ial list of th eir innovations!

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One -click sh opping: Amazon.com r ecognized th at one of th e most importa nt ways in which it could value was to reduce the t ran sactiona l bur den on cust omer s. If th e compa ny could remem ber all relevant inform at ion a bout th e cust omer , the individual could breeze thr ough t he order ing process. This also esta blished switching costs ma king it a ha ssle to switch to oth er online st ores th at ma y or ma y not have an y given cust omer 's inform at ion. In a cont roversial move, th e compa ny also obta ined a pat ent on it s one-click sh opping system an d su ccessfully stalled its u sage by its rival- Bar nesa ndN oble.com44 . Pr oduct Review In forma tion: All pr oducts on Ama zon can be reviewed. In th e case of books, editorial reviews by leading ma gazines a re p rovided by th e compa ny. For all products, cust omer r eviews are available. Moreover, cust omer s can ra te each oth er's reviews. A ra ting figure is placed aga inst each review so th at cust omer s can decide wheth er to read it or not based on tha t. Pu rchase Circles: Supp ose you are inter ested in lear ning about th e books being rea d by your rival firm or scient ists at MIT, Ama zon pr ovides you t o do th is. In th e compan y's words 45 - "We group t he item s we send t o par ticula r zip and postal codes, and t he items ordered from ea ch doma in na me. We then a ggregate th is an onymous data a nd apply an algorithm th at const ru cts bestseller lists of items th at a re more popula r with each specific group th an with t he gen era l populat ion. No personally ident ifiable inform at ion is used t o crea te P ur cha se Circle lists. The regular ity with which a P ur cha se Circle is upda ted depen ds on its size and activity of a Pu rcha se Circle group. Large Pu rchase Circles are upd at ed weekly; smaller ones a re u pdated monthly".


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E-Mail Alerts: Ama zon allows consu mer s t o keep t abs on th eir favorite au thor or m usician. Individuals can enter t he na me of th eir favorite au th or, for exam ple, an d when th at person's next book comes a long, Ama zon e-ma ils th e cust omer with a n alert . In some cases, cust omer s are alert ed before t he book is a vailable to th e pu blic. Recomm enda tions: The compa ny u ses collaborat ive filtering(see th e cha pter on p ersonalization for det ails) an d other p ersonalization techniques to recomm end books an d music to user s. The compa ny remembers t he n am e of each customer an d t he web site greets each individual as th ey log in. Then , when th e user picks a book(say), the system recomm ends a few oth er books th at m ay be of inter est. Clearly, th is encoura ges th e users to browse and buy more th an what th ey ha d originally inten ded. Wish List: Each individual can creat e a wish list of items t ha t t hey would like to acquire. This list is open to th e world an d if a friend or acquaintan ce wants, he or she can m ake sur e tha t th e items you wan t ar e order ed an d sent to you. The P age You Ma de: The web site creat es a special page th at consists of recently viewed port ions of th e site. Consu mer s who ha ve forgotten somethin g tha t t hey looked a t a few minu tes a go can conven iently go to th is page and locat e the item of inter est.

The r esult of th ese innovations m an ifests itself in t he leader ship r ole of Ama zon. As shown in Table 7, Ama zon domina tes others in m ultiple product cat egories ba sed on h ow well it serves its cust omers. [I n s e r t T a b l e 7 Ab o u t H e r e .] T he 2001 Holiday S hopping S eason an d A m azon’s First Profit

Ama zon.com r easser ted it s dominan ce in t he e-tailing sector in t he 2001 holiday sea son. Accordin g to Nielsen’s Net Ra tings, it was t he n um ber one site in ter ms of total nu mber of un ique visitors in th e month of November 2001 with a bout 31 m illion visitors. It wa s followed by Ya hoo! Sh opping with 27 million visitors a nd eBay with about 26 m illion visitors. Moreover, as shown in Ta ble 8, Ama zon.com r an ked a mong th e top 10 fast est growing E-ta ilers. This was int eresting becau se this list usua lly ha s e-ta ilers who do not m ak e th e top 10 list in t erm s of total t ra ffic. [I n s e r t T a b l e 8 Ab o u t H e r e .]


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Buoyed by th is domina nt perform an ce, Ama zon.com posted its first qu ar terly profit of $5.8 million in th e fourt h qu ar ter of 2001. The comp an y achieved th is due to a var iety of factors. Accordin g to Bezos, the m ost importa nt one ma y have been th e reduction in pr ices46 Without a question, it was the very significant reduction in prices that we put in place in t he fourt h qua rt er(that contr ibuted most to profits). We had always ha d low prices, but in t he four th quar ter we r eally lowered pr ices -for exa mple, 30% off on books over $20. Tha t h ad a su bsta nt ial effect on volum e. You can't do th at un til you ha ve th e operat ing efficiency to afford to do it. We just s aw it a litt le bit faster th an we expected.

Oth er factors helped 47 - E.g. A favorable excha nge ra te with t he E ur o, lower fulfillmen t costs (down 17% from pr evious yea r), better inven tory ma na gement . The compan y has made great improvements in operations an d shipped 35% more items with th e same n um ber of employees. This feat wa s achieved by far ming out th e fulfillment opera tions of cert ain products. Interestingly, the compa ny quickly announced tha t it ma y not ma ke qua rt erly profits for a while. Reta ilers pay out suppliers in the first qu ar ter of th e year an d deman d slackens ma king it tough to tur n a profit in t his qua rt er. Ama zon a lso car ries about $2.2 billion in long-term debt th at is expected to place a hea vy bur den. The compa ny ma y have overinvested in distribut ion a nd some expert s note th at only 40% of war ehouse capacity is being ut ilized. Some ha ve sta rt ed to worr y th at t he compa ny ha s sacrified too mu ch gr owth in sales by sta rt ing to focus on pr ofits. People in t his corner ha ve cited th e reduced expendit ur e on m ar ketin g as evidence for t his48 . The compan y an nounced a free shipping deal in the same press an noun cemen t as its first qua rt erly profit. The compa ny said tha t it would offer free sh ipping to an y sale(on it ems other th an toys, video gam es, baby products and th ird-par ty goods) wort h less th an $99. Bezos has argu ed tha t, based on wha t t he compa ny kn ows about price elasticity, this may a rea sonable way to increase sales volume a nd t he size of th e order . However, critics were qu ick t o point out th e great er price pressur e th is would place on th e compa ny th at ha d barely come out of th e red. Bezos is confident t ha t costs can be fur th er cut leading to profits in th e fut ur e- oth ers a re not a s sure as he is. Expert s have pointed out th at du e to fine-print r estrictions, a small pr oport ion of cons um ers m ay benefit from th is offer. Fr om a compet itive sta ndpoint, bn .com alrea dy ha d su ch an offer a nd Buy.com quickly followed with a similar deal. Therefore, it is not clear if Ama zon will pick u p ma rket shar e from these reta ilers.

A Discu ssion of Am azon.com ’s Cum ula tive Losses Copyright 2001 Sandeep Krishna mur thy All Right s Reserved.

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When t he discussion h as t ur ned t o Ama zon’s first qu ar terly profit, it is appr opria te t o revisit th e rea sons for t he compa ny’s lar ge cum ulat ive lossesth e sh ar eholders ha ve an accum ula te d eficit of over $1.4 billion dollars. Here a re th e ma in ar gument s for t he poor cumu lative performa nce of the companyThe compa ny overspent on ma rketing a nd advertising. The ma rket ing expenses ar e provided in Table 1. Ana lysis shows th at ma rket ing expenses were a s high as 16.33% of net sales in th e year 1997 an d ha d redu ced to 10.72% in th e year 1999. The compa ny dra stically reduced ma rket ing expenses to about 6.52% of net sales in th e year 2000 an d it will probably be a sma ller per cent of sales in t he yea r 2001. Some critics ha ve argued th at Ama zon.com h ad bu ilt a st rong bran d early on. As a resu lt, the incremen ta l sales as a r esult of th e holiday advert ising cam paign wa s sma ll and t he compa ny would ha ve been closer t o profitability if it ha d redu ced ma rk eting expenses sooner. Poor investmen ts As indicated ea rlier, Ama zon.com invested in a nu mber of online r eta iling comp an ies su ch as Dru gstore.com, HomeGrocer.com an d Pet s.com. Most of these investments did not pay off (Pets.com and Homegrocer.com/Webvan, for example, ar e out of business) and th e compa ny wr ote off about $135 million in th e year 2000 alone. It grew t oo soon As shown earlier, Amazon.com rapidly diversified into a number of product cat egories an d a dded new ser vices such a s zShops an d Auctions. The compa ny ma y not ha ve fully under stood th e impact on the cost st ru ctu re as it added th ese products an d services. Some observers have pointed out t ha t with only th e book, mu sic an d video segment s being profitable, the compa ny ma y be forced to re-evalua te other products. Technology feat ur es vs. cost As described in the technology section, Amazon.com has introducing an am azing arr ay of technologies on its website. It ha s been an indu str y leader in th is rega rd . However, wh ile developing th ese technologies in-house gives th e compan y total cont rol it is a n expensive proposition. Some observers ha ve asked if Ama zon would ha ve been better off addin g fewer featu res a nd contr olling costs ra th er th an th e pat h it took. Conclusion

Amazon.com is a leader . As sh own in Table 7, in ma ny different ca tegories, it sta nds h ead a nd sh oulders a bove its compet ition. Copyright 2001 Sandeep Krishna mur thy All Right s Reserved.

20

However, the compa ny sta nds at a critical jun ctu re today. Pr ofits have proven to be elusive. For th e longest time J eff Bezos ha s argu ed th at focusing on profits would mea n giving up on growth opportu nities a nd is not in th e int erest of th e compa ny. However, this ha s now cha nged with Bezos sa ying- “This is th e right tim e to focus on t he fun da men ta l economics of our business, even if it mea ns sa crificing growth”. He ha s forecasted t ha t t he compa ny will tur n a n operat ing profit in th e f ourt h qua rter of 2001 an d has promised to focus more on growth next year 49 . The vast m ajority of investmen ts in online firm s ha ve been writt en off. The compa ny does not ha ve adequa te cash to opera te for a long per iod of time. The compa ny ha s accum ulat ed a vast deficit. However, th is has n ot st opped th e compa ny from m ak ing new acquisitions an d forming new partn erships. A key part nership was ann ounced with Tar get on Septem ber, 2001. Tar get agreed t o use Ama zon.com t echn ology for order fulfillmen t an d customer car e services on its Tar get.com, MarshallFields.com, Mervyns.com and GiftCatalog.com web sites 50 . It acquired t he opera tions of the defunct E gghead.com on December 19, 2001. This provides Ama zon.com a noth er chan nel to rea ch cust omer s51 . The compa ny also ann oun ced a pa rt ner ship with Circuit City on December 11, 2001 52 . Cust omer s can now place an order for a n electr onics item at Ama zon.com a nd pick it up at th eir local Circuit City. The compa ny continu es to add inn ovative feat ur es on its web site. It add ed th e “millions of ta bs” feat ur e in Sept ember. Cust omer s now ha ve a tab th at is their own an d is completely cust omized to their n eeds. Ama zon.com a lso added compu ters a nd E-Books t o its site. One problem t ha t an alysts have identified is that th e growth in th e num ber of cust omer s ha s slowed down. One an alyst ha s been quoted as saying“Everyone who want ed to buy a book online ha s alrea dy hear d of Ama zon”53 . An expert with in Amazon h as come u p with th is solution- “Ama zon shou ld increa se its h oldings of best s ellers an d st op holding slow-selling titles”54 . H e sees th is as t he wa y to reduce costs a nd m ove towards pr ofitability. The compa ny ha s at tr acted a $100 million investm ent from Amer ica Online fueling speculation tha t this ma y be the first step towards a merger55 . Moreover, th ere is some sent iment th at t he long-term futu re of th e compa ny ma y be as a t echn ology provider. This is really based on th e allian ce with Toys R Us wher e Ama zon r un s th e online storefront an d Toys R Us cont rols inventory and logistics. Copyright 2001 Sandeep Krishna mur thy All Right s Reserved.

21

The fut ur e of th e compan y is un writt en a nd will prove to be as inter esting as its past.


22

Question s for Discussion 1. Wha t is th e last ing legacy of Amazon.com? 2. What d id Ama zon.com get right an d what did it get wrong? 3. Should Ama zon ha ve rem ain ed an online bookst ore? Critically evaluate the arguments for and against quick diversification. 4. Can Ama zon.com su ccessfully comp ete with br icks an d clicks stores such as Bar nes an d Noble? 5. Note from the finan cial stat emen ts tha t services still repr esent a sma ller port ion of th e comp a ny’s revenu es. Wha t is th e role for services in th e long-term for th e compa ny? 6. You sh ould be able to obta in the a nswer t o th ese questions from th e finan cial statemen ta. Compu te th e rat io of opera ting income to sales and gross profit to sales. See how these rat ios have cha nged over time. Compa re with BN.com a nd eBa y.com. What do you learn from this? b. Compu te the cur ren t rat io (cur ren t assets/cur ren t liabilities) an d th e quick ra tio (cur ren t assets). See how th ese ra tios ha ve cha nged over time. Compa re with BN.com an d eBay.com. Wha t do you learn from t his? c. Stu dy th e accum ula ted deficit and how it has cha nged over time. How did Amazon.com fall int o this per ilous p osition? d. Monitor int erest paymen ts over time. How ha ve th ey cha nged an d what do we learn from tha t? 7. Several ar gumen ts h ave been provided for t he lack of profitability of Ama zon.com. Using the finan cial stat emen ts, ident ify th e ones th at ar e most ap plicable. 8. Can sm all booksellers compet e with a lar ge site such as Amazon.com? Wha t would you do if you wer e a s ma ll bookseller onlin e? 9. Bas ed on wh a t we know, pa int a pictu re for how Amazon.com will look like in 1 year a nd in 5 years.


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APPENDIX P r o f . U fu k I n c e ’s E x p l a n a t i o n o f Am a z o n ’s C o n v e r t i b l e B o n d I s su e . The choice between equity an d debt is a fun dam ent al question in pra ctical as well as th eoret ical fina nce. Even t hough we kn ow a lot now, still we do not kn ow everyth ing about th is subject a nd it still ma inta ins its place as a m ajor resear ch a rea . Some of th e th ings we know ar e as follows: * Equity is in gener al more costly to issue for t he compa ny th an debt. * Debt is more risky t o issue. There ar e several a dditiona l cha ra cter istics of th ese two finan cing choices tha t ma ke them a ttr active as well as un att ra ctive compar ed to th e other !

!

!

Int erest pa yment s are ta x-deductible for th e corpora tion and dividend payment s ar e not. This mak es debt more attr active th an equity. This is tr ue even for a non-dividend paying compa ny su ch as AMZN for rea sons I skip h ere for brevity. Ther e is some a rgum ent th at is also empirically observed in favor of some debt: The ma nagers seem to work h ar der an d do not waste as m uch capital if th ey have a debt obligation t ha t th ey have to meet at per iodic inter vals. It sort of disciplines th em. Even th ough some debt is good, when it gets too mu ch t he r isk of ban kru ptcy tend s to overweigh th e benefits of debt. This, even if th e compa ny n ever actua lly goes bank ru pt. The customers do not like to deal with a compa ny th at ma y go ban kr upt soon. Man y employees do not like to work for one eith er. Man y such indirect costs m ak e a h eavy debt load dangerous.

The empirical observat ion is th at debt level is highly indust ry-specific. Heavy/manufacturing industries can usually live with much higher debt loads t ha n service or h igh tech tha t tend to have more intan gible assets. To un derst an d th e choice of AMZN in J an ua ry 1999, let us look a t t he $1.25 billion issu e in det ail: This was not rea lly a st ra ight (plain-van illa) debt issue. It was a h ybrid (between debt an d equity) secur ity issue th at is known as Convert ible Bond (CB). In fact, it is t he la rgest CB issue ever in th e h istory of finan ce. It was origina lly set to be a $500 million issue bu t wa s later bum ped up t o $1.25 billion d ue t o int ense investor int erest. A CB pays inter est every six month s just like a regula r bond issue but it gives th e option t o the investor wh o purcha ses it t o convert it in to (cert ain nu mber of) shar es of stocks of th e sam e compa ny. Tha t is, ther e is a chan ce Copyright 2001 Sandeep Krishna mur thy All Right s Reserved.

24

tha t th e bonds th at r equire regular interest pa yments, to tur n into AMZN sha res at some point in th e fut ur e, at th e investors' choosing. The CB of AMZN wa s issued when its stock wa s tr adin g at about m id $120's. It is a 10-year bond, an d is convertible to about 6 AMZN sh ar es at an y time from t he d at e of issue u nt il mat ur ity. Of cour se, the investors will decide to convert only if th e sha res become m ore valu able th an th e bond itself. The stock pr ice th at ma kes t he conversion profita ble is $156/sha re. This was about a 25% premium to where the stock was t ra ding at t he time of the issue. Tha t is, the st ock h ad to appr eciate t o $156 or a bove, for th e debt issue t o become a stock issue. Anoth er importa nt feat ur e of AMZN CB was t he r at e of inter est- 4.75% an nu ally. Why would a compa ny issue a CB, instea d of str aight debt or equity? To un derstan d th is one m ust r ealize that at t he time of the issue no one kn ows how the futu re will ta ke sha pe. The compa ny does not k now what will ha ppen with th e stock pr ice. It hopes th at it will go up. The investors do not know this either . The compa ny ma y want to issue stock, but a t t he th en cur ren t pr ice of $120’s it ma y have felt th at th e stock wa s un dervalu ed. That is, if it were to issue st ock a t t ha t t ime it would h ave un dersold th e sta ke in th e compa ny h ur ting/dilutin g existing st ockh olders’ sta ke. By issuing CB th at would become stock a t $156 dollar level, in e ffect AMZN issues (pseu do) stock at th e time it needs the cash (J an ua ry 1999) an d not a t t he low price of $120’s. When /if th e ma rket price appreciates in t he futu re t o and beyond $156 the bonds will tu rn into stock a nd t he compa ny will ha ve issued st ock a t tha t h igher pr ice but got t he cash m uch earlier when it n eeded to finance immense investmen t t hroughout 1999. Why do the investors buy into this scheme? Becau se they a re betting th at th e stock will app reciat e beyond $156 (ma ybe mu ch beyond) which would en title th em t o get a piece of th e action a t $156/sha re inst ead of wha tever h igh ma rk et pr ice everyone else might be payin g. Of cour se, th is is only one side of th e coin. We all know NOW tha t AMZN st ock h as never seen th e level of $156, an d in fact plun ged down t o a level of $17 in 2 ½ year s. That mea ns t he investors never got to convert t heir bonds int o stock, and AMZN wa s n ot a ble to have stock issue a t a higher price. Does this mea n AMZN a nd the investors m ade a hu ge mistake together? NO. And t ha t’s th e beaut y of a CB issue tha t it is a contingent secur ity. Tha t is, since no one kn ows what will happen in th e fut ur e, the contingent secur ity ta kes care of possible fut ur e scena rios. Wha t did t he investors gain by buying CB instea d of stock? They did not get th e upside potent ial becau se of th e stock pr ice crash but th ey did not bur n completely eith er. They still ha ve in their h an ds a piece of paper t ha t k eeps paying th em rea l cash every six month s. If th ey had AMZN sh ar es th ey would h ave 12 cent s to the dollar of th eir original investm ent a nd n o dividends wha tsoever. Copyright 2001 Sandeep Krishna mur thy All Right s Reserved.

25

What did AMZN gain by issuing CB instea d of str aight bonds? The int erest ra te 4.75%. This is at least t wo percenta ge points lower th an wha t a compa ra ble 10 year T-note was paying at th e time. Thu s, a compa ny as risky an d speculat ive as AMZN was a ble borrow at 2 point s chea per th an th e safest borrower in t he face of th e world. AMZN got extrem ely chea p fina ncing.


26

Table 1 Am a z o n .c o m ’s H i s t o r i c a l In c o m e S t a t e m e n t s (Source: http://www.iredge.com/IREdge/IREdge.asp?c=002239&f=2019 , Accessed March 6, 2002, all figures in thousan ds) Ye a r e n d e d D e c e m b e r 3 1 , 2001 Net sales Cost of sales Gross pr ofit

2000

1999

1998

1997

$ 3,122,433

$ 2,761,983

2,323,875

2,106,206

1,349,194

476,155

118,969

798,558

655,777

290,645

133,664

28,818

25.6%

23.7%

17.7%

21.9%

19.5%

$ 1,639,839 $ 609,819

$ 147,787

Operating expenses: Fulfillment

374,250

414,509

237,312

65,227

15,944

Marketing

138,283

179,980

175,838

67,427

24,133

Technology and content

241,165

269,326

159,722

46,424

13,384

89,862

108,962

70,144

15,618

6,741

4,637

24,797

30,618

1,889

1,211

Amortization of goodwill and other intangibles (1)

181,033

321,772

214,694

42,599

-

Impairment-related an d other(1)

181,585

200,311

8,072

3,535

-

1,210,815

1,519,657

896,400

242,719

61,413

(412,257)

(863,880)

(605,755)

(109,055)

(32,595)

45,451

14,053

1,901

(26,639)

General and administrat ive Stock-based compensation (1)

Total operating expenses Loss from operations

29,103

40,821

(139,232)

(130,921)

(84,566)

Other income (expense)

(1,900)

(10,058)

1,671

Non-cash in vestment gains an d losses (1)

(2,141)

(142,639)

Interest income Interest expense

Net int erest income (expense) and other Loss before equity in losses of equity-method investees

-

-

(37,444)

(12,586)

1,575

(526, 427)

(1,106,677)

(643,199)

(121,641)

(31,020)

(304,596)

(76,769)

Cumulative effect of change in accounting principle (1)

(10,523)

Basic and diluted loss per sha re - pro forma

-

(242,797)

(30,327)

Basic and diluted loss per share

-

(114,170)

Equity in losses of equity-method investees, net (1)

Net loss- GAAP

-

(326)

-

(2,905)

-

-

-

($567,277)

$ (1,4 11,2 73)

($1.56)

$ (4.02)

$ (2.20)

$ (0.42)

$ (0.12)

$ (1.56)

$ (1.19)

$ (1.19)

$ (0.25)

$ (0.11)

364, 211

350,873

326,753

296,344

260,682

$ (7 19,9 68) $ (1 24 ,5 46 )

$ (3 1,0 20 )

Sha res used in comput at ion of basic and diluted loss per share (1) Amounts excluded from pro forma calculations


27

T a b l e 2 , Am a z o n . co m ’s H i s t o r i c a l B a la n c e S h e e t S t a t e m e n t s (Source: http://www.iredge.com/IREdge/IREdge.asp?c=002239&f=2019 , Accessed March 6, 2002,

all figures in thousands) 2001

2000

1999

1998

1997

ASSETS

Current assets: Cash and cash equival ents

$540,282

822435

133309

71583

110119

Marketable securities

456,303

278087

572879

301862

15256

Inventories

143,722

174563

220646

29501

8971

67,613

86044

79643

21308

3363

1,207,920

1361129

1006477

424254

137709

271,751

366416

317613

29791

9726

Goodwill, net Other intangibles, net

45,367

158990

534699

174052

0

34,382

96335

195445

4586

0

Investments in equity-method investees

10,387

52073

226727

7740

0

Other equity investments

17,972

40177

144735

0

0

Other assets

49,768

60049

40154

8037

2409

$1,637,547

2135169

2465850

648460

149844

$444,748

485383

463026

113273

33027

305,064

272683

176208

47484

8871

Unearned revenue

87,978

131117

54790

0

816

Interest payable

68,632

69196

24888

10

177

Current portion of long-term debt and other

14,992

16577

14322

808

1660

921,414

974956

733234

161575

44551

2,156,133

2127464

1466338

348140

76702

-

0

0

0

0

3,732

3571

3452

3186

2898

1,462,769

1338303

1194369

297438

65137

-9,853

-13448

-47806

-1625

-1930

-36,070

-2376

-1709

1806

0

-2,860,578

-2293301

-882028

-162060

-37514

Total stockholders' equity (deficit)

-1,440,000

-967251

2 66278

138745

28591

Total liabilities and stockholders' equity (deficit)

$1,637,547

2135169

2465850

648460

149844

Prepaid expenses and other current assets Total current assets Fixed assets, net

Total assets LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)

Current liabilities: Accounts payable Accrued expenses and other current liabilities

Total current liabilities Long-term debt and other Commitments and contingencies Stockholders' equity (deficit): Preferred stock, $0.01 par value: Authorized shares -- 500,000 Issued and outstanding shares -- none Common stock, $0.01 par value: Authorized shares -- 5,000,000 Issued and outstanding shares Additional paid-in capital Deferred stock-based compensation Accumulated other comprehensive income (loss) Accumulated deficit


28

Table 3 S e g m e n t -l e v e l S a l e s a n d P r o f it a b i li t y In fo r m a t i o n (Source: http://www.iredge.com/IREdge/IREdge.asp?c=002239&f=2019 , Accessed March 6, 2002, all figures in thousan ds) 2001

2000

1999

1,688,752

$ 1,698,266

$ 1,308,294

547,190

48 4,151

15 0,65 4

2,235,942

2 ,1 82 ,4 17

1 ,4 58 ,9 48

225,117

198,491

13,148

661,374

2 ,3 80 ,9 08

1 ,4 72 ,0 96

3 81 ,0 75

1 67 ,7 43

3,122,433

2 ,7 61 ,9 83

1 ,6 39 ,8 39

U.S. Books, Music and DVD/Video

453,129

41 7,452

26 2,87 1

U.S. Electronics, Tools a nd Kitchen

78,384

44,655

(20,086)

531,513

46 2,107

24 2,78 5

126,439

116,234

12,285

140,606

57 8,341

25 5,07 0

7 7,4 36

3 5,5 75

798,558

65 5,777

29 0,64 5

U.S. Books, Music and DVD/Video

156,753

71,441

(31,000)

U.S. Electronics, Tools a nd Kitchen

(140,685)

(269,890)

(163,827)

16,068

(198,449)

(194,827)

42,042

26,519

(78,320)

(58,110)

(171,930)

(273,147)

(103,112)

(145,070)

(79,223)

(45,002)

(317,000)

(352,370)

Net Sales $

U.S. Books, Music and DVD/Video U.S. Electronics, Tools a nd Kitchen Total U.S. Retail U.S. Services Total U.S. I n t er n a t ion a l Consolidat ed Totals G r o s s P r o f it

Total U.S. Retail U.S. Services Total U.S. I n t e r n a t ion a l Consolidat ed Totals P r o f o r m a i n c o m e ( lo s s ) f r o m operations

Total U.S. Retail U.S. Services Total U.S. International Consolidat ed Totals


29

Table 4 C o n s o l id a t e d S t a t e m e n t o f O p e r a t i o n s of B N .c o m (S o u r c e : 1 0Q , No v e m b e r 2 00 1, Al l fi g u r e s i n t h o u s a n d s u n l e s s o t h e r w i s e s t a t e d , 2 00 1 YT D fi g u r e s a r e u p t o 3 0 S e p t e m b e r , B N .C o m w a s a s u b s i d i a r y o f B a r n e s a n d N o b l e u p t o O c t o b e r 3 1 , 1 99 8)

YEAR YEAR YEAR YTD 2001 ENDED ENDED ENDED 12/31/2000 12/31/1999 12/31/1998 Net sales

$289,562

320,115

193,730

61,834

222,766

261,801

159,937

47,569

Gross profit Operating expenses:

66,796

58,314

33,793

14,265

Market ing, sales and fulfillment

31,820

132,483

101,077

70,423

Technology an d web site development

47,560

40,391

21,006

8,532

Genera l an d administr at ive

34,859

31,293

18,842

12,026

Depreciation an d amortization

23,626

36,088

15,510

7,140

75,051

--

--

--

11,740

--

--

20,593

30,728

--

--

189,592

357,774

156,435

98,121

(122,796)

(2 99 ,4 60 )

(1 22 ,6 42 )

(8 3,8 56 )

6,265

23,737

20,238

708

(116,531)

(2 75 ,7 23 )

(1 02 ,4 04 )

(8 3,1 48 )

84,396

210,320

54,253

--

($32,135) ($0.24)

(6 5, 40 3) ($2.02)

(4 8, 15 1) ($0.72)

(8 3,1 48 ) ($0.48)

43,787 ($0.24)

32,386 ($2.02)

28,778 ($0.72)

28,797 ($0.48)

Cost of sa les

Impairment and other special charges Stock based compen sa tion Equity in net loss of equity investment s including amortization of inta ngibles Total operat ing expens e Opera ting loss Inter est income, net Loss before minorit y int erest Minority int erest Net loss-historical Basic net loss per common sha re(5) Basic weighted avera ge common sh ar es outstanding(5) Dilut ed net loss per shar e(5)


30

Table 5 T o p I n t e r n e t R e t a i li n g S i t e s i n t e r m s o f U n i q u e Vi s it o r s , M a r c h 2 00 0 v s . M a r c h 2 00 1 (S o u r c e : M e d i a M e t r i x ) Mar 2000 Rank 1 2 3 4 5 6 7 8 9 10

Amazon.com BN.com CDNow Ticketm ast er McAfee Hp.com Apple.com En ews.com Ipr int.com Buy.com

Mar 2001 14,349,000 Amazon.com 18,229,000 5,404,000 X10.com 8,406,000 4,737,000 BN.com 4,877,000 3,617,000CDNow 4,694,000 3,549,000 Apple.com 4,029,000 3,441,000 Hp .com 4,018,000 3,185,000 Magazineoutlet.com 3,906,000 2,901,000 Sear s.com 3,842,000 2,871,000 Ticket ma ster .com 3,813,000 2,624,000 Dell.com 3,800,000


31

Table 6 T o p Au c t i o n S i t e s R a n k e d b y R e v e n u e S h a r e , M a y 2 00 1 (U .S .) Auction Revenue***,R e v e n u e Satisfaction Conversion Site* $ million Share Rate Rate 1. eBay.com** 357.51 64.30% 8.42 22.50% 2. uBid.com

81.73 14.70%

7.87

11.00%

3. Egghead.com (Onsale.com) 4. Yahoo! Auctions 5. Amazon Auctions

22.24

4.00%

7.75

8.00%

13.34

2.40%

7.84

4.40%

11.12

2.00%

7.64

6.50%

S ource: N ielsen/ / N etRatings & H arris Interactive eCom m ercePulse, May 2001 *Auction sites do not in clude travel related sites. **Figures for eBa y.com do not in clude figures for Half.com . *** All revenue figures are for May 2001.


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Table 7 Am a z o n .c o m i s t h e l e a d e r : T o p E -T a i l e r s i n B o o k s , T o y s , Vi d e o s a n d M u s i c (Source: Gomez.com, Accessed J uly 27 th 2001, Max. score possible is 10) Books (Spring 2000) 1 Amazon.com

Toys (Fall 2000) 8.66 Amazon.com

Videos Music (Summ er 2000) (Summer 2000) 8.02 Amazon.com 8.40 Amazon.com 8.16

2 bar nesa nd noble.com

7.63 Sma rt erKids.com

7.99 BUY.COM

8.25 CheckOut

7.67

3 BUY.COM

7.50 ZanyBra iny.com

7.33 CDNOW

7.73 BUY.COM

7.51

4 Borders.com

7.38 KBkids.com

7.06 Expr ess.com

7.58 Bar nes

7.47

5 Booksa million

7.35 Wal-Mart

6.33 800.com

7.29 CDNOW

7.24

6 fatbrain.com

6.71 Nutt yPutty.com

6.30 CheckOut Ent er.

7.25 SamGoody

6.89

7 Wal-Mart

6.60 J C Penney

5.73 Blockbuster

7.03 Tower

6.86

8 gohastin gs.com

5.92 Tar get

5.61 Bigstar .com

6.90 Expres s.com

6.85

9 varsitybooks.com

5.83 FAO Schwar tz

5.56 Borders.com

6.86 ARTISTdirect.com 6.45

10 BookBu yer Out let

5.43

Sam Goody.com


6.83 MuZic

6.31

33

Table 8 T o p 1 0 F a s t e s t G r o w i n g E -t a i le r s i n t h e 2 00 1 h o li d a y s h o p p i n g s e a s o n (S o u r c e : N i e ls e n N e t R a t i n g s )

1 Colum bia Hous e 2 Finger hu t.com 3 Overs tock.com 4 Officedep ot.com 5 Apple.com 6 Best buy.com 7 HP .com 8 St ap les.com 9 Ama zon.com 10 Circuit city.com

Shopping Shopping Trips, Nov- Trips, NovDec. 2000, Dec. 2001, in in % thousands thousands change 7,958 25,386 219.0 3,300 8,051 144.0 6,215 12,894 107.5 5,222 10,003 91.6 10,322 17,642 70.9 13,735 22,389 63.0 17,043 260,067 1425.9 5,609 8,509 51.7 133,197 198,822 49.3 6,346 8,950 41.0


34

F i gu r e 1 Am a z o n .c o m ’s S t o c k P r i c e P a t h (Sour ce: Quicken.com, S sta nd s for s tock s plit, Accessed on Mar ch 6, 2002)


35


36


37

ENDNOTES 1

Unless otherwise stated, all footnote URLs verified on March 10, 2002. Bezos, Jeff(1998), “A Bookstore By Any Other Name”, July 27,. 3 Ramo, Joshua Cooper(1999), “Amazing Person.com”, . 4 Hof, Robert(2001), “Q&A with Amazon’s Jeff Bezos”, March 26, . 5 Gregory, Nina(1999), “Of Amazonian Proportions”, December, . 6 Bezos, Jeff(1998), “A Bookstore By Any Other Name”, July 27, . 7 Taylor, William(1996), “Who’s Writing the Book on Web Business?”, October, . 8 Amazon.com, 1999 Annual Report 10K, , “About Amazon.com”, Amazon.com web site, 9 Bezos, Jeff(1998), “A Bookstore By Any Other Name”, July 27,. 10 Laseter, Tomothy M., Patrick W. Houston, Joshua L. Wright, and Juliana Y. Park(2000), “Amazon Your Industry: Extracting Value from the Value Chain”, First Quarter, . 11 Hof, Robert(1998), “Amazon.com: The Wild World of Web Commerce”, . 12 Laseter, Tomothy M., Patrick W. Houston, Joshua L. Wright, and Juliana Y. Park(2000), “Amazon Your Industry: Extracting Value from the Value Chain”, First Quarter, . 13 Hof, Robert(1998), “Amazon.com: The Wild World of Web Commerce”, . 14 “Amazon.com: Case Study”, 1999, http://www.umich.edu/~cisdept/bba/320/1999/fall/amazon.html 15 Adapted from BN.com 10Q statement, April 2001. 16 Laseter, Tomothy M., Patrick W. Houston, Joshua L. Wright, and Juliana Y. Park(2000), “Amazon Your Industry: Extracting Value from the Value Chain”, First Quarter, . 17 Wiggins, Richard(2001), “Of Jeff Bezos and Leo Durocher”, 6(5), May, . 18 Wiggins, Richard(2001), “Of Jeff Bezos and Leo Durocher”, 6(5), May, . 19 Amazon.com 1999 Annual Report 10-K/A, page 5. 20 Hof, Robert(1998), “Amazon.com: The Wild World of Web Commerce”, . 21 The first quote is from- Hof, Robert(2001), “Q&A with Amazon’s Jeff Bezos”, March 26, . 22 Wiggins, Richard(2001), “Of Jeff Bezos and Leo Durocher”, 6(5), May, . 23 Arango, Tim(2001), “Amazon's Foe in Race to Profitability: The Middleman”, June 4, . 24 This entire discussion is based on- Arango, Tim(2001), “Amazon's Foe in Race to Profitability: The Middleman”, June 4, . 25 Thanks to my student, Eng Lim, for pointing this out. 26 Staff reporter(2000), “Amazon gets patent for affiliate program”, Feb 27, . 2


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Amazon

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