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CASE STUDY
Amazon.com 2007early 2009
Gary J. Stockport

This case study is concerned with the continual roll-out of Amazons global strategy through the development of
resources and strategic capabilities. It is about global dominance through the development and use of technology
and acquisitions and alliances to offer an increasing array of products and services and continually enhancing
customer experience. The case discusses the widening of Amazons business through serving three distinct and
different groups of customers. The case highlights a number of potentially disruptive technologies including Kindle
and cloud computing.

Introduction How might depressed consumer sentiment in the global


financial crisis affect its growth?
By 2008, Amazon.com had a market capitalisation of
Is the continued heavy investment in technology and
some US$29.4 billion1 (19.3bn or x21.4bn) (see
innovation the right strategy for building and maintain-
Appendix 6) and employed around 20,700 employees.
ing Amazons sustainable competitive advantage?
It was a truly global company and it had established
What is the optimal balance between catering for
websites in Canada, the UK, Germany, France, Japan and
the needs of Amazons different customer groups? As
China and 47 per cent of consolidated sales were out-
Amazon developed from being just an online retailer
side its home country (see Appendix 2). The company
to a web services provider for sellers and now moving
sold everything from books to jewellery to digital music
into providing web technology infrastructure develop-
and it had recently established itself as a major player in
ment, it may face challenges in trying to reconcile
cloud computing with the development and provision of
its vision of being customer-centric through having
services in the cloud.
to consider which group(s) of customers should take
Amazon had faced many challenges over the years. It had
priority.
weathered significant challenges such as the technology
Generally, is Amazons business model the right model
bubble bursting during April 2000 as well as deteriorating
looking ahead five years or more?
shareholder sentiment at various times. The organisation
had survived and overcame all these challenges, and even
within the eye of the recent global financial crisis, Amazon The founder Jeff Bezos
continued to make strategic investment decisions for the
At the age of 14, Jeff Bezos, the stepson of a petroleum
longer term. CEO Jeff Bezos pointed out: When we plant a
engineer, admitted to wanting to become an astronaut or
seed, it tends to take 5 to 7 years before it has a meaningful
a physicist, or something that would allow him to use
impact on the economics of the company.
cutting edge technology. During his high school years he
As 2009 rolled on, some strategic issues that Bezos
founded his first venture, the DREAM Institute, which was
had himself identified and needed to consider included the
a summer school programme aimed at stimulating creative
following:
thinking in youngsters.
By the age of 30, Jeff Bezos, the Princeton summa
1
$1 0.66 x0.73. cum laude graduate with a Bachelor degree in Electrical

This case study is an update of a number of case studies written about Amazon.com and published in earlier editions of this
textbook.
This version of the case was written by Professor Gary J. Stockport and MBA students Tricia Ong, Celina Chien, Eun-Ah Lee,
Wentao (Mark) Wa, Mary Ngusaru and Michael Yoo: Business School, The University of Western Australia. It is intended as a basis
for class discussion and not as an illustration of good or bad practice. Gary J. Stockport 2010. Not to be reproduced or quoted
without permission.
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574 AMAZON.COM 2007EARLY 2009

Engineering and Computer Science, was the youngest Silicon Valley funding for a further $8 million. During 1997,
Senior Vice President of D.E. Shaw, running a Wall Street an initial public offering (IPO) comprising 3 million shares
hedge fund. Whilst working at Shaw, Bezos came up with raised $50 million and enabled an aggressive expansion
the statistic that the electronic world, known as the World of the business.
Wide Web, would grow at an incredible rate of 2300 per
cent monthly. Bezos, stunned by these growth figures, felt
Vision
driven to act quickly, saying: I decided that when I was
eighty, I wouldnt regret quitting a Wall Street job when The vision behind Amazon has progressively changed
I was thirty, but when I was eighty I might really regret since it started in 1995. What began as the goal to become
this great opportunity. the worlds biggest and best online bookstore developed
After quitting his job, Bezos drove his wife, MacKenzie, into a store where customers could buy anything with
and their dog across the US in a Chevy Blazer that his a capital A. It also wanted to become the worlds most
stepfather had donated, arriving in Seattle on 5 July 1994. customer-centric company. Bezos added:
Bezos had already chosen books as his preferred product
Our goal is to be Earths most customer-centric com-
due to their low price point and the size of the global
pany. I will leave it to others to say if weve achieved
market, estimated at over US$80 billion at the time. He
that. But why? The answer is three things. The first
believed web-based technology would provide customers
is that customer-centric means figuring out what your
with a much larger range of titles at their fingertips as
customers want by asking them, then figuring out
well as enable better organisation and presentation of the
how to give it to them, and then giving it to them.
millions of books.
Thats the traditional meaning of customer-centric,
Seattle was a logical choice to locate the business as it
and were focused on it. The second is innovating on
was close to Ingram Books, the largest US book distributor.
behalf of customers, figuring out what they dont know
It also had access to a large supply of computer software
they want and giving it to them. The third meaning,
talent. Furthermore, the State of Washington had a more
unique to the internet, is the idea of personalisation:
favourable sales tax climate. Over the next 12 months,
redecorating the store for each and every individual
whilst operating from the garage of his rented home,
customer. If we have 10.7 million customers . . . then
Bezos, his wife, and three others established relationships
we should have 10.7 million stores.
with shippers and wholesalers, developed the software
and tried to raise money. The business went live with an
online store in July 1995. Defining the business
The core of what defined Amazon, as reflected in the 1997
Early growth Letter to Shareholders, has remained over the years. This
Bezos believed the power of the internet lay in continuous letter contained a series of core commitments such as their
communication and word of mouth, which made brand- emphasis on longer term market leadership. Extracts from
ing even more important. As a result, he chose to name it are reproduced opposite.
his site after the worlds largest river, believing Amazon From originally serving just website retail customers,
would become the biggest bookshop in the world. Bezos Amazon in 2009 served three distinct groups of customers:
pointed out: A brand for a company is like a reputation
Consumer customers: through its retail websites, Amazon
for a person. You earn reputation by trying to do hard
provided a wide range of merchandise, low prices, and
things well.
convenience to its consumers;
In 1995, Amazon had no significant online rivals and
Seller customers: sellers that sold their products either
although Barnes and Noble had a 14 per cent market
on Amazons websites or on their own brand websites
share of traditional retail bookstores, it had no online
and fulfilled their orders using Amazons fulfilment
presence. Once launched, it took less than a year for
facilities;
Amazon to be recognised as the webs largest and best
Developer customers: customers that used Amazon web
online bookstore with over 1 million titles. During this early
services which provided access to Amazons technology
growth period, Bezos did a lot of the manual work himself
infrastructure that enabled them to create virtually any
such as loading and unloading packages in the back of
type of business. See Appendix 3 for a more detailed
his Chevy Blazer and delivering them to the Post Office.
analysis defining Amazons business.
Unable to raise critical funds needed to grow the business
from his existing contacts in New Yorks money market, Central to Amazons strategy was growth. Figure 1
Bezos relied on private investment of $1.2 million and shows Amazons approach of achieving growth through
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AMAZON.COM 2007EARLY 2009 575

1997 LETTER TO SHAREHOLDERS

(From the 6th Paragraph)

Because of our emphasis on the long term, we may make decisions and weigh tradeoffs differently than some
companies. Accordingly, we want to share with you our fundamental management and decision-making approach
so that you, our shareholders, may confirm that it is consistent with your investment philosophy:

We will continue to focus relentlessly on our customers


We will continue to make investment decisions in light of long-term market leadership
We will continue to measure our programs and the effectiveness of our investments analytically, to jettison those
that do no provide acceptable returns, and to step up our investment in those that work best. We will continue to
learn from both our successes and our failures.
We will make bold rather than timid investment decisions where we see a sufficient probability of gaining market
leadership advantages. Some of these investments will pay off, others will not, and we will have learned another
valuable lesson in either case.
When forced to choose between optimising the appearance of our GAAP accounting and maximising the present
value of future cash flows, well take the cash flows.

Source: Extract of 1997 letter to Shareholders reprinted in the 2002 and subsequent Annual Reports.

Figure 1 Amazons Strategy Selection: Amazon offered the widest selection of products,
from its vast selection of retail products to Amazons
software and Cloud Computing offerings;
Price: Amazon was committed to price leadership and to
consistently and continuously offer this with no sacrifice
to quality. For example, Amazon offered free shipping offers
to customers along with a guarantee of on-time delivery;
Convenience: Amazon continually strived to please its
customers. For example, Amazon dedicated many
resources to understanding what its customers wanted
by offering customer review and feedback forms on all of
its products.
These three pillars were supported by Amazons continual
commitment to innovation and investing in the future.
Source: Originally drawn by Jeff Bezos in 2005.
Bezos concluded: Theres more to innovation ahead of us
than innovation behind us. Underpinning innovation was
the emphasis upon technology.

being customer-centric and continually improving the


customer experience by offering lower prices and wider Fulfilment
selection. This in turn fed back to the increasing use of Although Amazon was commonly regarded as an online
Amazons websites (traffic) by customers and sellers, which business, products had to be physically shipped to customers.
again fed back to growing resources for innovation for Amazons many fulfilment centres were typically strategically
improved customer experience, and so the virtuous cycle located in a number of cities in North America, Europe
continued. Amazons brand mantra was to relentlessly and Asia, often near airports. In total, they comprised some
serve the customer by shaping the customer experience. 19.7 million square feet of properties all over the world
Its corporate logo had continually evolved over the past (see Appendix 4). In 2008, Amazon.com opened a new
10 years to match Amazons shifting business offerings. 600,000 square feet fulfilment centre in Hazleton, PA to
Amazon had built a three pillar strategy to guide and serve Amazons Northeast customers. Another new facility
reach Bezos vision. These pillars were selection, price and in Goodyear, Arizona of more than 500,000 square feet
convenience, with its foundation on innovation. was also opened.
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576 AMAZON.COM 2007EARLY 2009

During 2008, Amazon launched Frustration-Free Amazon believed the continual investment in techno-
Packaging, a new initiative designed to make it easier for logical innovation helped Amazon to achieve two com-
customers to take products from their packages. Frustration- plementary goals. Firstly, it improved efficiency, ultimately
Free Packaging was launched in the US with 19 bestselling lowering operating costs and enabling the company to offer
products from leading manufacturers including Fisher-Price, lower prices to customers. Secondly, heavy investment
Mattel, Microsoft and electronics manufacturer Transcend. in research and development enabled Amazon to find new
Amazon intended to expand this initiative across its inter- ways to improve customer experience. With its advanced
national sites during 2009. technology, Amazon had no need to segment customers
based upon the more traditional marketing methods such
as demographic or human behaviour. Customer search
Staff
patterns and purchasing behaviour were tracked almost
Amazon had always taken a strategic approach to recruit- instantaneously as soon as a customer accessed the
ing. As mentioned earlier, it located in Seattle as there was website. Furthermore, Amazons website made intelligent
a large supply of computer software talent available. Over recommendations of what other customers purchased after
the years, it had continually strengthened its management a new customer found a product they were interested
team. For example, during 1997 Richard Dalzell, a former in. In many ways, Amazon had built the ultimate virtual
Wal-Mart Vice President joined as Chief Information Officer salesperson right at the customers fingertips, by leveraging
(CIO). He brought expertise in merchandising and logistics off information from millions of customer transactions
systems, supply chain systems, international retailing and and online window-shoppers. This competency was very
merchandising systems, and commercial decision support powerful and other organisations had failed to produce
and data mining systems. Other senior managers had been similar market data on such a large scale. Bezos concluded
recruited from a variety of companies such as AlliedSignal, by claiming that:
Apple, Black and Decker, Delta Airlines and Microsoft.
More generally, Amazon recruited tightly around their by building new technologies ourselves we get to offer a
need to service the customer. Bezos added: better customer experience for millions of people. Does
this give us an advantage? Absolutely [but] you have to
Companies get skills-focused, instead of customer-needs continue to innovate. This is something that has to be
focused. When [companies] think about extending refreshed every day, every week and every year.
their business into some new area, the first question is
why should we do that we dont have any skills in that Amazons continual emphasis upon technology led to
area. That approach puts a finite lifetime on a company, a number of major outcomes between 2007 to early 2009
because the world changes and what used to be cutting- including Kindle, improving Amazon Web Services, offering
edge skills have turned into something your customers digital content and enhancing accessibility.
may not need anymore. A much more stable strategy is
Kindle
to start with what do my customers need? Then do an
Amazon developed and marketed an innovative wireless
inventory of the gaps in your skills.
electronic reading device called Amazon Kindle under
Culturally, Bezos ensured that his company was never the Amazon brand. This device was unveiled in the final
satisfied with the status quo and never too comfortable quarter of 2007 and enabled customers to download books,
and he emphasised: I ask our people to wake up afraid magazines, newspapers and blogs. Amazon Whispernet,
and terrified (about the customer) every morning. He also Kindles wireless delivery system, used a nationwide (US)
pointed out: customers are the folks who have the money. high speed data network and Kindle users could easily gain
Our competitors are never going to send us money! access to the Kindle Store where over 90,000 books were
available. There were no additional charges for wireless
Technology, technology, technology access or service commitments for customers so this was a
truly convenient value add for Amazons book shoppers.
Despite the progressive change in their vision, Bezos typical
Kindle supported a ready-to-use function and as it did not
response about the main difference between conventional
require any set-up or software installation users were able
retail and his business was:
to use Kindle immediately. Kindle users could also store
The three most important things in retail are location, their personal documents in various formats such as DOC,
location, location. The three most important things for HTML and JPEG.
our consumer business are technology, technology, By June 2008, Kindle had become the top selling product
technology. Thats what takes the place of real estate in among Amazons vast selection of consumer electronics
our business. products and the most wished for electronics item by
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AMAZON.COM 2007EARLY 2009 577

Amazon customers. Amazon had increased the number These new capabilities were amongst the top requests from
of book titles available to Kindle from 90,000 to 190,000 developers.
with more books being added every day. Amazon built During the third quarter of 2008, Amazon Mechanical
relationships with partners such as Simon & Schuster, Turk launched a new set of web-based tools that made it
Inc. and Christian Publishers, making even more titles avail- easier for businesses to outsource work to an on-demand
able and further fuelling interest in this revolutionary workforce to businesses worldwide. These web tools
product. allowed customers to utilise the internet to outsource
During early 2009, Amazon launched Kindle 2, an thousands of tasks, manage a virtual workforce and easily
improved version of the original product with longer download work results. This technology opened up the
battery life and a new Text-to-Speech feature. Amazon was service to a wider range of customers because it no longer
a major player in the professionally narrated audiobooks required clients to have programming skills. With these
business through its subsidiaries Audible and Brilliance, and new web-based tools, any business could submit work that
the Text-to-Speech feature would be likely to introduce required human intelligence to a workforce of hundreds
new customers to the convenience of listening to books and of thousands of workers from over 100 countries in just
thereby expand the professionally narrated audiobooks a few minutes. This enabled businesses to get important
industry. Amazon further enhanced Kindle for iPhone and work done quickly and inexpensively.
iPod touch in March 2009, which allowed customers to In the same quarter (third quarter of 2008), Amazons
enjoy over 240,000 books. innovative AWS division launched the Amazon Elastic
Block Store (Amazon EBS), a new and improved storage
Amazon Web Services feature for EC2 that provided unlimited storage potential
The most disruptive technological innovations released to clients using the Amazon EC2 service.
by Amazon between 2007 and early 2009 were through The last quarter of 2008 was a busy and productive
Amazon Web Services (AWS). AWS products were examples one for AWS. EC2 was upgraded for compatibility with
of Cloud Computing, a model whereby IT vendors host Microsoft products such as Microsoft Windows Server and
hardware and software in their own data centres and Microsoft SQL Server, and provided even greater flexibility
make them accessible via the internet. The trend in Cloud for deploying solutions in the AWS cloud.
Computing has been compared to the development of AWS also launched Amazon CloudFront, a high-
the electricity network more than a century ago, whereby performance, self-service, pay-as-you-go method of distribut-
companies stopped having to produce their own power and ing data over the internet at high data transfer speeds.
instead plugged into a national electric grid. In the same Adam Selipsky, Vice President of Product Management
way, individuals and organisations can now connect to and Developer Relations at AWS claimed:
a cloud of computing resources to fuel their information
Our customers asked us for a way to globally distribute
and processing needs on the internet. The benefit of
their most frequently accessed content with all the
this approach was that companies with access to huge
benefits that AWS provides: low, pay-as-you-go pricing,
economies of scale can sell their hardware or software
high performance and reliability.i
processing power to users on a pay as you use basis far
cheaper than a user could individually. If the internet AWS also introduced Public Data Sets on AWS, which
community could facilitate this disruptive technology, enabled developers and researchers to cost-effectively
personal computers as we know them today may become create, share and consume large sets of data free of charge.
obsolete and products such as Kindle or dumb terminals AWS had been working to lower the barriers to entry for
could take their place. fellow scientists for the past five years, and Public Data
A number of big technology names had already embraced Sets on AWS would provide virtually free resources to
the Cloud Computing revolution, including Google, IBM researchers. By increasing the number of people with
and Sun Systems. However, Amazons EC2 was commonly access to important and useful data, and making it easy to
regarded as being the most popular and more commercial- compute on that data with cost-efficient services such as
ised than any of its competitors offerings. Products that Amazon EC2, AWS hoped to fuel innovation and further
AWS released included AWS Premium Support, Amazon accelerate the pace of new discoveries.
Mechanical Turk, Amazon EBS, Amazon CloudFront and AWS was voted the fifth most influential biztech product
Public Data Sets on AWS. of 2008 by ZD Net. Peter De Santis, General Manager of
AWS Premium Support provided IT customers with EC2 concluded: For over 2 years, weve focused on deliver-
fast, one-on-one technical assistance and released new ing a cost-effective, web scale infrastructure to developers,
features that enabled developers to build even more giving them complete flexibility in the kinds of solutions
powerful and fault resilient applications on the internet. they deliver.
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578 AMAZON.COM 2007EARLY 2009

Digital contents In April 2008, Amazon.com launched Amazon TextBuyIt,


Another significant expansion for Amazon between 2007 a new service that allowed customers to use text messages
and early 2009 was in its digital content offerings. During to find and buy products sold on Amazon.com. With the
2007, Amazon launched a MP3 Music Store, a digital addition of TextBuyIt to Amazons existing mobile offering,
music downloads store. All MP3 contents on the Amazon including its mobile site and mobile iPhone site, customers
MP3 store were offered without Digital Rights Manage- could now shop virtually anywhere using either text
ment (DRM) software, so customers could listen to these message or their mobile devices web browser.
MP3s without any restrictions. EMI music, one of the major In order to expand Amazons IT offering to its developer
music providers, joined this launch and the Warner Music clients, Amazon Payments announced early in 2009 the
Group had become another supplier by the end of 2007. general availability of Amazon Flexible Payments Service
This DRM-free partnership with major music providers (Amazon FPS). This effectively allowed developers to
helped Amazon establish its strategic position as the accept payments from Amazons millions of customers
worlds largest selection of DRM-free MP3. and enabled developers to monetise their innovations
From early 2008, Amazon made DRM-free MP3 music quickly.
downloads from Sony Music Entertainment available to
customers on Amazon MP3. Consequently, Amazon MP3
Market and product and service expansion
became the only retailer to offer customers DRM-free MP3s
from all the major music labels, as well as over 33,000 Amazons emphasis on technology and innovation
independent labels. It also announced in January 2008 an enabled it to quickly roll out its activities across the world
international roll-out of Amazon MP3, where every song (see Appendix 5). During 2007, it launched a number of
was playable on virtually any digital music capable device, new sites that served customers with specific needs. In
including the PC, Mac, iPod, iPhone and BlackBerry. early 2007, Amazon launched Endless.com which focused
Later in the year, Amazon launched a New Artists Store on shoe and handbag items. It provided free overnight
featuring comprehensive artist content, including full album shipping, a 110 per cent price guarantee on its products
discographies, CDs, DRM-free MP3 and vinyl catalogue and convenient navigation and search functions for over
selection along with community features such as artist 250 brands and 15,000 styles of shoes and handbags.
images, biographies and related products. Endless.com operated 24-hour-a-day customer service
In September 2008, Amazons subsidiary IMDb.com phone support, which enhanced and facilitated the
announced that users could watch over 6000 full length customer shopping experience. By mid-2007, it had added
feature films and TV episodes for free on IMDb.com. This over 50 new brands to its existing selection.
included new stores devoted to customers favourite TV Amazon launched two music stores, Classical Music
series and childrens programming. It rolled-out a German Blowout Store and Go Indie Music Store. According to
version in November, www.imdb.de, specifically to help Thomas May, Amazons senior music editor, there were
German-speaking movie and TV lovers easily find informa- a decreasing number of bricks-and-mortar music stores
tion for their favourite films and TV shows. and increasing demand for the selection of classical
music offered on Amazon. Go Indie Music Store provided
Accessibility music buyers with hundreds of titles from more than
Many technology developments were aimed at enhancing 30 independent music labels.
customer accessibility. For example, during early 2008, Amazon All Business Centre was introduced as a
Amazon launched a new feature, Amazon Currency new category store, providing one-stop shopping for
Converter, on its website allowing international customers start-up businesses as well as growing businesses. This
to pay for their purchases in the currency of their payment store offered various solutions targeted at entrepreneurs
card, instead of US dollars. This enabled international needs and some of the key offerings were customer forums,
customers to purchase eligible items from its website with laptops, software solutions, furniture and stationery. The
greater ease and certainty. store also provided customers with services such as
Along similar lines, Amazon launched Bill Me Laters next Amazon Web Services, Fulfilment and Amazon Corporate
generation payments service for its customers to complete Accounts.
purchases instantly online without using a credit card. With Amazon continuously expanded globally via its inter-
its flexible financing programmes Bill Me Later, Inc. was a national network. After the initial success of Amazon
leader in the digital payments industry. Its network included Jewellery, Amazon launched its Jewellery & Watches Store
hundreds of top-tier merchants including Borders, Bluefly, in the UK, Germany, France and Japan. Amazons jewellery
Continental Airlines, eLUXURY, Fujitsu, JetBlue, Toshiba, business had remarkable growth in the second quarter
Toys R Us, US Airways, Walmart.com and Zappos. of 2007, 260 per cent in diamond sales, 169 per cent
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AMAZON.COM 2007EARLY 2009 579

in coloured gemstones and 107 per cent in sterling silver In October 2008, Amazon acquired Reflexive Entertainment,
sales. The success attracted various brands, such as Crislu, a PC casual game distributor and developer. Reflexives
Elle, Miss Sixty, Nautica and Technomarine. CEO Lars Brubaker announced its acquisition with the
During 2008, Amazon launched its Office Supplies Store, expectation that Reflexive would serve a broader range of
a single shopping destination that offered competitive customers via Amazons distribution channel.
prices on products for the classroom, home office, small
Amazon.com also completed its acquisition of AbeBooks,
office, corporate office and everything in-between. This new
an online marketplace for books, with over 110 million
store included a selection of more than 500,000 products
primarily used, rare and out-of-print books listed for sale
from thousands of manufacturers, including both well
by thousands of independent booksellers from around the
known and hard to find brands such as Avery, Hammermill
world. AbeBooks added millions of customers to Amazons
and Raymond Geddes.
existing consumer base and expanded its geographic
Amazon also diversified into auto parts, launching its
reach with AbeBooks global websites (AbeBooks.com,
Motorcycle Store as a single shopping destination for
AbeBooks.ca, AbeBooks.co.uk, AbeBooks.de, AbeBooks.fr,
motorcycle and parts, accessories and protective gear. The
AbeBooks.it and Iberlibro.com). AbeBooks.com also had
store showcased a selection of more than 300,000 products
affiliates in Germany and the US.
from over 500 manufacturers, including top brands like
Alpine Stars, Fox Racing, Harley Davidson, Suzuki and
Tour Master. Competitors
During August 2008, Amazon unveiled the Software Based on Amazons Annual Report (2009a), it was
en Espanol Store, a new category store featuring essential possible to identify six different types of competitors. Firstly,
Spanish language and bilingual software products. With there were physical-world retailers, publishers, vendors,
content primarily in English accompanied by some Spanish distributors, manufacturers and producers of Amazons
information, the store featured an extensive selection of products. Examples included Wal-Mart and Barnes & Noble.
business and office software as well as educational offerings Secondly, there were other online e-commerce and mobile
and software for children. The Amazon Software en Espanol e-commerce sites, including sites that sold or distributed
Store was designed to be the destination for Hispanic con- digital content. A major player, eBay, had achieved less than
sumers and to help meet the needs of the nearly 1.6 million half of Amazons sales, but earned much higher net income
Hispanic-owned businesses in the US. and net profit margin (see Appendix 1). John Donahoe,
Amazon kicked off 2009 with the launch of Amazons CEO of eBay, recently announced that it would focus on the
Inauguration Store, which offered customers everything secondary market . . . as a part of its effort to transform
considered necessary to attend an event, host an inaugura- its core marketplace business (Morrison, 2009). Thirdly,
tion party or watch the milestone occasion from home. there were indirect competitors including media companies,
Another launch included Amazons PC Casual Game web portals, comparison shopping websites and web search
Download Store which offered over 600 game titles to engines. Fourthly, there were companies that provided
compete with PC game portals such as Yahoo Games. e-commerce services, including website development,
fulfilment and customer services. Fifthly, there were com-
panies that provided infrastructure web services or other
Acquistions and alliances
information storage or computing services or products.
Over the 2007 to early 2009 period, strategically aligned As Amazon entered into the web infrastructure industry,
acquisitions and alliances remained a key way for Amazon two new competitors were Apple and Google. Finally, there
to pursue technology development, applications and were companies that designed, manufactured, marketed
extend products or services. These alliances benefited or sold digital media devices. Again, Apple and Google were
Amazons partners through, for example, access to capital, competitors within this category. Appendix 6 provides a
management expertise and Amazons huge customer comparison of some competitors revenue.
database. Some examples of acquisitions included:

In June 2008, the company acquired Fabric.com, a leading Key financials


online store that offered custom measured and cut fabrics, Appendix 2 presents sales and income as allocated to
as well as patterns, sewing tools and accessories. This North America and International Segments 200108.
acquisition enabled Fabric.com to further expand its selec-
tion of fabrics and accessories while enabling Amazon.com Capital expenditure and cash
to offer its customers a wider variety of products in the In line with Amazons mission to become the Earths most
sewing, craft and hobby segment. customer-centric company for its three primary customer
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580 AMAZON.COM 2007EARLY 2009

sets: consumers, sellers and developers (Amazon.com, credit terms to its customers and enjoyed longer payment
2009a), Amazon continued to invest heavily in technology terms from suppliers, the value difference being approxi-
innovation. Bezos pointed out: mately 26 days. This operational advantage enabled
Amazon to use funds collected from customers as a source
We transform much of customer experience such as
of working capital. As a consequence of this, and in con-
unmatched selection, extensive product information,
junction with other cash management initiatives, Amazon
personalized recommendations, and other new software
was able to maintain a strong cash flow position and fund
features into largely a fixed expense. With customer
its continuous investment in technology innovation.
experience costs largely fixed, our costs as a percentage
Amazons long term debt data also indicated that it was
of sales can shrink rapidly as we grow our business.
relying less on long term debt to fund its innovation and
This commitment to invest heavily in technology innova- operations activities (see Appendix 7).
tion was reflected in the high rate of year-on-year growth
in technology and content operating expenses and cost Share price
of internal-use software and website development (see Since listing in 1997, Amazon had yet to pay dividends to
Appendix 7). During 2008, US$1033 million was spent shareholders. Investors had therefore to rely upon share
on the development and enhancement of various areas of price fluctuations for investor return. Figure 2 shows
technology and content, including seller platforms, web Amazons share price relative to the market index.
services, digital initiatives as well as technology infrastruc- Doubts about Amazons plan to continue its massive
ture. In 2008, Amazon had also capitalised US$187 million spending to build its new Web Services technology and
of internal-use software and website development cost. capacity combined with investors frustration with the
This amount represented an increase of 45 per cent from apparent lack of payoff in Amazons earlier investment
its 2007 level ($129m). resulted in its stock price falling close to 50 per cent from
Another stated strategic financial focus for Amazon 2004 to 2006 (Sage, 2006). Consequently, during 2007,
was on Long term, sustainable growth in free cash flow Amazon was forced to invest in its technology and market
(Amazon.com, 2009a). Typically, Amazon offered short expansion at a slower rate in order to subdue shareholder

Figure 2 Amazon share price 20069 relative to market index DJI and IXIC

Source: Yahoo! Finance.


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AMAZON.COM 2007EARLY 2009 581

anxiety. However, this slowdown of investment in innova- of its plans to redeem US$335 million of the outstanding
tion did not last long, I believe you have to be willing to principal on its convertible subordinated notes due by
be misunderstood if youre going to innovate, Bezos said the end of March 2009 further confirmed the strength
when an interviewer remarked that he was able to ignore of its cash position and was well received by the market
criticism from Wall Street, the press, and others about (Kelleher, 2009).vi
Amazons investments in innovation (Burrows, 2008). However, other analysts were keen to point out that
Accordingly, in 2008, investment and expenses on invest- as Amazons survival had been reliant on sales growth, a
ment rebounded to pre-2007 levels and was supported significant reduction in the sales growth rate would have
by shareholder sentiment due to positive returns being a considerable impact on Amazons cash flow and future
delivered to the market. ability to invest in technology innovation. Symptoms of
decreasing consumer demand were reflected in Amazons
2008 December quarter revenue, which had only grown
2009 and beyond mixed opinions
by 18 per cent in comparison to 40 per cent in the last
During 2008, Amazon warned that the global financial quarter of 2007.
crisis would amplify the strategic and financial risks it faced Amazons international sales contribution, currently at
and would be likely to make general trading conditions 47 per cent, was expected to increase to 50 per cent of its
far more challenging during 2009. However, analysts were consolidated sales in the near future (Amazon.com, 2009a).
divided about whether Amazon would be able to weather Whilst this would spread the risk of a slow-down in
the storm better than its peers. For example, a senior analyst North American markets, it would also increase Amazons
at Sanford C. Bernstein predicted that Amazon would exposure to foreign exchange risk, which amounted to a
continue to outperform its competition. loss of US$320 million in fourth quarter in 2008 alone.
Amazons ability to maintain strong cash flow whilst Clearly, there was much for Bezos to consider.
reducing its reliance on borrowed funds for day-to-day
operations has seen it gain favourable commentary from the Reference:
share market. In addition, Amazons recent announcement i
Phil Muncaster, Amazon Cloud Front takes off, Vnunet.com, 2008.

APPENDIX 1 Peer comparison 2008


Dow Jones Industry: Etailing (B2C)
Market cap Net income Net profit
Rank Company name Sales USD m Employees USD m USD m margin
1 Amazon.com, Inc. 19,166.00 20,700 29,413.66 645.00 3.41%
2 eBay, Inc. 8,541.26 16,200 15,305.78 1,779.47 20.83%
3 Priceline.com Incorporated 1,884.81 1,780 3,210.43 193.47 10.46%
4 Ticketmaster Entertainment, Inc. 1,240.48 3,600 229.99 169.35 13.45%
5 Overstock.com, Inc. 834.37 1,036 216.05 12.66 1.52%
6 Value Vision Media, Inc. 781.55 869 11.78 22.45 2.87%
7 United Fuel & Energy Corporation 446.04 420 8.51 5.21 1.17%
8 Rue du Commerce SA 408.90 246 39.69 3.75 0.92%
9 Digital River, Inc. 394.23 1,335 1,081.42 63.60 16.13%
10 DeNA Co., Ltd. 321.77 446 1,513.08 73.32 23.96%
Source: Reuters, Factiva (exhibited in Dow Jones Company Report for Amazon.com. Inc.).
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582 AMAZON.COM 2007EARLY 2009

APPENDIX 2 Sales and income as allocated to segments, 200108

Calendar years ended 31 December ($m)


2008 2007 2006 2005 2004 2003 2002 2001
North America
Net sales $10,228 $8,095 $5,869 $4,711 $3,847 $3,259 $2,761 $2,461
Cost of sales 7,733 6,064 4,344 3,444 2,823 2,392 2,020 1,802
Gross profit 2,495 2,031 1,525 1,267 1,024 867 741 659
Direct segment operating expenses (1) 2,050 1,631 1,295 971 703 583 562 600
Segment operating income (loss) 445 400 230 296 321 284 179 59
International
Net sales 8,938 6,740 4,842 3,779 3,074 2,005 1,172 662
Cost of sales 7,163 5,418 3,911 3,007 2,496 1,614 921 522
Gross profit 1,775 1,322 931 772 578 391 251 140
Direct segment operating expenses (1) 1,127 873 661 502 409 313 250 243
Segment operating income (loss) 648 449 270 270 169 78 1 103
Consolidated
Net sales 19,166 14,835 10,711 8,490 6,921 5,264 3,933 3,123
Cost of sales 14,896 11,482 8,255 6,451 5,319 4,006 2,941 2,324
Gross profit 4,270 3,353 2,456 2,039 1,602 1,258 992 799
Direct segment operating expenses 3,177 2,504 1,956 1,473 1,112 896 812 843
Segment operating income (loss) 1,093 849 500 566 490 362 180 44
Stock-based compensation 275 185 101 87 58 88 69 5
Other operating income (expense) 24 9 10 47 8 3 47 363
Income (loss) from operations 842 655 389 432 440 271 64 412
Total non-operating income (expense), net 59 5 12 4 85 232 215 144
Benefit (provision) for income taxes 247 184 187 95 233 4 1
Cumulative effect of change in accounting principle 9 26 1 11
Net income (loss) $645 $476 $190 $359 $588 $35 $149 $567

Segment highlights:
Y/Y net sales growth:
North America 26% 38% 25% 22% 18% 18% 12% 3%
International 33 39 28 23 53 71 77 74
Consolidated 29 39 26 23 31 34 26 13
Y/Y gross profit growth:
North America 23% 33% 20% 24% 18% 17% 13% 14%
International 34 42 21 33 48 55 78 83
Consolidated 27 37 20 27 27 27 24 22
Y/Y segment operating income growth:
North America 11% 74% 22% 8% 13% 58% 212% N/A
International 44 66 0 59 116 7,700 101 29
Consolidated 29 68 12 16 35 101 509 86
Net sales mix:
North America 53% 55% 55% 55% 56% 62% 70% 79%
International 47 45 45 45 44 38 30 21
Gross Margin:
North America 24.4% 25.1% 26.0% 26.9% 26.6% 26.6% 26.8% 26.8%
International 19.9 19.6 19.2 20.4 18.8 19.5 21.4 21.1
Consolidated 22.3 22.6 22.9 24.0 23.1 23.9 25.2 25.6
Sources: Compiled from various sources.
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AMAZON.COM 2007EARLY 2009 583

APPENDIX 3 Defining the business


As mentioned in the main body of the case study, from originally serving just website retail customers, Amazon in 2009
served three distinct groups of customers:

Consumer customers: through their retail websites, Amazon provided a wide range of merchandise, low prices, and
convenience to their consumers.
Seller customers: sellers that sold their products either on Amazons websites or on their own brand websites and
fulfilled their orders using Amazons fulfilment facilities.
Developer customers: customers that used Amazon Web Services (AWS) which provided access to Amazons technology
infrastructure that enabled them to create virtually any type of business. These services include:
Amazon Simple Storage Service (Amazon S3)
Amazon Elastic Compute Cloud (Amazon EC2)
Amazon Simple Queue Service (Amazon SQS)
Amazon SimpleDB
Amazon Flexible Payments Service (Amazon FPS)
Amazon Mechanical Turk.

Amazons retail offerings included:

Browsing
Searching
Review and content
Recommendations and personalisation
One-click technology
Secure credit card payment
Availability and fulfilment
Kindle and Accessibility
Digital contents

There were two principal operation divisions for Amazons retail sites:

North America division operated www.amazon.com, www.amazon.ca, www.shopbop.com, and www.endless.com


International division operated www.amazon.co.uk, www.amazon.de, www.amazon.co.jp, www.amazon.fr,
www.amazon.cn, and www.joyo.cn

The principal retail segments under these sites included:

Media: books, movies, music, digital downloads, software, video games;


Electronic and other general merchandise (EGM): electronics and computers, devices, home and garden, toys,
children and baby, grocery, apparel, shoes and jewellery, health and beauty, sports and outdoors, auto and industrial,
and tools;
Other: Amazon Enterprise Solutions, Amazon Web Services, co-branded credit card, miscellaneous marketing, and
others.

Amazon divided the company into three functional areas:

Product development: Departments within this area included editorial, marketing, product feasibility, pricing, website
design and site navigation, e-commerce solutions and Kindle;
Technology content and development: Software and technical production along with databases, information technology
systems and engineering and computer science;
Supply chain and distribution: Distribution centres, business-to-business client relationship management, and supply
chain management.
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584 AMAZON.COM 2007EARLY 2009

APPENDIX 4 Fulfilment and warehousing


Fulfilment centres were located in the following cities, often near airports.
North America:
Arizona: Phoenix, Goodyear
Delaware: New Castle
Indiana: Whitestown, Munster
Kansas: Coffeyville
Kentucky: Campbellsville, Hebron (near CVG), Lexington, and Louisville
Nevada: Fernley and Red Rock (near 4SD)
New Hampshire: Nashua
Pennsylvania: Carlisle, Chambersburg, Hazleton, and Lewisberry
Texas: Dallas/Fort Worth
Ontario, Canada: Mississauga (a Canada Post facility)

Europe:
Amazon.co.uk warehouse: Glenrothes
Bedfordshire, England: Marston Gate
Inverclyde, Scotland: Gourock
Fife, Scotland: Glenrothes
Neath Port Talbot, Wales: Crymlyn Burrows near Jersey Marine
Loiret, France: Orlans-Boigny
Loiret, France: Orlans-Saran
Hesse, Germany: Bad Hersfeld
Saxony, Germany: Leipzig

Asia:
Chiba, Japan
Guangzhou, China
Suzhou, China
Beijing, China

Source: Amazon from Wikipedia. This appendix uses material from Wikepedia article Amazon.com and is available under the Creative Commons
Attribution-ShareAlike License, http://creativecommons.org/licenses/by-sa/3.0//.

APPENDIX 5 Chronology of retail product globally rolled out across


Amazons websites
Global Selection
Product categories US UK Germany France Japan China Canada
Physical media 95 98 98 00 00 04 02
Electronics 99 01 01 05 03 04 08
Toys 99 01 04 07 04 04
Baby 99 07 07 07 07 06
Tools and hardware 99 04 04
Home and garden 00 04 04 07 03
Apparel and accessories 02 08 08 07
Sports and outdoors 03 07 06 05 06
Jewelry and watches 03 07 07 07 07 06
Health and personal care 03 08 07 06 06
Beauty 04 08 08 08 06
Shoes 05 07 07 07
Dry goods 06
Auto parts and accessories 06 08
Digital media 07 08
Office supplies 08
Fabric 08
Motorcycle and ATV parts and accessories 08
Source: Adopted from Morgan Stanley Technology Conference, 4 March 2009.
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AMAZON.COM 2007EARLY 2009 585

APPENDIX 6 Competitors revenue comparison

Revenue (US$,000) 2000 2001 2002 2003 2004 2005 2006 2007 2008

Amazon 2,761,983 3,122,433 3,932,936 5,263,699 6,921,124 8,490,000 10,711,000 14,835,000 19,166,000
eBay 431,424 748,821 1,214,100 2,165,096 3,271,309 4,552,401 5,969,741 7,672,329 8,541,261
Barnes and Noble 3,468,043 4,375,804 4,870,390 5,269,335 5,951,015 4,873,595 5,139,618 5,286,674 5,121,804
Yahoo! 1,110,178 717,422 953,067 1,625,097 3,574,517 5,257,668 6,425,679 6,969,274 7,208,502
Apple 7,983,000 5,363,000 5,742,000 6,207,000 8,279,000 13,931,000 19,315,000 24,006,000 32,479,000
Wal-Mart 166,809,000 193,295,000 219,812,000 246,525,000 258,681,000 287,989,000 348,368,000 378,476,000 405,607,000
Google 86,426 439,508 1,465,934 3,189,223 6,138,560 10,604,917 16,593,986 21,795,550
Source for 200608: Dow Jones Factiva (Originally from Reuters).
Source for 200005: Adopted from Amazon.com (B) from 2004 to 2006 by Stockport, 2007 (Originally from Mergent and Amazon annual reports).

APPENDIX 7 Technology expense, technology cost capitalised, free cash flows and
long term debt 200108

(in millions) Calendar Years Ended December 31


Technology and Content 2008 2007 2006 2005 2004 2003 2002 2001
Operating Expenses
Value $1033 $818 $662 $451 $283 $257 $216 $242
Y/Y Operating expenses growth: 26% 23% 47% 59% 10% 2% 11% N/A
Internal-Use Software and Website Development Cost Capitalised
Value $187 $129 $123 $90 $44 $83 $92 N/A
Y/Y Capitalised Cost Growth: 45% 5% 37% 105% 47% 10% N/A N/A
Free Cash Flow
Value $1364 $1181 $486 $529 $477 $347 $135 $170
Y/Y Free cash Flow Growth: 15% 143% 8% 11% 37% 157% 179% N/A
Long Term Debt
Value $409 $1282 $1247 $1521 $1855 $1945 $2277 N/A
Y/Y Free cash Flow Growth: 68% 3% 18% 18% 5% 15% N/A N/A
Source: Amazon.com.