2. In May 1997, AMAZON.COM, a young American company, applied for a listing on the stock
exchange by offering 3,000,000 shares with a nominal value of $0.01 each. The shares were put
on the market at the price of $18. The capital thus raised served to cover the enormous financial
needs incurred by the extremely rapid growth experienced by the company in just over 2 years.
With the sale of 3,000,000 shares, 51% of the share capital remained in the hands of the founder
and his family.
ORIGINS
AMAZON.COM was established in July 1994 in Seattle (USA) by 30-year-old Jeffrey P. Bezos.
His idea was to sell books over the Internet: books, Bezos held, are in fact one of the few
products that consumers are willing to buy on-line and AMAZON.COM offers them the
possibility of doing it round-the-clock, whatever part of the world they are in. The company’s
ultimate ambition is to become “leader in the on-line sale of products and services with a high
information content” (entering, for example, the video and music business). AMAZON.COM,
“Earth’s biggest bookstore”, started sales in 1995. Its first year of life was spent setting up the
necessary infrastructure as well as planning and developing its activities and opening a Website.
In May 1997, AMAZON.COM had about 2,500,000 titles in its catalogue (or rather, on its
virtual shelves), i.e. 10 times the number of titles that can be found in the largest “physical”
bookstore in the world. When shopping, the customer who accesses the AMAZON.COM site can
“fill up” a shopping cart with books that interest him, just like in any bookstore, deciding at the
end what he wants to buy. And all this sitting comfortably in front of a screen. Once the decision
has been made, all he needs to do is click a button, thus starting up the procedure for
communicating his credit card data. As far as delivery is concerned, there are various options,
also for international customers; one is to have the books gift-wrapped. Some titles are available
immediately, whilst others are delivered in the course of 48-72 hours. Out-of-print titles are
generally available within 2-6 months. If a rare book is available at a higher price than that
initially communicated to the customer, the latter is contacted for authorization of the purchase.
As far as best-sellers are concerned, customers are offered discounts of up to 40% on the cover
price; for all other books the discount varies from 20%-30%. This means that AMAZON.COM
can undercut the prices of traditional competitors even when the price is inclusive of shipping
expenses. In March 1997, AMAZON.COM’s Website could reckon with 80,000 visits a day,
compared to 2,200 the previous year. The electronic bookstore may be consulted by author, title
or subject. Furthermore, it is possible to use a number of keywords, to get profiles of best-selling
authors and to read book reviews made by customers themselves. The AMAZON.COM Website
also provides information on other books written by a given author or recommends books which
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3. develop themes related to those of interest to customers. Furthermore, by indicating one’s
interests, it is possible to receive reading suggestions plus previews of soon-to-be-released titles.
By creating an “on-line community”, the company hopes to provide its customers with a pleasant
and familiar experience they will want to repeat. If this occurs, it means they can count on
customers who are loyal and repeat purchasers. Today customers already have at their disposal 9
E-mail addresses to get in touch with the company, request information, and make suggestions.
Furthermore, there is a freefone customer service department for those clients who are unwilling
to communicate their credit card number via computer.
According to AMAZON.COM, the “ace up the sleeve” of an on-line bookstore is the number of
titles it can offer. The space on virtual shelves being unlimited, it is possible to include all those
titles which a physical bookstore cannot afford to keep in stock. As its target market is enormous
and without geographic confines, a virtual bookstore can − thanks to its centralized management
− reduce a number of costs and gain a competitive edge over traditional bookstores. In spite of
the extremely high number of publications offered, AMAZON.COM has very small stocks
(estimated at about 400 titles). Books which are not immediately available are ordered from
nearby distributor INGRAM BOOK, one of America’s foremost distributors. Closeness to this
distributor is so important that it was the determining factor in choosing the location of
AMAZON.COM. In fact, the company’s founder chose to set up his business in Seattle precisely
because of the presence of INGRAM BOOK. A second important supplier is Baker & Taylor
Inc. There are no long-term agreements with these suppliers. AMAZON.COM is, instead, linked
with them by computer, thus allowing the company to make searches and order books without
wasting time.
AMAZON.COM has a staff of 256 persons (they numbered 11 on 31st December 1995): most of
those who occupy key positions joined the company in 1997 and therefore it is too early to speak
of their full integration in the organization. The entire structure is concentrated in rented office
space occupying only two floors: on one work the editorial staff who write the book reviews and
the programmers who oversee the correct functioning of the software. On the other, in a room full
of computers, there are a number of operators who provide different kinds of customer services:
from the search for books about which the customer does not recall the information needed for
on-line retrieval, to the correction of the personal data of a customer who realizes that he has
given incorrect information about himself. Despite the fact that these services are very costly,
they offer important returns: in addition to customer satisfaction, every direct contact affords the
possibility of acquiring personal information, addresses, and customer preferences. These are
things publishers would give anything to have. Customer knowledge, in fact, has always been a
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4. privilege of the bookstores, who rarely give the publisher feedback on readers’ tastes and
requirements.
AMAZON.COM has developed its own system for the management of its Website, a search
engine and all the rest of its software for the management of customer transactions (for example
for the handling of orders, the use of credit cards, purchases, management of stocks, and
shipping), encountering no small difficulties in finding software specialists. At present these
software systems are not linked to its management information systems (such as those used for
performance measurement, planning and management control): this creates some problems and
the need to intervene “manually” when there is a need to produce reports of an economic and
financial nature. All the hardware is concentrated in the company’s headquarters in Seattle. There
are no company-owned premises.
AMAZON.COM’s business, defined by the founder himself as “information brokerage”, saw an
exceptional boom in sales in the three-year period 1994-1996, when income rose from 0 in 1994
to $15.7 million in 1996. Sales referring to the period January 1 - 31 March 1997 amounted to
over $32 million. AMAZON.COM can at this point reckon with 340,000 customers located in
over 100 countries. Sales abroad amount to about 35%, whilst regular customers account for
40% of orders.
As far as operating results are concerned, in 1995 the company showed a loss of $303,000 and in
1996 a loss of $5.8 million. A good percentage of the expenses sustained so far (39% of net
sales) can be put down to marketing efforts made and include costs of advertising, public
relations and promotions, not to speak of the salaries of persons engaged in marketing and sales
activities. As the company is bent on taking an aggressive approach to the market, marketing
costs are bound to grow in the coming years. Product development costs have also carried
significant weight, especially in 1995 (when they were the equivalent of 33% of net sales). These
costs, especially those relating to salaries and fees for personnel and consultants and to the
purchase of telecoms systems, are considered strategic and thus destined to grow considerably, at
least in absolute terms.
In the near future the company expects to see a further and significant worsening of its operating
results. In order to evaluate the performance of AMAZON.COM, we must consider that out of
about 100,000 operators currently carrying out business activities on the Internet, those who up
to now have achieved profits and a reputation can be counted on the fingers of one hand.
AMAZON.COM, on the contrary, is already well known and highly reputed among a vast
number of Internet navigators. The competition is also showing great interest in this business:
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5. Simon & Schuster (which belongs to VIACOM Inc.) opened a Website in April 1997 and
BORDERS GROUP Inc. has announced its intention to do the same. In mid-May, moreover,
BARNES & NOBLE Inc., using America Online, opened a virtual bookstore with more than 1
million titles. It aims, however, to open its own site in a very short time and offer customers a
discount of 30% off the cover price of books.
THE FUTURE
AMAZON.COM’s strategy is based above all on customer loyalty. The company’s aim is to
increase customer value through the use of technologies, by offering services which are also
personalized, and by setting very cheap prices. In order to increase brand awareness,
AMAZON.COM will attempt not only to offer top-level services, but also to use different
marketing channels. These include already planned advertising investments in the main Websites
(ads currently appear on CNET, Yahoo!, Pointcast, Excite, Lycos, Quote.com and CNN) and
other media (such as The New York Times Book Review and Wired), public relations campaigns
(thanks to which AMAZON.COM has already been publicized in a number of TV and radio
programmes and newspaper articles), and the development of alliances with partners who can
help publicize the brandname.
The two cornerstones of the company’s strategy for the future are the consolidation of
relationships with distributors and publishers and investment in staff, considered the company’s
key resource. In order to improve company results it is furthermore not excluded that its range of
action will be broadened by means of the opening of other Websites, the sale of other products
and the acquisition of complementary products and technologies. Last, but not least, is the
objective of selling advertising space on its own site which, considering the high number of daily
visitors, represents an excellent business.
Company strategy envisages the use of commercial software when this is available. Nevertheless,
a great deal of investment has been made (and will be made in the future) to develop software that
is unique in this business. Internally developed software allows the company to accept and verify
customer orders, to pass orders to suppliers, to manage purchased products and assign them to
the customer who has ordered them, and to handle the shipment of books. All this using different
guiding criteria.
PROFILES OF KEY PERSONS
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6. - Jeffrey P. Bezos: founder of AMAZON.COM, of which he is currently President, Chief
Executive Officer and Chairman of the Board. Aged 33 and with a degree in engineering and
computer science obtained magna cum laude from Princeton University, Jeffrey Bezos
worked with the Bankers Trust Company between 1988 and 1990 (becoming Vice President
in 1990) and with D.E. Shaw & Co. from 1990 to 1994 (becoming Vice President in 1992).
- Rick R. Ayre: has been with AMAZON.COM since 1996 as Vice President and Executive
Editor. A sociology graduate, he previously worked for PC Magazine where he held various
positions.
- Mark L. Breier: is an economics graduate from Stanford University, where he was
subsequently awarded an MBA. After gaining experience with Parker Brothers (parlour
games manufacturer), Kraft (food sector) and Cinnabon Rolls, he joined AMAZON.COM in
January 1997 as Vice President of Marketing.
- Joy D. Covey: graduated magna cum laude in Business Administration from California State
University, subsequently obtaining an MBA from Harvard Business School. Before joining
the firm in 1996 as Chief Financial Officer and Vice President of Finance and
Administration, she worked for two companies operating in the information technology
sector: Digidesign and Avid Technology. Before that she was a partner of Wasserstein
Perella & Co. and had worked also for Arthur Young & Company.
- Oswaldo F. Duenas: joined the firm in January 1997 as President of Operations. His previous
work experience was gained with the Latin American division of International Service
System, with National Vision Associates and with Federal Express.
- Mary E. Engstrom: joined AMAZON.COM in February 1997 as President of Publisher
Affairs. She holds an economics degree from the University of California and an MBA from
the Anderson Graduate School of Management in Los Angeles. Her previous managerial
work experience was gained with Symantec Corporation (software) and Microsoft.
- Sheldon J. Kaphan: a mathematics graduate, since March 1997 he has been Vice President
and Chief Technology Officer of AMAZON.COM. His previous work experience was gained
with Compaq and with a joint venture between Apple Computer and IBM.
- Scott E. Lipsky: joined the firm in July 1996 as Vice President of Business Expansion. His
previous experience was with Barnes & Noble Inc. (bookstore chain), Barnes & Noble
College Bookstore Inc., Omni Information Group (software developer and system integrator)
and Babbage’s (chain of software retailers).
- John D. Risher: graduated magna cum laude in comparative literature from Princeton
University, subsequently earning an MBA from Harvard Business School. After gaining
work experience with Microsoft, he joined the firm in February 1997 as Vice President of
Product Development.
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7. - Joel R. Spiegel: a biology graduate, he previously worked on various development
programmes at Hewlett-Packard, Visicorp and Apple Computer and, subsequently, at
Microsoft. Since March 1997 he has been with AMAZON.COM as Vice President of
Engineering.
- Tom A. Alberg: a graduate of Harvard University, he has worked for Perkins Coie, McCaw
Cellular Communications Inc., LIN Broadcasting Corporation, and Madrona Investment
Group (private merchant bank). He has been a Director of AMAZON.COM since 1996. He
currently sits on the boards of various enterprises: Active Voice Corporation, Emeritus
Corporation, Mosaix Inc., Teledesic Corporation and Visi Corporation.
- Scott D. Cook: graduated in mathematics and economics from the University of Southern
California, subsequently earning an MBA from Harvard Business School. He has been Brand
Manager at Procter & Gamble and a consultant with Bain & Company. He is co-founder of
Intuit Inc., a software house. At present he is a Director of Broderbund Software Inc. and of
Intuit. He has been sitting on the board of AMAZON.COM since January 1997.
- L. John Doerr: After obtaining an MBA from Harvard Business School, he worked for Intel
Corporation (for 5 years) and then, as partner, for Kleiner Perkins Caufield & Byers (venture
capital company). He sits on the boards of various firms including Netscape Communications
Corporation, Intuit Inc., Macromedia Inc., Platinum Software Inc., Shiva Corporation and
Sun Microsystems. Since June 1996 he has been a Director of AMAZON.COM.
- Patricia Q. Stonesifer: A graduate from Indiana University, she worked first for Que
Corporation and then for Microsoft, concerning herself with the company’s investments in
new on-line and Internet-based products (including the Microsoft Network). Today she is a
free-lance consultant whose clients include companies like DreamWorks SKG. Since
February 1997 she has been a Director of AMAZON.COM as well as of Kinko’s Inc.
- Board members do not receive monetary considerations, but are only refunded their expenses
for attending board meetings. Jeffrey Bezos draws an annual salary of $64,333.
THE SECTOR
Internationally speaking, the sector is characterized by its considerable size, its fast growth rate
and relatively high degree of fragmentation. According to Euromonitor, by the year 2000 book
sales in the US will amount to $30 billion. It is further estimated that worldwide sales, which
amounted to $82 billion in 1996, will climb to about $90 billion in 2000. A number of analyses
have shown that there is a certain amount of correlation between customers who buy a large
number of books and people who use the Internet.
Publishers, who number about 50,000, sell their books directly to retailers and to a network of
distributors. These distributors are the main suppliers of most retailers. The two principal
American distributors, who together cover 25% of the US market, have wagered above all on the
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8. high growth of the superstores, on account of which many of the smaller sales outlets have had to
close down. According to AMAZON.COM the superstores stock on average 130,000 titles, with
the larger ones carrying as many as 175,000. The small bookstores, which today are suffering
strong competition from the superstores, concentrate, instead, on a much smaller number of
books. Stock investments are very high for all these bookstores and premises and staff generally
have high costs.
As the publishers allow bookstores to return most of their unsold books, the bookstores order
large quantities of books, thus forcing the publishers to run the risks of their sales forecasting
errors. Neither the distributors nor the publishers, on the other hand, are in a position to gather
data on the behaviour, tastes and characteristics of readers, and this prevents them from
supplying personalized services or resorting to direct marketing. The competition is varied and
potential entrants numerous, all of which extremely aggressive: in January 1997, for instance,
Barnes & Nobles alleged that AMAZON.COM was guilty of dishonest advertising in that it is
not a bookstore and does not have in stock most of the titles offered on the market.
ON-LINE SALES
The company’s business and growth potential depend to a large extent on the use its customers
will make of the Internet. According to IDC (International Data Corporation), users of the
Internet numbered 35 million at the end of 1996 and should reach 163 million by the year 2000.
This expansion has been made possible thanks to the diffusion of the personal computer, to the
improved performance of PCs and modems, to improved infrastructure and to a more widespread
understanding of the Internet’s potential. Again according to IDC estimates, in 1995 on-line sales
of goods and services amounted to $318 million and will reach $95 billion by 2000.
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9. ATTACHMENT 1 - CONDENSED PROFIT AND LOSS ACCOUNT (in
thousands of $US)
FROM JUN 5 YEAR YEAR FROM JAN 1
TO DEC 31, 1995 1996 TO MAR 31,
1994 1997
NET INCOME 511 15,746 16,005
COST OF GOODS SOLD 409 12,287 12,484
GROSS PROFIT MARGIN 102 3,459 3,521
SELLING AND
MARKETING EXPENSES 200 6,090 3,906
PROD. DEVELOPMENT
COSTS 38 171 2,313 1,570
GENERAL AND ADMIN.
EXPENSES 14 35 1,035 1,142
PROFIT (LOSS) FROM
ORDINARY ACTIVITIES (52) (304) (5,979) (3,097)
INTEREST RECEIVED 1 202 64
NET PROFIT (LOSS) FOR
THE PERIOD (52) (303) (5,777) (3,033)
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10. ATTACHMENT 2 - CONDENSED BALANCE SHEET (in thousands of
$US)
YEAR 1995 YEAR 1996 MAR 31 1997
CASH IN HAND AND WITH BANKS 996 6,248 7,162
INVENTORIES 17 571 939
ACCRUED INCOME AND PREPAID
EXPENSES 14 321 937
TOTAL CURRENT ASSETS 1,027 7,140 9,038
NET FIXED ASSETS 57 985 2,491
GUARANTEE DEPOSITS 146 193
TOTAL ASSETS 1,084 8,271 11,722
TRADE ACCOUNTS PAYABLE 99 2,852 5,650
OTHER SHORT-TERM DEBTS 8 2,018 3,309
TOTAL CURRENT LIABILITIES 107 4,870 8,959
TOTAL SHAREHOLDERS’ EQUITY 977 3,401 2,763
TOTAL LIABILITIES AND
SHAREHOLDERS’ EQUITY 1,084 8,271 11,722
9
