The Dot Com Bubble – a remarkable failure that claimed the hopes and dreams of countless internet pioneers as they programmed their way to fame and fortune. It has been more than a decade since the crash but from its ashes remains a select few companies who managed to hold on to their vision of internet domination. Today there is a clear winner: the undeniable champion of the internet and the world’s largest online retailer Amazon.com, Inc. Today, many have forgotten Amazon’s tumultuous beginnings and the problems it faced.
Many of the company’s online partners went bust and some analysts questioned whether Amazon’s leaders could drive the company to achieve profitability before the venture capital ran out. Even as the company’s brand value rose, the stock price fell dramatically from its high of $113 on December 9, 1999, to around $15 just one year later. But Amazon rebounded from the brink of bankruptcy with a partnership with Toys “R” Us and the expansion of its service offerings to include hosting both physical and online customers and offering logistics services within its global distribution infrastructure. Amazon.com: In the Beginning
It is like an unwritten pattern that if you want to find the next big event in the new technology era, the most likely place would be the garage, with many famous companies stepping up from there like HP and the Apple Corporation. So too was Amazon found in a small Seattle garage by Jeff Bezos in 1994. Pre-Amazon, Bezos was an expert analyst in Wall Street specializing in networks. When the internet rose in popularity in the early 90’s, he analyzed what kind of products could be sold online. After many lists of potential products, he decided on books – he wanted to use the internet to organize a company that could sell books online. Timeline of Events
1994: Amazon was founded by Jeff Bezos. The company was located in Seattle, close to Ingram, one of the largest book distributors in the world. 1995: Amazon.com online bookstore was officially launched. The company sold its first book. By September, the company was selling over $20,000 per week. 1996: Amazon was reincorporated in Delaware. It developed its capabilities with increasingly sophisticated browsing and focused search capabilities. It provided shopping carts, 1-click shopping, wish lists and so on. 1997: On May 15th, the company initially offered its stock to the public as AMAZ at the price of $18 per share, generating $16 million dollars. 1998: Amazon.com expanded into new product categories.
Bookpages.co.uk became Amazon UK. 1999: Amazon built an internet movie database, bought three internet firms to increase its range of books and music, and created retail space and auctions for independent dealers. 2000: With the bankruptcy of living.com and pets.com, executives of Amazon reevaluated the company’s business model. In August, the company partnered with Toys “R” Us. Top Management Profiles
Jeff Bezos is the president, CEO, and founder of Amazon. He created Amazon in 1994 seeking to offer the Earth’s biggest selection and to be Earth’s most customer-centric company where customers can find anything they want to buy online. To accomplish that goal, Bezos recruited managers from some of the best companies in the country as well promoted from within his own ranks to populate the highest hierarchy of Amazon’s organizational structure:
Diego Piacentini serves as Senior Vice President of International Consumer Business. Before he joined Amazon, Piacentini was vice president and general manager of Apple Computer Europe where he headed operations for Europe, the Middle East and Africa. Under his leadership, Amazon has: launched two new Web sites, Amazon.fr and Amazon.co.jp; increased international revenues; gained new customers around the globe; expanded product selection; and improved technological features across all of Amazon’s international sites.
Jeffrey M. Blackburn has served as Senior Vice President of Business Development since April 2006. He was vice president of business development during June 2004 and April 2006, Vice President of European Customer Service from July 2003 to June 2004, and Vice President of Operations Integration from November 2002 to July 2003. He played a crucial role in the execution of Amazon’s IPO, the purchase of the online movie database IMDB, and the acquisition of Zappos.
Andrew R. Jassy is Senior Vice President of Amazon Web Service and he leads the Technology Infrastructure department. Amazon Web Service provides software developers and businesses with cloud-based infrastructure services that are inexpensive, reliable, scalable, comprehensive and flexible.
Thomas J. Szkutak is Senior Vice President and CFO of Amazon. He oversees the company’s overall financial activities. Before joining Amazon, he worked with GE for 20 years where he was the CFO of GE lighting and managed a division with $3 billion in annual revenue and more than 33,000 employees around the world. Vision, Mission, and Goals
Amazon’s vision is to offer the earth’s largest selection of products and services. The company is committed to its mission to solidify and extend its brand and customer base by selling a larger variety of goods and services at lower prices than competitors while minimizing its necessary operating expenses and maximizing the positive customer experiences. Bezos’ own words in 1997 were that “a big part of the challenge for us will lie not in finding new ways to expand our business, but in prioritizing our investments.” In retrospect, we see that Amazon has expanded their business in virtually every direction – but more important is that the company has prioritized those expansions and investments entirely around one goal: service to the customer. Industry: Standing Tall
It’s impossible to analyze the industry within which Amazon operates because there is no one single industry – Amazon has grown to become a global leader in books, music, videos, toys, electronics, software, home products, and so many other products and services that one would have to examine the entire global economy for a sufficient analysis. For the purpose of this case analysis, we will examine Amazon’s standing specifically within the information technology industry. One of Amazon’s core strengths that affect the performance of its entire operation is its proprietary IT infrastructure.
This has been the company’s strongest competitive advantage since its creation. However, with the evolution of technology today and the evidence of Moore’s Law all around us, Amazon’s IT infrastructure is shifting from a strategic role of IT to a supportive role of IT. Today, reduced costs and increased access to information technologies have effectively eliminated the barriers to entry into electronic marketplaces. With new competition emerging in all corners of the globe and established competition, such as E-bay and Barnes and Noble, holding their at home in the U.S., Amazon has to be ready to act and react at a moment’s notice if it wants to maintain its lead in any one industry. This is discussed further in the section on competitive positioning. Business Model: Organic Growth
Amazon’s business model is based on its overall strategy to ‘Get Big Fast’ by investing aggressively in new product categories and new businesses, spending money on brand awareness, and focusing its resources of gaining new customers and retaining old customers. The company’s business model has evolved from online book retailing in 1995, to hosting auctions and a consumer-to-consumer marketplace in ’99-’00, to partnering with other internet startups and offering logistics and e-commerce services to wannabe internet businesses in ’01, to offering proprietary hardware and digital media through the Kindle devices in ’07, and finally to now currently offering cloud services to companies at very profitable margins. No matter who you are, where you are, or what you want, Amazon wants to be the company that provides it to you.
Amazon ultimately makes its money in a variety of ways so here are just a few examples. Amazon takes a small percentage of the sale price of each item that is sold through its website. This percentages, which are considerably transparent and can be found easily on the company website, vary depending on the type of product and the final sale price. Amazon also allows companies to advertise their products by paying to be listed as featured products. Amazon Prime users pay an annual service fee in order to take advantage of unique perks such as free shipping and the Netflix-like Instant Video services.
More recently, the Amazon Kindle is creating an entirely new revenue model for the company – by selling the Kindle device at a loss, Amazon still profits from the digital media the users purchase through the device and achieves a profitable and sustainable competitive advantage. Finally, according to one industry expert, Amazon’s cloud services are Amazon’s next big revenue generator operating at a more than 80% profit margin, far above any of its other services, even after giving customers several sequential price cuts. Competitive Positioning
As a retailer to the general public, Amazon is a cost leader with their products and a service differentiator with their customer service. Amazon’s mission is to offer a virtually limitless selection of products at a lower cost than competing online retailers and traditional brick-and-mortar stores while simultaneously providing a high-quality customer service experience. The company is able to accomplish this for several reasons:
1) The development of their proprietary digital business infrastructure streamlines business operations, enables the capacity needed for huge inventories, and effectively links customer service centers to distribution/fulfillment centers;
2) Amazon can offer lower prices because most of its customers do not have to pay sales tax (depending on the customers’ state laws) and because its headquarters is located near Ingram, America’s largest book distribution center; and
3) Amazon creates cost synergies between its diverse businesses by creating cost synergies and exploiting high utilization rates in its cost centers (i.e. lower fulfillment costs rates, higher sales per employee).
As a business-to-business service provider, Amazon is a product differentiator. Amazon’s goal is to exploit its unique e-commerce expertise, proprietary distribution capabilities, and passion for customer service to design, build, and maintain successful internet businesses for traditional brick-and-mortar stores. By recruiting the most talented people, Amazon created its own proprietary digital business infrastructure that was built with diversity in mind because Bezos wanted Amazon to offer the “Earth’s Biggest Selection.” This focus on diversity enables Amazon to exploit its core capabilities in digital business infrastructure by offering its services to traditional businesses that have yet to establish a presence in the electronic marketplace or are in need other IT services beyond their own technical expertise. Key Issue: Profitability the Key to Success?
One of the key problems outlined in the case is that Amazon was not profitable going into the Dot.Com Bubble. In its first five years of operations it operated at a loss, losing roughly $3 billion dollars. There are two primary reasons for this: 1) Amazon operates as a cost leader, and so the company’s gross margins are lower than its competitors (see exhibit 3 in the case), and 2) Amazon’s strategy for success is about market share now and revenue later. Because Amazon is primarily a cost leader, it has to sell a lot more products than other companies to cover all of its fixed costs. At the same time, Bezos planned for Amazon to become the Earth’s largest retailer and invested heavily into proprietary information technologies to further that goal. So while the company’s gross margins were positive and on an upward trend (case exhibit 2), its operating margins were deep in the red.
Despite the losses, investors stayed bullish on the company’s stock because of its ability to improve key metrics other than profitability. Amazon was able to weather the bursting of the Dot.Com Bubble because it invested in traditional businesses whose profits were least effected by the burst instead of continuing to partner with riskier internet start-ups like pets.com and living.com, which had declared bankruptcy in 2000. Though Amazon did not achieve its goal of being cash-flow positive by the end of 2001, the company did finally turn its first profit in the fourth quarter of 2002. Though only $5 million, on revenues of over $1 billion, it was important accomplishment and sent a signal to investors that internet businesses could both be profitable and deliver on their big promises. Amazon has since remained profitable and maintained revenues of over $1 billion per fiscal quarter. Key Issue: “Get Big Fast” by Partnerships?
In order to “Get Big Fast,” Amazon engaged in new partnerships with several other dot-coms startups in 2000, such as Drugstore.com, Greenlight.com, Pets.com, and Living.com. Amazon agreed to give these partners’ sites their own category tab on the Amazon home page and in return to collect a portion of their profits over a certain period. However, with the dot-com stock market crash in mid-2000, many of Amazon’s partners found themselves running out of venture capital and forced to file bankruptcy.
The burst of the dot-com bubble made Amazon rethink its partnership strategy. Shortly after Living.com went out of business, Amazon ended a few partnerships and adjusted its agreement with other partners to lessen its risk. No partners’ web sites would display on the homepage – instead, all partners’ sites would go under standard categories. Most importantly, Amazon decided to make the best out of its infrastructures by offering its partners access to its global distribution and customer service network. Amazon charges its partners through either fixed fees or commission-style pricing. By doing so, Amazon successfully reversed the loss situation and redirected the partnership dynamic. Key Issue: Strong Competition
Competition has significantly increased over the past decade due to the low barriers of entry into the electronic marketplace. Competition has knocked on Amazon’s door in the form of traditional retailers such as Wal-Mart, Toys “R” Us, Barnes & Noble, and Sears, as well as in the form of online retailers such as BarnesandNoble.com and eBay.com. eBay has historically been Amazon’s primary competitor because they facilitate the sale of many of the same products. In 1999, eBay’s accomplished a gross margin of 83% compared to Amazon’s margin of only 20%. However where eBay has continued to specialize in online auctions, Amazon has branched into many areas and diversified the risk that eBay poses to the company’s bottom line. So What’s Ahead?
While the case focused on Amazon as a startup company in the infant years of e-commerce, we’re now in the Web 2.0 era and we’re witnessing the birth of E-Commerce 2.0. The distinction is real: bits vs. boxes. Selling bits — digital goods like e-books, online movies, MP3 music files and video games — used to be a sideline. Now, though, devices like tablets, smartphones, smart TVs and game consoles are major platforms for consumption, making bits a large component of what is often referred to as e-commerce 2.0. Amazon needs to make decisions that will transition its business model away from physical goods and toward digital media. Amazon’s web services are a step in the right direction. Amazon has built a $1B annual business by providing cheap and efficient cloud computing power – but analysts believe that they’re only scratching the service. Microsoft and Google are placing their bets here too, so Amazon will face competition and thinner margins over time, but the real prize will be in enterprise-level business customers with serious money to burn. References
List all the references used in the case. Ensure the citations are formatted in APA format. Any part of the case that has 5 words or more from a source must be appropriately quoted, cited, and referenced. Wikipedia is NOT an acceptable reference. Your case must pass TurnItIn with a 20% or lower Similarity Index Report.
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