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                        Amazon.com, Inc.: a case study analysis     Reid M. Berryman [email protected] School of Communication Western Michigan University ABSTRACT: This paper is a case study analysis of Amazon.com, Inc. (Amazon). In this paper, I look at the business strategy of Amazon. Spe...

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                        Amazon.com, Inc.: a case study analysis     Reid M. Berryman

[email protected]

School of Communication Western Michigan University

ABSTRACT: This paper is a case study analysis of Amazon.com, Inc. (Amazon). In this paper, I look at the business strategy of Amazon. Special attention is given to five parts, including a historical overview, organizational structure, business operations, financial performance, and the future outlook of Amazon. The historical overview chronologically describes landmark events of Amazons beginnings to their current position today. The companies departmental structure is categorized and briefly commented on in section two. An analysis is provided for Amazons operations with a breakdown of major products and services offered. A comprehensive financial analysis of Amazon follows (section four) with matching insight that links performance to events and business strategies. The future outlook of Amazon is discussed last, offering a topical overview of where Amazons business interest is shifting. KEYWORDS: Cloud computing, Computational advertising, E-book readers, Electronic commerce, Multimedia content creation, Multimedia streaming, Personalization, Recommender systems, Tablet computers, Web services.

                               

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I. HISTORICAL OVERVIEW In the early 1990’s, the dot-com boom drastically changed the landscape of communications, business and culture with no signs of regression. For new businesses, effective innovation offered great potential through the World Wide Web. Growing popularity of Internet access created an inspiring logistical niche later popularized as “E-commerce”, proving to be a successful means of purchasing products through the Internet. Jeff Bezos, founder of Amazon.com, Inc. (Amazon) was the first to profitably innovate in this emerging market, and has become the world’s largest online retailor.1 Bezos realized the opportunity presented by the web revolution, whereas becoming an established industry leader was the only means to long-term profitability. In 1994, Bezos left his vice-president position at D. E. Shaw, a Wall Street firm, to move forward with his business idea that would soon become Amazon.com.2 Before the end of 1994, Jeff Bezos incorporated his book e-commerce company as “Cadabra”.3 Later, Bezos rebranded the company as Amazon for two distinct reasons: The alphabetical advantage when listed in directories and metaphorically representing the Amazon River in terms of the company’s size. Piloted right out of Bezos’s garage, Amazon became an instant success and soon acquired a warehouse for continued operations. Bezos planned his supply chain strategically from day one, placing the company headquarters in Seattle near a large book distributor in Oregon.4 An illustration of his original homepage in 1994 can be viewed in Figure 1. listed below. Figure 1. Amazon.com Home Page (1994)

Source: Telco2.net 2014

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1.1 Early Growth & Mission By 1995, Amazon quickly became the world’s top online book selling website. Two popular web portals (Yahoo! and Netscape) placed it in their featured website lists.6 Two business practices correlated with Amazons immediate scalable success, it was capable of adjusting to rapid demand of products while maintaining satisfied customers. Amazons mission statement still reflects these core concepts today: To be Earth’s most customer-centric company, where customers can find and discover anything they might want to buy online, and endeavors to offer its customers the lowest possible prices.7 Amazon created a supply chain based on wholesale relationships for inventory it did not have, acting as the middleman in the shipping process because it still only had its Seattle warehouse. With this logistical design, Bezos was able to ship to over 50 states and 45 countries in July of 1995.8 Bezos’s bachelor degree in computer science and electrical engineering from Princeton (1986) provided him insight to the interface, information systems and database capabilities Amazon relied on.9 Leveraging these three technically competitive factors allowed customers to easily find the books they needed and simplified the purchasing process. He sought balance between capability, performance and low operations cost in the selling and delivery of books. This is supplemented by their customer-oriented culture; not just a necessary task but also a value they believe makes Amazon profitable. According to Bezos “Customer focus is a cultural issue” and he expresses it as a differentiator for Amazon.10 When they're in the shower in the morning, they're thinking about how they're going to get ahead of one of their top competitors…Here in the shower, we're thinking about how we are going to invent something on behalf of a customer.11 When Amazon releases a new service, it’s directed at innovating within their current customer base or exploiting the market for new ones. In July of 1996, they launched their “Associates” program, allowing independent websites to receive commission revenue at 3-8% per sale. Specifically, this was performed by inline linking to Amazon titles and was one of their first vertically integrated moves.12 The dynamic reach that individual sellers could achieve at the niche level produced a great revenue source for Amazon. The success of this program took hold in 1997, when large companies at the time such as Yahoo! and America Online became the top grossing associates in the program.13

1.2 Amazons IPO Amazon became a public company in May of 1997 with an initial public offering (IPO) of three million shares of common stock.14 The IPO provided growth funding to develop their distribution capabilities and website features. The company’s investment activities were heavily scrutinized. Analysts were doubtful regarding the company’s ability to produce a return on investment. Bezos explained the company’s goals in his first letter to shareholders in 1997: Our goal remains to continue to solidify and extend our brand and customer base. This requires sustained investment in systems and infrastructure to support outstanding customer convenience, selection, and service while we grow.15

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By 1998, Amazon was fast becoming one of the world’s leading Internet startups. They conducted business with over one and half million customers, reaching both the United States and 160 countries.16 This outreach made them the third largest bookseller in the U.S. without the brick and mortar presence its competitors had (Barnes & Noble and Borders).17 Outstanding success as an e-commerce bookseller influenced the development of new services, products and additional markets to enter. Amazon acquired the “Internet Movie Database” (IMDB) in April of 1998, purchasing their way into the online media market.18 Bezos realized IMDB’s capability to vertically integrate as an information asset. IMDB aligned with his vision of distributing media and entertainment products, made evident when he promoted movie sales through it shortly after the acquisition.19 Two other acquisitions in 1998 eliminated potential competitors in the book e-commerce industry. “Bookpages” and “Telebook” based in the United Kingdom and Germany were acquired for a total of $55 million. This decision was Amazons first transnational horizontal growth, adapting their business model to cultures that valued different books than their domestic consumers.20

1.3 From Growth to Regression In 1999, Amazon hit a strategic barrier where they were unable to simply acquire the competition as in the past. “Amazon Auctions” was released to compete with the growing consumer-to-consumer auction website “eBay”.21 Unfortunately, replicating auction style purchasing on Amazons e-commerce platform proved ineffective. Instead, it evolved into a differentiated product called “Amazon Marketplace” that took better advantage of Amazons platform. Amazon Marketplace allowed customers to compete with prices Amazon offered, which developed a win-win solution.22 Jeff Bezos soon emerged as a celebrity CEO and was titled “Time Magazine’s Person of the Year” in 1999.23 Bezos made aggressive executive decisions with positive outcomes, which increased his individual fame and significantly shaped the culture Amazon represents today.24 As the dot-com bust approached, it affected the stock price between 2000-2002, marking the company’s first regressive business decisions. Bezos rationalized the short-term stock sink between these years and reassured shareholders it was a result of temporary causes. Bezos stated with confident and now proven accuracy: So, if the company is better positioned today than it was a year ago, why is the stock price so much lower than it was a year ago? As the famed investor Benjamin Graham said, ‘‘in the short term, the stock market is a voting machine; in the long term, it’s a weighing machine.’’ Clearly there was a lot of voting going on in the boom year of ’99—and much less weighing.25

1.4 Dot-com Survival & Returning Patterns Amazon posted a $3 million first quarter net profit in 2002, signifying the end of its internal recession. Operating as a lean cost cutting corporate culture led to their first annual profit in 2003 at $35.3 million.26 Stable financial growth soon followed and maintaining profitability these years rebooted Amazons business strategy of acquisitions and innovations. In 2005, the debut of the still popularized service “Amazon Prime”, a “shipping club” arrived.27 Shipping time was a decision criterion customers used when evaluating online ordering, and Amazon Prime wanted to close this gap, experiencing profitability with the service soon after.28 Amazon had now expanded their product categories far beyond books, offering apparel and electronics since the early

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2000’s. Amazon was also making “heavy investments in technology” to become a differentiator in digital services, cutting its operating margin to 4.1% in 2005.29 This worried investors in spite of Bezos’s explanations; Wall Street analysts such as Steve Weinstein at Pacific Crest Securities reflected the concerns of many regarding Amazon’s strategy: I was impressed with the revenue acceleration, but the margins are a sticky point. It’s just not clear they’re getting the return on their investments.30 In alignment with Amazons technical investments, they prepared the legal side of their online video content network they hoped to grow by purchasing distribution rights from NBC and other networks.31 Amazon then became an entrant into this new market through their video and media digital delivery or video-on-demand (VoD) services.32 Prior investments in technical infrastructure made Amazons charge into digital services a next step in Bezos’s vision. On August 25th 2006, Amazon publically announced their entry into the computational services industry.33 EC2 (Elastic Compute Cloud) was a revolutionary service that took true advantage of Amazons scale of operations and their geographical placement. They were the first to offer cloud computing power in an easy to purchase, incremental model, dynamically scaling to client needs. This declared Amazons successful entry as a technology services provider, still showing growth in 2013. Amazon pushed investments into hardware development, an area they had yet to conquer and released their first hardware device in 2007 called the “Kindle”, selling out almost instantly.34 Placing a handheld e-book reader in customer hands made the purchasing process much more natural. In 2009, continued success of their e-book selection, the Kindle, and growing exchange efficiencies led to the announcement they had sold more digital books than printed ones.35 They unveiled “Amazon Prime Instant Video” which in 2011 became a direct competitor with Netflix and Hulu streaming services.36 Amazon also made strategic licensing contracts between 2011-2012 with Disney-ABC, 20th Century Fox, West Discovery Communications, PBS Distribution, and NBC-Universal Cable & New Media Distribution, positioning them well for online video delivery.37 Amazon continued expanding its distribution centers around the globe in China, France, and India continuing to grow diversity in their product line.38 Bezos and Amazon remained fiercely competitive and innovative through an industry bust as well as a global financial crisis. This was not by chance and instead an example of highly successful long term strategic planning with rational reactions as unpredictable events emerged.

II. ORGANIZATIONAL STRUCTURE Amazon has developed the industry reputation for being an “everything store.”39 Their product diversity continues to grow through acquisitions of successful competitors and innovations into new niche markets.40 Headquartered in Seattle, Washington, Amazon operates on a global scale. Beyond the corporate offices, their fulfillment, customer service, data, and software development centers are located in many countries. Amazon’s products, services, and divisions are vertically integrated to create internal synergies so departmental names and structure are dynamic and change often. Table 1 displays the nine divisions that

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make up Amazon, Inc. An aggregate table from varying sources with a detailed breakdown by individual services and products can be seen in Appendix 1. Table 1. Amazon.com, Inc.’s organizational chart (Oct 2013)

North America and  International Retail   

Seller Services 

Finance and Administration 

 

 

Digital 

Legal 

Human Resources 

 

 

 

Amazon Web Services 

Worldwide Operations and  Customer Service 

E‐Commerce Platform 

Source: Amazon.com, Inc. 2013

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III. BUSINESS OPERATIONS

3.1 Business Philosophy Amazon communicates its business and operating philosophy through the vision of its CEO Jeff Bezos. Their mission statement loosely defines the products and services Amazon sells, instead discussing customer service as being critical to their success.42 As a result, it’s clear Amazon does not prefer to label itself as the seller or producer of any one product or service. First, Amazon recognizes markets they can compete for customers in that are underserved by existing competitors. Secondly, Amazon strategically innovates by developing new markets through improved delivery methods or synergetic combinations of other strategic business units.43 Each market venture always ties back into their distribution and logistical capabilities, clearly represented in their most profitable products and services. 

3.2 Aggressive Entrepreneurial Culture Amazon takes a proactive approach to external market pressures, avoiding forced reactions to competitors and management by crisis. Jeff Bezos states Amazon is “internally driven to improve our services”.44 Their market view is aggregated through their own customer’s reactions and displays the entrepreneurial orientation of Amazon, “When we’re at our best, we don’t wait for external pressures”.45 Smaller competitors in an industry can get away with mimicking competition for a profitable share; being a successful industry leader means creating the forces others firms react to.

3.3 Current Products While Amazon continues to grow each year, the company remains focused on the business of E-commerce. Amazon began as a technology and database oriented company moving physical product, but has since transformed its business model as physical products are widely converted to digital content (Book’s, DVD’s, Web Services). Amazon has consistently reinvested its profits

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in new technological development, a financial strategy that caused great concern in the early 2000’s. The negative speculation of this strategy has been widely dropped, although Bezos refuses to leave it unaddressed: Our heavy investments in Prime, AWS, Kindle, digital media, and customer experience in general strike some as too generous, shareholder indifferent, or even at odds with being a for-profit company.46 Bezos wants investors to take a long-term view toward growth and development. This approach has not always been well received by outside investors.47

3.3.1 Retail Website and E-Commerce Amazon’s retail service focuses on “more types of products, more conveniently and at lower prices”.48 Their retail sales and distribution vertically integrate with all other products offered (both digital and physical). Through their e-commerce platform, they empower the consumer with tools to research and comparison shop. When the decision to purchase is made, they make the process as easy, cost effective and satisfying for the consumer as possible.

3.3.2 Amazon Web Services (AWS) [2006]

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Amazon focuses on attracting “developer customers”, through selling “cloud infrastructure services” hosted at Amazon’s data centers50. Amazon is able to subsidize its own data and processing requirements by turning what’s normally a cost center into a profitable division. Amazons ability to successfully scale and manage large projects has placed them as the market leader in cloud computing services.51

3.3.3 Digital Media Delivery [2006] Amazon offers a variety of digital content delivery services (Amazon Instant Video September 2006, Amazon MP3 September 2007, and the Kindle Store November 2007).52 Amazon Instant Video has distribution rights from three major mainstream broadcasting networks (CBS, NBC, and FOX) in addition to agreements with smaller broadcasting networks.53 Amazon MP3 differentiates its platform from competitors by offering downloads with no Digital Rights Management (DRM).54 The Kindle store sells content designed for the Kindle platform. E-books are the primary digital product sold, but shared content between the aforementioned media services exist as well.

3.3.4 The Kindle [2007] Amazon’s fulfillment of their customer centric mission was shown through the development of their Kindle e-reader in 2007, incorporating every leading philosophy the company stands for. Amazons strategy reached beyond the product itself, stating that “roughly breakeven prices” was their goal. 55 Profitability came from the content delivery system and purchasing ability placed in consumer hands. Amazons vision of becoming a digital content distributor primarily evolved from the Kindles operating strategy, disruptively innovating the e-book industry: th

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