‘The Amazon.com case traces the evolution of Amazon. com's business model from its founding in 1994 to early 2001. The case ends as the company stands poised on the *brink of bankruptcy.” lef Bezos, founder ‘nd CEO, is convinced that the company willbe able to leverage ils strategic position, within a network of cus- tomers, suppliers, and partnets, and the capabilities it built, te achieve profitability by year-end 2001. Do you agree? And, if 0, how will he achieve this seemingly insurmountable goal? While all ate familiar with the ‘outcome of this case, the story of how Bezos achieved his goals provides powerl insights on the impact of IT ‘on Business mode! performance. As you read the case, ‘consider the folowing questions: How did the Amazon, com business madel evolve from the company's launch in 1995 to early 20017 What role did IT play in the company’s strategy and the capabilities it built to execute strategy? As a member of the company’s board of directors, what advice would you give to lott Bezos ‘nearly 20017 Case 12 Amazon.com: The Brink of Bankruptcy ‘We sok o offre Ean’ Biggest Solocion and to beth ‘rsomers can find and cover anything they may wane 10 buy online sas Most Customer M. Rowen, “Amazon.com,” Prudential Secures Research, September 23, 1999, p. 3. “Friday, April 14, 2000, ended a week of major downsides for both technology and blue-chip stodks. This downturn marked the endl of what had become known as the "internet Bubble.” The NASDAQ tumbled 355.46 points (9.7%), which was the worst one-day price drop since the Nasdaq opened in 1971, The Dow Jones Industrial ‘Average slipped 616.23 point (5.68, its worst ever ‘one-day point loss). . Tas, “Ruthless Self His All Sectors This Was One forthe Record Books," war. ‘TheStreet.com (April 14, 2000), in 2000, jupiter Research analysts estimated that U.S. Fetal sales had exceeded $2.7 tllion, while U.S. online Fetal sales were over $12 billon (up 66% from 1999). “jupiter Consumer Survey Report,” Jupiter Media Metrix, vol. 2, 2001 brand worldwide, immediately above Motorola (#49) and Colgate (#50) and well above Hilton (#68) and Pampers (#71). Indeed, even as the stock price fell, analysts estimated that the value of the Amazon.com brand had risen from $14 billion in 1999 to $4.5 billion in 2000 Despite the company’s popularity, in January 2001, Bezos, who had graced the cover of Time ‘magazine as “Man of the Year” just one year carlicr, was under tremendous pressure to generate profits. (See Exhibit 2 for a financial summary.) In his letter to shareholders that accompanied the company’s 2000 annual report, he stressed thatthe company would rise to the challenge: While here are foregone conlasions, nd we il ave mich oprve, Amazon.com today ia unique eet We ave the brand the eustomer relationships the ‘ecimology, the ffillmentinfasrace, the nana stengt, the people, ad the determination to extend our leadership in his ft indy and to il an impor tan, and sting company? Bezos believed that the key challenge to the company in late 2000 was to achieve profitability by year-end 2001. He advised investors that the company had a “tremendous amount of work todo and there could be no guarantees,” yet also found time for humor: ‘We've been calle alt of very Fay things: Amazon otto, Amazon dot con, Amaze dot bem and my personal fevorite rmazon dot ong, because leary wee not forsroit company! By summer 2000, some analysts had begun to question whether Amazon.com executives would be able to achieve profitability before the money ran out. Ravi Suria and Stan Oh, analysts at Lehman Brothers, published a report on Amazon. com’s credit rating that raised the concerns of investors and hastened the stock price slide. * Founded in 1974, tnterbrand was leading global brand management consultancy. Is yearly ranking ofthe work's ‘most vakiable brands was published in Busnessieok and ‘was also avalable on the Interbrand Web site (wm inter brand.com. "Amazon.com 2000 Annual Report 1), Bezos, Keynote Speech at Harvard Busines School Gjberposiom, February 26, 2000 —_—7 EXHIBIT 2 anna Hartman Sacer. at on it en Aon cml pra Wi (to em icone este towing em tc ed ception, enya ring nin ale150 Module One Tard Busines Advomage EXHIBIT 2. Amazou.com Historical Balance Sheet (In USS thousands, except per share data) (Continued)-— — i Case 1-2. Amazon com: Phe Brink of Bankruptcy 1ST4152. Module One JT and Brsines Advantage EXHIBIT 2 Amavon.com Business Segment Analysis (in USS thousands) (Continued) 1eAmaconcom bd ot generated $318 milion in exh ‘dance sheet as ofthe end of [199 he compmy borose fm options exercise (in 1999) ar a pai its sop von $680 milion benny ofthis year [20 IF inthe ame quite 8 sod goods? tscash lence ‘th company tne een alo borrow the money, he ‘woul hve Hee dow o $115 elon which woud have ‘Amazon.com try ead ve boen ove. © proce to at the company inthe pocouse With he tutes ashlee! oF $706 millon sheng up onthe 1, Suria and 5. Oh, “Amazon.com Credit Update + in their July 2000 report, Sua and Oh stated that Lehman Brothers Investment Rescorch, June 22, 2000; amazon.com did not pay ts suppliers for Q4 Inventory. Suriaand S. Oh, “Amazon.com Credit Update,” Lehman Until Q1 ofthe following year. ‘rothers Investment Research, July 27, 2000,a 7 Bezos knew its rising fulfillment costs, which increased from 11 percent of sales in 1998 to 14 ercent in 1999, needed to be addressed quickly Simply growing revenues and retaining customers inattractive market segments would not be enough. While he was happy to see that the company had achieved profitability in its book, music, and video categories, Bezos knew that the eompany needed to generate profits sufficient to support the cash flow needs of all ofits businesses while also delivering returns to investors. To complicate the picture, while online revenues were expected to continue growing, strong competitors were lining up to exploit each market. (See Exhibit 3 for market size and competitor comparisons.) Amazon.com believed that its digital business infrastructure—which linked its customer facing processes (shopping, buying, paying, and ‘customer service) to its back-end processes (supply chain, inventory, and order fulfillment) —was a proprietary asset that would provide sustainable advantage. It claimed that even its “picking-and- packing"—notoriously labor-intensive activities for retailers—were supported by technology that Bezos believed would enable the company to reduce fulfillment costs asa percentage of sales to EXHIBIT 3 Addressable Market (U.S. only) Case 1-2. dazoncom: Fe tin of Bantrptcy 153 the single digits when the company was operating at scale, But Amazon.com executives soon Jeamed that supply chain, inventory management, ‘and order fulfillment processes were difficult to efficiently scale across a diverse range of products. While its book, music, and video stores, were breaking even, its toy, home and garden, clectronies, and international stores continued to burn cash. The dot-com stock market crash exacerbated the company’s problems and, by ‘mid-2000, many of its online retail partners had declared, or were heading toward, bankruptey.'! Bezos and the senior team immediately began to explore ways to quickly leverage its capabilities, fill excess capacity, and deal with competitive threats from traditional retailers, In August 2000, Amazon.com announced that it ‘would close down its online toy store and partne with Toys “R” Us, Ine. to open a Toys *R Us-branded online store. Under the terms of this partnership, Amazon.com would utilize its retailing technology to build and host the Tays “R™ "On August 2, 2000, The industry Stondard reported that, after seing inventory, Living.com, eToys, boo com, and! Garden.com had, or were in the proceso, selling assets in bankeyptey court ptr Me Mee, 20, Salam Sth Bay “Anon Galegories 12000 U5: Marke 2005 US) Market Extimate _Ghline Retail 9 of Total Market Online Retail 9 of Total Market Books, $2.28 9%. 33.78 15% Music 30.78 5 4.46, a Video (OVD : 30.58 4 168 10 Total BMV $448 7 978 7 Toys es NIA oe NIA 48 ‘Video Games NIA NA NIA NIA Computers 618 25 1178 46 Software 148 ie 3.88 B Consumer Electronics 118 wiiz4 3.68, 29 Home & Garden 1.08 03 128 29 Auctions (Consumer Only) 3.38 (NA) 2858 NA184 Module One 1Pand Rusiness Advantage EXHIBIT 3 Addressable Market (US. only) (Continued) Comparison of Performance Metrics for Online and Offline Retailers Sore: Aor Bea ta fom Sind Rear gh Dc "Anaoncom”lanan Sh arc Fy Resch, Deer 9199 (hed on a fom Meda Met) ynline Retailer EXHIBIT 4 Projected Economies of the Amazon.com /Tays “R” Us Partnership (in USS millions) Sacer ae ond 1 Pat an NMC Arson a” Deke ene Bro py Rec, Api 2,200 Us online store, while also providing customer service, inventory management, fulfillment, and logistics services in its state-of-the-art customer service and distribution centers. Toys “R” Us ‘would maintain control of product sourcing and ‘marketing, and would “own” the inventory in the Amazon.com distribution centers. (See Exhibit 4 for estimates of the economics of the Toys “R” Us deal.) As such, this partnership represented f further expansion of Amazon.com's. service offerings to include hosting both physical and online customer and logistics services (includingcall center, fulfillment, inventory management, and distribution) in its global distribution and customer service network. By adding this new “Infrastructure Services” business model to its retail, marketplace, and auction models,” Bezos believed that this new combination of business models would be the “tipping point” enabling exponential growth in returns." The Amazon.com platform is comprised of brand, customers technology distribution capability, deep -commerce expertise, and a great team with @ passion for innovation aad serving customers well ‘We believe tht we have reached a “tipping point? where thi-patform allows us to launch new e-commerce businesses faster, witha higher quality of customer experience, a lower ineremen= tal cost, a higher chance of sucoess, and a clearer path to scale and profitability than perhaps any ‘other company." "See LM. Applegate, Understanding internet Business Models, avaible trom Harvard Business School Publishing, "Econamists define a market's “tipping point” as the point at whieh @ daminant technology or player defines the standard for an industry in “winner-take-all” economies of scale and scope. See C, Shapiro and H. Varian, Information Rules: A Strategic Guide to the Network Feonomy, Boston: HBS Press, 1999 (p. 176-177 and 187- 188) for a more in-depth discussion Amazon.com 1999 Annual Report (Seattle: Amazon, om, 2000), (Case 1-2 Amazon.com: The Brink of Bankruptcy 185 While the concept of adding this new services business model was compelling, by early 2001, it ‘was not clear how much longer the eompany could wait to begin cashing in on the “new Internet economics.” Some analysts, such as Thomas Weisel Partners (TWP) “questioned [Amazon, com's} ability to gain the scale and operating efficiencies necessary t0 compete in the long un,” but other analysts were more optimistic.'* the risks were high but so too were the potential returns, Would Amazon.com achieve its aggressive goal of becoming cash flow positive by the end of 2001? Was it poised for exponential growth in revenues, profits, and returns to investors? Finally, hhow much time did the company have and how ‘much would it need to spend to prove that it could create and sustain value over time? * 5, O'fathe and D. Bernstein, “Amazon.com— Underperform," Thomas Weel Partners Equity Research, ‘March 2, 2001 "SH. Becker and M. Gross, “Amazon.com, Inc, Lehman ‘Brothers Equity Research, March 2, 2001