AMAZON.

COM
In May 1997, AMAZON.COM, a young American company, applied for a listing on the stoc
e!change "y offering #,$$$,$$$ shares %ith a nominal &alue of '$.$1 each. (he shares %ere put
on the maret at the price of '1). (he capital thus raised ser&ed to co&er the enormous financial
needs incurred "y the e!tremely rapid gro%th e!perienced "y the company in *ust o&er + years.
,ith the sale of #,$$$,$$$ shares, -1. of the share capital remained in the hands of the founder
and his family.
ORIGINS
AMAZON.COM %as esta"lished in /uly 1990 in 1eattle 231A4 "y #$5year5old /effrey 6. 7e8os.
9is idea %as to sell "oos o&er the Internet: "oos, 7e8os held, are in fact one of the fe%
products that consumers are %illing to "uy on5line and AMAZON.COM offers them the
possi"ility of doing it round5the5cloc, %hate&er part of the %orld they are in. (he company;s
ultimate am"ition is to "ecome <leader in the on5line sale of products and ser&ices %ith a high
information content= 2entering, for e!ample, the &ideo and music "usiness4. AMAZON.COM,
<>arth;s "iggest "oostore=, started sales in 199-. Its first year of life %as spent setting up the
necessary infrastructure as %ell as planning and de&eloping its acti&ities and opening a ,e"site.
In May 1997, AMAZON.COM had a"out +,-$$,$$$ titles in its catalogue 2or rather, on its
&irtual shel&es4, i.e. 1$ times the num"er of titles that can "e found in the largest <physical=
"oostore in the %orld. ,hen shopping, the customer %ho accesses the AMAZON.COM site can
<fill up= a shopping cart %ith "oos that interest him, *ust lie in any "oostore, deciding at the
end %hat he %ants to "uy. And all this sitting comforta"ly in front of a screen. Once the decision
has "een made, all he needs to do is clic a "utton, thus starting up the procedure for
communicating his credit card data. As far as deli&ery is concerned, there are &arious options,
also for international customers? one is to ha&e the "oos gift5%rapped. 1ome titles are a&aila"le
immediately, %hilst others are deli&ered in the course of 0)57+ hours. Out5of5print titles are
generally a&aila"le %ithin +5@ months. If a rare "oo is a&aila"le at a higher price than that
initially communicated to the customer, the latter is contacted for authori8ation of the purchase.
As far as "est5sellers are concerned, customers are offered discounts of up to 0$. on the co&er
price? for all other "oos the discount &aries from +$.5#$.. (his means that AMAZON.COM
can undercut the prices of traditional competitors e&en %hen the price is inclusi&e of shipping
e!penses. In March 1997, AMAZON.COM;s ,e"site could recon %ith )$,$$$ &isits a day,
compared to +,+$$ the pre&ious year. (he electronic "oostore may "e consulted "y author, title
or su"*ect. Aurthermore, it is possi"le to use a num"er of ey%ords, to get profiles of "est5selling
authors and to read "oo re&ie%s made "y customers themsel&es. (he AMAZON.COM ,e"site
also pro&ides information on other "oos %ritten "y a gi&en author or recommends "oos %hich
1
de&elop themes related to those of interest to customers. Aurthermore, "y indicating one;s
interests, it is possi"le to recei&e reading suggestions plus pre&ie%s of soon5to5"e5released titles.
7y creating an <on5line community=, the company hopes to pro&ide its customers %ith a pleasant
and familiar e!perience they %ill %ant to repeat. If this occurs, it means they can count on
customers %ho are loyal and repeat purchasers. (oday customers already ha&e at their disposal 9
>5mail addresses to get in touch %ith the company, reBuest information, and mae suggestions.
Aurthermore, there is a freefone customer ser&ice department for those clients %ho are un%illing
to communicate their credit card num"er &ia computer.
According to AMAZON.COM, the <ace up the slee&e= of an on5line "oostore is the num"er of
titles it can offer. (he space on &irtual shel&es "eing unlimited, it is possi"le to include all those
titles %hich a physical "oostore cannot afford to eep in stoc. As its target maret is enormous
and %ithout geographic confines, a &irtual "oostore can thans to its centrali8ed management
reduce a num"er of costs and gain a competiti&e edge o&er traditional "oostores. In spite of
the e!tremely high num"er of pu"lications offered, AMAZON.COM has &ery small stocs
2estimated at a"out 0$$ titles4. 7oos %hich are not immediately a&aila"le are ordered from
near"y distri"utor INCDAM 7OOE, one of America;s foremost distri"utors. Closeness to this
distri"utor is so important that it %as the determining factor in choosing the location of
AMAZON.COM. In fact, the company;s founder chose to set up his "usiness in 1eattle precisely
"ecause of the presence of INCDAM 7OOE. A second important supplier is 7aer F (aylor Inc.
(here are no long5term agreements %ith these suppliers. AMAZON.COM is, instead, lined %ith
them "y computer, thus allo%ing the company to mae searches and order "oos %ithout %asting
time.
AMAZON.COM has a staff of +-@ persons 2they num"ered 11 on #1st Gecem"er 199-4: most of
those %ho occupy ey positions *oined the company in 1997 and therefore it is too early to spea
of their full integration in the organi8ation. (he entire structure is concentrated in rented office
space occupying only t%o floors: on one %or the editorial staff %ho %rite the "oo re&ie%s and
the programmers %ho o&ersee the correct functioning of the soft%are. On the other, in a room full
of computers, there are a num"er of operators %ho pro&ide different inds of customer ser&ices:
from the search for "oos a"out %hich the customer does not recall the information needed for
on5line retrie&al, to the correction of the personal data of a customer %ho reali8es that he has
gi&en incorrect information a"out himself. Gespite the fact that these ser&ices are &ery costly,
they offer important returns: in addition to customer satisfaction, e&ery direct contact affords the
possi"ility of acBuiring personal information, addresses, and customer preferences. (hese are
things pu"lishers %ould gi&e anything to ha&e. Customer no%ledge, in fact, has al%ays "een a
+
pri&ilege of the "oostores, %ho rarely gi&e the pu"lisher feed"ac on readers; tastes and
reBuirements.
AMAZON.COM has de&eloped its o%n system for the management of its ,e"site, a search
engine and all the rest of its soft%are for the management of customer transactions 2for e!ample
for the handling of orders, the use of credit cards, purchases, management of stocs, and
shipping4, encountering no small difficulties in finding soft%are specialists. At present these
soft%are systems are not lined to its management information systems 2such as those used for
performance measurement, planning and management control4: this creates some pro"lems and
the need to inter&ene <manually= %hen there is a need to produce reports of an economic and
financial nature. All the hard%are is concentrated in the company;s headBuarters in 1eattle. (here
are no company5o%ned premises.
AMAZON.COM;s "usiness, defined "y the founder himself as <information "roerage=, sa% an
e!ceptional "oom in sales in the three5year period 19905199@, %hen income rose from $ in 1990
to '1-.7 million in 199@. 1ales referring to the period /anuary 1 5 #1 March 1997 amounted to
o&er '#+ million. AMAZON.COM can at this point recon %ith #0$,$$$ customers located in
o&er 1$$ countries. 1ales a"road amount to a"out #-., %hilst regular customers account for
0$. of orders.
As far as operating results are concerned, in 199- the company sho%ed a loss of '#$#,$$$ and in
199@ a loss of '-.) million. A good percentage of the e!penses sustained so far 2#9. of net sales4
can "e put do%n to mareting efforts made and include costs of ad&ertising, pu"lic relations and
promotions, not to spea of the salaries of persons engaged in mareting and sales acti&ities. As
the company is "ent on taing an aggressi&e approach to the maret, mareting costs are "ound
to gro% in the coming years. 6roduct de&elopment costs ha&e also carried significant %eight,
especially in 199- 2%hen they %ere the eBui&alent of ##. of net sales4. (hese 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 gro% considera"ly, at least in a"solute
terms.
In the near future the company e!pects to see a further and significant %orsening of its operating
results. In order to e&aluate the performance of AMAZON.COM, %e must consider that out of
a"out 1$$,$$$ operators currently carrying out "usiness acti&ities on the Internet, those %ho up
to no% ha&e achie&ed profits and a reputation can "e counted on the fingers of one hand.
AMAZON.COM, on the contrary, is already %ell no%n and highly reputed among a &ast
num"er of Internet na&igators. (he competition is also sho%ing great interest in this "usiness:
#
1imon F 1chuster 2%hich "elongs to HIACOM Inc.4 opened a ,e"site in April 1997 and
7ODG>D1 CDO36 Inc. has announced its intention to do the same. In mid5May, moreo&er,
7ADN>1 F NO7I> Inc., using America Online, opened a &irtual "oostore %ith more than 1
million titles. It aims, ho%e&er, to open its o%n site in a &ery short time and offer customers a
discount of #$. off the co&er price of "oos.
THE FUTURE
AMAZON.COM;s strategy is "ased a"o&e all on customer loyalty. (he company;s aim is to
increase customer &alue through the use of technologies, "y offering ser&ices %hich are also
personali8ed, and "y setting &ery cheap prices. In order to increase "rand a%areness,
AMAZON.COM %ill attempt not only to offer top5le&el ser&ices, "ut also to use different
mareting channels. (hese include already planned ad&ertising in&estments in the main ,e"sites
2ads currently appear on CN>(, JahooK, 6ointcast, >!cite, Iycos, Luote.com and CNN4 and
other media 2such as (he Ne% Jor (imes 7oo De&ie% and ,ired4, pu"lic relations campaigns
2thans to %hich AMAZON.COM has already "een pu"lici8ed in a num"er of (H and radio
programmes and ne%spaper articles4, and the de&elopment of alliances %ith partners %ho can
help pu"lici8e the "randname.
(he t%o cornerstones of the company;s strategy for the future are the consolidation of
relationships %ith distri"utors and pu"lishers and in&estment in staff, considered the company;s
ey resource. In order to impro&e company results it is furthermore not e!cluded that its range of
action %ill "e "roadened "y means of the opening of other ,e"sites, the sale of other products
and the acBuisition of complementary products and technologies. Iast, "ut not least, is the
o"*ecti&e of selling ad&ertising space on its o%n site %hich, considering the high num"er of daily
&isitors, represents an e!cellent "usiness.
Company strategy en&isages the use of commercial soft%are %hen this is a&aila"le. Ne&ertheless,
a great deal of in&estment has "een made 2and %ill "e made in the future4 to de&elop soft%are that
is uniBue in this "usiness. Internally de&eloped soft%are allo%s the company to accept and &erify
customer orders, to pass orders to suppliers, to manage purchased products and assign them to
the customer %ho has ordered them, and to handle the shipment of "oos. All this using different
guiding criteria.
PROFILES OF KEY PERSONS
0
5 /effrey 6. 7e8os: founder of AMAZON.COM, of %hich he is currently 6resident, Chief
>!ecuti&e Officer and Chairman of the 7oard. Aged ## and %ith a degree in engineering and
computer science o"tained magna cum laude from 6rinceton 3ni&ersity, /effrey 7e8os
%ored %ith the 7aners (rust Company "et%een 19)) and 199$ 2"ecoming Hice 6resident
in 199$4 and %ith G.>. 1ha% F Co. from 199$ to 1990 2"ecoming Hice 6resident in 199+4.
5 Dic D. Ayre: has "een %ith AMAZON.COM since 199@ as Hice 6resident and >!ecuti&e
>ditor. A sociology graduate, he pre&iously %ored for 6C Maga8ine %here he held &arious
positions.
5 Mar I. 7reier: is an economics graduate from 1tanford 3ni&ersity, %here he %as
su"seBuently a%arded an M7A. After gaining e!perience %ith 6arer 7rothers 2parlour
games manufacturer4, Eraft 2food sector4 and Cinna"on Dolls, he *oined AMAZON.COM in
/anuary 1997 as Hice 6resident of Mareting.
5 /oy G. Co&ey: graduated magna cum laude in 7usiness Administration from California 1tate
3ni&ersity, su"seBuently o"taining an M7A from 9ar&ard 7usiness 1chool. 7efore *oining
the firm in 199@ as Chief Ainancial Officer and Hice 6resident of Ainance and Administration,
she %ored for t%o companies operating in the information technology sector: Gigidesign and
A&id (echnology. 7efore that she %as a partner of ,asserstein 6erella F Co. and had %ored
also for Arthur Joung F Company.
5 Os%aldo A. Guenas: *oined the firm in /anuary 1997 as 6resident of Operations. 9is pre&ious
%or e!perience %as gained %ith the Iatin American di&ision of International 1er&ice
1ystem, %ith National Hision Associates and %ith Aederal >!press.
5 Mary >. >ngstrom: *oined AMAZON.COM in Ae"ruary 1997 as 6resident of 6u"lisher
Affairs. 1he holds an economics degree from the 3ni&ersity of California and an M7A from
the Anderson Craduate 1chool of Management in Ios Angeles. 9er pre&ious managerial
%or e!perience %as gained %ith 1ymantec Corporation 2soft%are4 and Microsoft.
5 1heldon /. Eaphan: a mathematics graduate, since March 1997 he has "een Hice 6resident
and Chief (echnology Officer of AMAZON.COM. 9is pre&ious %or e!perience %as gained
%ith CompaB and %ith a *oint &enture "et%een Apple Computer and I7M.
5 1cott >. Iipsy: *oined the firm in /uly 199@ as Hice 6resident of 7usiness >!pansion. 9is
pre&ious e!perience %as %ith 7arnes F No"le Inc. 2"oostore chain4, 7arnes F No"le
College 7oostore Inc., Omni Information Croup 2soft%are de&eloper and system integrator4
and 7a""age;s 2chain of soft%are retailers4.
5 /ohn G. Disher: graduated magna cum laude in comparati&e literature from 6rinceton
3ni&ersity, su"seBuently earning an M7A from 9ar&ard 7usiness 1chool. After gaining %or
e!perience %ith Microsoft, he *oined the firm in Ae"ruary 1997 as Hice 6resident of 6roduct
Ge&elopment.
-
5 /oel D. 1piegel: a "iology graduate, he pre&iously %ored on &arious de&elopment
programmes at 9e%lett56acard, Hisicorp and Apple Computer and, su"seBuently, at
Microsoft. 1ince March 1997 he has "een %ith AMAZON.COM as Hice 6resident of
>ngineering.
5 (om A. Al"erg: a graduate of 9ar&ard 3ni&ersity, he has %ored for 6erins Coie, McCa%
Cellular Communications Inc., IIN 7roadcasting Corporation, and Madrona In&estment
Croup 2pri&ate merchant "an4. 9e has "een a Girector of AMAZON.COM since 199@. 9e
currently sits on the "oards of &arious enterprises: Acti&e Hoice Corporation, >meritus
Corporation, Mosai! Inc., (eledesic Corporation and Hisi Corporation.
5 1cott G. Coo: graduated in mathematics and economics from the 3ni&ersity of 1outhern
California, su"seBuently earning an M7A from 9ar&ard 7usiness 1chool. 9e has "een 7rand
Manager at 6rocter F Cam"le and a consultant %ith 7ain F Company. 9e is co5founder of
Intuit Inc., a soft%are house. At present he is a Girector of 7roder"und 1oft%are Inc. and of
Intuit. 9e has "een sitting on the "oard of AMAZON.COM since /anuary 1997.
5 I. /ohn Goerr: After o"taining an M7A from 9ar&ard 7usiness 1chool, he %ored for Intel
Corporation 2for - years4 and then, as partner, for Eleiner 6erins Caufield F 7yers 2&enture
capital company4. 9e sits on the "oards of &arious firms including Netscape Communications
Corporation, Intuit Inc., Macromedia Inc., 6latinum 1oft%are Inc., 1hi&a Corporation and
1un Microsystems. 1ince /une 199@ he has "een a Girector of AMAZON.COM.
5 6atricia L. 1tonesifer: A graduate from Indiana 3ni&ersity, she %ored first for Lue
Corporation and then for Microsoft, concerning herself %ith the company;s in&estments in
ne% on5line and Internet5"ased products 2including the Microsoft Net%or4. (oday she is a
free5lance consultant %hose clients include companies lie Gream,ors 1EC. 1ince
Ae"ruary 1997 she has "een a Girector of AMAZON.COM as %ell as of Eino;s Inc.
5 7oard mem"ers do not recei&e monetary considerations, "ut are only refunded their e!penses
for attending "oard meetings. /effrey 7e8os dra%s an annual salary of '@0,###.
THE SECTOR
Internationally speaing, the sector is characteri8ed "y its considera"le si8e, its fast gro%th rate
and relati&ely high degree of fragmentation. According to >uromonitor, "y the year +$$$ "oo
sales in the 31 %ill amount to '#$ "illion. It is further estimated that %orld%ide sales, %hich
amounted to ')+ "illion in 199@, %ill clim" to a"out '9$ "illion in +$$$. A num"er of analyses
ha&e sho%n that there is a certain amount of correlation "et%een customers %ho "uy a large
num"er of "oos and people %ho use the Internet.
6u"lishers, %ho num"er a"out -$,$$$, sell their "oos directly to retailers and to a net%or of
distri"utors. (hese distri"utors are the main suppliers of most retailers. (he t%o principal
American distri"utors, %ho together co&er +-. of the 31 maret, ha&e %agered a"o&e all on the
@
high gro%th of the superstores, on account of %hich many of the smaller sales outlets ha&e had to
close do%n. According to AMAZON.COM the superstores stoc on a&erage 1#$,$$$ titles, %ith
the larger ones carrying as many as 17-,$$$. (he small "oostores, %hich today are suffering
strong competition from the superstores, concentrate, instead, on a much smaller num"er of
"oos. 1toc in&estments are &ery high for all these "oostores and premises and staff generally
ha&e high costs.
As the pu"lishers allo% "oostores to return most of their unsold "oos, the "oostores order
large Buantities of "oos, thus forcing the pu"lishers to run the riss of their sales forecasting
errors. Neither the distri"utors nor the pu"lishers, on the other hand, are in a position to gather
data on the "eha&iour, tastes and characteristics of readers, and this pre&ents them from
supplying personali8ed ser&ices or resorting to direct mareting. (he competition is &aried and
potential entrants numerous, all of %hich e!tremely aggressi&e: in /anuary 1997, for instance,
7arnes F No"les alleged that AMAZON.COM %as guilty of dishonest ad&ertising in that it is not
a "oostore and does not ha&e in stoc most of the titles offered on the maret.
ON-LINE SALES
(he company;s "usiness and gro%th potential depend to a large e!tent on the use its customers
%ill mae of the Internet. According to IGC 2International Gata Corporation4, users of the
Internet num"ered #- million at the end of 199@ and should reach 1@# million "y the year +$$$.
(his e!pansion has "een made possi"le thans to the diffusion of the personal computer, to the
impro&ed performance of 6Cs and modems, to impro&ed infrastructure and to a more %idespread
understanding of the Internet;s potential. Again according to IGC estimates, in 199- on5line sales
of goods and ser&ices amounted to '#1) million and %ill reach '9- "illion "y +$$$.
7
ATTACHMENT 1 - CONDENSED PROFIT AND LOSS ACCOUNT (in
thousans o! "US#
FROM $UN %
TO DEC &1'
1(()
YEAR
1((%
YEAR
1((*
FROM $AN 1
TO MAR &1'
1((+
NET INCOME %11 1%'+)* 1*',,%
COST OF GOODS SOLD ),( 1-'-.+ 1-').)
GROSS PROFIT MARGIN 1,- &')%( &'%-1
SELLING AND
MARKETING E/PENSES -,, *',(, &'(,*
PROD0 DE1ELOPMENT
COSTS &. 1+1 -'&1& 1'%+,
GENERAL AND ADMIN0
E/PENSES 1) &% 1',&% 1'1)-
PROFIT (LOSS# FROM
ORDINARY ACTI1ITIES (%-# (&,)# (%'(+(# (&',(+#
INTEREST RECEI1ED 1 -,- *)
NET PROFIT (LOSS# FOR
THE PERIOD (%-# (&,&# (%'+++# (&',&&#
)
ATTACHMENT - - CONDENSED 2ALANCE SHEET (in thousans o!
"US#
YEAR 1((% YEAR 1((* MAR &1 1((+
CASH IN HAND AND 3ITH 2ANKS ((* *'-). +'1*-
IN1ENTORIES 1+ %+1 (&(
ACCRUED INCOME AND PREPAID
E/PENSES 1) &-1 (&+
TOTAL CURRENT ASSETS 1',-+ +'1), (',&.
NET FI/ED ASSETS %+ (.% -')(1
GUARANTEE DEPOSITS 1)* 1(&
TOTAL ASSETS 1',.) .'-+1 11'+--
TRADE ACCOUNTS PAYA2LE (( -'.%- %'*%,
OTHER SHORT-TERM DE2TS . -',1. &'&,(
TOTAL CURRENT LIA2ILITIES 1,+ )'.+, .'(%(
TOTAL SHAREHOLDERS4 E5UITY (++ &'),1 -'+*&
TOTAL LIA2ILITIES AND
SHAREHOLDERS4 E5UITY 1',.) .'-+1 11'+--
9