History of Amazon

In January 2019, Amazon.com Inc (Amazon) became the most valuable company in the world, above Microsoft, Apple, and Alphabet (Google).1 Jeff Bezos, Amazon’s founder and CEO was now the world’s richest man. On January 31st, 2019, Amazon announced 2018 operating profits of $12.4 billion, up from $178 million in 2014, on sales of $232 billion, up from $89 billion four years earlier (see Exhibit 1). The shareholders expressed their satisfaction (see Exhibit 2), but not all were happy with Amazon’s meteoric rise. Many traditional retailers in the United States were going bankrupt, while major competitors such as Walmart and Best Buy were forced to invest aggressively in online retailing to prevent their market share from eroding. Every retail sector appeared to be under threat, fueling anxieties that Amazon and America’s other tech giants were becoming too big and powerful. In the United States, Amazon was drawing criticism from across the political spectrum, with calls for it to be broken up. Meanwhile, the European Union was also investigating its practices. Did Amazon’s success threaten its very existence?

History
Bezos began his career as a programmer for Wall Street trading firms and hedge funds. After working for hedge fund D. E. Shaw on investments in technology companies, Bezos began exploring the idea of founding an Internet retailer. He considered over 20 categories of products for his venture and ultimately chose to focus on books.
The Book Business
In the 1990s, the book retailing business was highly fragmented, complicated, and prone to inventory and return problems. The traditional book retail market was composed of national chains and independent booksellers. The two major chains were Barnes & Noble and Borders. These chains collectively had more than 2,000 stores across the United States and typically offered discounts of 10% to 30% off popular books. There were also 5,500 independent booksellers in the United States operating 7,000 stores.6 This number had been falling through the 1990s, partly as a result of price competition from chain stores. Mass merchants (e.g., Wal-Mart and Kmart), wholesale clubs (e.g., Sam’s Club and Professor John R. Wells and Research Associates Benjamin Weinstock, Galen Danskin, and Gabriel Ellsworth prepared this case. This case was developed from published sources. Funding for the development of this case was provided by Harvard Business School and not by the company. HBS cases are developed solely as the basis for class discussion. Cases are not intended to serve as endorsements, sources of primary data, or illustrations of effective or ineffective management.

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Costco), grocery stores, and other non-bookstore outlets were another major source of competition, accounting for almost half of book sales.
For an author’s book to reach a retail store, the book typically had to go through four intermediaries: agents, publishers, distributors, and wholesalers.1 First, an agent would accept a book and market it to a publisher. Some of the major publishers in the 1990s were Penguin Books, Harper Collins, Random House, and Simon & Schuster. The top 20 publishers accounted for 88% of sales in North America. If a publisher accepted the book, it would manage publication, marketing, and sales.
In order to distribute the book, the publisher would contract with a distributor. A distributor’s primary responsibility was to act as a middleman between the wholesaler and the publisher. Distributors would ship and return books from the wholesaler to the publisher, and they would give smaller publishers the bargaining power to get their books stocked by a major wholesaler.
Wholesalers were the key link between retailers and the publishing world. Ingram was the largest wholesaler and controlled 50% of the US market. Wholesalers would distribute catalogues to bookstores and fulfill book orders placed by retailers. To ensure that they could meet retail demand, wholesalers would maintain inventories of publishers’ books and ship them out to bookstores on demand. If a retailer misjudged the number of copies that would sell, a bookstore could return to the book to the wholesaler (who would then return it to the publisher) for a full refund (minus shipping costs). In this way, books were sold on consignment and had high return rates and high inventory costs to the publisher. Publishers typically received back over 30% of their initial book run.
Barnes & Noble and Borders sourced much of their inventory directly from publishers, cutting out wholesalers and distributors, and stored their inventory in company-owned distribution centers. In 1996, 40% of Barnes & Noble’s inventory was pushed directly from publishers, and the company expected this figure to increase to 50% by 1998. It took several weeks to source a book directly from the publisher, and Barnes & Noble and Borders could ship a book from their own distribution centers to a retail store in two to three days.
Amazon’s Entry
In 1994, Bezos quit his job at D. E. Shaw and drove across the country to Seattle, Washington. Bezos chose Seattle for three reasons: its technology cluster; its proximity to Ingram, the largest book wholesaler; and its lack of sales tax. Wherever Bezos shipped a book in the United States, he would not have to levy sales tax, which put him at an immediate advantage over local bookstores. Sales tax varied from state to state but averaged about 6% of sales. Bezos began Amazon out of his garage. The company name reflected his ambitions for the firm: like the Amazon River, he intended to be the biggest in the world. After a year of software development with a team of 10 employees, Amazon’s website was launched in July 1995 (see Exhibit 3a).
From the start, Amazon was focused on making e-commerce attractive, secure, and easy for first- time online buyers. Customers needed only an email address, a credit card, and a password to place an order. Amazon listed over 1 million titles in its database, and prices were often deeply discounted compared to physical retailers’. The goal was to offer “much more selection than was possible in a physical store . . . and presented it in a useful, easy-to-search, and easy-to-browse format in a store open 365 days a year, 24 hours a day.”

Reviewers also played an important part in the success of a book

By September 1995, Amazon was generating weekly sales of $20,000.14 For 1995, annual sales were
$511,000.15 To accommodate the rapidly increasing demand, the company moved out of Bezos’ basement into headquarters in Seattle and built a 50,000-square-foot distribution center.
In July 1996, the company launched Amazon Associates, which allowed individuals to embed links to Amazon within their own websites, write reviews or recommendations, and gain a 3% to 8% commission on books purchased through these links. There was no cost to join the program, and associates could enroll through Amazon and begin selling products through their site within hours. This network of sellers helped to drive traffic to the Amazon site. While the typical newly launched Internet company spent 119% of sales on advertising during the late 1990s, Amazon’s marketing was 10% of sales. In 1996, Amazon recorded sales of $15.7 million and an operating loss of $6.0 million.

Going Public and Growth (1997-1999)
In May 1997, Amazon went public at $18 a share, raising $54 million, valuing the company at $438 million. By December of 1997, Amazon’s stock had risen to $59 per share. The company recorded sales of $148 million in 1997 and operating losses of $29 million.
Amazon’s IPO success was not unusual at the time. Starting in January 1997, Internet companies began achieving sky-high valuations. According to CNN, “Investors would buy almost anything even vaguely associated with the Internet, regardless of valuation.” In total, web companies raised $1 billion through 34 IPOs in 1997, $2 billion through 45 IPOs in 1998, and $24.1 billion through 292 IPOs in 1999.22 In January 1999, Amazon took advantage of this continued optimism to issue $1.25 billion of bonds, which gave the company a substantial cash cushion.
Amazon’s rapid expansion in 1997 was partly fueled by several major Amazon Associates, including Yahoo, American Online, and Netscape. In 1998, Amazon launched Amazon.com Advantage, which focused on the sales of independent authors and publishers. The same year, Amazon released Amazon.com Kids, which marketed titles for younger children and teenagers. Amazon also began to expand internationally, acquiring Bookpages (UK) and Telebook (Germany) in 1998.
In 1998, Amazon moved beyond the book category with the acquisition of IMDb (the Internet Movie Database), an online database of information and reviews about movies and television shows. Before year-end, Amazon became the leading online video retailer. The same was true of music CDs. Amazon made 125,000 titles available in 1998 and soon led the category.
In 1999, the company entered more categories, including toys and electronics (July), home improvement and tools (November), video games and software (November), and patio furniture and kitchenware (December). In addition to these category entries, Amazon also released a new online marketplace called zShops in 1999. On this site, Amazon rented space at a fixed rate ($9.99 per month) to smaller merchants who sold items and paid a sliding commission based on the final sale price, generally between 2.5% and 5%. Sellers managed stocking and shipping, while Amazon processed transactions through its 1-Click payment system, guaranteed refunds to protect buyers against fraud, and hosted reviews for the products.
During this time, Amazon also made significant investments in its distribution and warehouse infrastructure. By early 2000, Amazon operated 10 distribution centers (in Seattle, Delaware, Georgia, Kansas, Kentucky, Nevada, North Dakota, the United Kingdom, and Germany) totaling 4.5 million square feet of space, with capacity of $10 billion worth of sales—more than five times Amazon’s 1999 revenues. The company also operated six customer service centers across the United States, the United Kingdom, and Germany.
Amazon’s distribution centers and customer service centers were tied together with a digital infrastructure that linked operations throughout the world. In the December holiday season, more than 99% of orders were shipped on time. In Amazon’s 1999 Annual Report, Bezos noted that Amazon’s investments in digital and physical infrastructure had put the company at a “‘tipping point’ where this platform allows us to launch new e-commerce businesses faster, with a higher quality of customer experience, a lower incremental cost, a higher chance of success, and a clearer path to scale and profitability than perhaps any other company.”
In 1999, sales reached $1.6 billion with an operating loss of $606 million. Bezos was named Time’s “Person of the Year.” However, investors were wary about Bezos’s focus on market share and revenue growth over profitability. The article announcing Bezos’s award described how “naysayers referred to it as ‘Amazon.org.’” (The .org domain was reserved for nonprofits).

Dot.com Bust and the Route to Profitability (2000–2003)
In February 2000, Amazon signed a five-year agreement with Living.com that guaranteed the company as the exclusive supplier for the Amazon.com Home Living store. Through this agreement, Amazon acquired an 18% stake in Living.com for $10 million. Amazon made similar deals with numerous other new, high-potential start-ups. The Wall Street Journal described Amazon as “the granddaddy of Internet shopping” and said that the company had “played patron to other electronic retailers, funneling hundreds of millions of dollars and throngs of its customers to the start-ups.”
In August 2000, Living.com filed for Chapter 7 bankruptcy and closed its website. Other e-retailers were also in trouble. Many renegotiated contracts with Amazon that had been signed only months before. Greenlight negotiated payments of $15.25 million over two years rather than $82.5 million over the next five. Bezos noted, “What good partners do is when circumstances change, they try to help each other.” Tom Courtney, an analyst at Bank of America, noted, “We don’t think they’re going to end up with much of a return on those investments.”
In June 2009, Ravi Suria, a Lehman Brothers bond analyst, published a report that questioned Amazon’s ability to survive, and Amazon’s stock price fell by one-fifth. By the end of 2000, the company’s share price fell below $20, down from a high of over $100 at the beginning of the year. Bezos lost 80% of his net worth, but he remained optimistic about the future of the company. He noted, “It has been a great business year.”
Despite the 2000 dotcom collapse, Amazon expanded its customer base from 13 million to 25 million and its operations into Japan and France. In November 2000, Amazon launched Amazon Marketplace, which allowed sellers to sell new and used items next to Amazon’s product selection rather than separately through zShops. Amazon also began offering free shipping for orders over
$100.40 In addition, the company strengthened the management team, hiring Joseph Galli from Black & Decker as president, Jarren Kesnon from Delta Air Lines as CEO, and Jeffrey Wilker from AlliedSignal as chief logistics officer. Bezos remarked that prior to 2000, he had failed to create a more formal strategic planning process. He noted, “We have done a reasonable job in that area, but it’s been by the seat of our pants. Not with finesse, but because we have tons of smart people who care, which is great, but [it] needs to be much more of a process.” Amazon’s cash balance at the end of 2000 stood at $1.1 billion.

The new team began structuring operations. In early 2001, Amazon laid off 1,300 employees (around 15% of its workforce), closed a distribution facility, and initiated a policy of “Get the Crap Out.” This was designed to cut unprofitable products. The company found that “more than 10 percent of the products sold from the electronic, kitchen, and tool departments lost money, while 5 percent of the book, music, and video products were losers.” Bezos noted, “We’ll ferociously manage the products we carry so that we sell only products that are profitable. The thirty-pound box of nails isn’t long for our world.” Amazon also focused on alternative ways of making product lines profitable—for example, selling items in packs to save on shipping, reducing inventory levels, pressing vendors for more discounts, or raising prices.
In 2001, the company was re-organized into four operating segments: US Books, Music, and DVD/Video accounted for 54% of sales; US Electronics, Tools, and Kitchen for 17%; Services for 7%; and International for 22% of sales. The company reported financial information for these four segments for two years only. Beginning in 2003, it reported only for two segments: North America and International.
Amazon also began offering “e-commerce solutions” to traditional retailers through three programs: Merchant@amazon.com, the Merchant Program, and the Syndicated Stores Program. In Merchant@amazon.com, a company’s products were integrated into Amazon’s website, and customers purchased products through Amazon’s one-click process. The third party would pay Amazon a fixed fee and sales commission, and Amazon offered the option of delivering and storing products for the merchant. Toys “R” Us, Target, Circuit City, Gap, and Land’s End were all part of this program. In the Merchant Program, a third party used Amazon’s software and technology, but the website was located under its own URL. Target migrated to this system in 2002. In the Syndicated Stores Program, a third- party seller’s site would use Amazon’s e-commerce services and offer Amazon’s product selection, with Amazon controlling all fulfillment and payment. This program was an outgrowth of Amazon Associates, and bookseller Borders used it for its website.
Amazon did not disclose revenue from these relationships, but analysts estimated that 14% of products sold in 2002 were by third parties. Jeetil Patel, a Deutsche Bank analyst, estimated that Amazon charged a commission of 10% to 15% on third-party products and that most of this commission was profit, resulting in an estimated gross margin of more than 70% for the third-party services segment. In contrast, estimated margins for products that Amazon had to stock and ship were around 22%.
When Amazon had come under pressure in 2000, the company reduced its discounting on books. Prices were raised again in 2001, bringing growth to a halt. To revive sales, in April 2002, the company discounted all books over $15 by 30%. In June, it dropped its Free Shipping sales minimum to $49. Third-quarter 2002 sales for its book, music, and video unit were up 17%. The Free Shipping minimum was dropped again in August to an order size of $25.52
In 2002, sales reached $3.9 billion, and Amazon posted its first yearly operating profit of $106 million. Amazon’s shares rose 75% in 2002, while markets were generally falling.
As it turned to profitability, Amazon continued to add new categories including Apparel and Accessories (2002), Sports and Outdoor (2003), and Health and Personal Care (2003).