AMAZON.COM

In May 1997, AMAZON.COM, a young American company, applied for a listing on the stock exchange by offering 3,000,000 shares with a nominal value of $0.01 each. The shares were put on the market at the price of $18. The capital thus raised served to cover the enormous financial needs incurred by the extremely rapid growth experienced by the company in just over 2 years. With the sale of 3,000,000 shares, 51% of the share capital remained in the hands of the founder and his family.

ORIGINS

AMAZON.COM was established in July 1994 in Seattle (USA) by 30-year-old Jeffrey P. Bezos. His idea was to sell books over the Internet: books, Bezos held, are in fact one of the few products that consumers are willing to buy on-line and AMAZON.COM offers them the possibility of doing it round-the-clock, whatever part of the world they are in. The company’s ultimate ambition is to become “leader in the on-line sale of products and services with a high information content” (entering, for example, the video and music business). AMAZON.COM, “Earth’s biggest bookstore”, started sales in 1995. Its first year of life was spent setting up the necessary infrastructure as well as planning and developing its activities and opening a Website.

In May 1997, AMAZON.COM had about 2,500,000 titles in its catalogue (or rather, on its virtual shelves), i.e. 10 times the number of titles that can be found in the largest “physical” bookstore in the world. When shopping, the customer who accesses the AMAZON.COM site can “fill up” a shopping cart with books that interest him, just like in any bookstore, deciding at the end what he wants to buy. And all this sitting comfortably in front of a screen. Once the decision has been made, all he needs to do is click a button, thus starting up the procedure for communicating his credit card data. As far as delivery is concerned, there are various options, also for international customers; one is to have the books gift-wrapped. Some titles are available immediately, whilst others are delivered in the course of 48-72 hours. Out-of-print titles are generally available within 2-6 months. If a rare book is available at a higher price than that initially communicated to the customer, the latter is contacted for authorization of the purchase.

As far as best-sellers are concerned, customers are offered discounts of up to 40% on the cover price; for all other books the discount varies from 20%-30%. This means that AMAZON.COM can undercut the prices of traditional competitors even when the price is inclusive of shipping expenses. In March 1997, AMAZON.COM’s Website could reckon with 80,000 visits a day, compared to 2,200 the previous year. The electronic bookstore may be consulted by author, title or subject. Furthermore, it is possible to use a number of keywords, to get profiles of best-selling authors and to read book reviews made by customers themselves. The AMAZON.COM Website also provides information on other books written by a given author or recommends books which develop themes related to those of interest to customers. Furthermore, by indicating one’s interests, it is possible to receive reading suggestions plus previews of soon-to-be-released titles. By creating an “on-line community”, the company hopes to provide its customers with a pleasant and familiar experience they will want to repeat. If this occurs, it means they can count on customers who are loyal and repeat purchasers. Today customers already have at their disposal 9 E-mail addresses to get in touch with the company, request information, and make suggestions. Furthermore, there is a freefone customer service department for those clients who are unwilling to communicate their credit card number via computer.

According to AMAZON.COM, the “ace up the sleeve” of an on-line bookstore is the number of titles it can offer. The space on virtual shelves being unlimited, it is possible to include all those titles which a physical bookstore cannot afford to keep in stock. As its target market is enormous and without geographic confines, a virtual bookstore can ( thanks to its centralized management ( reduce a number of costs and gain a competitive edge over traditional bookstores. In spite of the extremely high number of publications offered, AMAZON.COM has very small stocks (estimated at about 400 titles). Books which are not immediately available are ordered from nearby distributor INGRAM BOOK, one of America’s foremost distributors. Closeness to this distributor is so important that it was the determining factor in choosing the location of AMAZON.COM. In fact, the company’s founder chose to set up his business in Seattle precisely because of the presence of INGRAM BOOK. A second important supplier is Baker & Taylor Inc. There are no long-term agreements with these suppliers. AMAZON.COM is, instead, linked with them by computer, thus allowing the company to make searches and order books without wasting time.

AMAZON.COM has a staff of 256 persons (they numbered 11 on 31st December 1995): most of those who occupy key positions joined the company in 1997 and therefore it is too early to speak of their full integration in the organization. The entire structure is concentrated in rented office space occupying only two floors: on one work the editorial staff who write the book reviews and the programmers who oversee the correct functioning of the software. On the other, in a room full of computers, there are a number of operators who provide different kinds of customer services: from the search for books about which the customer does not recall the information needed for on-line retrieval, to the correction of the personal data of a customer who realizes that he has given incorrect information about himself. Despite the fact that these services are very costly, they offer important returns: in addition to customer satisfaction, every direct contact affords the possibility of acquiring personal information, addresses, and customer preferences. These are things publishers would give anything to have. Customer knowledge, in fact, has always been a privilege of the bookstores, who rarely give the publisher feedback on readers’ tastes and requirements.

AMAZON.COM has developed its own system for the management of its Website, a search engine and all the rest of its software for the management of customer transactions (for example for the handling of orders, the use of credit cards, purchases, management of stocks, and shipping), encountering no small difficulties in finding software specialists. At present these software systems are not linked to its management information systems (such as those used for performance measurement, planning and management control): this creates some problems and the need to intervene “manually” when there is a need to produce reports of an economic and financial nature. All the hardware is concentrated in the company’s headquarters in Seattle. There are no company-owned premises.

AMAZON.COM’s business, defined by the founder himself as “information brokerage”, saw an exceptional boom in sales in the three-year period 1994-1996, when income rose from 0 in 1994 to $15.7 million in 1996. Sales referring to the period January 1 - 31 March 1997 amounted to over $32 million. AMAZON.COM can at this point reckon with 340,000 customers located in over 100 countries. Sales abroad amount to about 35%, whilst regular customers account for 40% of orders.

As far as operating results are concerned, in 1995 the company showed a loss of $303,000 and in 1996 a loss of $5.8 million. A good percentage of the expenses sustained so far (39% of net sales) can be put down to marketing efforts made and include costs of advertising, public relations and promotions, not to speak of the salaries of persons engaged in marketing and sales activities. As the company is bent on taking an aggressive approach to the market, marketing costs are bound to grow in the coming years. Product development costs have also carried significant weight, especially in 1995 (when they were the equivalent of 33% of net sales). These 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 grow considerably, at least in absolute terms.

In the near future the company expects to see a further and significant worsening of its operating results. In order to evaluate the performance of AMAZON.COM, we must consider that out of about 100,000 operators currently carrying out business activities on the Internet, those who up to now have achieved profits and a reputation can be counted on the fingers of one hand. AMAZON.COM, on the contrary, is already well known and highly reputed among a vast number of Internet navigators. The competition is also showing great interest in this business: Simon & Schuster (which belongs to VIACOM Inc.) opened a Website in April 1997 and BORDERS GROUP Inc. has announced its intention to do the same. In mid-May, moreover, BARNES & NOBLE Inc., using America Online, opened a virtual bookstore with more than 1 million titles. It aims, however, to open its own site in a very short time and offer customers a discount of 30% off the cover price of books.

THE FUTURE
AMAZON.COM’s strategy is based above all on customer loyalty. The company’s aim is to increase customer value through the use of technologies, by offering services which are also personalized, and by setting very cheap prices. In order to increase brand awareness, AMAZON.COM will attempt not only to offer top-level services, but also to use different marketing channels. These include already planned advertising investments in the main Websites (ads currently appear on CNET, Yahoo!, Pointcast, Excite, Lycos, Quote.com and CNN) and other media (such as The New York Times Book Review and Wired), public relations campaigns (thanks to which AMAZON.COM has already been publicized in a number of TV and radio programmes and newspaper articles), and the development of alliances with partners who can help publicize the brandname.

The two cornerstones of the company’s strategy for the future are the consolidation of relationships with distributors and publishers and investment in staff, considered the company’s key resource. In order to improve company results it is furthermore not excluded that its range of action will be broadened by means of the opening of other Websites, the sale of other products and the acquisition of complementary products and technologies. Last, but not least, is the objective of selling advertising space on its own site which, considering the high number of daily visitors, represents an excellent business.

Company strategy envisages the use of commercial software when this is available. Nevertheless, a great deal of investment has been made (and will be made in the future) to develop software that is unique in this business. Internally developed software allows the company to accept and verify customer orders, to pass orders to suppliers, to manage purchased products and assign them to the customer who has ordered them, and to handle the shipment of books. All this using different guiding criteria.

PROFILES OF KEY PERSONS - Jeffrey P. Bezos: founder of AMAZON.COM, of which he is currently President, Chief Executive Officer and Chairman of the Board. Aged 33 and with a degree in engineering and computer science obtained magna cum laude from Princeton University, Jeffrey Bezos worked with the Bankers Trust Company between 1988 and 1990 (becoming Vice President in 1990) and with D.E. Shaw & Co. from 1990 to 1994 (becoming Vice President in 1992). - Rick R. Ayre: has been with AMAZON.COM since 1996 as Vice President and Executive Editor. A sociology graduate, he previously worked for PC Magazine where he held various positions. - Mark L. Breier: is an economics graduate from Stanford University, where he was subsequently awarded an MBA. After gaining experience with Parker Brothers (parlour games manufacturer), Kraft (food sector) and Cinnabon Rolls, he joined AMAZON.COM in January 1997 as Vice President of Marketing. - Joy D. Covey: graduated magna cum laude in Business Administration from California State University, subsequently obtaining an MBA from Harvard Business School. Before joining the firm in 1996 as Chief Financial Officer and Vice President of Finance and Administration, she worked for two companies operating in the information technology sector: Digidesign and Avid Technology. Before that she was a partner of Wasserstein Perella & Co. and had worked also for Arthur Young & Company. - Oswaldo F. Duenas: joined the firm in January 1997 as President of Operations. His previous work experience was gained with the Latin American division of International Service System, with National Vision Associates and with Federal Express. - Mary E. Engstrom: joined AMAZON.COM in February 1997 as President of Publisher Affairs. She holds an economics degree from the University of California and an MBA from the Anderson Graduate School of Management in Los Angeles. Her previous managerial work experience was gained with Symantec Corporation (software) and Microsoft. - Sheldon J. Kaphan: a mathematics graduate, since March 1997 he has been Vice President and Chief Technology Officer of AMAZON.COM. His previous work experience was gained with Compaq and with a joint venture between Apple Computer and IBM. - Scott E. Lipsky: joined the firm in July 1996 as Vice President of Business Expansion. His previous experience was with Barnes & Noble Inc. (bookstore chain), Barnes & Noble College Bookstore Inc., Omni Information Group (software developer and system integrator) and Babbage’s (chain of software retailers). - John D. Risher: graduated magna cum laude in comparative literature from Princeton University, subsequently earning an MBA from Harvard Business School. After gaining work experience with Microsoft, he joined the firm in February 1997 as Vice President of Product Development. - Joel R. Spiegel: a biology graduate, he previously worked on various development programmes at Hewlett-Packard, Visicorp and Apple Computer and, subsequently, at Microsoft. Since March 1997 he has been with AMAZON.COM as Vice President of Engineering. - Tom A. Alberg: a graduate of Harvard University, he has worked for Perkins Coie, McCaw Cellular Communications Inc., LIN Broadcasting Corporation, and Madrona Investment Group (private merchant bank). He has been a Director of AMAZON.COM since 1996. He currently sits on the boards of various enterprises: Active Voice Corporation, Emeritus Corporation, Mosaix Inc., Teledesic Corporation and Visi Corporation. - Scott D. Cook: graduated in mathematics and economics from the University of Southern California, subsequently earning an MBA from Harvard Business School. He has been Brand Manager at Procter & Gamble and a consultant with Bain & Company. He is co-founder of Intuit Inc., a software house. At present he is a Director of Broderbund Software Inc. and of Intuit. He has been sitting on the board of AMAZON.COM since January 1997. - L. John Doerr: After obtaining an MBA from Harvard Business School, he worked for Intel Corporation (for 5 years) and then, as partner, for Kleiner Perkins Caufield & Byers (venture capital company). He sits on the boards of various firms including Netscape Communications Corporation, Intuit Inc., Macromedia Inc., Platinum Software Inc., Shiva Corporation and Sun Microsystems. Since June 1996 he has been a Director of AMAZON.COM. - Patricia Q. Stonesifer: A graduate from Indiana University, she worked first for Que Corporation and then for Microsoft, concerning herself with the company’s investments in new on-line and Internet-based products (including the Microsoft Network). Today she is a free-lance consultant whose clients include companies like DreamWorks SKG. Since February 1997 she has been a Director of AMAZON.COM as well as of Kinko’s Inc. - Board members do not receive monetary considerations, but are only refunded their expenses for attending board meetings. Jeffrey Bezos draws an annual salary of $64,333.

THE SECTOR
Internationally speaking, the sector is characterized by its considerable size, its fast growth rate and relatively high degree of fragmentation. According to Euromonitor, by the year 2000 book sales in the US will amount to $30 billion. It is further estimated that worldwide sales, which amounted to $82 billion in 1996, will climb to about $90 billion in 2000. A number of analyses have shown that there is a certain amount of correlation between customers who buy a large number of books and people who use the Internet.
Publishers, who number about 50,000, sell their books directly to retailers and to a network of distributors. These distributors are the main suppliers of most retailers. The two principal American distributors, who together cover 25% of the US market, have wagered above all on the high growth of the superstores, on account of which many of the smaller sales outlets have had to close down. According to AMAZON.COM the superstores stock on average 130,000 titles, with the larger ones carrying as many as 175,000. The small bookstores, which today are suffering strong competition from the superstores, concentrate, instead, on a much smaller number of books. Stock investments are very high for all these bookstores and premises and staff generally have high costs.

As the publishers allow bookstores to return most of their unsold books, the bookstores order large quantities of books, thus forcing the publishers to run the risks of their sales forecasting errors. Neither the distributors nor the publishers, on the other hand, are in a position to gather data on the behaviour, tastes and characteristics of readers, and this prevents them from supplying personalized services or resorting to direct marketing. The competition is varied and potential entrants numerous, all of which extremely aggressive: in January 1997, for instance, Barnes & Nobles alleged that AMAZON.COM was guilty of dishonest advertising in that it is not a bookstore and does not have in stock most of the titles offered on the market.

ON-LINE SALES
The company’s business and growth potential depend to a large extent on the use its customers will make of the Internet. According to IDC (International Data Corporation), users of the Internet numbered 35 million at the end of 1996 and should reach 163 million by the year 2000. This expansion has been made possible thanks to the diffusion of the personal computer, to the improved performance of PCs and modems, to improved infrastructure and to a more widespread understanding of the Internet’s potential. Again according to IDC estimates, in 1995 on-line sales of goods and services amounted to $318 million and will reach $95 billion by 2000.

ATTACHMENT 1 - CONDENSED PROFIT AND LOSS ACCOUNT (in thousands of $US)

| |FROM JUN 5 TO DEC 31, |YEAR 1995 |YEAR 1996 |FROM JAN 1 TO MAR 31, |
| |1994 | | |1997 |
|NET INCOME | |511 |15,746 |16,005 |
|COST OF GOODS SOLD | |409 |12,287 |12,484 |
|GROSS PROFIT MARGIN | |102 |3,459 |3,521 |
|SELLING AND MARKETING EXPENSES | | | | |
| | |200 |6,090 |3,906 |
|PROD. DEVELOPMENT COSTS | | | | |
| |38 |171 |2,313 |1,570 |
|GENERAL AND ADMIN. EXPENSES | | | | |
| |14 |35 |1,035 |1,142 |
|PROFIT (LOSS) FROM ORDINARY ACTIVITIES | | | | |
| |(52) |(304) |(5,979) |(3,097) |
|INTEREST RECEIVED | |1 |202 |64 |
| | | | | |
|NET PROFIT (LOSS) FOR THE PERIOD | | | | |
| |(52) |(303) |(5,777) |(3,033) |

ATTACHMENT 2 - CONDENSED BALANCE SHEET (in thousands of $US)

| |YEAR 1995 |YEAR 1996 |MAR 31 1997 |
|CASH IN HAND AND WITH BANKS |996 |6,248 |7,162 |
|INVENTORIES |17 |571 |939 |
|ACCRUED INCOME AND PREPAID EXPENSES | | | |
| |14 |321 |937 |
|TOTAL CURRENT ASSETS |1,027 |7,140 |9,038 |
|NET FIXED ASSETS |57 |985 |2,491 |
|GUARANTEE DEPOSITS | |146 |193 |
|TOTAL ASSETS |1,084 |8,271 |11,722 |
| | | | |
|TRADE ACCOUNTS PAYABLE |99 |2,852 |5,650 |
|OTHER SHORT-TERM DEBTS |8 |2,018 |3,309 |
|TOTAL CURRENT LIABILITIES |107 |4,870 |8,959 |
|TOTAL SHAREHOLDERS’ EQUITY |977 |3,401 |2,763 |
|TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY | | | |
| |1,084 |8,271 |11,722 |