AMAZON.COM: EVOLUTION OF A DISRUPTOR*

AMAZON.COM: EVOLUTION OF A DISRUPTOR*

eff Bezos, founder and CEO of Amazon.com (Amazon), took his online start-up from an underground sensation for
book-lovers on the Internet to one of the most admired firms in America. Amazon has transform traditional book-retailing
and then expanded into numerous product categories to become the “Mall of the Internet”. More recently, Amazon has
been pushing devices such as the Kindle, Kindle Fire, and Fire TV. This aggressive expansion is risky: it puts Amazon in
direct competitions with such powerhouses as Apple and Netflix. This case describes how Bezos and his top
management team managed its significant transformation, and how it is positioning itself for the formidable challenges
ahead.

THE CRITICAL EARLY YEARS

In 1994, Jeffrey Bezos, a computer science and electrical-engineering graduate from Princeton University, was the
youngest senior vice-president in the history of D.E. Shaw, a Wall Street-based investment bank. During the
summer of 1994, one important statistic about the Internet caught his attention—Internet usage was growing at
2300% a year. His reaction: “Anything growing that fast is going to be ubiquitous very quickly. It was my wake-up
call.”
He left his job at D.E. Shaw and made a list of 20 possible products to sell on the Internet. He quickly narrowed his
prospects to music and books. Both shared an advantage for online sale: far too many titles for a single store to
stock. He chose books and described why in a 1996 Fast Company interview.
There are 1.5 million English-language books in print, 3 million in all languages worldwide. This volume defined the
opportunity. Consumers value authoritative selection. The biggest phenomenon in retailing is the big-format store—the
"category killer"—whether it's selling books, toys, or music. But the largest physical bookstore in the world has only 175,000
titles. With some 4,200 US publishers and the two biggest booksellers, Barnes & Noble and Borders Group Inc., accounting
for less than 12% of total sales, there aren't any 800-pound gorillas in book selling. 1
In contrast, the music industry had only six major record companies that controlled distribution of records and CDs sold in
the US. With such control, these firms had the potential to lock out a new business threatening the traditional record store
format.
To start his new venture, Bezos left New York City to move to either Boulder, Seattle, or Portland. As he drove west, he
refined his thoughts and business plan. He chose Seattle as his final destination. Recalls Bezos:
It sounds counterintuitive, but physical location is very important for the success of a virtual business. We could have started
anywhere. We chose Seattle because it met a rigorous set of criteria. It had lots of technical talent. It was near a large book
warehouse. It was a nice place to live. Finally, it was in a small state. In the mail-order business you must charge sales tax
to customers who live in any state where you have a business presence. It made no sense to be in California or New York.
Obviously Seattle has a great programming culture. And it's close to Roseburg, Oregon, which has one of the biggest book
warehouses in the world.
Bezos launched Amazon.com in July 1995. Working out of his garage, he ironically meet prospective employees and
suppliers at a nearby Barnes & Noble. Bezos raised several million dollars from private investors and to keep pace with
sales growth, he expanded the Seattle warehouse and built a 200,000-square-foot state-of-the-art distribution center in
New Castle, Delaware. With revenues surging quarter after quarter, Bezos took his company public May 14, 1997. After
initial volatility, share price rose steadily. By July 1998, the firm’s
*This case was originally prepared by Professor Suresh Kotha, University of Washington for class discussion and not to illustrate effective or
ineffective management. Professor John Mezias made some edits and additions to adjust focus and update the case.
1 “Who’s writing the book on web business?” Fast Company, October-November, 1996, p. 132-133.
company’s capitalization was $6.4 billion; larger than the combined value of the two largest retailers, Barnes & Noble and
Borders Books & Music, whose combined sales were about 10 times that of Amazon’s.
In early years, Amazon doubled sales every 2.4 months. 2 Innovative initiatives, such as the Associates Program increased

traffic to Amazon via referral links. For example, Starchefs, which features cookbook authors, recommends books and
creates a link from its webpage to Amazon’s catalog page for the books. Associated websites earn referral fees up to 15%
for link-generated sales. More than 90,000 sites joined this program. These micro-franchises had no overhead and it
allowed Amazon to track ad success by the number of click-throughs to the store's web site and the number of Internet
surfers who actually purchase something. Industry analysts estimate only 2-3% of people who see a web ad actually click-
through to see more. Despite amazing revenue growth, the firm posted net losses as costs also increased. Amazon
spends a substantial amount on advertising and marketing, which grew to 23% of sales. The firm also advertised in The
Wall Street Journal and the New York Times; on Yahoo!, Microsoft Network (MSN) and Microsoft’s Slate magazine; and
on radio and television. (Exhibit 1 has an early income statement and balance sheet).
At founding, the company planned to be profitable in five years. The firm pushed its business plan aggressive, but it took
longer than 5 years to be profitable. Despite continuing loses, Wall Street’s interest in the new venture remained strong.
Based on cybershare (and revenues), the firm became the largest online bookstore. Amazon expanded the market for
books by exposing people to more books than ever before, especially books not found in retail bookstores.

THE BOOK PUBLISHING SUPPLY CHAIN

The US is the largest market for books. With over 2,500 publishers, book publishing is one of the most fragmented
industries. Amazon’s entry shook up this entire supply chain. (Exhibit 2 depicts that supply chain.) Below are descriptions
of key players in this supply chain. Similar shake ups occurred in many supply chains as online players entered different
industries. Amazon’s entry into the book supply chain caused the first such change.
Publishers: Publishers sell books to their distributors on consignment and assume all the risk. They also accept returns,
thus guaranteeing their distributors a 100% refund on all unsold books. They advance money to authors under contract
and decide how many copies of a book to print. Typically a “first-run” print for a book varies from 5,000-50,000 copies.
However, best-selling authors’ first-run prints are set at around 300,000 copies. Publishers print more copies than will be
sold and about 25% of all books distributed to wholesalers returned. According to industry experts, 20-30% returns for
hardcover book is acceptable and anything above 50% is disastrous. Generally 10% of titles make a profit, with 90%
barely breaking even. The "big three" – Warner Books, Simon & Schuster, and Pearson – accounted for over 20% of sales.
The 20 largest US book-publishers command over 60% of all retail sales and consolidation will further strengthen their
market power. However, experts doubt that publishers are grasping the magnitude of technological changes affecting the
entire book supply chain.
Wholesalers. Wholesalers distribute books to independent booksellers and chains consolidating their orders into large
lot-orders for publishers. Publishers supply wholesalers who then supply the thousands of US retail bookstores.
Wholesalers accounted for almost 30% of publishers’ before Amazon entered the industry. Unlike
2 Financial Times, October 7, 1996.
publishers and retailers, wholesalers are highly concentrated, with firms like Ingram Book Co., and Baker and Taylor had
over 80% of the wholesale market. However, competition in wholesaling, which revolves around delivery speed and
number of titles stocked, was growing intense. Although Ingram, for instance, receives more than 70% of orders
electronically and offers one-day delivery to about 82% of its US customers, the average net profit per book for
wholesalers was less than 1.5%. Also, superstores of the large retailers no longer use wholesalers for initial orders. For
example, Barnes & Noble was buying over 90% of its titles directly from publishers. Internet bookstores also bypassed
wholesalers and purchased directly from publishers.
Retail Bookstores: Retail bookstores, independents, and general retailers accounted for 35-40% of industry revenues.

From 1975-1995, the number of bookstores in the US increased from 11,990 to 17,340. According to industry sources,
total sales of the four largest bookstore chains: Barnes & Noble, Borders Books & Music, Books-A-Million, and Crown
Books rose 14.3% to $5.68 billion, which represented 24% of all book sales. Industry analysts note that superstore sales
were growing at a compounded rate of 71% while non-superstore sales grew at a rate of 4%. With the increasing growth
of superstores, experts cautioned that in smaller markets a shakeout was inevitable. A spokesperson for the American
Booksellers Association, noted:
From 1993-1995, 150 to 200 independent-owned bookstores went out of business; 50-60 in 1996 alone. … By contrast in
the same period, approximately 450 retail superstores opened, led by Barnes & Noble and Borders Group with 348
openings. 3
Independent booksellers hoped superstore growth reached a saturation point. Barnes & Noble and Borders entered many
cities, but 142 US metropolitan markets still did not have a superstore. Prudential Securities analyst Amy Ryan believed
current expansion would continue because the US could support 1,500 more superstores.
Institutions and Libraries: The US has more than 29,000 private, public, and academic libraries. 4 This market is crucial
to publishers because of its stability and size. Since libraries order only what they want, this lowers the overhead costs
associated with inventory and return processing, making this segment relatively profitable for publishers. Moreover, as
hardcover trade books become relatively expensive, many readers now borrow