Amazonmss29766d01

  • 1,361 views
Uploaded on

 

More in: Business , Technology
  • Full Name Full Name Comment goes here.
    Are you sure you want to
    Your message goes here
    Be the first to comment
No Downloads

Views

Total Views
1,361
On Slideshare
0
From Embeds
0
Number of Embeds
0

Actions

Shares
Downloads
62
Comments
0
Likes
1

Embeds 0

No embeds

Report content

Flagged as inappropriate Flag as inappropriate
Flag as inappropriate

Select your reason for flagging this presentation as inappropriate.

Cancel
    No notes for slide

Transcript

  • 1. MORGAN STANLEY RESEARCH NORTH AMERICA Morgan Stanley & Co. Incorporated Mary Meeker Mary.Meeker@morganstanley.com +1 (1)212 761 8042 Scott Devitt Scott.Devitt@morganstanley.com +1 (1)212 761 3365 Collis H. G. Boyce July 13, 2009 Collis.Boyce@morganstanley.com +1 (1)212 761 6578Stock Rating Amazon.comOverweightIndustry View Deep Dive into Risks and theAttractive Water is Fine…Reiterate Key Ratios and Statistics Overweight Reuters: AMZN.O Bloomberg: AMZN US Internet & Consumer Software / United States of America Shr price, close (Jul 10, 2009) $77.63 Mkt cap, curr (mm) $33,924 The digital transitions (PC + mobile) challenged our 52-Week Range $91.75-34.68 thesis on Amazon.com. Concerns about the digital media transition and potential erosion of Amazon.com’s Fiscal Year ending 12/08 12/09e 12/10e 12/11e core Media (Books / Music / Video / Games) business ModelWare EPS ($) 1.41 1.58 2.06 2.72 have been around for years. We had not been that P/E 36.5 49.1 37.7 28.5 Unless otherwise noted, all metrics are based on Morgan Stanley ModelWare concerned owing to our optimism that Amazon.com framework (please see explanation later in this note). e = Morgan Stanley Research estimates would continue to gain share of both physical + digital media sales. However, the raging success in recent quarters of Apple and its 40MM+ mobile wireless device (iTouch + iPhone) users + its uber powerful iTunes digital media distribution channel (75MM users) led us to revisit our thesis. We do deep dives into drivers, categories, and share. Our analysis focuses on: 1) Amazon.com’s past / present / future revenue drivers; 2) market + market share dynamics by business line (books, music, video, games, consumer electronics and computer hardware); and 3) recent growth drivers like Prime, international expansion, flat panel TV, Kindle, mobile applications, web services, private label, and advertising. Our positive conviction has risen after our analysis. We expect Amazon.com to continue to be a share gainer in the share gainer industries (online + mobile commerce). The structured and methodical build-out of Morgan Stanley does and seeks to do business with its platform - which took almost a decade to fully companies covered in Morgan Stanley Research. As blossom - has positioned Amazon.com to meaningfully a result, investors should be aware that the firm may increase its market share in multiple areas. Estimates have a conflict of interest that could affect the may prove conservative, especially for 2011 and beyond, objectivity of Morgan Stanley Research. Investors should consider Morgan Stanley Research as only a as revenue mix shifts to faster growing EGM (electronics single factor in making their investment decision. + general merchandise) businesses, away from media. Customers of Morgan Stanley in the US can receive We believe investors with a 1- to 5-year time horizon can independent, third-party research on companies significantly outperform the S&P 500 by owning covered in Morgan Stanley Research, at no cost to Amazon.com shares despite the move up from the them, where such research is available. Customers can access this independent research at bottom in November. We reiterate our $95 base case www.morganstanley.com/equityresearch or can call DCF value with an upside bias. 1-800-624-2063 to request a copy of this research. For analyst certification and other important disclosures, refer to the Disclosure Section, located at the end of this report.
  • 2. MORGAN STANLEY RESEARCH July 13, 2009 Amazon.comRisk-Reward Snapshot: Amazon.com (AMZN, $78, OW) Investment ThesisRisk-Reward View: Potential for On-Going Upside Driven by Execution $ 140 FALSE 7/10/2009 2008-FY • eCommerce leader that continues to take market share from offline and $125 (+61%) 120 online competitors • Broad selection / best-in-class 100 $95 (+22% ) customer experience / ease of use $ 77.63 creates superior user experience and 80 drives loyalty • Focus on customer has led toBullCase 60 $60 (-23%) double-digit active customer / seller 40 growth Key Value Drivers 20 • Active customers eclipsed 90MM and 0 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 further customer growth should drive Base Case (Jul-10) Historical Stock Performance Current Stock Price continued revenue growth • Continue revenue per active Upside 71x Upside Assumes EGM businesses remain especially robust as customer expansion driven by Prime Case Case 09e Amazon.com gains more retail share and, to a lesser degree, the and selection $125 EPS company participates in digital distribution upside for of books, Potential Catalysts video and games. Assumes Amazon.com continues to add products and selection and gains related share. Assumes 5-yr. • Faster-than-expected economic revenue CAGR (C08-C13E) of 17% and EBITDA margins expand recovery could spur commerce to 10.4% in C2018E. growth Base 60x Base Assumes Amazon.com continues to benefit from challenging • Additional retail bankruptcies could Case Case 09e economy and Amazon.com’s business continues to significantly continue to shift sales online $95 EPS outperform overall eCommerce. Digital distribution impacts • Growing inventory could force business, but Amazon.com is able to participate in some of the retailers to seek additional channels digital transition. Assumes 5-yr. revenue CAGR (C08-C13E) of 15% and EBITDA margins expand to 9.7% in C2018E. to move product Downside 48x Business slows as digital distribution negatively impacts sales of Key Debates Case Downside media and Amazon.com does not effectively find a way to $60 Case 09e participate in digital Media sales (Music, Video, Books). Assumes • Amazon.com generates 56% of CQ1 EPS 5-yr. revenue CAGR (C08-C13E) of 13% and EBITDA margins revenue from media products and expand to 7.5% in C2018E. faces competitive threat as media sales transition to digital.SWOT Analysis – Amazon.com • Investors value the business based Strengths Weaknesses on free cash flow and capitalize the 1. Brand leadership, low capital costs l 1. Price competition / product mix pressuring free cash float at the same rate as 2. Best-in-class user experience defined by near-term margins operating free cash; if growth slows, selection / convenience / reliability / low prices / 2. High exposure to foreign exchange fluctuations free shipping / powerful recommendation engine FCF flow drops and could have a 3. Seasonality + inventory risk 3. Leader in innovation + one-to-one logistics meaningful impact on the stock Opportunities Threats • Amazon.com benefits from its 1. Continued share gains in overall retail market, in 1. Execution risk in new markets / categories / non-physical presence status in many which eCommerce penetration is still low. products U.S. states giving the company a 2. Continued expansion into international markets 2. Intense competition in both core (retail) + new (both mature + emerging) with selection/Prime markets (digital downloads, eCommerce sales tax collection advantage over 3. Monetization of early-stage initiatives gaining solutions, web services, etc.) traditional retailers that could be more traction, such as Kindle, Amazon Web Services + 3. Legal (e.g., state sales tax issues, international forcefully challenged given the digital downloads (VoD + AmazonMP3) sales tax possibility)Source: Morgan Stanley Research, Michael Porter’s Competitive Strategy. economic climate 2
  • 3. MORGAN STANLEY RESEARCH July 13, 2009 Amazon.comTable of ContentsInvestment Case P.4 Key Debate: Can Amazon.com Grow Through Technology Shifts? P.4 Highlights of Our Deep Dive P.4Amazon.coms Mix Shift and Share Gains Are Supporting Sustainable Growth P.10Secular Trends – Amazon.com As General Merchandise Retailer P.13Seismic Media Consumption Shifts Create Opportunities and Risks for Amazon.com P.15Drill Down on Media Revenue Drivers – Books / Music / Video / Video Games P.20Amazon.com Outperformance Across Segments Could Continue P.29Future Growth Drivers In Depth P.30 Books / Kindle (eBooks) P.30 Music P.36 Video P.38 Amazon Web Services (AWS) P.40 Private Labels P.41 Vertical Search Engine & Ad Platform P.42Revisiting Amazon.com’s Core Strengths P.44 Strong User + Revenue per User Trends P.44 Amazon Prime + Widening Selection P.44 International Prime and Product Category Expansion P.45 Singular Customer Focus P.46Amazon.com Financial Model P.47 3
  • 4. MORGAN STANLEY RESEARCH July 13, 2009 Amazon.com said, Amazon.com shares are priced for continued high ratesInvestment Case of revenue growth, expanding operating margins, and share gains within eCommerce / overall retail, which can makeAfter completing our analysis on Amazon.com, our investors uncomfortable on a short-term basis despite a strongconviction in AMZN shares has increased further and we long-term tailwind behind the company.reiterate our $95 base case value with an upside bias. Webelieve if Amazon.com can successfully manage the digital The raging success of Apple with its 40MM+ mobile wirelesstransition of its Media business, there could be upside to our device (iTouch + iPhone) users + its uber-powerful iTunesexpectations. Currently our base case assumes 15% revenue digital media distribution channel (with 75MM users) led us togrowth and EPS of $2.06 for C2010E, while our upside case revisit our thesis. We come away from our deep dive with anassumes 17% revenue growth and EPS of $2.42, which even higher conviction in Amazon.com as an investment thanrepresents 15% upside to the Street’s $2.10 estimate. we had going in. We believe the combination of more product categories, more Prime customers, and more internationalKey Debate: Can Amazon.com Grow Through penetration will drive Amazon.com’s growth for years.Technology Shifts?Each of Amazon.com’s media (BMV) businesses – Books / • Our model assumes Amazon.com’s EGM revenueMusic / Video / Video Games – is going through two surpasses Media revenue by CQ4:10, up from 42% offundamental technology shifts: 1) distribution shift from offline revenue in CQ1 and 27% in 2005.to online and 2) format shift from physical to digital. The onlyapparent potential rub for on-going powerful growth from • We model EGM revenue growing at strong 26-28% ratesAmazon.com appears to be the transition to digital media. The (or potentially much higher) in 2009-2012E as: 1) online +rapid share gains by the iTunes ecosystem have sharpened offline share gains continue; 2) consumer electronics +our focus on the challenges that these shifts pose. computer hardware (together, 23% of C2008E revenue) benefit from digital transitions; and 3) other EGM productsExhibit 1 (such as toys, home improvement, and apparel, estimatedAmazon.com EGM Could Surpass Media Business at 16% of C2008 revenue) benefit from rising selectionAs Early As CQ4:09, and Likely No Later Than and awareness.CQ4:10 • 100% We estimate annual Media revenue growth in the 2-6% 90% range in 2009-2012E, down from 16-31% over the past % Share of Amazon.com Total Revenue EGM to Surpass Media % 80% four years, owing primarily to: 1) digital share gains in Share of Revenue in CQ4:09 - CQ4:10 70% music, video and books and 2) console cyclicality in 60% 50% games. 40% 30% Highlights of Our Deep Dive 20% Competitive fortress creates sustainable competitive 10% advantage. Over the years, Amazon.com has methodically 0% CQ1:01 CQ1:02 CQ1:03 CQ1:04 CQ1:05 CQ1:06 CQ1:07 CQ1:08 CQ1:09 CQ1:10E CQ1:11E built a business with the sole purpose of providing a trusted EGM Revenue % Share Media Revenue % Share consumer retail experience and being structurally positioned to Media % Share Trendline (y = -0.0001x2 - 0.0038x + 0.8185 R2 = 0.9821) EGM % SHare Trendline (y = 0.0001x2 + 0.0038x + 0.1594 R2 = 0.9791) do so with a low-cost operator model and a unique logisticsSource: Company data, Morgan Stanley Research infrastructure.We continue to believe that consumer Internet companies Three Amazon.com statements over the years stand out,that care most about customers (while supporting representing the mission of the company: 1) to be the world’scompelling increasing-returns business models) will most customer centric company; 2) start with the customer andperform best as investments over the long-term. Minimal work back; and 3) ‘Amazon and done.’ While the mission isswitching costs associated with the Internet make a low-cost simple, what the company has built makes it difficult foroperator, customer-centric model key for success. No competitors to gain an edge, especially now that most ofcompany epitomizes “low-cost operator” and Amazon.com’s infrastructure is in place to reach its goals. As“customer-centric” better than Amazon.com, in our view. That well, Amazon.com sits at just 7% global market share of an 4
  • 5. MORGAN STANLEY RESEARCH July 13, 2009 Amazon.comindustry (eCommerce) that is just 5% of its addressable for the transition to digital from Amazon.com (iPods, flat panelindustry (retail), or an Amazon.com share of total global retail TVs, cables, stereo accessories, etc), providing an offset toof less than 0.4%. Continued growth will be driven by its some potential deterioration in music and video from digitalfirst-class brand name / customer service + broad selection of over time.products that most consumers need, and, increasingly –thanks to mobile devices – a storefront that can be nearly …and International is still early: Amazon.com hasanywhere, anytime. continued to extend its Prime initiatives with launches in Japan in June 2007, Germany and UK in November 2007, and France in October 2008. The growth rate of Amazon.com’s international business is now starting to feel the positive effectsThree areas will be at the core of Amazon.com’s future of Prime initiatives as the international business has nowgrowth: grown faster than the U.S. for two consecutive quarters after eight quarters of the U.S. growing faster than international –1. Gaining a greater percentage of the legacy physical media international accounted for 47% of revenue in CQ1. An businesses as they decline and competitors go bankrupt; additional driver of growth in international markets has been the product category expansion that has occurred over the past2. Continuing to build its digital platform to compete with two years as 16 international product categories were added in well-positioned companies such as Apple for digital 2007 and nine in 2008. dollars; and3. Gaining more share of non-media products, specifically electronics, and increasingly becoming the destination location for all devices that play digital books, music, and video.On the media front, Amazon.com seems very well-positionedin books with Kindle, its eBook platform, and its emerging opendistribution platform. The MP3 market will be more of achallenge, although Amazon.com should continue to gainshare in physical CDs as some competitors go bankrupt andothers reduce shelf space allocation, and if an alternative to theiPhone emerges then Amazon.com’s MP3 product looks muchstronger. Video is at a very early stage and we believeAmazon.com has a good product in Amazon Video on Demandand we expect the company could be much more aggressive inthis area over time as more digital content becomes available.Finally, video games appears to be the segment showing theslowest transition to digital and is a category which appears tobe gaining retail shelf space at the cost of Music and Video.Amazon.com is very focused on the video game segment andrecently announced its entrance into the used game market.We expect the digital transition to occur eventually, but believeit could still be three to five years away.Electronics and General merchandise sales making up thedifference... Amazon.com has become increasingly reliant onnon-media categories for growth and EGM now accounts for42% of revenue with 38% Y/Y revenue growth in CQ1. Thedata suggest customers are purchasing much of the equipment 5
  • 6. MORGAN STANLEY RESEARCH July 13, 2009 Amazon.comExhibit 2Amazon.com Revenue Driver Drill Down – Media (Music / Video / Book / Video Games) Growth Slowing WhileEGM (Consumer Electronics / Computer Hardware / Apparel / Toys...) Growing Rapidly... Amazon.com Estimated Revenue by Segment Mix shift occurring as EGM 100% 2% 3% 3% segment continues to gain share - 19% now at 39% of revenue vs. 27% 80% 27% three years earlier. 10% 39% 11% Media (Books / Music / Video / % of Total Revenue 60% 15% Video Games) = 58% of revenue 14% 13% in C2008 vs. 70% three years 14% earlier. 40% 10% 10% 6% 20% 40% 35% 28% 0% 2001E 2002E 2003E 2004E 2005E 2006E 2007E 2008E Books Music Video Other Media Revenue (Video Games) EGM Revenue Other (Web Services, etc.)Source: Morgan Stanley Research, Company Documents, IDC, Morgan Stanley Enterprise Hardware Team (Katy Huberty), Morgan Stanley Media Team (Ben Swinburne), Veronis Shuler, NielsenVideoscan, Best Buy, Circuit City, Game Stop, Target, Wal-Mart, The Association of American Publishers, NPD Group, The Recording Industry Association of America, The Consumer ElectronicsAssociation, TWICE Market Research.Exhibit 3...Consumer Electronics and Computer Hardware Have Risen to an Estimated 23% of Amazon.com RevenueWhile Music Has Fallen to an Estimated 6% Amazon.com Estimated Revenue by Segment Consumer electronics and 100% 2% 2% 3% computer hardware accounted for 13% 15% 16% an estimated 6% of revenue in 2% 80% 4% 5% C2001E, but rose to an estimated 10% 8% 10% 23% in C2008E. % of Total Revenue 11% 13% 60% 15% Conversely, Music represented an 14% 13% estimated 14% of revenue in 14% 40% 10% 10% 2001E, but declined to an estimated 6% in 2008E. 6% 20% 40% 35% 28% 0% 2001E 2002E 2003E 2004E 2005E 2006E 2007E 2008E Books Music Video Other Media Revenue (Video Games) Consumer Electronics Computer Hardware Other EGM Other (Web Services, etc.)Source: Morgan Stanley Research, Company Documents, IDC, Morgan Stanley Enterprise Hardware Team (Katy Huberty), Morgan Stanley Media Team (Ben Swinburne), Veronis Shuler, NielsenVideoscan, Best Buy, Circuit City, Game Stop, Target, Wal-Mart, The Association of American Publishers, NPD Group, The Recording Industry Association of America, The Consumer ElectronicsAssociation, TWICE Market Research. 6
  • 7. MORGAN STANLEY RESEARCH July 13, 2009 Amazon.comExhibit 4Amazon.com Revenue Drilldown Indicates Importance of Books and EGM…This Is Good News C2001E C2002E C2003E C2004E C2005E C2006E C2007E C2008E C2009E C2010E C2011E C2012E Com m entsAm azon.com Total Revenue ($MM) $3,122 $3,933 $5,264 $6,921 $8,490 $10,711 $14,836 $19,166 $21,968 $25,057 $28,725 $33,501 While revenue grow th rates may slow over next few years ow ing to law of large Y/Y Growth -- 26% 34% 31% 23% 26% 39% 29% 15% 14% 15% 17% num bers, recession + physical to digital m edia transition, a few years out, revenue Q/Q Growth -- -- -- -- -- -- -- -- -- -- -- -- grow th could re-accelerate ow ing to EGM m ix shift + on-going online share gains. Media Revenue ($MM) $2,456 $3,099 $4,049 $5,102 $5,931 $7,066 $9,243 $11,083 $11,694 $12,154 $12,406 $13,022 Faster grow ing EGM business m ay be larger than stronghold BMV business w ithin Y/Y Growth -- 26% 31% 26% 16% 19% 31% 20% 6% 4% 2% 5% 5 quarters. % Share of Total 79 79 77 74 70 66 62 58 53 49 43 39 Books $1,249 $1,429 $1,908 $2,452 $2,946 $3,342 $4,443 $5,328 $5,611 $6,006 $6,330 $6,605 Could becom e industry leader (surpassing Barnes & Noble) by 2010E, future Y/Y Growth -- 14% 34% 28% 20% 13% 33% 20% 5% 7% 5% 4% grow th likely im pacted by law of large numbers + rising digital com petition. % Share of Media Revenue 51 46 47 48 50 47 48 48 48 49 51 51 % Share of Total Revenue 40 36 36 35 35 31 30 28 26 24 22 20 Core Books Revenue $1,249 $1,429 $1,908 $2,452 $2,946 $3,342 $4,439 $5,261 $5,343 $5,525 $5,593 $5,653 Core business grow th slow ing, but Kindle + Kindle app devices (iPhone) should Y/Y Growth -- 14% 34% 28% 20% 13% 33% 18% 2% 3% 1% 1% help offset. Kindle Book Revenue $0 $0 $0 $0 $0 $0 $3 $68 $268 $481 $737 $952 Leading m arket w ith Kindle store / hardw are...competing devices / stores m ay Y/Y Growth -- -- -- -- -- -- -- -- 297% 79% 53% 29% lim it Kindle hardw are grow th. Kindle Units (Cumulative) 0 0 0 0 0 0 75 560 1,500 2,350 3,326 4,251 Purpose-built Kindle has created a new m arket for e-books. Y/Y Growth -- -- -- -- -- -- -- -- 168% 57% 42% 28% Tie Ratio 0 0 0 0 0 0 3 14 22 16 12 8 Non- Kindle Application Units (Cumulative) 0 0 0 0 0 0 0 0 800 1,200 1,800 2,610 Believe consumer interest in dow nloading books from Kindle store on a rising Y/Y Growth -- -- -- -- -- -- -- -- -- 50% 50% 45% num ber of devices (Apple, iPhone / tablet) w ill be high. Tie Ratio 0 0 0 0 0 0 0 0 5 8 16 20 Music $427 $508 $639 $788 $891 $994 $1,176 $1,204 $1,157 $1,110 $1,088 $1,066 Likely to continue to gain physical share in m arket that is continue to rapidly Y/Y Growth -- 19% 26% 23% 13% 12% 18% 2% -4% -4% -2% -2% m igrate to digital distribution. Likely the business line w ith m ost dow nside risk. % Share of Media Revenue 17 16 16 15 15 14 13 11 10 9 9 8 % Share of Total Revenue 14 13 12 11 10 9 8 6 5 4 4 3 Video $465 $576 $759 $981 $1,150 $1,333 $1,685 $1,974 $2,122 $2,235 $2,337 $2,418 Likely to continue to gain physical (and perhaps digital) share in m arket that w ill Y/Y Growth -- 24% 32% 29% 17% 16% 26% 17% 8% 5% 5% 3% increasingly migrate to digital distribution. Expect near-term Blu-Ray share gains. % Share of Media Revenue 19 19 19 19 19 19 18 18 18 18 19 19 % Share of Total Revenue 15 15 14 14 14 12 11 10 10 9 8 7 Other Media Revenue (Video Games + Softw are) $314 $585 $742 $881 $945 $1,398 $1,939 $2,577 $2,804 $2,802 $2,650 $2,932 Rising shelf space in traditional retailers + slow m ove to digital dow nloads should Y/Y Growth -- 86% 27% 19% 7% 48% 39% 33% 9% 0% -5% 11% m ake it m ore difficult to grow in excess of the m arket over tim e. % Share of Media Revenue 13 19 18 17 16 20 21 23 24 23 21 23 % Share of Total Revenue 10 15 14 13 11 13 13 13 13 11 9 9EGM Revenue ($MM) $594 $747 $1,103 $1,686 $2,329 $3,361 $5,209 $7,541 $9,631 $12,125 $15,344 $19,276 EGM is m ost underpenetrated business segm ent + has significant potential as Y/Y Growth -- 26% 48% 53% 38% 44% 55% 45% 28% 26% 27% 26% Am azon custom ers increasingly take advantage of grow ing non-BMV products. % Share of Total Revenue 19 19 21 24 27 31 35 39 44 48 53 58 Consumer Electronics $134 $200 $312 $473 $668 $991 $1,621 $2,452 $3,155 $3,997 $5,032 $6,289 Rising num ber of consum ers buy their digital players from Am azon ow ing to Y/Y Growth -- 48% 56% 52% 41% 48% 64% 51% 29% 27% 26% 25% selection, price, review s + related product / accessory suggestions. % Share of EGM Revenue 23 27 28 28 29 29 31 33 33 33 33 33 % Share of Total Revenue 4 5 6 7 8 9 11 13 14 16 18 19 Computer Hardw are $60 $74 $136 $239 $401 $661 $1,182 $1,929 $2,545 $3,322 $4,321 $5,579 Ongoing innovation in PC products could lead to on-going strong grow th. Y/Y Growth -- 24% 84% 76% 67% 65% 79% 63% 32% 31% 30% 29% % Share of EGM Revenue 10 10 12 14 17 20 23 26 26 27 28 29 % Share of Total Revenue 2 2 3 3 5 6 8 10 12 13 15 17 Other EGM $400 $473 $655 $974 $1,261 $1,708 $2,406 $3,161 $3,930 $4,806 $5,990 $7,408 Most underpenetrated business line provides significan grow th opportunity as Y/Y Growth -- 18% 38% 49% 29% 35% 41% 31% 24% 22% 25% 24% custom ers, selection + product lines grow . % Share of EGM Revenue 67 63 59 58 54 51 46 42 41 40 39 38 % Share of Total Revenue 13 12 12 14 15 16 16 16 18 19 21 22Other Revenue ($MM) $73 $87 $112 $133 $230 $284 $384 $542 $644 $778 $976 $1,204 Grow th should be driven by third party relationships (Target, Marks and Spencer), Y/Y Growth -- 19% 28% 19% 73% 24% 35% 41% 19% 21% 25% 23% continued expansion of Web Services, and other relationships (Chase credit card % Share of Total Revenue 2 2 2 2 3 3 3 3 3 3 3 4Source: Morgan Stanley Research, Company Documents, IDC, Morgan Stanley Enterprise Hardware Team (Katy Huberty), Morgan Stanley Media Team (Ben Swinburne), Veronis Shuler, Nielsen Videoscan, Best Buy, Circuit City, GameStop, Target, Wal-Mart, The Association of American Publishers, NPD Group, The Recording Industry Association of America, The Consumer Electronics Association, TWICE Market Research.Note: Kindle Application Units include Kindle hardware sales and devices that support Kindle content such as the iPhone. 7
  • 8. MORGAN STANLEY RESEARCH July 13, 2009 Amazon.comExhibit 5Amazon.com Has Just 12% Share In USA Books - its Most Mature Category…and Has Less Share in Other BusinessSegments…Expect Share Gains in All Categories … C2001E C2002E C2003E C2004E C2005E C2006E C2007E C2008E C2009E C2010E Com m entsAm azon.com Total Revenue ($MM) $3,122 $3,933 $5,264 $6,921 $8,490 $10,711 $14,836 $19,166 $21,968 $25,057 Y/Y Growth 13% 26% 34% 31% 23% 26% 39% 29% 15% 14%Am azon.com Year End Active Custom er (MM) 25 31 39 47 55 64 76 88 99 110 Y/Y Growth 25% 26% 27% 19% 17% 16% 19% 16% 12% 11%Revenue Per Average Active Custom er ($) (1) $143 $142 $150 $162 $168 $180 $214 $234 $235 $240 Y/Y Growth -12% -1% 5% 8% 4% 7% 18% 10% 0% 2%USA Book Sales ($MM) $22,000 $22,033 $22,358 $23,006 $24,263 $24,197 $24,960 $24,255 $23,527 $23,763 Could becom e industry leader (surpassing Y/Y Growth 0% 0% 1% 3% 5% 0% 3% -3% -3% 1% Barnes & Noble) by 2010E, future grow th likely Amazon.com USA Book Sales 921 920 1,070 1,244 1,512 1,694 2,226 2,572 2,696 2,871 im pacted by law of large num bers + rising Y/Y Growth -- 0% 16% 16% 22% 12% 31% 16% 5% 7% digital com petition. AMZN % Share of USA 4 4 5 5 6 7 9 11 11 12USA Recorded Music Sales ($MM) 13,741 12,614 11,854 12,345 12,297 11,758 10,372 8,480 6,754 5,850 Likely to continue to gain physical share in Y/Y Growth -4% -8% -6% 4% 0% -4% -12% -18% -20% -13% m arket that is continue to rapidly m igrate to Amazon.com USA Music Sales 315 327 358 400 457 504 589 581 556 531 digital distribution. Likely the business line Y/Y Growth -- 4% 10% 12% 14% 10% 17% -1% -4% -4% w ith m ost dow nside risk. AMZN % Share of USA 2 3 3 3 4 4 6 7 8 9USA Hom e Video Sales ($MM) 11,761 15,415 18,515 19,553 17,988 18,364 17,393 15,358 13,918 12,804 Likely to continue to gain physical (and Y/Y Growth 22% 31% 20% 6% -8% 2% -5% -12% -9% -8% perhaps digital) share in m arket that w ill Amazon.com USA Video Sales 343 371 425 498 590 676 844 953 1,020 1,069 increasingly m igrate to digital distribution. Y/Y Growth -- 8% 15% 17% 19% 14% 25% 13% 7% 5% Expect near-term Blu-Ray share gains. AMZN % Share of USA 3 2 2 3 3 4 5 6 7 8USA Video Gam e Sales ($MM) 9,712 10,448 9,972 9,765 10,121 11,915 16,557 19,531 20,117 19,020 Rising shelf space in traditional retailer stores Y/Y Growth 21% 8% -5% -2% 4% 18% 39% 18% 3% -5% + slow m ove to digital dow nloads should Amazon.com USA Video Game Sales 232 377 416 447 485 708 971 1,244 1,347 1,340 m ake it m ore difficult to grow in excess of the Y/Y Growth -- 63% 10% 7% 9% 46% 37% 28% 8% -1% m arket over tim e AMZN % Share of USA 2 4 4 5 5 6 6 6 7 7USA Consum er Com puter Hardw are Sales ($MM) 18,289 17,398 17,523 17,478 18,512 20,129 22,351 22,565 22,238 21,191 Ongoing innovation in PC products could lead Y/Y Growth -- -5% 1% 0% 6% 9% 11% 1% -1% -5% to strong on-going grow th. Amazon.com USA Computer Hardw are Sales 58 68 109 160 248 398 712 1,133 1,494 1,934 Y/Y Growth -- 16% 61% 47% 55% 60% 79% 59% 32% 29% AMZN % Share of USA 0 0 1 1 1 2 3 5 7 9USA Consum er Electronic Sales ($MM) (2) 61,358 63,588 64,813 73,463 82,793 90,920 93,425 97,406 101,947 110,232 Rising num ber of consum ers buy their digital Y/Y Growth -1% 4% 2% 13% 13% 10% 3% 4% 5% 8% players from Am azon ow ing to selection, Amazon.com USA Consumer Electronic Sales 131 182 248 317 414 597 976 1,440 1,852 2,327 price, review s + related product / accessory Y/Y Growth -- 39% 36% 28% 31% 44% 64% 47% 29% 26% suggestions. AMZN % Share of USA 0 0 0 0 1 1 1 1 2 2Source: Morgan Stanley Research, Company Documents, IDC, Morgan Stanley Enterprise Hardware Team (Katy Huberty), Morgan Stanley Media Team (Ben Swinburne), Veronis Shuler, Nielsen Videoscan,Best Buy, Circuit City, Game Stop, Target, Wal-Mart, The Association of American Publishers, NPD Group, The Recording Industry Association of America, The Consumer Electronics Association, TWICE Market Research.Note: (1) Revenue per average active user is calculated by dividing annual revenue by mid-year active customers. (2) USA Consumer Electronic Sales based on TWICE market data less computer hardware sales, music sales, video sales, and video game sales. 8
  • 9. MORGAN STANLEY RESEARCH July 13, 2009 Amazon.comExhibit 6Overarching Trends – Secular + Cyclical Positives Far Outweigh Negatives Secular Cyclical Positive Negative Positive Negative Offline to online shift Consumption of Potential accelerating Weak consumer traditional media share gains from spending Strong online players (music / video / bankruptcies / gaining share from books) shifting to challenges of brick & weaker online players digital, where piracy + mortar retailers Apple iTunes store / EGM (Electronics / iPod dominate music, Possible forex benefit General and likes of YouTube starting CH2:09E Merchandise) growth / Hulu / Netflix lead in outpacing Media video (Books / Music / Video / Video Games) International markets relatively nascent Well positioned mobile players (like Amazon.com) likely to gain shareSource: Morgan Stanley Research 9
  • 10. MORGAN STANLEY RESEARCH July 13, 2009 Amazon.comAmazon.coms Mix Shift and Share Gains Are SupportingSustainable GrowthExhibit 7Good News: Electronics & General Merchandise (EGM) Will Be Increasingly Important to the InvestmentCase…Books / Video / Music to Decline to 22% / 7% / 3% of Amazon.com Estimated Revenue by End of 2012E 45% Over the past five years, electronics and other merchandise % Share of Total Amazon.com Revenue 40% C2008E C2012E has become an increasing Share Share 35% component of product mix due to 28% Amazon.com’s increase in product 30% categories and selection within 25% non-Media product categories. 22% 20% In CQ1, EGM accounted for 42% 15% 10% of Amazon.com’s total revenue vs. 10% 24% in C2004. As growth rates in 6% 7% physical media continue to 5% 3% decline, Amazon.com takes a 0% greater percentage of what remains and positions in digital E E E E E E E E E E E E 01 02 03 04 05 06 07 08 09 10 11 12 media, growth of electronics and 20 20 20 20 20 20 20 20 20 20 20 20 Books Music Video other categories become Books Revenue Share Linear Trendline (y = -0.0159x + 0.411, R2 = 0.9458) increasingly important to the Video Revenue Share Linear Trendline (y = -0.0066x + 0.1618, R2 = 0.9112) Music Revenue Share Linear Trendline (y = -0.0103x + 0.1513, R2 = 0.9759) investment case.Source: Morgan Stanley Research, Company Documents, IDC, Morgan Stanley Enterprise Hardware Team (Katy Huberty), Morgan Stanley Media Team (Ben Swinburne), Veronis Shuler, NielsenVideoscan, Best Buy, Circuit City, Game Stop, Target, Wal-Mart, The Association of American Publishers, NPD Group, The Recording Industry Association of America, The Consumer ElectronicsAssociation, TWICE Market Research. 10
  • 11. MORGAN STANLEY RESEARCH July 13, 2009 Amazon.comExhibit 8Amazon.com’s Revenue Growth Increasingly Driven by EGM FX-Neutral Amazon.com Segment Revenue Growth, CQ4:05 - CQ1:09 Since CQ4:05, EGM segment 100% revenue has grown at an average Media EGM of 46% Y/Y on an FX-Neutral 90% basis, compared to 21% for Media 80% segment. FX-Neutral Y/Y Revenue Growth (%) 70% We expect EGM to continue to 60% outperform Media with continued strength in Consumer Electronics 50% and Computer Hardware. 40% 30% 20% 10% 0% CQ4:05 CQ2:06 CQ4:06 CQ2:07 CQ4:07 CQ2:08 CQ4:08Source: Company data, Morgan Stanley ResearchExhibit 9Good News: Amazon.com’s Media Segment’s Share Gains from Brick & Mortar Retailers are AcceleratingAmazon.com Media Segment Y/Y Growth Consistently Outpaces Peer Groups…Amazon.com Is Only Player inLegacy Media Retail to Make Digital Transition …It’s a Technology Platform … 50% Amazon.com Media Segment Benchmark Group - Physical Media Retailers Amazon.com continues to outperform traditional retailers owing to broad selection, high 40% customer satisfaction, and low prices. Revenue Y/Y Growth (%) 30% Growth gap could expand as some retailers close stores, 20% consumers increasingly look for discounts online, and traditional retailers look for additional 10% channels to move inventory. 0% -10% CQ1:02 CQ1:03 CQ1:04 CQ1:05 CQ1:06 CQ1:07 CQ1:08 CQ1:09Note: Benchmark group of physical media retailers include Barnes & Noble, Borders Group, Blockbuster, Netflix and Gamestop.Source: Company data, Morgan Stanley Research, FactSet 11
  • 12. MORGAN STANLEY RESEARCH July 13, 2009 Amazon.comExhibit 10…Which Translate Into Accelerated Market Share Gains in the U.S. Amazon.com U.S. Media Revenue & Market Share, 2001-2008 Traditional retail struggles and difficult economy seems to be $9,000 9% accelerating Amazon.com share Amazon.com USA Media Revenue ($MM) Market Share (% ) 8% $8,000 8% gains. USA Media Segment Revenue ($MM) 7% $7,000 7% Digital transition could expand the gap even further as not all retailers $6,000 6% 5% will be able to participate in digital Market Share (%) $5,349 $5,000 5% $4,631 5% distribution. 4% $4,000 4% $3,581 4% 3% 3% $3,045 $3,000 $2,589 3% $2,269 $1,995 $2,000 $1,810 2% $1,000 1% $0 0% 2001E 2002E 2003E 2004E 2005E 2006E 2007E 2008ESource: Company data, Morgan Stanley ResearchNote: Market share is of total U.S. books, music, video and video games market.Exhibit 11In Declining Music Industry, Amazon.com Benefits From Secular Shift to Online and Digital Distributions andStill Has a Opportunity with Physical Distribution + Physical Media Sales Market $15,000 9% Amazon.com benefits as retailers trim music shelf space due to $13,500 8% industry declines and consumers $40 $183 $504 are force to look online for $12,000 $878 7% products. Amazon.coms Market Share (%) Total USA Music Sales ($MM) $10,500 6% $1,257 Amazon.com has started to $9,000 5% participate in digital distribution $7,500 $1,635 with AmazonMP3, but it is still $14,324 $13,741 4% early stages and competition from $12,614 $6,000 $11,814 $12,162 $11,793 $10,880 iTunes + the likes of Pandora is $4,500 $9,115 3% daunting. $6,845 2% $3,000 $1,500 1% $0 0% 2000 2001E 2002E 2003E 2004E 2005E 2006E 2007E 2008E USA Physical Music Sales USA Digital Music Sales Amazon.coms Share in USA Physical Music Amazon.coms Share in USA Digital MusicSource: Amazon.com, RIAA, Morgan Stanley Research. 12
  • 13. MORGAN STANLEY RESEARCH July 13, 2009 Amazon.comSecular Trends – Amazon.com as General Merchandise RetailerExhibit 12Secular Trends – Amazon.com Shows Impressive Revenue Growth with 29% 5-Year CAGR Through 2008…Newer EGM Businesses / Initiatives & Media Share Gains to Lesser Degree Driving Incremental Growth 2003 - 2008 Revenue CAGR: 29% New businesses / initiatives $25 $250 driving incremental growth (Category / international expansion - EGM + 3rd party, Revenue by Segment ($B) $20 $200 Revenue Per Customer Prime, Kindle, Web Services, 39% Private Label...). $15 of $150 Total Especially strong EGM growth (47% 5-year revenue CAGR with $10 $100 17% 38% Y/Y CQ1 growth to 42% of of 58% revenue) has masked recent Total $5 of $50 slowdown / challenges in physical 42% Total media businesses with 22% 79% 56% 5-year revenue CAGR with 7% $0 $0 Y/Y CQ1 growth to 56% of 2001 2002 2003 2004 2005 2006 2007 2008 CQ1:09 revenue. Amazon.com Media Revenue Amazon.com EGM Revenue Other Revenue Annual Revenue Per CustomerSource: Company data, Morgan Stanley Research 13
  • 14. MORGAN STANLEY RESEARCH July 13, 2009 Amazon.comExhibit 13Secular Trends – Mix Shift Adds Credibility to ‘Amazon.com as a General Merchandiser’EGM Revenues Could Surpass Media Revenues as Early as CQ4:09 100% EGM Segment has shown 90% strength as various media segments have been challenged. % Share of Amazon.com Total Revenue EGM to Surpass Media % 80% Share of Revenue in CQ4:09 - CQ4:10 70% EGM segment typically 60% commands a higher revenue share in calendar fourth quarter of 50% the year – as the result, if EGM 40% does not surpass Media in 30% CQ4:09E, it might take another year. 20% 10% Consumers appear to be 0% purchasing the devices from CQ1:01 CQ1:02 CQ1:03 CQ1:04 CQ1:05 CQ1:06 CQ1:07 CQ1:08 CQ1:09 CQ1:10E CQ1:11E Amazon.com that allow them to EGM Revenue % Share watch or listen to digital media, Media Revenue % Share Media % Share Trendline (y = -0.0001x2 - 0.0038x + 0.8185 R2 = 0.9821) helping offset a core risk to EGM % SHare Trendline (y = 0.0001x2 + 0.0038x + 0.1594 R2 = 0.9791) Amazon.com’s investment thesis related to the mix shift toward digital from physical in music and video.Source: Company data, Morgan Stanley ResearchExhibit 14Secular Trends – International Revenue Growing at 35% 5-Year CAGR vs. 26% CAGR for N. America BusinessInternational Now 47% of Total Revenue…Could Exceed 50% by C2011 Amazon.com International $20 2003-2008 revenue growth has exceeded N. International America growth for past two CAGR = 35% 2008 quarters, breaking N. America $15 International streak of eight consecutive 47% of Total quarters with the highest growth rate. Revenue ($B) $10 2000 In past two years, Amazon.com International has launched 28 product 14% of Total categories outside of the N. 53% $5 America, as well as Amazon.com 47% Prime in UK / Germany / France / 86% Japan. More product categories + 53% Prime + more third-party business $0 should allow International to grow 2000 2001 2002 2003 2004 2005 2006 2007 2008 CQ1:09 faster than U.S. for many years. Amazon.com North America Revenue Amazon.com International RevenueSource: Company data, Morgan Stanley Research 14
  • 15. MORGAN STANLEY RESEARCH July 13, 2009 Amazon.comSeismic Media Consumption Shifts Create Opportunities and Risksfor Amazon.comExhibit 15Secular & Cyclical Trends – Recession Boosts Ongoing Share Gains vs. Offline + Online Competitors Amazon.com North America Amazon.com Share Gain Accelerates During Downturn revenue Y/Y growth has High Customer Satisfaction / Recommendation Engine / Impressive Metrics consistently outpaced U.S. retail eCommerce growth since CQ2:06 Amazon.com vs. US Retail Amazon.com and the outperformance gap (1) Key Operating Metrics expanded to ~30ppts (percentage 50% E-Commerce Sales 40% Revenue ($MM) CQ2:08 $4,063 CQ3:08 $4,264 CQ4:08 $6,704 CQ1:09 $4,889 points) in CQ1 from ~13ppts in 30% Y/Y Change 41% 31% 18% 18% CQ4:07 (beginning of the ~13ppts Active Customers (MM) 82 85 88 91 recession). Y/Y Growth 20% Y/Y Change 18% 17% 16% 15% Revenue per Active (2) 51 51 78 55 Customer ($) 10% ~30ppts Y/Y Change 19% 11% 1% 2% 0% Active Sellers (000) 1,420 1,405 1,500 1,600 Y/Y Change 18% 17% 18% 23% -10% Total Units (MM) 190 203 309 255 Y/Y Change 32% 30% 28% 30% -20% Third-Party Units (MM) 55 63 83 82 CQ1:03 CQ1:04 CQ1:05 CQ1:06 CQ1:07 CQ1:08 CQ1:09 Y/Y Change 33% 26% 33% 39% U.S. Retail E-Commerce Sales Kindle Books Available 140 185 230 270 Amazon.com North America Revenue (000) U.S. Total Retail Sales Note: (1) Adjusted for eBay by adding eBay US gross merchandise volume and subtracting eBay US transaction revenue; Source: Amazon.com (CQ1:09), US Dept. of Commerce (CQ1:09); (2) Revenue per active customers is based on average active customers. Source: Amazon.com, DOC, Morgan Stanley Research.Exhibit 16Media Consumption – At Margin, Shifting to Internet + Cell Phone – Both Amazon.com Power Alleys,Especially vs. Offline Retail Younger Generation (18-41) – Younger generations are Spend Most Time on Internet / Cell Phone vs. Other Media consuming more media (49 hours per week) than older generations % of Media Consumption (37 hours per week). In particular, Younger Generation Seniors they are spending more (40% of (Age 18 - 41) (Age 63+) Newspaper - 3% total media consumption) time on Magazine - 4% the Internet + cell phone vs. older Video Game - 6% Newspaper Internet generation (17% of total media - 13% consumption time). Meanwhile - 12% Magazine - 8% Internet - 25% Movie - 11% Video Game - 2% they are spending significantly Movie - 8% TV - 38% less time (29% total) on TV + Radio - 14% newspaper + magazine vs. older generation (59% total). TV - 22% Radio - 13% Cell Phone - 15% Cell Phone - 5% Total Hours of Media Usage Per Week: Total Hours of Media Usage Per Week: 49 Hours 37 Hours Note: Data per Forrester Research’s 2007 North American Technographics Consumer Benchmark Survey; Age 18-41 data is the average of age 18-27 & 28-41. Source: Forrester Research. 15
  • 16. MORGAN STANLEY RESEARCH July 13, 2009 Amazon.comExhibit 17Media Consumption – Most Radical Transition Ever as New Technology Ecosystems Related to SocialNetworking / Video / Mobile Evolve With Unprecedented Speed - All Driving Rising Internet + Mobile Usage Time Since Y/Y Applications Applications Primary Amazon.com’s Kindle is market Platform Inception Users Growth Available Downloaded Use leader in eBooks ecosystem, while its Video On Demand / MP3 storeSkype 5.8 Yrs 443MM 43% -- -- Voice / Video / Messaging actively compete in digital video /YouTube 4.2 Yrs 422MM 57% -- -- Video Broadcasting music market.Facebook 5.2 Yrs 307MM 164% 52K+ 308MM+ Social Networking In addition, Amazon.com benefitsiTunes Store 8.3 Yrs 75MM 62% 10MM+ 6B+ Music / Video / Apps from selling many of the leading consumer electronic devices suchTwitter 3.0 Yrs 32MM 1905% 1K+ -- Message Broadcasting as the Nintendo Wii and iPodNintendo Wii 2.5 Yrs 52MM 112% 1K+ 350MM+* Gaming Touch (sales reported in the Electronics & GeneralApple Wireless Devices 1.9 Yrs 40MM 265% 50K 1B+ Mobile Connectivity Merchandise category). iPhone (2.5G + 3G) 1.9 Yrs 22MM 301% 50K -- 3G / Wi-Fi iPod Touch (Wi-Fi) 1.6 Yrs 18MM 239% 50K -- Wi-FiAmazon Kindle 1.5 Yrs 1MM -- 300K+ -- BooksSource: Amazon.com, Nintendo, YouTube, Facebook, Apple, Morgan Stanley ResearchNote: * Nintendo Wii applications refer to game titles, downloads refer to game units sold. iTunes’ users only include paid-users; applications available / downloads refer to songs available / downloaded.Kindle’s 300k+ apps refer to book titles available. iPhone users are estimates by Katy Huberty, YouTube, Facebook users per comScore global 4/09; 16
  • 17. MORGAN STANLEY RESEARCH July 13, 2009 Amazon.comExhibit 18Media Consumption – Apple iTunes Ecosystem Creates Significant Challenge for Amazon.com; Has GarneredLeadership Position in Digital Distribution of For Pay Music (with ~70% Global Share) + Video + MobileApplications with Revenue of Estimated $3.6B (+39%) in 2009E CAGR($ in millions, except for per user data) C2003E C2004E C2005E C2006E C2007E C2008E C2009E C2010E C2011E C2012E C08E-12E iTunes Content Revenue ($MM) $35 $202 $577 $1,225 $1,768 $2,571 $3,579 $4,620 $5,681 $7,351 30% Y/Y Growth -- 486% 185% 113% 44% 45% 39% 29% 23% 29% Q/Q Growth -- -- -- -- -- -- -- -- -- -- Songs $35 $202 $567 $1,086 $1,481 $2,125 $2,872 $3,661 $4,427 $5,769 28% Y/Y Growth -- 484% 180% 92% 36% 43% 35% 27% 21% 30% Q/Q Growth -- -- -- -- -- -- -- -- -- -- Videos -- -- $10 $139 $287 $428 $601 $784 $965 $1,199 29% Y/Y Growth -- -- -- 1300% 106% 49% 41% 30% 23% 24% Q/Q Growth -- -- -- -- -- -- -- -- -- -- Apps (1) -- -- -- -- -- $19 $105 $175 $289 $383 112% Y/Y Growth -- -- -- -- -- -- 455% 66% 65% 33% Q/Q Growth -- -- -- -- -- -- -- -- -- -- Item Average Selling Price (ASP - $) $0.99 $0.99 $0.98 $1.03 $1.04 $0.87 $0.62 $0.52 $0.43 $0.42 -16% Songs ASP $0.99 $0.99 $0.98 $0.97 $0.95 $0.92 $0.97 $0.99 $0.99 $0.99 Videos ASP -- -- $1.99 $1.99 $1.99 $1.99 $1.99 $1.99 $1.99 $1.99 Apps ASP (2) -- -- -- -- -- $0.15 $0.14 $0.12 $0.12 $0.12 Items Downloaded (MM) 35 204 587 1,195 1,703 2,970 5,742 8,943 13,201 17,375 56% Y/Y Growth -- 484% 187% 104% 42% 74% 93% 56% 48% 32% Q/Q Growth -- -- -- -- -- -- -- -- -- -- Songs Downloaded 35 204 582 1,125 1,559 2,310 2,976 3,698 4,472 5,827 26% Y/Y Growth -- 484% 185% 94% 39% 48% 29% 24% 21% 30% Q/Q Growth -- -- -- -- -- -- -- -- -- -- Videos Downloaded -- -- $5.00 70 144 215 302 394 485 602 29% Y/Y Growth -- -- -- $13.00 106% 49% 41% 30% 23% 24% Q/Q Growth -- -- -- -- -- -- -- -- -- -- iPhone Apps Downloaded -- -- -- -- -- 445 2,464 4,851 8,244 10,945 123% Y/Y Growth -- -- -- -- -- -- 454% 97% 70% 33% Q/Q Growth -- -- -- -- -- -- -- -- -- -- Cumulative Downloads (MM) 35 239 826 2,021 3,724 6,694 12,436 21,379 34,580 51,955 67% Songs Downloaded 35 239 821 1,946 3,505 5,815 8,791 12,488 16,961 22,788 Video Downloaded -- -- 5 75 219 434 736 1,130 1,615 2,218 iPhone Apps Downloaded -- -- -- -- -- 445 2,909 7,760 16,004 26,949 Cumulative Registered Users (MM) 3 8 18 31 46 75 103 130 161 197 28% Y/Y Growth -- 147% 134% 68% 48% 62% 39% 26% 24% 23% Q/Q Growth -- -- -- -- -- -- -- -- -- -- iTunes Revenue Per User ($) $15 $34 $42 $46 $44 $41 $39 $38 $38 $40 -1% Y/Y Growth -- 132% 25% 9% -4% -7% -6% -1% 0% 5% Q/Q Growth -- -- -- -- -- -- -- -- -- -- Songs Revenue Per User $15 $34 $42 $41 $37 $34 $31 $31 $30 $32 -2% Y/Y Growth -- 132% 24% -2% -9% -8% -9% -2% -2% 5% Q/Q Growth -- -- -- -- -- -- -- -- -- -- Videos Revenue Per User -- -- $0.54 $5 $7 $7 $6 $7 $7 $7 -1% Y/Y Growth -- -- -- $8.36 40% -4% -4% 1% 0% 1% Q/Q Growth -- -- -- -- -- -- -- -- -- -- Apps Revenue Per User -- -- -- -- -- $0 $1 $1 $2 $2 67% Y/Y Growth -- -- -- -- -- -- 325% 28% 34% 8% Q/Q Growth -- -- -- -- -- -- -- -- -- -- Item Downloads Per User 15 34 43 45 43 47 62 74 89 95 19% Y/Y Growth -- 132% 26% 4% -5% 10% 32% 20% 20% 7% Q/Q Growth -- -- -- -- -- -- -- -- -- -- Song Downloads Per User 15 34 43 42 39 37 32 31 30 32 -4% Y/Y Growth -- 132% 25% -1% -8% -5% -14% -4% -2% 5% Q/Q Growth -- -- -- -- -- -- -- -- -- -- Video Downloads Per User -- -- $0.27 3 4 3 3 3 3 3 -1% Y/Y Growth -- -- -- $8.36 40% -4% -4% 1% 0% 1% Q/Q Growth -- -- -- -- -- -- -- -- -- -- App Downloads Per User -- -- -- -- -- 6 26 40 55 60 76% Y/Y Growth -- -- -- -- -- -- 324% 52% 38% 8% Q/Q Growth -- -- -- -- -- -- -- -- -- --Source: Source: Apple, Morgan Stanley ResearchNote: (1) Apple takes 30% of revenue from application sales; (2) Apps ASP would have been higher if excluding free app downloads; In 3/09, average listing price for paid apps was $3.93, while themost popular listing price for paid apps was $0.99 (44% of all available apps). 17
  • 18. MORGAN STANLEY RESEARCH July 13, 2009 Amazon.comExhibit 19Blackberry vs. iPhone Summary – iPhone Share Gains are Extremely Powerful in Smartphone Market CQ2:07 CQ3:07 CQ4:07 CQ1:08 CQ2:08 CQ3:08 CQ4:08 CQ1:09Global Net Subscriber Additions (000) BlackBerry 1,200 1,450 1,650 2,180 2,300 2,600 2,600 3,900 Y/Y Growth 76% 106% 89% 114% 92% 79% 58% 79% Q/Q Growth 18 21 14 32 6 13 0 50 iPhone 270 1,119 2,315 1,703 717 6,892 4,363 3,793 Y/Y Growth -- -- -- -- 166% 516% 88% 123% Q/Q Growth -- 314 107 -26 -58 861 -37 -13Global Subscribers (000) BlackBerry 8,820 10,270 11,920 14,100 16,250 18,900 21,500 25,400 Y/Y Growth 58% 66% 70% 85% 84% 84% 80% 80% Q/Q Growth 16 16 16 18 15 16 14 18 iPhone 270 1,389 3,704 5,407 6,124 13,016 17,379 21,172 Y/Y Growth -- -- -- -- 2168% 837% 369% 292% Q/Q Growth -- 414 167 46 13 113 34 22 iPhone / BlackBerry Ratio 3% 14% 31% 38% 38% 69% 81% 83% iPhone + iPod Touch Users (000) 270 1,933 7,510 10,663 13,012 21,571 30,284 37,327 Y/Y Growth -- -- -- -- 4719% 1016% 303% 250% Q/Q Growth -- 616 289 42 22 66 40 23 iPhone + iPod Touch / BlackBerry Ratio 3% 19% 63% 76% 80% 114% 141% 147%Average Selling Price (US$) BlackBerry $341 $352 $342 $346 $340 $347 $341 $369 Y/Y Growth -5% 1% -1% 3% 0% -1% 0% 7% Q/Q Growth 1 3 -3 1 -2 2 -2 8 iPhone $525 $450 $425 $425 $400 $625 $625 $600 Y/Y Growth -- -- -- -- -24% 39% 47% 41% Q/Q Growth -- -14 -6 0 -6 56 0 -4Source: Company reports, Morgan Stanley Research. Note: RIM fiscal year ends in February, CQ1:09 for RIM is 12/08 through 2/09, while CQ1:09 for Apple is 1/09 through 3/09; ASPsare pre-carrier subsidy prices. 18
  • 19. MORGAN STANLEY RESEARCH July 13, 2009 Amazon.comExhibit 20Media Consumption – Ramp of Digital Usage of Video Creates Risks / Opportunities for Amazon.com; DigitalVideo Streaming to PC & TV = Biggest Driver of Consumer Internet Traffic Growth, per Cisco Internet video to TV (through IPTV / Amazon Video On Demand / Netflix streaming…) will be the biggest Internet traffic growth driver (rising 104% CAGR from 2007 to 2012E to 17% of global Internet traffic), per Cisco. Internet video to PC (through YouTube / Hulu / iTunes / Amazon Video On Demand / Netflix…) traffic growth will also remain robust at 57% CAGR. Amazon.com is an active player in both areas (with its Video On Demand service / IMDb.com) and has potential to benefit from secular growth in online / mobile video, while continuing to gain share in the declining physical video sales. 19
  • 20. MORGAN STANLEY RESEARCH July 13, 2009 Amazon.comDrill Down on Media Revenue Drivers – Books / Music / Video / VideoGamesExhibit 21Books – Under Cyclical Pressure; U.S. Book Sales Traditionally Highly Correlated with Consumer Spending Quarterly Y/Y USA Growth Trends USA Books vs. Consumer Spending Books accounted for an estimated 14% 28% of Amazon.com revenue in C2008E vs. 36% five years ago 12% Correlation: 84% and supported an estimated 20% 10% Y/Y growth. 8% 6% With an 84% correlation, USA Y/Y Growth book industry sales (retail dollar 4% spending as measured by 2% American Association of 0% Publishers) have trended in line -2% with Consumer Spending. USA Personal Consumption Expenditures (Non-Durable Goods) Y/Y -4% USA Book Sales Y/Y -6% CQ1:07 CQ2:07 CQ3:07 CQ4:07 CQ1:08 CQ2:08 CQ3:08 CQ4:08Source: Bureau of Economic Analysis, American Association of Publishers, Morgan Stanley ResearchNote: Consumer spending is limited to PCE non-durable goods real consumptions, adjusted for inflation. Book sales data not available in CQ1:09, shaded blue bar is our estimates based on regressionformula. 20
  • 21. MORGAN STANLEY RESEARCH July 13, 2009 Amazon.comExhibit 22Books – Sales Could Rise Again in 2010E after Declining in 2008E and 2009EAssuming Consumer Spending Correlation Holds, Based on Morgan Stanley Forecast of ~2% Growth in 2010 If Consumer Book Sales USA Real PCE (Non-Durable Goods) vs. Total Book Sales Y/Y, CQ1:07 - Spending Y/Y is Y/Y could be CQ4:08 (Correlation = 84%) 5% 12% 15% 4 10 3 8 2 5 1 3 USA Total Book Sales Y/Y Growth Rates 10% y = 2.3527x + 0.0053 0 1 2 R = 0.7104 -1 -2 -2 -4 5% -3 -7 -4 -9 -5 -11 0% -4% -3% -2% -1% 0% 1% 2% 3% 4% MS forecast for USA real personal -5% consumption expenditures (non-durable goods) of -1.8% Y/Y for 2009E, using 84% correlation, -10% implies book sales would decline USA Real Personal Consumption Expenditures (Non-Durable Goods) Y/Y Growth Rates -3% in 2009E.Source: American Association of Publishers, Morgan Stanley ResearchExhibit 23Books – Annual Sales Growth Could Recover to 1%, Slightly Below 5-Year Historical Average of 2%Assuming Minor Secular Drag Owing to Digital Migration & Historical Correlation to Consumer Spending USA Book Sales & Y/Y Growth Rates, 2001 - 2012E We believe erosion of physical $30,000 10% book sales (owing to digital replacement) may occur slowly 8% over next 1-3 years though $25,000 6% erosion will likely gain momentum 4% over 3+ years. We believe impact $20,000 will occur more slowly than Revenue ($MM) Y/Y Growth (%) 2% experienced by music / video $15,000 0% where consumption has been in -2% electronic (and often linear) form $10,000 for decades while book reading -4% has remained physical and -6% non-linear. $5,000 -8% $0 -10% 2001 2002 2003 2004 2005 2006 2007 2008 2009E 2010E 2011E 2012E USA Book Sales ($MM) Y/Y GrowthSource: AAP, Morgan Stanley Research 21
  • 22. MORGAN STANLEY RESEARCH July 13, 2009 Amazon.comExhibit 24Music + Video – Music Revenue Growth Declines Are Secular; Video Growth Declines Also Secular but So Far,Less So than Music; Music + Video Sales Have Had Relatively Low Correlation with Consumer Spending Consumer Book DVD Music USA Music / Video vs. Consumer Spending Quarterly Y/Y Growth Trends Spending Y/Y Sales Y/Y Sales Y/Y Sales Y/Y CQ1:07 3.0% 7.8% -7.6% -16.0% CQ2:07 2.7 7.6 3.7 -6.0 5% CQ3:07 2.4 12.4 -9.9 -1.7 CQ4:07 1.7 1.9 -0.3 0.7 CQ1:08 0.7 1.3 1.5 -4.4 CQ2:08 1.2 -0.9 -1.1 -1.0 0% CQ3:08 -0.9 -3.1 -9.1 -7.0 CQ4:08 -3.4 -5.1 -13.1 -7.4 CQ1:09 -3.0 -11.6 -11.4 -5% Correlation w/ 84% 62% 21% Y/Y Growth Consumer Spending -10% Music accounted for estimated 6% of Amazon.com revenue in C2008E vs. 12% five years ago -15% USA Personal Consumption Expenditures (Non-Durable Goods) Y/Y and supported estimated 2% Y/Y USA DVD Sales Y/Y growth in C2008E. WMG Music Sales Y/Y -20% CQ1:07 CQ2:07 CQ3:07 CQ4:07 CQ1:08 CQ2:08 CQ3:08 CQ4:08 CQ1:09E Music sales declines = secular with low correlation of 21% to consumer spending. Video accounted for estimated 10% of Amazon.com revenue in C2008E vs. 14% five years ago and supported estimated 17% Y/Y growth in C2008E. Video sales declines = secular & cyclical with relatively low correlation of 62% to consumer spending.Source: Bureau of Economic Analysis, Nielsen, Warner Music Group, Morgan Stanley ResearchNote: We use Warner Music Group (WMG) FX-neutral Y/Y global music revenue growth rates as proxy for music revenue. Consumer spending is limited to PCE non-durable goods real consumptions,adjusted for inflation. Video sales are approximated by domestic DVD unit sales. 22
  • 23. MORGAN STANLEY RESEARCH July 13, 2009 Amazon.comExhibit 25Music Industry – Accelerating Declines in Physical Sales Are Not Offsetting U.S. Digital Growth USA Music Industry Sales & Y/Y Growth, Physical vs. Digital, 1999 - 2012E Steady decline in music revenue $15,000 40% since peak in 1999. $14B $14B $13,500 $13B 30% Rise of digital music has not been $12B $12B $12,000 $12B $12B enough to offset physical declines 20% due to: Total USA Music Sales ($MM) $10B $10,500 Y/Y Growth Rates (%) $9,000 $8B 10% 1) lower price points and ability to purchase individual songs; $7,500 $7B 0% $6,000 $6B $5B 2) piracy; and -10% $5B $4,500 3) rise of free / ad-supported -20% $3,000 streaming music / YouTube / -30% extremely cheap ($0.10 per web $1,500 song vs. Amazon.com / iTunes’ $0 -40% ~$1.00 per song) web-only 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009E 2010E 2011E 2012E songs. USA Physical Music Sales USA Digital Music Sales Physical Music Y/Y Growth Digital Music Y/Y Growth Total Music Sales Y/Y Growth 2003-2008 Music CAGR: -6% 2008-2012E Music CAGR: -13%Source: RIAA, Morgan Stanley ResearchExhibit 26Music Industry – Global Sales Declines Are Accelerating Global Music Industry Sales & Y/Y Growth, 1999 - 2008 Global Music industry showing $45,000 10% single-digit declines Y/Y. Global Music Industry Retail Sales 8% $40,000 $39B $37B Y/Y Growth Despite iTunes Music growth, $34B $34B $33B 6% global music industry declines $35,000 $34B $32B $32B appear to be accelerating. Global Music Sales ($MM) $30B 4% $30,000 $27B 2% Global Music 5-year total revenue Y/Y Growth $25,000 CAGR of -4% growth slightly less 0% than USA CAGR of -6% owing to $20,000 -2% less digital cannibalization of $15,000 physical CD sales in international -4% markets. $10,000 -6% $5,000 -8% 2003-2008 Music CAGR: -4% $0 -10% 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008Source: IFPI, Morgan Stanley Research 23
  • 24. MORGAN STANLEY RESEARCH July 13, 2009 Amazon.comExhibit 27Music + Video + Game Industries – Piracy Still Biggest Challenge Global Unique Visitors, 2/08 - 4/09 Illegal download / P2P file sharing has 140 large + rapidly growing user base: 120 RapidShare – 77MM global unique Total Unique Visitors (MM) visitors, +105% Y/Y in 4/09 100 Mininova.org – 30MM global unique 80 visitors, +63% Y/Y 60 Thepiratebay.org – 16MM global unique visitors, +103% Y/Y 40 vs. 20 iTunes – 124MM global unique visitors, +20% Y/Y 2/08 4/08 6/08 8/08 10/08 12/08 2/09 4/09 RapidShare Mininova.org Thepiratebay.org IMDb.com – 57MM global unique iTunes IMDb.com Hulu.com visitors, +34% Y/Y Hulu.com – 9MM global unique visitors, +900% Y/YSource: comScore global, 4/09, iTunes users are comScore estimates, Apple reported 75MM active iTunes users as of CQ4:08Exhibit 28Music Industry – Apple iTunes Taking Share from Industry and Amazon.com With an estimated user base of Amazon.com Music vs. iTunes Music (Global) 400MM portable media players, +6% $4 Y/Y, in 2008 vs. a base of ~150MM players five years ago and a very active PC-based music industry, the $2.9B $3 music industry has steadily migrated to digital distribution since music Revenue ($B) $2.1B industry revenue peaked 10 years $2 ago. $1.5B $1.2B $1.2B $1.2B Apple iTunes garnered ~70% share of $0.9B $1.0B $1.1B $1 $0.8B global digital music revenue and 8% $0.6B share of total global music revenue in $0.2B 2008, per IFPI and Morgan Stanley estimates. $0 2004E 2005E 2006E 2007E 2008E 2009E Apple – with its powerful iTunes AMZN Est. Music Revenue iTunes Estimated Music Revenue distribution system (75MM active customers in CQ4:08, +62% estimated Y/Y) – will likely continue to gain share of for pay music (and video).Source: Company documents, Morgan Stanley Research, Morgan Stanley Enterprise Hardware Team (Katy Huberty) 24
  • 25. MORGAN STANLEY RESEARCH July 13, 2009 Amazon.comExhibit 29Video Industry – DVD Sales in Decline, Offset Somewhat by New Formats Including Blu-ray / Digital $25,000 USA Home Video Sales & Y/Y Growth, 2000 - 2012E 35% 2000-2004 – strong $ growth driven by DVD adoption 30% Rising DVD rentals + competition $20,000 25% from online video usage have negatively impacted video sales Total Home Video Sales ($MM) Previous 20% Growth Cycle revenue. $15,000 Driven by 15% Y/Y Growth DVD Forecast on-going decline in DVD 10% sales, accelerated by shift to: $10,000 5% 1) rent over purchase; 0% 2) digital over physical; and $5,000 -5% 3) free digital forms (Hulu). -10% Believe video industry better $0 -15% positioned vs. music industry as: 2000 2001E 2002E 2003E 2004E 2005E 2006E 2007E 2008E 2009E 2010E 2011E 2012E USA Home Video Sales Y/Y Growth 1) ASPs are maintained (no singles canalizing album sales) and 2) digital download / web streaming often support lower video quality due to bandwidth constraints.Source: Historical data per Ben Swinburne, MS Media Research; forecast per MS Internet ResearchNote: Our home video sales industry sizing includes physical sales of VHS, DVD, Blu-ray, digital sales and digital rental, all of which are Amazon.com’s businesses. 25
  • 26. MORGAN STANLEY RESEARCH July 13, 2009 Amazon.comExhibit 30Video Industry – Physical Sales Challenged by Physical Rental + Digital Downloads With an installed base expected to Video Revenue, Amazon.com vs. iTunes + Netflix, 2004E-2009E exceed 96MM portable units by $2.5 the end of 2009, Apple is likely $2.1B $2.3B positioned to compete more $2.0 $2.0B aggressively in video over time, $1.7B $1.8B especially as video over iPhone / iTouch / WiFi gain ongoing traction Revenue ($B) $1.3B $1.5B $1.5 with their growing base of users $1.1B $1.1B (40MM, as of May 2009). $1.0B $1.0 $0.7B A shift from purchase to rental in $0.5B physical video distribution could $0.5 benefit Netflix model over time. $0.0 2004E 2005E 2006E 2007E 2008E 2009E AMZN Est. Video Revenue iTunes Estimated Video Revenue NetflixSource: Company documents, Morgan Stanley Research, Morgan Stanley Enterprise Hardware Team (Katy Huberty)Exhibit 31Streaming Alternatives for Digital Video – Challenging Physical DVD Sales(In Millions) 2005 2006 2007 2008 2009E Digital downloads + rise of digitalXbox 360 1.5 10.4 17.8 28.6 40.8 rental services (NetFlix...) havePS3 0.0 1.7 10.5 21.3 35.1 challenged physical DVD sales.iPod / iPhone / iTouch (with video screens) 5.0 20.5 46.7 75.4 96.2TiVo 4.4 4.4 3.9 3.3 3.3 Digital formats attacking higherOther (Slingbox, Roku, Vudu) Less than 1MM Units priced DVD and Blu-Ray sales.Total Addressable Market 11.4 37.5 79.4 129.1 175.8 Y/Y Growth 229% 112% 63% 36% While Xbox and PS3 can play DVDs, they are also capable of providing instant digital streaming. More than one million Netflix subscribers already access Netflix digital titles through Xbox Live.Source: Company documents, Morgan Stanley Research, Morgan Stanley Media Team (Ben Swinburne)Note: ‘Other’ segment assumed to be constant at 500K units, TiVo 2009E estimate assumed no growth. Xbox 360 and PS3 units based on shipment data from company filings. 26
  • 27. MORGAN STANLEY RESEARCH July 13, 2009 Amazon.comExhibit 32Video Games –Taking Share of Media $ SpendLatest Game Cycle, Which Began in 2005, Has Supported Revenue CAGR of 21% from 2003-2008 WorldWide Video Game Sales & Y/Y Growth, 2001 - 2012E $60 50% Video games may be relatively immune in the near-term to the 40% digital transition as most digital $50 offerings are expansion packs and add-on content as opposed to full Total Video Game Sales ($MM) 30% $40 game downloads that replace package sales. 20% $30 That said, Amazon.com could be 10% at risk of seeing physical sales decline from the handheld $20 0% segment (~25% of the industry in C2008E) as more consumers $10 download games directly to the -10% iPhone/iTouch and eliminate the middleman. $0 -20% 2001 2002 2003 2004 2005 2006 2007 2008 2009E 2010E 2011E 2012E Video game industry cycling Software Dollar Sales Hardware Dollar Sales Y/Y Growth against difficult comparables coupled with expected 2009 price cuts of the PS3 and Wii.Source: Sony, Nintendo, Microsoft, Sega, NPD, Morgan Stanley Estimates 27
  • 28. MORGAN STANLEY RESEARCH July 13, 2009 Amazon.comAmazon.com Outperformance Across Segments Should ContinueExhibit 33Books – Amazon.com’s Book Business Should Continue to Outperform U.S. Industry Amazon.com Estimated Books Revenue Growth vs. Industry, 2001 - 2012E Amazon.com could become industry leader (surpassing 80% Barnes & Noble) by 2010E, 70% future growth likely impacted by Amazon.com 60% Estimated law of large numbers + rising Book Sales Y/Y Growth digital competition. 50% USA Book Core business growth slowing, Y/Y Growth Rates 40% Industry but Kindle + Kindle app devices Sales Y/Y 30% Growth (iPhone) should help offset. 20% 10% 0% 2001E 2002E 2003E 2004E 2005E 2006E 2007E 2008E 2009E 2010E 2011E 2012E -10% -20%Source: Company data, Morgan Stanley Research, AAPExhibit 34Video – Negative Industry Growth (ex. rentals) Could Moderate but Continue Likely to continue to gain physical (and perhaps digital) share in Amazon.com Estimated Video Revenue Growth vs. Industry, 2001 - 2012E market that will increasingly 80% migrate to digital distribution. 70% Amazon.com Estimated Video We expect near-term Blu-Ray 60% Revenue Y/Y Growth share gains could help 50% Amazon.com grow in excess of Y/Y Growth Rates 40% USA Home Video overall industry. Industry Revenue 30% Y/Y Growth 20% 10% 0% -10% -20% 2001E 2002E 2003E 2004E 2005E 2006E 2007E 2008E 2009E 2010E 2011E 2012ESource: Company data, Morgan Stanley ResearchNote: Our home video sales industry sizing includes physical sales of VHS, DVD, Blu-ray, digital sales and digital rental, all of which are Amazon.com’s businesses. 28
  • 29. MORGAN STANLEY RESEARCH July 13, 2009 Amazon.comExhibit 35Music – U.S. Industry Could Show Lasting Negative Growth; Amazon.com Outperformance Sustainable Amazon.com Estimated Music Revenue Growth vs. Industry, 2001 - 2012E Amazon.com likely to continue to gain physical share in market that 80% is continuing to rapidly migrate to 70% digital distribution. Amazon.com Estimated Music 60% Revenue Y/Y We believe Music business has Growth 50% most downside risk. Y/Y Growth Rates 40% USA Music Industry Revenue 30% Y/Y Growth 20% 10% 0% -10% -20% 2001E 2002E 2003E 2004E 2005E 2006E 2007E 2008E 2009E 2010E 2011E 2012ESource: Company data, Morgan Stanley Research, RIAAExhibit 36Video Games – Amazon.com Should Continue to Outperform U.S. Industry Amazon.com Other Media (Video Games) Revenue Growth vs. Industry, 2001 - 2012E Market share gains more difficult 100% as retailers dedicate more shelf space to video game industry (at expense of Music and Video). 80% Amazon.com Estimated Video Games Revenue Presence of pure play competitors Y/Y Growth such as GameStop also could limit 60% / slow share gains. Y/Y Growth Rates USA Video Game Industry Revenue 40% Y/Y Growth Believe that video game industry (specifically the console market) will be slower to transition to digital 20% and transition could still be three to five years away. 0% 2001E 2002E 2003E 2004E 2005E 2006E 2007E 2008E 2009E 2010E 2011E 2012E -20%Source: Company data, Morgan Stanley Research, NPD Group 29
  • 30. MORGAN STANLEY RESEARCH July 13, 2009 Amazon.com Online video is still early and Amazon.com has a reasonableDrill Down on Future Growth start with Amazon.com Video on Demand. That said,Drivers Amazon.com faces significant competition from Apple, Netflix, and others in digital while Amazon.com may gain similarly inAmazon.com generated $11.1B or 58% of its revenue, from the physical video as it does in physical music for the samemedia business in C2008 of which we estimate books was reasons. There are other high-quality companies, such as$5.3B (48% of media), music was $1.2B (11% of media), and Netflix, competing in physical rental distribution of video thatvideo was $2.0B (18% of media), assuming Amazon.com’s could impact Amazon.com’s physical sales over time.Media revenue mix is consistent with the overall U.S. mediarevenue mix. We estimate the remaining 23% ($2.6B) of We go on to highlight recent flat panel shares gains byAmazon.com media revenue comes from other media items Amazon.com, as the company has gained 250 basis points ofsuch as video games, consoles, and software, which saw share in the past year. We believe consumer electronics andsignificant gains over the past three years driven by the computer hardware to be 23% of Amazon.com total revenue inadoption of next-generation video game consoles. C2008E and believe consumers are increasingly purchasing electronics on Amazon.com to participate in the transition toEach of the Media segments are going through two digital media – this is good for Amazon.com. We note thatfundamental technology shifts: 1) distribution shift from offline despite Circuit City’s exit from the market, that Best Buy lost 70to online and 2) format shift from physical to digital. bps of shares Y/Y compared to Amazon.com’s 250 bps gainAmazon.com has been and will continue to be a beneficiary of and Wal-Mart’s 250 bps gain.the first distribution shift. But, being a physical goods retailer, itmay face some hurdles in the format shift from physical to Finally, we dip our toe into Web Services, highlightdigital of books / music / video. Amazon.com’s private label efforts, and Amazon.com’s increasing presence as a third-party distribution outlet orIn this section, we first highlight the books category and we search for retail.conclude that books remains the most relevant category inAmazon.com’s product mix, which makes the early success of Books - At Estimated 28% of C2008E Revenue,the Kindle device so important. We estimate that Amazon.com Books Business Remains Amazon.com’s Largesthas sold between 800K and 1.2MM kindle units as of the end of Business LineCQ2. We estimate that Amazon.com will generate $474MM of Importantly for Amazon.com, the book business has been oneKindle device and book revenue in 2009 and $1B by 2011. of the last forms of personal entertainment to migrate from physical form to digital form. We believe the core reasons forWe believe current margin on the Kindle hardware exceeds this trend are: 1) books tend to be light weight and portable; 2)Amazon.com’s core consumer electronics and computer books tend to be read in a non-linear way – read / set aside /hardware gross margin and that Kindle book gross margin is read / set aside…; 3) completing a book tends to take a longbelow physical book gross margin for the time being. Given period of time – unlike reading a newspaper or magazine, forAmazon.com’s aggressive price points on digital books, we example, which is often done quickly then disposed of; 4) manybelieve margin accretion could come over time with more people like keeping / displaying / marking / sharing their books;volume and further negotiations with book publishers. While and 5) books don’t require special equipment like graphicsbooks accounts for 28% of total revenue, we estimate total processors for games, speakers for music, screens for TVs.Kindle (hardware and digital books) at 2% in C2009E and 4%by C2011E. Net, the ‘use case’ for eBooks, heretofore, has been less compelling for books than it has been for games, recordedThe good news on music is that it is just 6% of revenue, down music, films, newspapers and magazines. That said, with thefrom 14% in 2001. The bad news is that Apple’s dominance in rollout of the comprehensive and easy-to-use Kindle – whichmusic seems to only be increasing with now 40MM+ interoperates seamlessly with Amazon.com’s bookstore –iphone/itouch users and 75MM iTunes users. Investors should Amazon.com is leading the way in the online book business.come away from our analysis of the music business with While Apple’s iPod, in effect, created the for-pay online musiccomfort that Amazon.com’s risk here seems controlled by its industry as we know it today, it’s notable that the iPod and the6% contribution to revenue and bankruptcies in music-only iTunes ecosystem evolved simultaneously and had to trainstores/general merchandisers reducing shelf space for users to change the way they consume music. We believephysical CDs, as they have lost luster as foot traffic drivers. 30
  • 31. MORGAN STANLEY RESEARCH July 13, 2009 Amazon.comAmazon.com with books, could prove to be an even betterposition that Apple was in as it’s already built up a base of tensof millions of happy book buyers and it links its Kindle store Kindle - Still Early But Lots of Promise – A Billion Dollarecosystem with its Kindle hardware, and increasingly with Business in 2011?hardware from other market players – note the Kindle store onthe Apple iPhone. We believe this ‘store’ will become even As Amazon.com continues to grow and the investmentmore relevant when Apple roles out its tablet product – which community continues to extrapolate near-term trends, it’sshould be closer in form factor to the Kindle than to the iPhone. important to check for sustainability. We have displayed the underlying drivers of Amazon.com’s growth and why it shouldWe believe Amazon.com is well-positioned for a transition in its be sustained, but the risk to the business lies in its reliance onbook business over time and Amazon.com is at the front of this Media transactions for still 58% of revenue. Risks can becomeshift since Kindle has been the device that has brought eBooks opportunities and we believe Amazon.com has positioned itsinto the mainstream. Amazon.com seems to have significant business well for the transition of physical media retail to digitalopportunity with eBooks as: 1) the market is still very early media retail and the first successful example is the Kindlestage; 2) an international device has not yet launched; and 3) release and the initial consumer adoption of the product.the textbook opportunity could be significant with publisher anduniversity / K-12 adoption. We estimate Amazon.com’s global book business in 2008E equaled $5.3B, or 48% of media revenue, and 28% of totalWe note that there is a risk of hardware players such as Apple revenue. Amazon.com’s digital reading device - Amazonmaking it possible for consumer to purchase eBook content Kindle - has been a roaring success to date and we believe thatdirect and bypass Amazon.com. As well, Stanza (now the company has sold between 800K and 1.2MM cumulativeAmazon-owned) came out of nowhere as an alternative to Kindle devices, a wide range given limited information.purchasing eBooks from Amazon.com. While the possible Amazon.com has mentioned that Kindle customers arethreats are out there: 1) the possible competitors have limited purchasing the same number of physical books as prior to thedirect relationships with publishers and Amazon.com has Kindle purchase and 1.6x-1.7x the number of digital books aspositioned itself in other categories such as MP3 as a physical book purchases. Also, Amazon.com has noted Kindlesupplier-friendly distribution outlet and 2) Amazon.com is book sales as a percent of total book sales for the 275K titlesopening up the Kindle book platform to allow accessibility on available (now 300K) in Kindle form is up to 35% as of mid-May,other devices, including the recent Apple iPhone app launch up from 13% at the launch of Kindle 2 on February 23.and the ability to purchase Kindle books from the iPhone. 1.05MM Kindle Units As of CQ209 – Again, there is limitedExhibit 37 information available regarding Kindle unit sales and attachedAmazon.com = Estimated 20% of Book Business digital units but we have put together some basic assumptions(ex-Textbooks)…and eBooks are Fastest Growing to build from over time, as more information is available. UsingSegment device unit sales since inception of 1,050,000 and assuming 2007 2008 Y/Y ChangeTrade (Total) 8,525,932 8,079,423 (5.2%) that Amazon.com sells 450K more units for the remainder of Adult Hardbound 2,800,080 2,436,070 (13.0) 2009, we arrive at $206MM of device revenue in 2009, Adult Paperbound 2,282,173 2,364,331 3.6 Juvenile Hardbound 2,048,155 1,794,184 (12.4) assuming revenue is booked evenly over an eight-quarter Juvenile Paperbound 1,395,524 1,484,838 6.4 period. Using a 16-unit eBook attachment rate, we arrive atBook Clubs & Mail Order 621,605 600,470 (3.4)Mass Market Paperback 1,119,140 1,085,566 (3.0) 18.4MM attachments and $166MM of eBook revenue in 2009.Audio books 218,230 172,402 (21.0) Using a 4-unit eBook attachment rate per semester forReligious 783,411 723,872 (7.6)eBooks 67,233 113,220 68.4 textbooks, we arrive at 60,000 attachments and $3MM ofProfessional 3,474,656 3,457,283 (0.5) eTextbook revenue in 2009. Using a 4-unit eBook attachmentEl-Hi (K-12 Education) 6,356,211 6,076,538 (4.4)Higher Education 3,677,970 3,777,275 2.7 rate per year for non-kindle devices (iPhone), we arrive atAll Other 115,185 168,976 46.7 3.4MM attachments and $31MM of non-Kindle owner eBookTotal 24,959,573 24,255,025 (2.8%) revenue in 2009. Using a 0.5 subscription attachment rate, weAmazon NA Books (Estimated) 2,443,415 2,823,923 15.6% arrive at 750,000 subscriptions by year-end 2009 and $69MM % of U.S. Book Industry 10% 12% of subscription revenue in 2009. Our combined 2009 KindleU.S. Book Industry (ex. Textbooks) 14,925,392 14,401,212 (3.5%) revenue estimate would be $474MM with 1.5MM deployed AMZN % of U.S. Book Industry 16% 20% Kindle units and 800K non-Kindle active units (iPhone). InSource: Company documents, NAA, Morgan Stanley Research 2010, we anticipate 850K in Kindle device sales, 400K 31
  • 32. MORGAN STANLEY RESEARCH July 13, 2009 Amazon.comnon-Kindle device activations (iPhone), and $736MM incombined revenue. It is important for investors to note that weare working with limited information and confidence in anypublic Kindle estimates, including ours, should be tempered.Exhibit 38Sprint Wholesale Data Supportive of 850,000Cumulative Kindle Sales Through CQ1 CQ3:07 CQ4:07 CQ1:08 CQ2:08 CQ3:08 CQ4:08 CQ1:09SubscribersSprint Wholesale 7,174 7,674 7,841 7,831 7,939 8,063 8,442Virgin Mobile 4,876 5,086 5,104 4,992 5,164 5,380 5,247Qwest 819 824 816 811 732 477 300Net AddsSprint Wholesale 500 167 -10 108 124 379Less: Virgin Mobile 210 18 -111 172 216 -133 Qwest 5 -8 -5 -79 -255 -177Sprint Net Adds 285 157 106 15 163 689Total Sprint Net Adds 1,416Kindle Units Normalized 75 155 105 150 75 290Cumulative Kindle 75 230 335 485 560 850Source: Company data, Morgan Stanley ResearchKindle DX To Change the Textbook Market; No MoreBackpacks? – In early May, Amazon.com announced its thirdversion of the Amazon Kindle, the Amazon Kindle DX, whichbegan shipping on June 10. The Kindle DX sold out within thefirst three days and, since inventory was replenished, hasalready sold out again (~4-6 week wait time). In our opinion,the biggest value from the Kindle DX will come fromAmazon.com’s ability to enter the textbook market. The firstKindle was released in 11/07 followed by the Kindle 2 in 2/09.The new Kindle DX costs $489 compared to the $299 Kindle 2(recently discounted from $359). The Amazon Kindle DXfeatures a 9.7” screen and is also a better device for readingnewspapers.Most Relevant Comment from DX Launch, Kindle BooksNow 35% of Units For Titles That Are Available on Kindle –Amazon.com CEO Jeff Bezos mentioned that Kindle unit salesnow represent 35% of total units sales for the then 275K titlesavailable (as of May 5) in Kindle format. The last publiclydisclosed figure by Amazon.com for Kindle’s penetration ofunits was in the low-double digits. The company experienced asignificant increase in penetration that coincided with the CQ1launch of Kindle 2 on February 24 and the Kindle iPhoneapplication launch on March 4. We assume that cumulativeKindle sales are between 800K and 1.2MM based on the verylimited data available, including Sprint’s wholesale subscriberadditions. Without providing exact figures, it seems less than3% of Amazon.com’s ~50MM domestic customers areaccounting for 35% of unit sales for books available in Kindleform, an amazing statistic that suggests a high percentage ofbook sales are concentrated in the Kindle-targeted “heavyreader” segment of the market. 32
  • 33. MORGAN STANLEY RESEARCH July 13, 2009 Amazon.comExhibit 39Amazon.com - Kindle Analysis(Revenue in $MM, Units in 000s, Price in $s) C2007E C2008E C2009E C2010E CQ4* CQ1 CQ2 CQ3 CQ4 CQ1* CQ2 CQ3* CQ4 CQ1 CQ2* CQ3 CQ4 C2007E C2008E C2009E C2010E C2011E C2012EHardw are Sum m aryKindle Units Sold (Version 1&2) 75 155 105 150 75 290 200 135 270 90 160 160 280 75 485 895 690 656 557 Y/Y Change -- -- -- -- 0% 87% 90% -10% 260% -69% -20% 19% 4% -- 547% 85% -23% -5% -15%Cumulative Units Sold 75 230 335 485 560 850 1,050 1,185 1,455 1,545 1,705 1,865 2,145 75 560 1,455 2,145 2,801 3,358Kindle Price $399 $399 $386 $359 $359 $359 $359 $299 $299 $275 $275 $275 $275 $399 $380 $348 $307 $255 $211Kindle Hardw are Revenue $4 $11 $17 $23 $27 $40 $49 $54 $60 $55 $56 $55 $61 $4 $78 $202 $227 $185 $150Kindle DX Units Sold - - - - - - - 15 30 10 40 40 70 - - 45 160 320 368 Y/Y Change -- -- -- -- -- -- -- -- -- -- -- 167% 133% -- -- -- 256% 100% 15%Cumulative Units Sold - - - - - - - 15 45 55 95 135 205 - - 45 205 525 893Kindle DX Price $0 $0 $0 $0 $0 $0 $0 $489 $489 $450 $450 $450 $450 $0 $0 $489 $459 $433 $398Kindle DX Hardw are Revenue $0 $0 $0 $0 $0 $0 $0 $1 $3 $3 $6 $8 $12 $0 $0 $4 $28 $84 $128Total Kindle Units Sold 75 155 105 150 75 290 200 150 300 100 200 200 350 75 485 940 850 976 925 Y/Y Change -- -- -- -- 0% 87% 90% 0% 300% -66% 0% 33% 17% -- 547% 94% -10% 15% -5%Cumulative Units Sold 75 230 335 485 560 850 1,050 1,200 1,500 1,600 1,800 2,000 2,350 75 560 1,500 2,350 3,326 4,251Avg. Price $399 $399 $386 $359 $359 $359 $359 $318 $318 $293 $310 $310 $310 $399 $380 $355 $336 $314 $286Kindle Hardw are Revenue $4 $11 $17 $23 $27 $40 $49 $55 $63 $59 $61 $62 $73 $4 $78 $206 $255 $269 $278Non-Kindle Active Units (iPhone) -- -- -- -- -- 500 100 100 100 100 100 100 100 -- -- 800 400 600 810 Y/Y Change -- -- -- -- -- -- -- -- -- -80% 0% 0% 0% -- -- -- -50% 50% 35%Cumulative Units Deployed -- -- -- -- -- 500 600 700 800 900 1,000 1,100 1,200 -- -- 800 1,200 1,800 2,610Total Kindle Application Devices 75 230 335 485 560 1,350 1,650 1,900 2,300 2,500 2,800 3,100 3,550 75 560 2,300 3,550 5,126 6,861Softw are Sum m aryAvg. Book Attach Rate 3 3 3 3 3 4 4 4 4 4 4 4 4 3 12 16 16 12 8Total Softw are Units Sold 225 690 1,005 1,455 1,680 3,400 4,200 4,800 6,000 6,400 7,200 8,000 9,400 225 4,830 18,400 31,000 33,788 29,924Unit Price $9.00 $9.00 $9.00 $9.00 $9.00 $9.00 $9.00 $9.00 $9.00 $9.00 $9.00 $9.00 $9.00 $9.00 $9.00 $9.00 $9.00 $9.00 $9.00Book Revenue $2 $6 $9 $13 $15 $31 $38 $43 $54 $58 $65 $72 $85 $2 $43 $166 $279 $304 $269Avg. Textbook Attach Rate 0 0 0 0 0 0 0 4 0 4 0 4 0 - - 4 8 8 8Total Softw are Units Sold - - - - - - - 60 - 40 - 160 - - - 60 200 656 754Unit Price $50.00 $50.00 $50.00 $50.00 $50.00 $50.00 $50.00 $50.00 $50.00 $50.00 $50.00 $50.00 $50.00 $50.00 $50.00 $50.00 $50.00 $50.00 $50.00Textbook Revenue $0 $0 $0 $0 $0 $0 $0 $3 $0 $2 $0 $8 $0 $0 $0 $3 $10 $33 $38Avg. Book Attach Rate 0 0 0 0 0 1 1 1 2 2 2 2 2 - - 5 8 16 20Total Softw are Units Sold - - - - - 500 600 700 1,600 1,800 2,000 2,200 2,400 - - 3,400 8,400 25,200 46,125Unit Price $9.00 $9.00 $9.00 $9.00 $9.00 $9.00 $9.00 $9.00 $9.00 $9.00 $9.00 $9.00 $9.00 $9.00 $9.00 $9.00 $9.00 $9.00 $9.00Non-Kindle Book Revenue $0 $0 $0 $0 $0 $5 $5 $6 $14 $16 $18 $20 $22 $0 $0 $31 $76 $227 $415Avg. Subscription Attach Rate 0.5 0.5 0.5 0.5 0.5 0.5 0.5 0.5 0.5 0.5 0.5 0.5 0.5 1 2 2 2 2 2Total Softw are Units Subscriptions 38 115 168 243 280 425 525 600 750 800 900 1,000 1,175 38 280 750 1,175 1,663 2,125Unit Price $29.97 $29.97 $29.97 $29.97 $29.97 $29.97 $29.97 $29.97 $29.97 $29.97 $29.97 $29.97 $29.97 $29.97 $29.97 $29.97 $29.97 $29.97 $29.97New spaper Revenue $1 $3 $5 $7 $8 $13 $16 $18 $22 $24 $27 $30 $35 $1 $24 $69 $116 $173 $230# of Titles Available 90,000 115,000 125,000 185,000 230,000 250,000 300,000 342,250 379,500 412,500 444,000 472,305 499,043 90,000 230,000 379,500 499,043 568,908 594,509 Y/Y Change -- -- -- -- 156% 117% 140% 85% 65% 65% 48% 38% 32% -- 156% 65% 32% 14% 4% Incremental Book Adds -- 25,000 10,000 60,000 45,000 20,000 50,000 42,250 37,250 33,000 31,500 28,305 26,738 -- 140,000 149,500 119,543 69,866 25,601% of Available Titles Sold on Kindle -- -- 6% 12% 12% 12% 35% 38% 40% 43% 45% 48% 50% -- 12% 40% 50% 56% 60%Kindle Softw are Revenue $3 $10 $14 $20 $24 $48 $59 $70 $91 $100 $110 $130 $141 $3 $68 $268 $481 $737 $952Total Revenue $7 $21 $31 $44 $50 $87 $108 $125 $154 $158 $171 $192 $214 $7 $145 $474 $736 $1,006 $1,230Source: Company data, Morgan Stanley ResearchAssumes hardware revenue amortized over eight quarters.Kindle units estimated based on Sprint wholesale net additions after adjusting for Virgin Mobile and Qwest.Non-Kindle units include incremental customers that do not own a Kindle device.Attach Rate = books + magazine + blogs downloaded per Kindle device.Textbook Attach Rate assumes textbooks are purchased in at beginning of each semester (September & January).* = new product Kindle device released 33
  • 34. MORGAN STANLEY RESEARCH July 13, 2009 Amazon.comExhibit 40 Exhibit 41Kindle Sales Show Significant Ramp – New Kindle Publishers could benefit on cost side and profit atLaunch and iPhone Application Launch lower price levels… Freight College Store Expense 1% Operations 7% College Store Income (Pre- tax) 5% Editorial Costs 16% College Store Publishers Personnel 11% Income (After Tax) 7% Author Income Publisher 12% Paper & Printing 16% Publishers Publishers General and Marketing Admin. Costs Costs 15% 10% ~40% of Printing, Paper, Shipping costs could be eliminated with electronic delivery.Source: Jeff Bezos Kindle DX Launch Presentation Source: AAP, National Association of College Stores, Morgan Stanley Research$10 Billion Domestic Textbook Opportunity is Significant Newspapers and Magazines Can Also Be Read On Kindlefor Kindle DX – Amazon.com has already partnered to make – The potential opportunity for newspapers and magazines isthe new version available in five universities; Case Western, vast. ~10% of newspaper costs are related to newsprint andPrinceton, Reed, University of Virginia (Darden School), and printing expenses, which could be eliminated with electronicArizona State. We believe that Amazon.com could potentially delivery. The Kindle DX, which has a 9.7” screen, couldbe taking a page out of Apple’s playbook, when they struck a potentially offer advertisers a channel to effectively reachdeal with Harvard and 23 other universities in 1984 to make the subscribers. However, initial indications are that newspapersnew Apple Macintosh available to students for a steep discount will still be served advertising-free, similar to the Kindle and(~50% of retail). The U.S. textbook market is almost $10B in Kindle 2. Looking at The New York Times Company, 60% ofsize, or 41% of the total domestic book market, and is highly the C2008 revenue came from advertising and 31% was due toinefficient due to the physical textbook revision process and the circulation. However, no advertising should enhance thecannibalization of the primary market driven by the used customer experience, which is consistent with Amazon.com’stextbook market. customer-centric mentality.We would categorize the digital textbook effort as very early but A potential drawback for both the newspaper and textbookwe believe access to content could create a significant opportunity, in our opinion, would be the lack of color.long-term opportunity in the $10B category. Some universities Newspapers have increasingly added color and pictures tohave included laptops and iPods in tuition costs and it’s not out print versions and a shift to black and white might be viewed asof the realm of possibility that such an event could occur with a a step back. For textbooks, we question if particular subjectsreading device such as the Kindle over time. We are going to that rely on charts and pictures (Chemistry, Biology, etc.) couldshy away from direct estimates on the textbook opportunity at struggle in a black and white format.the moment since it has yet to launch and it will be slow to gaininitial adoption due to the small initial test group. However, webelieve, the most significant opportunity for Kindle couldultimately be in this textbook area due to publisher cost savingsand potential for a significant enhancement to user experiencefor the student. 34
  • 35. MORGAN STANLEY RESEARCH July 13, 2009 Amazon.comExhibit 42 Exhibit 43Kindle DX Stanza Source.Amazon.com Exhibit 44 Consumer Interest in eBooks Bolstered by Kindle and iPhone iTunes App Store – 14% Games, 12% Books, 11% Entertainment + 800MM Downloads (~13 per User) Average # of Paid Paid as % of Price of Category # of Apps % of Total Apps Category Total Paid Apps Games 3,326 14% 2,001 60% $2.23 Books 2,837 12 2,675 94 3.82 Entertainment 2,587 11 1,716 66 1.44 Utilities 2,067 9 1,474 71 2.66 Education 1,929 8 1,662 86 5.16 Lifestyle 1,404 6 1,023 73 2.21 Travel 1,258 5 1,064 85 5.09 Reference 1,177 5 905 77 6.52 Productivity 1,027 4 802 78 3.59 Sports 895 4 664 74 3.11Source.Amazon.com Music 838 4 559 67 3.90 Navigation 727 3 594 82 6.88 Healthcare & Fitness 704 3 577 82 2.94 Business 601 3 422 70 9.08 Photography 534 2 399 75 2.32Stanza Finance Social Networking 511 404 2 2 366 176 72 44 5.11 2.31 News 343 1 151 44 1.89Amazon.com recently announced its acquisition of Lexcycle, Medical Weather 280 127 1 1 237 88 85 69 22.01 3.02which owns the popular eBook app Stanza. Stanza currently Total 23,576 17,555 74% $3.93 Note: Data as of 3/20/09, only showing apps available. Downloads per person assumes 50% are new downloads / 50% arehas a library of ~100K books available on the iPhone/iTouch. update downloads. Apple announced that total apps / downloads reached 25K / 800MM as of 3/18. Source: Apple iTunes, Morgan Stanley Research.This acquisition is consistent with Amazon.com’s recent forayinto the digital book market with the 11/07 launch of the Kindle,subsequent acquisition of audio book leader Audible in 1/08,and launch of its Kindle app on the iPhone in 3/09. Theacquisition of Stanza also highlights the shifting competitivelandscape toward mobile devices as Apple now approaches50K applications on the iPhone / iPod Touch and bookcategory supported the second most number of applications asof 4/09. 35
  • 36. MORGAN STANLEY RESEARCH July 13, 2009 Amazon.comExhibit 45 Net, after years of chatter, the eBook market has finallyBooks Experiencing Accelerating Growth on taken off and Amazon.com is the clear early stageiPhone…We Believe Amazon Kindle iPhone App leader… and is in a strong position with its: 1) innovativeWas a Catalyst in Amazon.com’s 35% eBook ratio Kindle products / services; 2) avid base of tens of millions of iTunes App Store Book Category – book buyers connected through its online distribution channel; Accelerating Growth / Highest Paid Ratio (94%) / $3.82 ASP and 3) strong relationships with publishers and authors. iTunes App Store Books Available & M/M Growth, 7/08 – 3/09 3,000 120% Companies like Google, Apple, thousands of developers plus Paid Books Free Books M/M Growth publishers have vested interests in playing a role in this 154 2,500 100% emerging market. But for now, Amazon.com is very well 2,000 80% positioned and appears to have a strong product pipeline and is also being very aggressive / resourceful with its strategic Total Books M/M Growth 1,500 95 60% acquisitions in the space. 2,475 1,000 40% 55 1,387 500 43 20% 29 694 6 10 16 465 2 291 105 134 148 176 0 App Store 1 2 3 4 5 6 7 8 0% Music – Only 6% of Amazon Revenue, Expect Launch (7/11/08) Months Since Launch (3/11/09) Continued Apple Digital Dominance, But Amazon To Source: Apple iTunes, Morgan Stanley Research. Retain #2 Digital and Increasing Control of Legacy CD DistributionExhibit 46 Among the Media businesses, music was the first to feel the51% of iTunes App Store Books Selling for $0.99 impact of a format shift from physical to digital. According to the iTunes App Store Book Pricing Distribution & Top Developers, 3/09 RIAA, the U.S. music industry had $8.5B revenue in 2008, 1500 60% down -18% Y/Y. Excluding the 30% Y/Y growth of digital music Developers Titles Available and sales of $1.6B, physical music revenue fell a staggering IndiaNIC 25% Y/Y to $6.8B. The good news and bad news for 1200 428 48% Total Books Available Iceberg Reader 344 900 36% Amazon.com in the music space is that: 1) Amazon.com has AppEngines 234 % of Total Super Art Software 177 benefitted greatly from the distribution shift from offline to 600 NTT Solmare 174 24% online, particularly in music, gaining ~8% of U.S. physical DMBC 144 music revenue market share in 2008 by our estimates and its 300 12% digital store offering Amazon MP3 already grabbed ~8% of 0 0% domestic digital download market and 2) Apple is the undisputed king of digital music with its iTunes Store + iPod 0+ EE $1 9 $1 9 $1 9 $1 9 99 9 9 9 9 9 9 9 9 9 $1 9 $1 9 $1 9 $1 9 $1 9 $1 9 9 9 9 .9 .9 .9 .9 .9 .9 .9 .9 .9 .9 9 9 9 9 9 9 6. 7. 8. 9. $2 0. 1. 2. 3. 4. 5. FR $0 $1 $2 $3 $4 $5 $6 $7 $8 $9 Number of Books % of Total ecosystem – it is the largest domestic music retailer (per NPD, Source: Apple iTunes, Morgan Stanley Research. surpassed Wal-Mart in 4/08) with ~20% overall market share and we estimate Apple has ~70% of the U.S. digital music download market share.What does Amazon.com gain with the acquisition of Stanza?Besides access to 100K library (generally free titles), Stanzahas shown the ability to innovate and develop a superior app,in our opinion, and we believe that Amazon.com can use itstechnology and experience to continue to innovate in theeBook market. While the company stated that they do not planto alter the current app or user experience, we expect that onewill see the Kindle and Stanza leverage each other andStanza’s library could become available on the Kindle. Wealso note that Stanza supports several formats including PDF,EPUB, and an XML-based standard format, while the Kindlesupports its exclusive AZW format as well as PDF. 36
  • 37. MORGAN STANLEY RESEARCH July 13, 2009 Amazon.comExhibit 47 sold in 1/07, iTunes had already leapfrogged Amazon.com asIn A Declining Music Industry, Amazon.com Benefits then fourth largest music retailer in the U.S., per NPD Group.From Secular Shift to Online and Digital In the short two years following that achievement, iTunesDistributions, And Still Has a Large Untapped managed to: 1) surpass Target, Best Buy and Walmart as thePhysical Distribution + Physical Media Sales Market No.1 music retailer in the U.S. by 4/08; 2) sell a cumulative 6B $15,000 9% songs by 12/08; 3) dominate global digital music market with $13,500 8% an estimated 70% market share, per IFPI and our estimates; 4) $12,000 $40 $183 $504 sell an estimated 500MM+ cumulative videos by 1/09; 5) 7% $878 support 1B+ application downloads on the iPhone / iPod Touch Amazon.coms Market Share (%) Total USA Music Sales ($MM) $10,500 $1,257 6% platform in 9 months since 7/08; and 6) double the active user $9,000 5% base from 36MM to 75MM. $7,500 $1,635 $14,324 $13,741 $12,614 4% Exhibit 49 $6,000 $11,814 $12,162 $11,793 $10,880 3% Power of iTunes Ecosystem – On Track to Surpass $4,500 $9,115 Total Amazon.com Music + Video Sales in 2010E $6,845 2% $3,000 $12 $1,500 1% $0 0% $10 2000 2001E 2002E 2003E 2004E 2005E 2006E 2007E 2008E USA Physical Music Sales USA Digital Music Sales $8 Amazon.coms Share in USA Physical Music Amazon.coms Share in USA Digital Music Revenue ($B) $6Source: Amazon.com, RIAA, Morgan Stanley Research $4Exhibit 48 $2Media Consumption – Most Radical Transition Everas New Technology Ecosystems Related to Social $0Networking / Video / Mobile Evolve With 2004E 2005E 2006E 2007E 2008E 2009E 2010E 2011E 2012E iTunes AMZN Music AMZN Books AMZN VideoUnprecedented Speed - All Driving Rising Internet +Mobile Usage Time Since Y/Y Applications Applications Primary Source: Morgan Stanley ResearchPlatform Inception Users Growth Available Downloaded UseSkype 5.8 Yrs 443MM 43% -- -- Voice / Video / MessagingYouTube 4.2 Yrs 422MM 57% -- -- Video Broadcasting While Amazon.com is very well positioned in physical Social Networking music sales, it has its work cut out to transfer thatFacebook 5.2 Yrs 307MM 164% 52K+ 308MM+ success to digital music. The impressive data pointsiTunes Store 8.3 Yrs 75MM 62% 10MM+ 6B+ Music / Video / Apps demonstrate that Apple’s iTunes has a significant lead overTwitter 3.0 Yrs 32MM 1905% 1K+ -- Message Broadcasting competitors in the a la carte business of digital contentNintendo Wii 2.5 Yrs 52MM 112% 1K+ 350MM+* Gaming distribution. Amazon.com’s own MP3 offerings, while priced Mobile Connectivity competitively, lack a cool device and a core group of loyal /Apple Wireless Devices 1.9 Yrs 40MM 265% 50K 1B+ young users to challenge iTunes’ dominance. That said, iPhone (2.5G + 3G) 1.9 Yrs 22MM 301% 50K -- 3G / Wi-Fi iPod Touch (Wi-Fi) 1.6 Yrs 18MM 239% 50K -- Wi-Fi Amazon.com has done very well in physical CD sales –Amazon Kindle 1.5 Yrs 1MM -- 300K+ -- Books according to the NPD group, Amazon.com surpassed TargetSource: Morgan Stanley Research as the fourth largest music retailer in the U.S. in 4/08, thanks in part to the AmazonMP3 digital offerings. We would not beThere is a lesson to be learned from the music industry and its surprised to see Amazon.com make a Stanza-like acquisitiondigital revolution. Apple’s iTunes + iPod model has been the in the music category. We also believe an emerging alternativemost successful ecosystem in the digital music revolution (and phone to the iPhone would be a competitive positive forone that Amazon.com is following in the Kindle eBooks Amazon MP3. But, in our view, the digital music market willecosystem). Launched in 4/03 in the U.S., iTunes sold 1B likely become more and more difficult for Amazon.com tosongs globally within three years. By the time 4B songs were tackle. 37
  • 38. MORGAN STANLEY RESEARCH July 13, 2009 Amazon.comExhibit 50Apple iTunes – Dominant in Digital Music, and Increasingly Becoming a Digital Multimedia EntertainmentCenter with Videos + Apps! CAGR($ in millions, except for per user data) C2003E C2004E C2005E C2006E C2007E C2008E C2009E C2010E C2011E C2012E C08E-12E iTunes Content Revenue ($MM) $35 $202 $577 $1,225 $1,768 $2,571 $3,579 $4,620 $5,681 $7,351 30% Y/Y Growth -- 486% 185% 113% 44% 45% 39% 29% 23% 29% Q/Q Growth -- -- -- -- -- -- -- -- -- -- Cumulative Downloads (MM) 35 239 826 2,021 3,724 6,694 12,436 21,379 34,580 51,955 67% Songs Downloaded 35 239 821 1,946 3,505 5,815 8,791 12,488 16,961 22,788 Video Downloaded -- -- 5 75 219 434 736 1,130 1,615 2,218 iPhone Apps Downloaded -- -- -- -- -- 445 2,909 7,760 16,004 26,949 Cumulative Registered Users (MM) 3 8 18 31 46 75 103 130 161 197 28% Y/Y Growth -- 147% 134% 68% 48% 62% 39% 26% 24% 23% Q/Q Growth -- -- -- -- -- -- -- -- -- -- iTunes Revenue Per User ($) $15 $34 $42 $46 $44 $41 $39 $38 $38 $40 -1% Y/Y Growth -- 132% 25% 9% -4% -7% -6% -1% 0% 5% Q/Q Growth -- -- -- -- -- -- -- -- -- -- Item Downloads Per User 15 34 43 45 43 47 62 74 89 95 19% Y/Y Growth -- 132% 26% 4% -5% 10% 32% 20% 20% 7% Q/Q Growth -- -- -- -- -- -- -- -- -- --Apart from the a la carte download business, Amazon.com and U.S. data through 4/09, unique Internet viewers totaled 152MMApple’s iTunes will likely face challenges from the shifting (+13% Y/Y), and up from 134MM in 4/08. More impressive,usage model towards streaming music and away from paid total minutes now total 58B (+91% Y/Y) and up from 31B indownloads. This shift has already occurred within the younger 4/08. With more content available on the internet, we believegenerations. According to NPD, total music spending among that studios will continue to make content accessible throughU.S. teens (age 13-17, a bellwether / leading indicator group digital channels. Looking specifically at the DVD business,for music consumption) declined -19% Y/Y in 2008, of which, Morgan Stanley media analyst Ben Swinburne estimates theCD purchasing declined 26% Y/Y and paid digital downloads domestic DVD/download business was $15-16B C2008E. Wefell -13% Y/Y. estimate that Amazon.com’s domestic video business is approximately $1.0B in size or ~7% of the domestic videoApart from the worsening economy / tighter consumer budget, industry.the decline coincides with the rise of online streaming music(like Pandora / iMeem / Spotify) and music sharing on social Exhibit 51networks (MySpace Music). In addition, a recent NPD Internet Video Usage Shows Continued MomentumMusicLab survey indicated that 54% of teens who heard a song 70 160they liked on MySpace Music were likely to revisit the site and 140listen to that song again vs. only 1% of teen respondents who 60claimed they could click through and buy the song on 50 120 Unique Viewers (MM)AmazonMP3. This behavioral pattern among teens, enabled 100 Minutes (B) 40by ubiquitous Internet on PC and mobile devices, could signal 80the beginning of an industry-wide shift towards advertising or 30 60subscription-supported streaming services, away from paid 20downloads model. In our view, Amazon.com should (and 40probably is) thinking ahead of catching up to iTunes in the paid 10 20download world and start considering business strategies in 0 0the new streaming world. 04/07 08/07 12/07 04/08 08/08 12/08 04/09 Minutes Unique ViewersVideo, An Opportunity With Many Players….StillEarly and Studios May Control Timing, Not Source: ComScoreTechnologyDigital video is still in its infancy, but the current growth isshowing accelerating momentum. According to ComScore 38
  • 39. MORGAN STANLEY RESEARCH July 13, 2009 Amazon.comAmazon.com has over 40,000 titles available in digital and, important role on mobile phones. A new generation of wirelesswhile still very early, we believe Amazon.com could continue to enabled portable media players will enable unlimited /build a digital video platform to allow it to gain market share in anywhere / anytime access to YouTube and other onlinethis emerging industry, but it’s still to early to tell. streaming sites, why would a user pay $2 to purchase a music video clip and go through the trouble of syncing / side-loadingCurrently Amazon.com allows consumers to view video that clip onto the mobile phone / media player? Using iPhone /content directly online or on any TV through TiVo, Roku, Xbox iPod Touch and BlackBerry as an unscientific, but360, and Windows Media Center PCs or through partnerships forward-looking proxy, more and more mobile users (40MM inwith Sony (Bravia internet video link) and Panasonic (Viera iPhone / iPod Touch’s case) will likely to watch a video clip byCast). In addition, Amazon.com offers the ability to download tapping on the TV.com app on the iPhone screen and watchcontent onto wireless devices and media players through its the latest full episode of CSI:NY. Less and less users (seenUnbox video player. Amazon.com has built a platform in from the rapidly rising iPhone + iPod Touch-to-BlackBerryAmazon Video On Demand that should allow the company to users ratio) will spend $20 on a whole season of digitalcapture a component of the online video market as it expands downloads and then re-encode / side-load those onto theover time. BlackBerry. We believe Amazon.com should start looking beyond paid download model or streaming only to TVs and PCExhibit 52 screens, and investing in the potential of mobile / webU.S. Consumers with Access to Digital Video streaming video.(In Millions) 2005 2006 2007 2008 2009EXbox 360 1.5 10.4 17.8 28.6 40.8 Net, Amazon.com will likely remain well positioned withPS3 0.0 1.7 10.5 21.3 35.1iPod / iPhone / iTouch (with video screens) 5.0 20.5 46.7 75.4 96.2 physical video sales and a Blu-Ray booster helps, but theTiVo 4.4 4.4 3.9 3.3 3.3 jury is still out on the company’s ability to transition toOther (Slingbox, Roku, Vudu) Less than 1MM UnitsTotal Addressable Market 11.4 37.5 79.4 129.1 175.8 digital video sales over the long-term. Y/Y Growth 229% 112% 63% 36%Source: Company documents, Morgan Stanley Research, Morgan Stanley Media Team (Ben Flat-Panel Share Gains - A Relevant Growth DriverSwinburne)Note: ‘Other’ segment assumed to be constant at 500K units, TiVo 2009E estimate assumed Earlier in the second quarter, Morgan Stanley Retail Analystno growth. Xbox 360 and PS3 units based on shipment data from company filings. Greg Melich downgraded shares of Best Buy to Underweight from Equal-weight. A component of the downgrade rationale was based on Best Buy’s Y/Y flat panel TV market shareBased on estimates from Ben Swinburne and our media team, decline from 25.9% to 25.2% despite 600 basis points of Circuit~82MM consumers had access to viewing digital content by City share being redistributed throughout the industry.year-end 2008 through Apple TV, Xbox LIVE, iPods/iPhonesequipped with viewable screens, as well as TiVo, Slingbox, According to TraQline, Amazon.com’s dollar volume share ofRoku, and Vudu devices. flat panel TV sales increased to 4.6% of the market in CQ1 from 2.1%in CQ1:08. Amazon.com’s share seems to beA key risk in Amazon.com’s digital video undertaking is that the accelerating, most likely due to the Circuit City bankruptcy, asindustry is evolving very rapidly in terms of usage and Amazon.com grew sequential by 90 basis points.monetization models. While Video On Demand is off to a goodstart on TV via set-top boxes and Amazon.com is in the race forthe early lead on PC and mobile platforms, free / ad-supportedstreaming video has a dominant lead. Websites such asYouTube (108MM unique U.S. viewers, +29% Y/Y, 17Bminutes, +73% Y/Y in 4/09) and Hulu (40MM unique U.S.viewers, 2.4B minutes) exemplify this trend. Compared withthem, Amazon.com is still a small player in the web video world,accounting for 8% of total unique U.S. online video viewers andless than 1% of total minutes in 4/09, while YouTube and Hulucommands 71% / 26% of viewers and 30% / 4% of minutes.As Internet accelerates its move towards mobile platform, free /ad-supported streaming video will likely play an increasingly 39
  • 40. MORGAN STANLEY RESEARCH July 13, 2009 Amazon.comExhibit 53 Exhibit 54Amazon.com Gaining Flat Panel Share Amazon.com Taking Share at High-End of Flat Panel Y/Y ∆ BPS MarketFlat Panel TVs 2Q08 3Q08 4Q08 1Q09 Last 4Q Flat Panel TVs: Average Price PaidTotal Internet (50) 90 190 270 140 [CQ2:07 - CQ1:09]Amazon.com 70 160 170 250 160 $1,500Total Discount Stores 180 (10) 270 440 230Wal-Mart 300 280 350 250 290Costco (190) (110) (70) 150 (40) $1,250Target 70 40 50 60 50Total CE Specialists 40 100 (270) (660) (210) $1,000Best Buy 250 180 40 (70) 90Circuit City (130) (80) (370) (600) (310)H.H. Gregg 30 40 40 30 30 $750Total Computer Stores (50) 30 50 90 30Source: TraQline, Morgan Stanley Research $500 2Q07 3Q07 4Q07 1Q08 2Q08 3Q08 4Q08 1Q09 AMZN BBY COST WMTFor comparative purposes, in CQ1 Amazon.com’s share grew Source: TraQline, Morgan Stanley Researchby +250 basis points Y/Y compared to -70 at Best Buy, +250 atWal-Mart, +150 at Costco, and +60 at Target. We believeAmazon.com’s consumer value proposition in the TV market isvalue (price), selection, and convenience (white glove delivery), Amazon Web Services (AWS) – Approachingas in the rest of its business. Flat panel TVs is an example of a $400MM annual revenue according to IDC; A Leadercategory in which Amazon.com was almost non-existent three In The Cloud – Technology Company or Retailer?years ago at 0.4% to a major player by CQ1 at 4.6%. Amazon.com has built an open-source web services business that allows developers and entrepreneurs to leverageAmazon.com’s flat panel share grew to 2.9% in 2008 from Amazon.com’s web computing infrastructure.1.6% in 2007, which would be $210MM of incrementaldomestic dollar volume growth for Amazon.com based on a Recent AWS highlights include the announcement of the public$16B market. Amazon.com’s total domestic revenue grew by beta of Amazon Elastic MapReduce, introduction of Reserved$2.1B to $10.2B, so flat panel sales growth accounted for 10% Instances, relationship with IBM to allow developers to run IBAof Amazon.com’s domestic dollar volume based on the market software on EC2, launched CloudFront CDN offering, ability toshare gains. Based on conversations with industry run Microsoft Windows Server on Amazon EC2, and tieredparticipants, the effects on Amazon.com’s business may not be pricing for Amazon S3. Some notable companies using AWSas significant as the share gains suggest, but still have been a include Eli Lilly, ESPN, Autodesk, New York Times, SmugMug,major factor in dollar volume growth in the electronics category Playfish, WordPress.com, as well as several hedge funds. Infor Amazon.com. addition, AWS developers have grown from 120K in 2005 to 370K in 2008. 40
  • 41. MORGAN STANLEY RESEARCH July 13, 2009 Amazon.comExhibit 55 Simple Queue Service (Amazon SQS) offers a highlyBandwidth Showing Accelerating Growth scalable, hosted queue for storing messages as they travel between computers. Amazon Elastic MapReduce is a web service that enables users to process vast amounts of data. AWS Premium Support is one-to-one customer service infrastructure. Payments and Billing Services Amazon Flexible Payments Service (Amazon FPS) is a payments service designed from the ground up for developers. Amazon.com customers that use the payments system have the comfort of using their Amazon.com log-in and shipping information. Amazon DevPay is a simple-to-use online billing and account management service that makes it easy for businesses to sell applications that are built in, or run on top of, Amazon Web Services.Source: Company presentation On-Demand WorkforceExhibit 56 Amazon Mechanical Turk is a marketplace for work thatRegistered AWS Developers Ramping Nicely… requires human intelligence. Developers can leverage this 450 service to build human intelligence directly into their applications. 400 350 Alexa Web Services 300 # of Developers (000s) 250 The Alexa Web Information Service aggregates traffic data and web structure for users. The Alexa Top Sites web service 200 provides access to lists of web sites ordered by Alexa Traffic 150 Rank. 100 50 The Alexa Site Thumbnail service provides developers with 0 access to thumbnail images for the home pages of web sites. CQ1:06 CQ2:06 CQ3:06 CQ4:06E CQ1:07 CQ2:07E CQ3:07E CQ4:07E CQ1:08 CQ2:08 Merchant ServicesSource: Company data, Morgan Stanley ResearchNote: Estimated when not disclosed by company. Amazon Fulfillment Web Service (Amazon FWS) allowsWhile hard to quantify the revenue impact to Amazon.com yet, merchants to access Amazon.com’s fulfillment capabilitiesAWS has received significant recognition from venture through a simple web services interface. The FWS interfacecapitalists and entrepreneurs for its innovation in cloud allows third-party merchants the ability to monitor theircomputing and web services. Products include: Fulfillment By Amazon (FBA) inventory and order flow.Infrastructure Services Private Labels: Been Around For a Bit, but Not WellAmazon Elastic Compute Cloud (Amazon EC2) allows Known…Bolstered By Recommendationdevelopers to use Amazon.com’s web infrastructure for their Engine…More Margin for Amazon.com?businesses computing needs. Amazon SimpleDB is a webservice providing the core database functions of data indexing Private Labels – Another interesting business thatand querying. Amazon S3 is storage for the Internet. Amazon Amazon.com has entered discreetly is the private labelCloudFront is a web service for content delivery. Amazon business. Many loyal Amazon.com customers are unaware 41
  • 42. MORGAN STANLEY RESEARCH July 13, 2009 Amazon.comthat the company rolled out a private label brand in 8/05 called Exhibit 59Pinzon with a focus on household goods. In addition, Pike Street ProductsAmazon.com also has private labels under its Pike Street(bedding and bath), Strathwood (patio furniture), and Denali(tools) brands. In private label, Amazon.com has the ability togarner high profit transaction volume with assistance from itsrating and recommendation system.Exhibit 57Strathwood Products Source: Amazon.com Exhibit 60 Denali ProductsSource: Amazon.comExhibit 58Pinzon Products Source: Amazon.comSource: Amazon.com Vertical Search Engine and Ad Platform for Retail, Amazon Becoming Search For Retail Amazon.com is quickly becoming a vertical search engine / ad platform for the retail segment, as the company continues to add more third-party content to the site. Already 32% of total unit volume for Amazon.com comes from third-party transactions. Amazon.com’s marketplace offering provides distribution for small, medium, and large merchants, all in a 42
  • 43. MORGAN STANLEY RESEARCH July 13, 2009 Amazon.comstructured and trusted format that distinguishes it from othersearch/marketplace providers across the Internet. Exhibit 62 Product Ads – Offering Off-Platform Distribution forIn addition, Amazon.com is a prime online property for brand Retailersadvertisers. The homepage Amazon.com supported 89MMglobal unique visitors, up 10% Y/Y in 5/09, per comScore, andmany of Amazon.com-owned properties are the leadingverticals in the segment – IMDb.com, the leading online moviesite with 55MM global unique visitors (+32% Y/Y) has longbeen a key advertising medium for movie studios (in addition toprovide product links back to Amazon.com and offer free /ad-supported streaming videos to complement AmazonOnDemand), and DPReview.com, the leading camera reviewsite has supported display / search ads from camera makers,as well as buy links from Amazon.com. In September 2008,Amazon.com hired Lisa Utzschneider, who worked at Microsoftfor 10 years, to become a vice president of advertising sales forAmazon.com and increase its advertising efforts. Thecompany has a growing presence of display advertisementsthat do not disrupt the user experience, as displayed in thescreen shot below.Exhibit 61 Source: Amazon.comMinimally Invasive Display Ads Add Monetization ofHome Page Traffic While Amazon.com’s direct advertising initiatives are still relatively small – display advertisements and cost-per-click advertisements – the company’s efforts as a distribution platform are significant (32% of units as of CQ1) and becoming increasingly so as Amazon.com continues to grow its traffic and market share faster than eCommerce. The key to Amazon.com’s success in its distribution platform efforts is that it first built trust with the customer and then layered in other sources of revenue that rely on the customers legacy trust with Amazon.com. Given Amazon.com’s direct and controlled relationship with its customer, it has become closer to its usersSource: Amazon.com than any other distribution platform. As investors think about the future of retail distribution on the Internet, the trustedAmazon.com’s most interesting entry into the advertising advisor position that Amazon.com holds could allow themarket has come from its launch of Amazon Product Ads. company to become the first place that consumers go whenAmazon Product Ads allow retailers to place advertisements searching for retail product – in fact, the data (eighton Amazon.com on a cost per click basis. After clicking on an consecutive quarters of at least 18 percentage points of excessad, the consumer is taken to directly to the retailer’s site, revenue growth) suggests it may have already happened.exactly like search advertising results by the search companies.This also gives Amazon.com an opportunity to bundle itsAmazon Payments offering so retailers can provide consumerswith a similar Amazon.com checkout experience on their ownsite. 43
  • 44. MORGAN STANLEY RESEARCH July 13, 2009 Amazon.com consumer retail experience and being structurally positionedRevisiting Amazon.com’s Core to do so with a low-cost operator model and a unique logisticsStrengths infrastructure.Strong User + Revenue per User Trends Imply Three Amazon.com statements over the years stand out toOn-Going Share Gains represent the mission of the company: 1) to be the world’s most customer centric company; 2) start with the customerAmazon.com has supported especially strong user, revenue and work back; and 3) ‘Amazon and done’. While the missionper user, revenue and free cash flow trends in recent quarters, is simple, what the company has built has made it difficult for(see Exhibit 63) illustrating that the company is gaining share competitors to push back now that most of Amazon.com’sfrom its growing list of online and offline competitors. infrastructure is in place to reach its goals.Exhibit 63Amazon.com – Strong Operating Metrics Growth(1) Amazon.com has done an outstanding job of: 1) improving itsin Recent Quarters user experience (with the likes of its recommendation engine,(US$ in Thousands, Except When Noted) which we believe accounts for more than 25% ofRevenue CQ1:08 4,135,000 CQ2:08 4,063,000 CQ3:08 4,264,000 CQ4:08 6,704,000 CQ1:09 4,889,000 Amazon.com’s sales combined with relentless focus on Y/Y ChangeActive Customers (MM) 37% 79.0 41% 81.5 31% 84.5 18% 88.0 18% 91.0 improving the customer experience; 2) expanding its product Y/Y Change 19% 18% 17% 16% 15% selection and international growth; 3) offering better value toRevenue per Active Customer $53 $51 $51 $78 $55 Y/Y Change 15% 19% 11% 1% 2% its customers (with ramps in the likes of third-party sellers /TTM Active Sellers (000) 1,300 1,420 1,405 1,500 1,600 Y/Y Change 17% 18% 17% 18% 23% items and private label products); and 4) expanding itsTotal Units (1) 196,135 190,113 202,566 308,606 254,976 Y/Y Change 31% 32% 30% 28% 30% technology advantage (via launches of products / services likeThird-Party Units (1) Y/Y Change 58,841 36% 55,133 33% 62,795 26% 83,324 33% 81,592 39% Kindle e-reader, Amazon Web Services, Video On Demand,Third-Party Units as a % of TotalASP (1) 30 $21.08 29 $21.37 31 $21.05 27 $21.72 32 $19.17 and IMdB.com…) Y/Y Change 5% 7% 1% (8%) (9%)Incremental Operating Margin 7.1% 6.8% 5.4% 3.1% 8.5%TTM Revenue per Employee $917 $947 $932 $930 $965 Y/Y Change 12% 10% 7% 3% 5%TTM OpEx per Employee $153 $157 $156 $154 $160 Y/Y Change 3% 3% 3% 1% 5%TTM Free Cash Flow 790,000 816,000 970,000 1,364,000 1,430,000 Y/Y Change 52% 16% 21% 15% 81%TTM Free Cash Flow per Share $1.86 $1.91 $2.26 $3.16 $3.29 Y/Y Change 51% 15% 19% 13% 77% Amazon Prime + Widening Selection DrivingKindle Books Available 115,000 140,000 185,000 230,000 270,000 Loyalty and Market Share GainsSource: Morgan Stanley Research, Company ReportsNote: (1) Morgan Stanley Estimates. Y/Y total unit growth and third party units as % of total In Amazon.com’s physical retail business, the key to thefrom company reports. acceleration of growth over the past 2+ years has been driven by increased selection combined with the advancement ofExhibit 64 shipping initiatives Super Saver and Amazon Prime. While91MM Active Amazon.com Customers, Growing Amazon.com has grown its physical business, it has also15% Y/Y been investing aggressively in its digital efforts to improve its user experience and to protect itself from transition risk in its Active Customers (MM) 100 25% book, CD, and DVD businesses. In the past two years, Y/Y Growth (%) 80 20% Amazon.com has launched and enhanced its digital book 60 15% business with Kindle, its MP3 business with Amazon MP3, 40 10% and its video business with Amazon VOD. The greatest risk to 20 5% the Amazon.com growth story is within the media category, which still accounts for 56% of total revenue. We believe the 0 0% most significant external threats to Amazon.com include 05 05 06 06 07 07 08 08 09 Apple/Google in books, MP3, and online video, and Netflix in 1: 3: 1: 3: 1: 1: 3: 3: 1: Q Q Q Q Q Q Q Q Q online video. C C C C C C C C C Active Customers (MM) Y/Y Growth We continue to believe that Amazon.com’s share of globalSource: Company data, Morgan Stanley ResearchOver the years, Amazon.com has methodically built a eCommerce could increase to the low-teens in the nextbusiness with the sole purpose of providing a trusted several years, vs. 7% today. In February 2005, Amazon.com launched Amazon Prime in the United States, which allowed 44
  • 45. MORGAN STANLEY RESEARCH July 13, 2009 Amazon.comcustomers to receive product in two days for any in stock item Despite a perceived significant increase in the costs ofat a cost of $79 per year. Early on investors were nervous that shipping to guarantee two-day delivery, the effects oncustomers would unbundle purchases that historically were Amazon.com’s cost structure have been minimal, asbundled to qualify for Super Saver shipping and that the Prime Amazon.com’s net shipping cost has only increased by 50effort could prove to be a costly endeavor without an basis points from Amazon.com launch through CQ1.associated return. Amazon.com, as most great retailbusiness, had the perspective that scale and market share Exhibit 67would be the underlying drivers of success. Net Shipping Cost Increase Minor Since Prime LaunchExhibit 65 4.0%Revenue Growing Faster Than Shipping Costs 3.5%Despite Prime 3.0% Net Shipping Cost 2.5% 50% 2.0% 1.5% 40% Y/Y Growth % 1.0% 30% 0.5% 0.0% 20% 05 05 05 05 06 06 06 06 07 07 07 07 08 08 08 08 09 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q Net shipping cost 10% Source: Company data, Morgan Stanley Research 0% 3/05 9/05 3/06 9/06 3/07 9/07 3/08 9/08 3/09 Revenue Shipping CostsSource: Company data, Morgan Stanley Research International Prime and Product Category ExpansionThe results of Amazon’s Prime initiatives have been Amazon.com has continued to extend its Prime initiatives withimpressive as Amazon.com was growing 5 percentage points launches in Japan in June 2007, Germany and UK inslower than eCommerce in the first quarter of Prime’s launch November 2007, and France in October 2008. The growthto now growing at 21 percentage points faster than rate of Amazon.com’s international business is now starting toeCommerce as of CQ1. Amazon.com’s U.S. business has feel the positive effects of Prime initiatives as the internationalnow grown at least 18 percentage points faster than domestic business has now grown faster than the U.S. for twoeCommerce for eight consecutive quarters. Amazon.com’s consecutive quarters after eight quarters of the U.S. growingshare of domestic eCommerce is still just 9% (7% global), faster than international.which means to us that the company can grow at an excessrate for a long period before market share constraints become Exhibit 68an issue. International Growth Rate Now Exceeding United StatesExhibit 66 45%Amazon.com – Widening Relative Growth Gap vs. 40%Industry Owing to Prime and Selection 35% 30% 30% Growth Rate 25% 25% 20% Growth Differential 15% 20% 10% 15% 5% % 10% (5%) 1Q05 2Q05 3Q05 4Q05 1Q06 2Q06 3Q06 4Q06 1Q07 2Q07 3Q07 4Q07 1Q08 2Q08 3Q08 4Q08 1Q09 5% (10%) (15%) 0% 1Q05 3Q05 1Q06 3Q06 1Q07 3Q07 1Q08 3Q08 1Q09 AMZN v. eCommerce Global growth (ex-fx) Domestic growth Internatonal growth (ex-fx)Source: Company data, Morgan Stanley Research Source: Company data, Morgan Stanley Research 45
  • 46. MORGAN STANLEY RESEARCH July 13, 2009 Amazon.comAn additional driver of growth in international markets has Exhibit 71been the product category expansion that has occurred over International Revenue Breakdown – EGM Growing,the past two years as 16 international product categories were but Media Still Larger $14added in 2007 and nine in 2008. $12We believe the combination of more product categories, more $10Prime customers, and more international penetration will drive 44% Revenue ($B) $8the core retail business for years. Outside the United States, 39%we estimate that Amazon.com has less than 6% of the $6eCommerce market. $4 55% 64%Exhibit 69 $2‘Earth’s Biggest Selection’ Continues to Expand 100% $0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009E 2010E Media EGM Other Source: Company data, Morgan Stanley Research A Singular Customer Focus is Most Important Driver of Lifetime Customer Value We continue to believe that Amazon.com is taking eCommerce share because of its intense focus on an excellent customer experience whether it is through ‘Earth’s biggest selection’, low pricing, free / low-cost shipping. ASource: Company presentation recent study by Foresee shows that Amazon.com is the #2 online retailers measured by customer satisfaction with aExhibit 70North American Revenue Breakdown – EGM score of 84 and growing, one point behind Netflix who trendedEstimated to be Largest NA Segment by C2010E from an 86 down to 85 from last year. $14 We believe that Amazon.com has rewritten the book when it $12 comes to customer experience and it will become more $10 apparent as eCommerce continues to evolve. Great 52% customer experiences translate into goodwill and repeat Revenue ($B) $8 43% customers, while negative experiences lead to customers $6 seeking alternative channels to make purchases. According $4 to the same Foresee study, 89% of those who showed a high 20% 52% 43% satisfaction would purchase again online and 94% of $2 respondents would return to the same retailer. These figures 75% $0 are very different for unsatisfied customers. Only 52% would 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009E 2010E repeat a purchase online and, more importantly, only 60% Media EGM Other would return to the same retailer. These metrics highlight theSource: Company data, Morgan Stanley Research role that customer satisfaction can play and why Amazon.com’s focus on the customer has helped deliver significant Y/Y growth in excess of the industry. 46
  • 47. MORGAN STANLEY RESEARCH July 13, 2009 Amazon.comExhibit 72AMZN —Quarterly Income Statement(US$ in Thousands, Except per Share Data) F2007A F2008A F2009E 3/07 6/07 9/07 12/07 3/08 6/08 9/08 12/08 3/09 6/09 9/09 12/09Revenue $3,015,000 $2,886,000 $3,262,000 $5,673,000 $4,135,000 $4,063,000 $4,264,000 $6,704,000 $4,889,000 $4,661,206 $4,821,147 $7,597,143 Media 1,990,000 1,833,000 2,091,000 3,329,000 2,543,000 2,406,000 2,494,000 3,640,000 2,723,000 2,507,818 2,600,674 3,862,287 Electronics & Other General Merchandise 947,000 970,000 1,079,000 2,213,000 1,481,000 1,531,000 1,640,000 2,889,000 2,046,000 1,997,149 2,064,473 3,523,106 Other 78,000 83,000 92,000 131,000 111,000 126,000 130,000 175,000 120,000 156,240 156,000 211,750 North America $1,622,000 $1,601,000 $1,788,000 $3,084,000 $2,126,000 $2,168,000 $2,302,000 $3,631,000 $2,578,000 $2,521,551 $2,605,633 $4,095,138 Media 990,000 923,000 1,081,000 1,637,000 1,205,000 1,148,000 1,245,000 1,751,000 1,305,000 1,193,208 1,288,600 1,831,612 Electronics & Other General Merchandise 564,000 606,000 631,000 1,336,000 826,000 920,000 950,000 1,733,000 1,172,000 1,205,904 1,188,173 2,086,776 Other 68,000 72,000 76,000 111,000 95,000 100,000 107,000 147,000 101,000 122,440 128,860 176,750 International $1,393,000 $1,285,000 $1,474,000 $2,589,000 $2,009,000 $1,895,000 $1,962,000 $3,073,000 $2,311,000 $2,139,655 $2,215,515 $3,502,005 Media 1,000,000 910,000 1,010,000 1,692,000 1,338,000 1,258,000 1,249,000 1,889,000 1,418,000 1,314,610 1,312,075 2,030,675 Electronics & Other General Merchandise 383,000 364,000 448,000 877,000 655,000 611,000 690,000 1,156,000 874,000 791,245 876,300 1,436,330 Other 10,000 11,000 16,000 20,000 16,000 26,000 23,000 28,000 19,000 33,800 27,140 35,000 Company Revenue Guidance $2.85-3.00B $2.70-2.85B $3.0-3.175B $5.10-5.45B $3.95-4.15B $3.88-4.08B $4.200-4.425B $6.000-7.000B $4.525-4.925B $4.300-4.750BCost of Revenue 2,296,000 2,185,000 2,500,000 4,503,000 3,179,000 3,096,000 3,265,000 5,356,000 3,741,000 3,567,010 3,696,859 6,073,477 North America 1,183,000 1,167,000 1,328,000 2,386,000 1,557,000 1,609,000 1,716,000 2,850,000 1,884,000 1,887,381 1,947,710 3,210,588 International 1,113,000 1,018,000 1,172,000 2,117,000 1,622,000 1,487,000 1,549,000 2,506,000 1,857,000 1,679,629 1,749,149 2,862,889Gross Profit (incl. Depreciation) $719,000 $701,000 $762,000 $1,170,000 $956,000 $967,000 $999,000 $1,348,000 $1,148,000 $1,094,196 $1,124,288 $1,523,666 North America 439,000 434,000 460,000 698,000 569,000 559,000 586,000 781,000 694,000 634,170 657,922 884,550 International 280,000 267,000 302,000 472,000 387,000 408,000 413,000 567,000 454,000 460,026 466,366 639,116Marketing 71,000 63,000 72,000 131,000 101,000 98,000 104,000 165,000 124,000 121,191 127,760 186,130Fulfillment 253,000 248,000 285,000 467,000 343,000 345,000 378,000 531,000 407,000 403,194 424,261 600,174Technology & Content 167,000 176,000 181,000 190,000 203,000 218,000 226,000 235,000 239,000 249,375 255,521 262,101General & Administrative 49,000 49,000 47,000 54,000 51,000 61,000 60,000 57,000 56,000 67,587 65,085 83,569Other Operating Expense 0 3,000 3,000 3,000 6,000 0 7,000 8,000 11,000 0 0 0Total Stock Compensation Expense 34,000 46,000 51,000 54,000 54,000 73,000 70,000 79,000 67,000 83,950 80,500 82,950Amortization 0 0 0 0 0 0 0 0 0 0 0 0Total Operating Expenses (incl. Stock Com p. & Other) $574,000 $585,000 $639,000 $899,000 $758,000 $795,000 $845,000 $1,075,000 $904,000 $925,298 $953,128 $1,214,924Total Operating Expenses (excl. Stock Com p. & Other) $540,000 $536,000 $585,000 $842,000 $698,000 $722,000 $768,000 $988,000 $826,000 $841,348 $872,628 $1,131,974Operating Incom e (incl. Stock Com p. & Other) $145,000 $116,000 $123,000 $271,000 $198,000 $172,000 $154,000 $273,000 $244,000 $168,898 $171,160 $308,741Operating Incom e (excl. Stock Com p. & Other) 179,000 165,000 177,000 328,000 258,000 245,000 231,000 360,000 322,000 252,848 251,660 391,691 Company Operating Income (incl. Stock. Comp.) Guidance $82-122MM $65-105MM $75-110MM $221-291MM $155-200MM $120-160MM $115-160MM $145-305MM $125-210MM $110-190MM Company Operating Income (excl. Stock. Comp.) Guidance $120-160MM $110-150MM $125-160MM $275-345MM $210-255MM $200-240MM $195-240MM $230-390MM $200-285MM $200-280MMEBITDA (excl. Stock Com p. & Other) 241,000 225,000 238,000 391,000 323,000 315,000 307,000 436,000 409,000 342,038 336,868 481,262Net Interest (Income) and Other (Income) (1,000) 0 (3,000) (8,000) (7,000) 9,000 (28,000) (31,000) (4,000) (24,459) (23,668) (20,507)Pre-Tax Profit (excl. Stock Com p. & Other) 180,000 162,000 177,000 333,000 259,000 236,000 252,000 383,000 315,000 277,307 275,328 412,198Provision / (Benefit) for Income Taxes 33,000 33,000 44,000 74,000 62,000 46,000 59,000 80,000 69,000 54,567 63,159 86,644Adjustment for Extraordinary Items- Reported 0 0 0 0 0 0 0 0 0 0 0 0Tax benefit from Stock Compensation 0 0 0 0 0 0 0 0 0 0 0 0(Benefit) for NOL Carryforw ards 0 0 0 0 0 0 0 0 0 0 0 0Operating Net Incom e (excl. Stock Com p. & Other) $147,000 $129,000 $133,000 $259,000 $197,000 $190,000 $193,000 $303,000 $246,000 $222,740 $212,170 $325,554 Company Operating Net Income GuidanceAcquisition-Related and Restructuring Charges 0 0 0 0 0 0 0 0 0 0 0 0Remeasurement of Debt (1) 2,000 5,000 2,000 (2,000) (2,000) 0 0 0 0 0 0 0(Earnings) in Equity Interests 0 0 0 0 0 0 0 0 0 0 0 0Cumulative Effect of Change in Accounting 0 0 0 0 0 0 0 0 0 0 0 0Extraordinary Loss / (Gain) 0 0 0 0 2,000 (40,550) 5,000 (2,000) 2,000 36,607 0 0Tax Effect 0 0 0 0 0 (450) 0 0 0 0 0 0Reported Net Incom e $111,000 $78,000 $80,000 $207,000 $143,000 $158,000 $118,000 $226,000 $177,000 $102,182 $131,670 $242,604Wtd. Avg. Shares Out (Diluted) 420,000 423,000 425,000 427,000 426,000 430,000 436,000 436,000 437,000 437,380 438,143 438,910Operating EPS (excl. Stock Com p. & Other) $0.35 $0.30 $0.31 $0.61 $0.46 $0.44 $0.44 $0.69 $0.56 $0.51 $0.48 $0.74Reported EPS 0.26 0.18 0.19 0.48 0.34 0.37 0.27 0.52 0.41 0.23 0.30 0.55Key MetricsGrow th RateRevenue (Y/Y) 32.3% 34.9% 41.4% 42.3% 37.1% 40.8% 30.7% 18.2% 18.2% 14.7% 13.1% 13.3% Media (Y/Y) 26.1 26.6 35.6 33.3 27.8 31.3 19.3 9.3 7.1 4.2 4.3 6.1 Electronics & Other General Merchandise (Y/Y) 48.2 55.4 54.4 58.2 56.4 57.8 52.0 30.5 38.1 30.4 25.9 21.9 Other (Y/Y) 25.8 23.9 39.4 47.2 42.3 51.8 41.3 33.6 8.1 24.0 20.0 21.0 North America (Y/Y) 30.1 38.4 42.2 39.7 31.1 35.4 28.7 17.7 21.3 16.3 13.2 12.8 International (Y/Y) 35.0 30.9 40.4 45.6 44.2 47.5 33.1 18.7 15.0 12.9 12.9 14.0Revenue (Q/Q) (24.4) (4.3) 13.0 73.9 (27.1) (1.7) 4.9 57.2 (27.1) (4.7) 3.4 57.6Cost of Revenue (Y/Y) 32.6 34.0 42.2 43.6 38.5 41.7 30.6 18.9 17.7 15.2 13.2 13.4Cost of Revenue (Q/Q) (26.8) (4.8) 14.4 80.1 (29.4) (2.6) 5.5 64.0 (30.2) (4.7) 3.6 64.3Operating Expenses excl. Stock Comp. & Other (Y/Y) 26.5 24.9 22.6 35.6 29.3 34.7 31.3 17.3 18.3 16.5 13.6 14.6Operating Expenses excl. Stock Comp. & Other (Q/Q) (13.0) (0.7) 9.1 43.9 (17.1) 3.4 6.4 28.6 (16.4) 1.9 3.7 29.7Operating Income excl. Stock Comp. & Other (Y/Y) 49.2 106.3 145.8 43.2 44.1 48.5 30.5 9.8 24.8 3.2 8.9 8.8Operating Income excl. Stock Comp. & Other (Q/Q) (21.8) (7.8) 7.3 85.3 (21.3) (5.0) (5.7) 55.8 (10.6) (21.5) (0.5) 55.6EBITDA (Y/Y) 50.6 82.9 76.3 35.8 34.0 40.0 29.0 11.5 26.6 8.6 9.7 10.4EBITDA (Q/Q) (16.3) (6.6) 5.8 64.3 (17.4) (2.5) (2.5) 42.0 (6.2) (16.4) (1.5) 42.9Operating Net Income (Y/Y) 126.2 222.5 177.1 103.9 34.0 47.3 45.1 17.0 24.9 17.2 9.9 7.4Operating Net Income (Q/Q) 15.7 (12.2) 3.1 94.7 (23.9) (3.6) 1.6 57.0 (18.8) (9.5) (4.7) 53.4Margin AnalysisGross Margin 23.8% 24.3% 23.4% 20.6% 23.1% 23.8% 23.4% 20.1% 23.5% 23.5% 23.3% 20.1%Operating Margin (excl. Stock Comp. & Other) 5.9 5.7 5.4 5.8 6.2 6.0 5.4 5.4 6.6 5.4 5.2 5.2EBITDA Margin (excl. Stock Comp. & Other) 8.0 7.8 7.3 6.9 7.8 7.8 7.2 6.5 8.4 7.3 7.0 6.3Pre-Tax Margin 6.0 5.6 5.4 5.9 6.3 5.8 5.9 5.7 6.4 5.9 5.7 5.4Operating Net Margin 4.9 4.5 4.1 4.6 4.8 4.7 4.5 4.5 5.0 4.8 4.4 4.3Expense Analysis (as % of Revenue)Marketing 2.4% 2.2% 2.2% 2.3% 2.4% 2.4% 2.4% 2.5% 2.5% 2.6% 2.7% 2.5%Fulfillment 8.4 8.6 8.7 8.2 8.3 8.5 8.9 7.9 8.3 8.7 8.8 7.9Technology & Content 5.5 6.1 5.5 3.3 4.9 5.4 5.3 3.5 4.9 5.4 5.3 3.5General & Administrative 1.6 1.7 1.4 1.0 1.2 1.5 1.4 0.9 1.1 1.5 1.4 1.1Effective Tax Rate 22.6 28.4 34.9 26.5 30.2 28.2 32.4 26.3 27.8 28.2 32.4 26.3Revenue Mix (as % of Revenue)Media 66.0% 63.5% 64.1% 58.7% 61.5% 59.2% 58.5% 54.3% 55.7% 53.8% 53.9% 50.8%Electronics & Other General Merchandise 31.4 33.6 33.1 39.0 35.8 37.7 38.5 43.1 41.8 42.8 42.8 46.4Other 2.6 2.9 2.8 2.3 2.7 3.1 3.0 2.6 2.5 3.4 3.2 2.8North America 53.8% 55.5% 54.8% 54.4% 51.4% 53.4% 54.0% 54.2% 52.7% 54.1% 54.0% 53.9%International 46.2 44.5 45.2 45.6 48.6 46.6 46.0 45.8 47.3 45.9 46.0 46.1Footnotes(1) Remeasurement of debt includes non-cash losses (gains) based on periodic remeasurement of US$/Euro FX rate for 6.875% Euro-denominated PEACS convertible notes.Fiscal year ends in December. E = Morgan Stanley Research Estimates.Source: Morgan Stanley Research 47
  • 48. MORGAN STANLEY RESEARCH July 13, 2009 Amazon.comExhibit 73AMZN — Annual Income Statement(US$ in Thousands, Except per Share Data) F2004A F2005A F2006A F2007A F2008A F2009E F2010ERevenue $6,921,124 $8,489,923 $10,711,000 $14,836,000 $19,166,000 $21,968,496 $25,057,226 Media 5,102,349 5,931,000 7,066,000 9,243,000 11,083,000 11,693,779 12,153,624 Electronics & Other General Merchandise 1,686,244 2,329,000 3,361,000 5,209,000 7,541,000 9,630,728 12,125,292 Other 132,531 229,923 284,000 384,000 542,000 643,990 778,311 North America 3,847,344 4,711,000 5,869,000 8,095,000 10,227,000 11,800,322 13,504,301 Media 2,589,438 3,045,000 3,581,000 4,631,000 5,349,000 5,618,419 5,810,384 Electronics & Other General Merchandise 1,127,754 1,444,000 2,024,000 3,137,000 4,429,000 5,652,853 7,060,295 Other 130,152 222,000 264,000 327,000 449,000 529,050 633,621 International 3,073,780 3,778,923 4,842,000 6,741,000 8,939,000 10,168,175 11,552,926 Media 2,512,911 2,886,000 3,485,000 4,612,000 5,734,000 6,075,360 6,343,240 Electronics & Other General Merchandise 558,490 885,000 1,337,000 2,072,000 3,112,000 3,977,875 5,064,997 Other 2,379 7,923 20,000 57,000 93,000 114,940 144,689 Company Revenue Guidance $6.675-6.925B $8.373-8.673B $10.350-10.675B $14.263-14.613B $18.46-19.46BCost of Revenue 5,319,127 6,451,923 8,256,000 11,484,000 14,896,000 17,078,347 19,461,968 North America 2,823,792 3,444,000 4,344,000 6,064,000 7,732,000 8,929,680 10,206,775 International 2,495,335 3,007,923 3,912,000 5,420,000 7,164,000 8,148,667 9,255,193Gross Profit (incl. Depreciation) $1,601,997 $2,038,000 $2,455,000 $3,352,000 $4,270,000 $4,890,150 $5,595,258 North America 1,023,552 1,267,000 1,525,000 2,031,000 2,495,000 2,870,642 3,297,526 International 578,445 771,000 930,000 1,321,000 1,775,000 2,019,508 2,297,732Marketing 158,022 193,000 259,000 337,000 468,000 559,082 627,911Fulfillment 590,397 727,000 912,000 1,253,000 1,597,000 1,834,630 2,095,241Technology & Content 251,195 406,000 607,000 714,000 882,000 1,005,997 1,136,779General & Administrative 112,220 153,000 176,000 199,000 229,000 272,242 324,460Other Operating Expense 0 0 10,000 9,000 21,000 11,000 0Total Stock Compensation Expense 57,702 87,000 101,000 185,000 276,000 314,400 330,120Amortization 4,505 1,000 0 0 0 0 0Total Operating Expenses (incl. Stock Com p. & Other) $1,174,041 $1,567,000 $2,065,000 $2,697,000 $3,473,000 $3,997,350 $4,514,510Total Operating Expenses (excl. Stock Com p. & Other) $1,111,834 $1,479,000 $1,954,000 $2,503,000 $3,176,000 $3,671,950 $4,184,390Operating Incom e (incl. Stock Com p. & Other) $427,956 $471,000 $390,000 $655,000 $797,000 $892,800 $1,080,748Operating Incom e (excl. Stock Com p. & Other) 490,163 559,000 501,000 849,000 1,094,000 1,218,200 1,410,868 Company Operating Income (incl. Stock. Comp.) Guidance $431-506MM $339-429MM $605-675MM $716-876MM Company Operating Income (excl. Stock. Comp.) Guidance $475-535MM $535-610MM $452-542MM $796-866MM $1,016-1,176MMEBITDA (excl. Stock Com p. & Other) 570,392 680,000 706,000 1,095,000 1,381,000 1,569,168 1,816,046Net Interest (Income) and Other (Income) (148,850) 46,000 24,000 (12,000) (57,000) (72,633) (183,753)Pre-Tax Profit (excl. Stock Com p. & Other) 639,013 513,000 467,000 852,000 1,130,000 1,279,833 1,594,621Provision / (Benefit) for Income Taxes 0 95,000 187,000 184,000 247,000 273,370 357,495Adjustment for Extraordinary Items- Reported 0 14,000 0 0 0 0 0Tax benefit from Stock Compensation 0 0 0 0 0 0 0(Benefit) for NOL Carryforw ards 0 0 0 0 0 0 0Operating Net Incom e (excl. Stock Com p. & Other) $639,013 $404,000 $280,000 $668,000 $883,000 $1,006,464 $1,237,126 Company Operating Net Income Guidance $415-475MMAcquisition-Related and Restructuring Charges (542) 0 0 0 0 0 0Remeasurement of Debt (1) 824 (42,000) (11,000) 7,000 (2,000) 0 0(Earnings) in Equity Interests 0 0 0 0 0 0 0Cumulative Effect of Change in Accounting 0 (26,000) 0 0 0 0 0Extraordinary Loss / (Gain) (11,927) 39,000 0 0 (35,550) 38,607 0Tax Effect 0 (14,000) 0 0 (450) 0 0Reported Net Incom e $588,451 $359,000 $190,000 $476,000 $645,000 $653,456 $907,006Wtd. Avg. Shares Out (Diluted) 425,000 426,000 424,000 424,000 432,000 437,858 440,613Operating EPS (excl. Stock Com p. & Other) $1.50 $0.95 $0.66 $1.58 $2.04 $2.30 $2.81Reported EPS 1.38 0.84 0.45 1.12 $1.49 1.49 2.06Key MetricsGrow th RateRevenue (Y/Y) 31.5% 22.7% 26.2% 38.5% 29.2% 14.6% 14.1% Media (Y/Y) 26.0 16.2 19.1 30.8 19.9 5.5 3.9 Electronics & Other General Merchandise (Y/Y) 52.9 38.1 44.3 55.0 44.8 27.7 25.9 Other (Y/Y) 18.7 73.5 23.5 35.2 41.1 18.8 20.9 North America (Y/Y) 18.1 22.4 24.6 37.9 26.3 15.4 14.4 International (Y/Y) 53.3 22.9 28.1 39.2 32.6 13.8 13.6Revenue (Q/Q) -- -- -- -- -- -- --Cost of Revenue (Y/Y) 32.8 21.3 28.0 39.1 29.7 14.7 14.0Cost of Revenue (Q/Q) -- -- -- -- -- -- --Operating Expenses excl. Stock Comp. & Other (Y/Y) 24.1 33.0 32.1 28.1 26.9 15.6 14.0Operating Expenses excl. Stock Comp. & Other (Q/Q) -- -- -- -- -- -- --Operating Income excl. Stock Comp. & Other (Y/Y) 35.7 14.0 (10.4) 69.5 28.9 11.4 15.8Operating Income excl. Stock Comp. & Other (Q/Q) -- -- -- -- -- -- --EBITDA (Y/Y) 29.8 19.2 3.8 55.1 26.1 13.6 15.7EBITDA (Q/Q) -- -- -- -- -- -- --Operating Net Income (Y/Y) 149.6 (36.8) (30.7) 138.6 32.2 14.0 22.9Operating Net Income (Q/Q) -- -- -- -- -- -- --Margin AnalysisGross Margin 23.1% 24.0% 22.9% 22.6% 22.3% 22.3% 22.3%Operating Margin (excl. Stock Comp. & Other) 7.1 6.6 4.7 5.7 5.7 5.5 5.6EBITDA Margin (excl. Stock Comp. & Other) 8.2 8.0 6.6 7.4 7.2 7.1 7.2Pre-Tax Margin 9.2 6.0 4.4 5.7 5.9 5.8 6.4Operating Net Margin 9.2 4.8 2.6 4.5 4.6 4.6 4.9Expense Analysis (as % of Revenue)Marketing 2.3% 2.3% 2.4% 2.3% 2.4% 2.5% 2.5%Fulfillment 8.5 8.6 8.5 8.4 8.3 8.4 8.4Technology & Content 3.6 4.8 5.7 4.8 4.6 4.6 4.5General & Administrative 1.6 1.8 1.6 1.3 1.2 1.2 1.3Effective Tax Rate 0.0 25.6 51.1 27.6 28.9 28.3 28.3Revenue Mix (as % of Revenue)Media 73.7% 69.9% 66.0% 62.3% 57.8% 53.2% 48.5%Electronics & Other General Merchandise 24.4 27.4 31.4 35.1 39.3 43.8 48.4Other 1.9 2.7 2.7 2.6 2.8 2.9 3.1North America 55.6% 55.5% 54.8% 54.6% 53.4% 53.7% 53.9%International 44.4 44.5 45.2 45.4 46.6 46.3 46.1Footnotes(1) Remeasurement of debt includes non-cash losses (gains) based on periodic remeasurement of US$/Euro FX rate for 6.875% Euro-denominated PEACS convertible notes.Fiscal year ends in December. E = Morgan Stanley Research Estimates.Source: Company data, Morgan Stanley Research 48
  • 49. MORGAN STANLEY RESEARCH July 13, 2009 Amazon.comExhibit 74AMZN — Quarterly Revenue Contribution Analysis(US$ in Thousands, Except per Share Data) F2007A F2008A F2009E 3/07 6/07 9/07 12/07 3/08 6/08 9/08 12/08 3/09 6/09 9/09 12/09Total Revenue $3,015,000 $2,886,000 $3,262,000 $5,673,000 $4,135,000 $4,063,000 $4,264,000 $6,704,000 $4,889,000 $4,661,206 $4,821,147 $7,597,143 Y/Y Growth 32% 35% 41% 42% 37% 41% 31% 18% 18% 15% 13% 13% Q/Q Growth (24) (4) 13 74 (27) (2) 5 57 (27) (5) 3 58 Foreign Exchange Impact $84,000 $46,000 $75,000 $195,000 $185,000 $182,000 $80,000 ($320,000) ($268,000) ($300,000) -- -- Y/Y Growth ex. FX 29 33 38 37 31 34 28 24 25 22 -- -- Total Units 149,721 144,025 155,820 241,099 196,135 190,113 202,566 308,606 254,976 243,344 253,207 376,499 Y/Y Change 23% 25% 32% 33% 31% 32% 30% 28% 30% 28% 25% 22% Q/Q Change (17) (4) 8 55 (19) (3) 7 52 (17) (5) 4 49 Average Sales Price (ASP) $20.14 $20.04 $20.93 $23.53 $21.08 $21.37 $21.05 $21.72 $19.17 $19.15 $19.04 $20.18 Y/Y Change 8% 8% 7% 7% 5% 7% 1% (8%) (9%) (10%) (10%) (7%) Q/Q Change (8) (0) 4 12 (10) 1 (2) 3 (12) (0) (1) 6Category Breakdow n Media $1,990,000 $1,833,000 $2,091,000 $3,329,000 $2,543,000 $2,406,000 $2,494,000 $3,640,000 $2,723,000 $2,507,818 $2,600,674 $3,862,287 Y/Y Growth 26% 27% 36% 33% 28% 31% 19% 9% 7% 4% 4% 6% Q/Q Growth (20) (8) 14 59 (24) (5) 4 46 (25) (8) 4 49 % of Total Revenue 66 64 64 59 61 59 58 54 56 54 54 51 Electronics and Other General Merchandise $947,000 $970,000 $1,079,000 $2,213,000 $1,481,000 $1,531,000 $1,640,000 $2,889,000 $2,046,000 $1,997,149 $2,064,473 $3,523,106 Y/Y Growth 48% 55% 54% 58% 56% 58% 52% 31% 38% 30% 26% 22% Q/Q Growth (32) 2 11 105 (33) 3 7 76 (29) (2) 3 71 % of Total Revenue 31 34 33 39 36 38 38 43 42 43 43 46 Other $78,000 $83,000 $92,000 $131,000 $111,000 $126,000 $130,000 $175,000 $120,000 $156,240 $156,000 $211,750 Y/Y Growth 26% 24% 39% 47% 42% 52% 41% 34% 8% 24% 20% 21% Q/Q Growth (12) 6 11 42 (15) 14 3 35 (31) 30 (0) 36 % of Total Revenue 3 3 3 2 3 3 3 3 2 3 3 3Geographic Breakdow nNorth Am erica $1,622,000 $1,601,000 $1,788,000 $3,084,000 $2,126,000 $2,168,000 $2,302,000 $3,631,000 $2,578,000 $2,521,551 $2,605,633 $4,095,138 Y/Y Growth 30% 38% 42% 40% 31% 35% 29% 18% 21% 16% 13% 13% Q/Q Growth (27) (1) 12 72 (31) 2 6 58 (29) (2) 3 57 % of Total Revenue 54 55 55 54 51 53 54 54 53 54 54 54 Media $990,000 $923,000 $1,081,000 $1,637,000 $1,205,000 $1,148,000 $1,245,000 $1,751,000 $1,305,000 $1,193,208 $1,288,600 $1,831,612 Y/Y Growth 21% 26% 38% 31% 22% 24% 15% 7% 8% 4% 4% 5% Q/Q Growth (21) (7) 17 51 (26) (5) 8 41 (25) (9) 8 42 % of Total Revenue 33 32 33 29 29 28 29 26 27 26 27 24 % of North America Revenue 61 58 60 53 57 53 54 48 51 47 49 45 Electronics and Other General Merchandise $564,000 $606,000 $631,000 $1,336,000 $826,000 $920,000 $950,000 $1,733,000 $1,172,000 $1,205,904 $1,188,173 $2,086,776 Y/Y Growth 51% 66% 54% 53% 46% 52% 51% 30% 42% 31% 25% 20% Q/Q Growth (36) 7 4 112 (38) 11 3 82 (32) 3 (1) 76 % of Total Revenue 19 21 19 24 20 23 22 26 24 26 25 27 % of North America Revenue 35 38 35 43 39 42 41 48 45 48 46 51 Other $68,000 $72,000 $76,000 $111,000 $95,000 $100,000 $107,000 $147,000 $101,000 $122,440 $128,860 $176,750 Y/Y Growth 17% 16% 21% 37% 40% 39% 41% 32% 6% 22% 20% 20% Q/Q Growth (16) 6 6 46 (14) 5 7 37 (31) 21 5 37 % of Total Revenue 2 2 2 2 2 2 3 2 2 3 3 2 % of North America Revenue 4 4 4 4 4 5 5 4 4 5 5 4International $1,393,000 $1,285,000 $1,474,000 $2,589,000 $2,009,000 $1,895,000 $1,962,000 $3,073,000 $2,311,000 $2,139,655 $2,215,515 $3,502,005 Y/Y Growth 35% 31% 40% 46% 44% 47% 33% 19% 15% 13% 13% 14% Q/Q Growth (22) (8) 15 76 (22) (6) 4 57 (25) (7) 4 58 % of Total Revenue 46 45 45 46 49 47 46 46 47 46 46 46 Media $1,000,000 $910,000 $1,010,000 $1,692,000 $1,338,000 $1,258,000 $1,249,000 $1,889,000 $1,418,000 $1,314,610 $1,312,075 $2,030,675 Y/Y Growth 31% 27% 33% 36% 34% 38% 24% 12% 6% 5% 5% 8% Q/Q Growth (20) (9) 11 68 (21) (6) (1) 51 (25) (7) (0) 55 % of Total Revenue 33 32 31 30 32 31 29 28 29 28 27 27 % of International Revenue 72 71 69 65 67 66 64 61 61 61 59 58 Electronics and Other General Merchandise $383,000 $364,000 $448,000 $877,000 $655,000 $611,000 $690,000 $1,156,000 $874,000 $791,245 $876,300 $1,436,330 Y/Y Growth 45% 41% 54% 68% 71% 68% 54% 32% 33% 30% 27% 24% Q/Q Growth (27) (5) 23 96 (25) (7) 13 68 (24) (9) 11 64 % of Total Revenue 13 13 14 15 16 15 16 17 18 17 18 19 % of International Revenue 27 28 30 34 33 32 35 38 38 37 40 41 Other $10,000 $11,000 $16,000 $20,000 $16,000 $26,000 $23,000 $28,000 $19,000 $33,800 $27,140 $35,000 Y/Y Growth 150% 120% 433% 150% 60% 136% 44% 40% 19% 30% 18% 25% Q/Q Growth 25 10 45 25 (20) 63 (12) 22 (32) 78 (20) 29 % of Total Revenue 0 0 0 0 0 1 1 0 0 1 1 0 % of International Revenue 1 1 1 1 1 1 1 1 1 2 1 1FootnotesFiscal year ends in December. E = Morgan Stanley Research Estimates.Source: Morgan Stanley ResearchExhibit 75AMZN — Quarterly Revenue Mix(US$ in Thousands, Except per Share Data) F2007A F2008E F2009E 3/07 6/07 9/07 12/07 3/08 6/08 9/08 12/08 3/09 6/09 9/09 12/09Estim ated Segment Revenue as % of Total RevenueMedia 66% 64% 64% 59% 61% 59% 58% 54% 56% 54% 54% 51%Electronics and Other General Merchandise 31 34 33 39 36 38 38 43 42 43 43 46Other 3 3 3 2 3 3 3 3 2 3 3 3North America 54% 55% 55% 54% 51% 53% 54% 54% 53% 54% 54% 54% Media 33 32 33 29 29 28 29 26 27 26 27 24 Electronics and Other General Merchandise 19 21 19 24 20 23 22 26 24 26 25 27 Other 2 2 2 2 2 2 3 2 2 3 3 2International 46% 45% 45% 46% 49% 47% 46% 46% 47.3% 45.9% 46.0% 46.1% Media 33 32 31 30 32 31 29 28 29 28 27 27 Electronics and Other General Merchandise 13 13 14 15 16 15 16 17 18 17 18 19 Other 0 0 0 0 0 1 1 0 0 1 1 0FootnotesFiscal year ends in December. E = Morgan Stanley Research Estimates.Source: Morgan Stanley Research 49
  • 50. MORGAN STANLEY RESEARCH July 13, 2009 Amazon.comExhibit 76AMZN — Annual Revenue Contribution Analysis(US$ in Thousands, Except per Share Data) F2004A F2005A F2006A F2007A F2008A F2009E F2010ETotal Revenue $6,921,124 $8,489,923 $10,711,000 $14,836,000 $19,166,000 $21,968,496 $25,057,226 Y/Y Growth 31% 23% 26% 39% 29% 15% 14% Q/Q Growth -- -- -- -- -- -- -- Foreign Exchange Impact $276,000 ($74,000) $24,000 $400,000 $127,000 ($568,000) -- Y/Y Growth ex. FX -- 24 26 35 28 18 14 Total Units 346,607 434,479 536,267 690,665 897,420 1,128,027 1,353,632 Y/Y Change 29% 25% 23% 29% 30% 26% 20% Q/Q Change -- -- -- -- -- -- -- Average Sales Price (ASP) $19.97 $19.54 $19.97 $21.48 $21.36 $19.48 $18.51 Y/Y Change 2% (2%) 2% 8% (1%) (9%) (5%) Q/Q Change -- -- -- -- -- -- --Category Breakdow n Media $5,102,349 $5,931,000 $7,066,000 $9,243,000 $11,083,000 $11,693,779 $12,153,624 Y/Y Growth 26% 16% 19% 31% 20% 6% 4% Q/Q Growth -- -- -- -- -- -- -- % of Total Revenue 74 70 66 62 58 53 49 Electronics and Other General Merchandise $1,686,244 $2,329,000 $3,361,000 $5,209,000 $7,541,000 $9,630,728 $12,125,292 Y/Y Growth 53% 38% 44% 55% 45% 28% 26% Q/Q Growth -- -- -- -- -- -- -- % of Total Revenue 24 27 31 35 39 44 48 Other $132,531 $229,923 $284,000 $384,000 $542,000 $643,990 $778,311 Y/Y Growth 19% 73% 24% 35% 41% 19% 21% Q/Q Growth -- -- -- -- -- -- -- % of Total Revenue 2 3 3 3 3 3 3Geographic Breakdow nNorth Am erica $3,847,344 $4,711,000 $5,869,000 $8,095,000 $10,227,000 $11,800,322 $13,504,301 Y/Y Growth 18% 22% 25% 38% 26% 15% 14% Q/Q Growth -- -- -- -- -- -- -- % of Total Revenue 56 55 55 55 53 54 54 Media $2,589,438 $3,045,000 $3,581,000 $4,631,000 $5,349,000 $5,618,419 $5,810,384 Y/Y Growth 14% 18% 18% 29% 16% 5% 3% Q/Q Growth -- -- -- -- -- -- -- % of Total Revenue 37 36 33 31 28 26 23 % of North America Revenue 67 65 61 57 52 48 43 Electronics and Other General Merchandise $1,127,754 $1,444,000 $2,024,000 $3,137,000 $4,429,000 $5,652,853 $7,060,295 Y/Y Growth 28% 28% 40% 55% 41% 28% 25% Q/Q Growth -- -- -- -- -- -- -- % of Total Revenue 16 17 19 21 23 26 28 % of North America Revenue 29 31 34 39 43 48 52 Other $130,152 $222,000 $264,000 $327,000 $449,000 $529,050 $633,621 Y/Y Growth 18% 71% 19% 24% 37% 18% 20% Q/Q Growth -- -- -- -- -- -- -- % of Total Revenue 2 3 2 2 2 2 3 % of North America Revenue 3 5 4 4 4 4 5International $3,073,780 $3,778,923 $4,842,000 $6,741,000 $8,939,000 $10,168,175 $11,552,926 Y/Y Growth 53% 23% 28% 39% 33% 14% 14% Q/Q Growth -- -- -- -- -- -- -- % of Total Revenue 44 45 45 45 47 46 46 Media $2,512,911 $2,886,000 $3,485,000 $4,612,000 $5,734,000 $6,075,360 $6,343,240 Y/Y Growth 41% 15% 21% 32% 24% 6% 4% Q/Q Growth -- -- -- -- -- -- -- % of Total Revenue 36 34 33 31 30 28 25 % of International Revenue 82 76 72 68 64 60 55 Electronics and Other General Merchandise $558,490 $885,000 $1,337,000 $2,072,000 $3,112,000 $3,977,875 $5,064,997 Y/Y Growth 149% 58% 51% 55% 50% 28% 27% Q/Q Growth -- -- -- -- -- -- -- % of Total Revenue 8 10 12 14 16 18 20 % of International Revenue 18 23 28 31 35 39 44 Other $2,379 $7,923 $20,000 $57,000 $93,000 $114,940 $144,689 Y/Y Growth 98% 233% 152% 185% 63% 24% 26% Q/Q Growth -- -- -- -- -- -- -- % of Total Revenue 0 0 0 0 0 1 1 % of International Revenue 0 0 0 1 1 1 1FootnotesFiscal year ends in December. E = Morgan Stanley Research Estimates.Source: Morgan Stanley ResearchExhibit 77AMZN — Annual Revenue Mix(US$ in Thousands, Except per Share Data) F2004A F2005A F2006A F2007A F2008A F2009E F2010EEstim ated Segm ent Revenue as % of Total RevenueMedia 74% 70% 66% 62% 58% 53% 49%Electronics and Other General Merchandise 24 27 31 35 39 44 48Other 2 3 3 3 3 3 3North America 56% 55% 55% 55% 53% 54% 54% Media 37 36 33 31 28 26 23 Electronics and Other General Merchandise 16 17 19 21 23 26 28 Other 2 3 2 2 2 2 3International 44% 45% 45% 45% 47% 46% 46% Media 36 34 33 31 30 28 25 Electronics and Other General Merchandise 8 10 12 14 16 18 20 Other 0 0 0 0 0 1 1FootnotesFiscal year ends in December. E = Morgan Stanley Research Estimates.Source: Morgan Stanley Research 50
  • 51. MORGAN STANLEY RESEARCH July 13, 2009 Amazon.comExhibit 78AMZN – Key Metrics(US$ in Thousands, Except per Share Data) F2007A F2008A F20 3/07 6/07 9/07 12/07 3/08 6/08 9/08 12/08 3/09 6/09Segment Profitability:Total Revenue $3,015,000 $2,886,000 $3,262,000 $5,673,000 $4,135,000 $4,063,000 $4,264,000 $6,704,000 $4,889,000 $4,661,206 Y/Y Growth 32% 35% 41% 42% 37% 41% 31% 18% 18% 15% Q/Q Growth (24) (4) 13 74 (27) (2) 5 57 (27) (5) North America Revenue $1,622,000 $1,601,000 $1,788,000 $3,084,000 $2,126,000 $2,168,000 $2,302,000 $3,631,000 $2,578,000 $2,521,551 Y/Y Growth 30% 38% 42% 40% 31% 35% 29% 18% 21% 16% Q/Q Growth (27) (1) 12 72 (31) 2 6 58 (29) (2) % of Total Revenue 54 55 55 54 51 53 54 54 53 54 International Revenue $1,393,000 $1,285,000 $1,474,000 $2,589,000 $2,009,000 $1,895,000 $1,962,000 $3,073,000 $2,311,000 $2,139,655 Y/Y Growth 35% 31% 40% 46% 44% 47% 33% 19% 15% 13% Q/Q Growth (22) (8) 15 76 (22) (6) 4 57 (25) (7) % of Total Revenue 46 45 45 46 49 47 46 46 47 46Total Gross Profit $719,000 $701,000 $762,000 $1,170,000 $956,000 $967,000 $999,000 $1,348,000 $1,148,000 $1,094,196 Y/Y Growth 31% 38% 39% 38% 33% 38% 31% 15% 20% 13% Q/Q Growth (15) (3) 9 54 (18) 1 3 35 (15) (5) % Margin 24 24 23 21 23 24 23 20 23 23 North America Gross Profit 439,000 434,000 460,000 698,000 569,000 559,000 586,000 781,000 694,000 634,170 Y/Y Growth 29% 40% 34% 31% 30% 29% 27% 12% 22% 13% Q/Q Growth (17) (1) 6 52 (18) (2) 5 33 (11) (9) % Margin 27.1 27.1 25.7 22.6 26.8 25.8 25.5 21.5 26.9 25.2 International Gross Profit 280,000 267,000 302,000 472,000 387,000 408,000 413,000 567,000 454,000 460,026 Y/Y Growth 36% 34% 47% 48% 38% 53% 37% 20% 17% 13% Q/Q Growth (12) (5) 13 56 (18) 5 1 37 (20) 1 % Margin 20.1 20.8 20.5 18.2 19.3 21.5 21.0 18.5 19.6 21.5Employee & Productivity Metrics:TTM Revenue Run-Rate $11,447,000 $12,194,000 $13,149,000 $14,836,000 $15,956,000 $17,133,000 $18,135,000 $19,166,000 $19,920,000 $20,518,206TTM OpEx Run-Rate 2,067,000 2,174,000 2,282,000 2,503,000 2,661,000 2,847,000 3,030,000 3,176,000 3,304,000 3,423,348Headcount 14,000 14,400 15,800 17,000 17,800 18,400 20,500 20,700 20,600 22,789 Y/Y Change 13% 13% 19% 22% 27% 28% 30% 22% 22% 24% Q/Q Change 1 3 10 8 5 3 11 1 (0) 11TTM Revenue per Employee $821 $859 $871 $905 $917 $947 $932 $930 $965 $946 Y/Y Change 13% 16% 17% 15% 12% 10% 7% 3% 5% (0%) Q/Q Change 4 5 1 4 1 3 (1) (0) 4 (2)TTM OpEx per Employee $148 $153 $151 $153 $153 $157 $156 $154 $160 $158 Y/Y Change 14% 14% 8% 6% 3% 3% 3% 1% 5% 0% Q/Q Change 3 3 (1) 1 0 3 (1) (1) 4 (1)Active Customers (MM) 66.2 69.0 72.0 76.0 79.0 81.5 84.5 88.0 91.0 93.7 Y/Y Change 15% 17% 17% 19% 19% 18% 17% 16% 15% 15% Q/Q Change 3 4 4 6 4 3 4 4 4 3Revenue per Active Customer $46 $43 $46 $77 $53 $51 $51 $78 $55 $50 Y/Y Change 14% 16% 21% 20% 15% 19% 11% 1% 2% (0%) Q/Q Change (27) (8) 8 66 (30) (5) 1 51 (30) (8)TTM Active Sellers (000) 1,110 1,200 1,200 1,270 1,300 1,420 1,405 1,500 1,600 1,696 Y/Y Change 3% 12% 9% 15% 17% 18% 17% 18% 23% 19% Q/Q Change 1 8 0 6 2 9 (1) 7 7 6Total Units 149,721 144,025 155,820 241,099 196,135 190,113 202,566 308,606 254,976 243,344 Y/Y Change 23% 25% 32% 33% 31% 32% 30% 28% 30% 28% Q/Q Change (17) (4) 8 55 (19) (3) 7 52 (17) (5)ASP $20.14 $20.04 $20.93 $23.53 $21.08 $21.37 $21.05 $21.72 $19.17 $19.15 Y/Y Change 8% 8% 7% 7% 5% 7% 1% (8%) (9%) (10%) Q/Q Change (8) (0) 4 12 (10) 1 (2) 3 (12) (0)Third-Party Units 43,419 41,479 49,862 62,686 58,841 55,133 62,795 83,324 81,592 71,787 Y/Y Change 23% 24% 41% 38% 36% 33% 26% 33% 39% 30% Q/Q Change (4) (4) 20 26 (6) (6) 14 33 (2) (12)Third-Party Units as a % of Total 29 29 32 26 30 29 31 27 32 30Total Units Sold Per Day 1,664 1,583 1,694 2,621 2,132 2,066 2,202 3,354 2,771 Y/Y Change 23% 25% 32% 33% 28% 31% 30% 28% 30% -- Q/Q Change (16) (5) 7 55 (19) (3) 7 52 (17) (100)Holiday Peak -- -- -- 5,400 -- -- -- 6,300 -- -- Y/Y Change -- -- -- 34% -- -- -- 17% -- --Net Shipping Profit (Loss) ($87,000) ($75,000) ($89,000) ($184,000) ($128,000) ($128,000) ($132,000) ($242,000) ($168,000) ($142,080) Y/Y Change 28% 25% 39% 47% 47% 71% 48% 32% 31% 11% Q/Q Change (30) (14) 19 107 (30) 0 3 83 (31) (15)Shipping Revenue $151,000 $152,000 $171,000 $265,000 $192,000 $186,000 $191,000 $266,000 $190,000 $223,200 Y/Y Change 17% 19% 45% 38% 27% 22% 12% 0% (1%) 20% Q/Q Change (21) 1 13 55 (28) (3) 3 39 (29) 17Outbound Shipping Costs $238,000 $227,000 $260,000 $449,000 $320,000 $314,000 $323,000 $508,000 $358,000 $376,800 Y/Y Change 21% 21% 43% 42% 34% 38% 24% 13% 12% 20% Q/Q Change (25) (5) 15 73 (29) (2) 3 57 (30) 5Company Defined Free Cash Flow :TTM Operating Cash Flow 725,000 894,000 1,001,000 1,406,000 1,040,000 1,088,000 1,275,000 1,697,000 1,757,000 1,505,855TTM Capital Expenditures (204,000) (193,000) (200,000) (223,000) (250,000) (272,000) (305,000) (333,000) (327,000) (327,918)TTM Free Cash Flow 521,000 701,000 801,000 1,183,000 790,000 816,000 970,000 1,364,000 1,430,000 1,177,937 Y/Y Change 4% 87% 119% 144% 52% 16% 21% 15% 81% 44% Q/Q Change 7 35 14 48 (33) 3 19 41 5 (18)TTM Diluted Shares 423,000 422,250 422,500 423,750 425,250 427,000 429,750 432,000 434,750 436,595TTM Free Cash Flow per Share $1.23 $1.66 $1.90 $2.79 $1.86 $1.91 $2.26 $3.16 $3.29 $2.70 Y/Y Change 5% 89% 120% 144% 51% 15% 19% 13% 77% 41% Q/Q Change 8 35 14 47 (33) 3 18 40 4 (18)Incremental Margin Analysis:Incremental Revenue (Y/Y Increase) $736,000 $747,000 $955,000 $1,687,000 $1,120,000 $1,177,000 $1,002,000 $1,031,000 $754,000 $598,206Incremental Operating Income (Y/Y Increase) 59,000 85,000 105,000 99,000 79,000 80,000 54,000 32,000 64,000 7,848Incremental Operating Margin 8.0% 11.4% 11.0% 5.9% 7.1% 6.8% 5.4% 3.1% 8.5% 1.3%FootnotesFiscal year ends in December. E = Morgan Stanley Research Estimates.Source: Morgan Stanley Research 51
  • 52. MORGAN STANLEY RESEARCH July 13, 2009 Amazon.comExhibit 79AMZN – Historical Balance Sheet(US$ in Thousands, Except per Share Data) F2006A F2007A F2008A F2009E 3/06 6/06 9/06 12/06 3/07 6/07 9/07 12/07 3/08 6/08 9/08 12/08 3/09Assets: Cash & Cash Equivalents $507,000 $683,000 $693,000 $1,022,000 $748,000 $1,004,000 $1,366,000 $2,539,000 $1,496,000 $1,548,000 $1,650,000 $2,769,000 $1,701,000 Short-Term Marketable Securities 827,000 736,000 526,000 997,000 672,000 661,000 543,000 573,000 655,000 832,000 674,000 958,000 1,029,000 Inventories 538,000 521,000 736,000 877,000 754,000 735,000 970,000 1,200,000 1,077,000 1,107,000 1,315,000 1,399,000 1,266,000 Accounts Receivable and Other Assets 228,000 291,000 281,000 399,000 358,000 384,000 474,000 705,000 581,000 586,000 597,000 827,000 587,000Current Assets $2,100,000 $2,231,000 $2,236,000 $3,295,000 $2,532,000 $2,784,000 $3,353,000 $5,017,000 $3,809,000 $4,073,000 $4,236,000 $5,953,000 $4,583,000 Property and Equipment 361,000 405,000 449,000 457,000 442,000 443,000 491,000 543,000 594,000 651,000 731,000 854,000 889,000 Goodw ill 193,000 193,000 194,000 195,000 196,000 214,000 218,000 222,000 392,000 400,000 405,000 438,000 433,000 Other Intangibles 205,000 208,000 0 0 0 0 0 0 0 0 0 0 0 Long-Term Investments 0 0 180,000 199,000 225,000 224,000 231,000 260,000 280,000 284,000 278,000 145,000 118,000 Other Assets 131,000 128,000 209,000 217,000 266,000 319,000 325,000 443,000 808,000 914,000 916,000 924,000 957,000Total Assets $2,990,000 $3,165,000 $3,268,000 $4,363,000 $3,661,000 $3,984,000 $4,618,000 $6,485,000 $5,883,000 $6,322,000 $6,566,000 $8,314,000 $6,980,000Liabilities & Equity: Accounts Payable 920,000 943,000 1,196,000 1,816,000 1,211,000 1,295,000 1,674,000 2,795,000 1,864,000 1,963,000 2,242,000 3,594,000 2,380,000 Accrued Expenses and Other Liabilities 416,000 449,000 506,000 650,000 574,000 560,000 572,000 823,000 702,000 725,000 774,000 969,000 807,000 Unearned Revenue 54,000 49,000 49,000 49,000 45,000 64,000 56,000 79,000 79,000 87,000 86,000 124,000 223,000 Interest Payable 0 0 0 0 0 0 0 0 0 0 0 0 0 Short-Term Debt 17,000 17,000 17,000 17,000 17,000 17,000 17,000 17,000 906,000 441,000 42,000 59,000 0Total Current Liabilities $1,407,000 $1,458,000 $1,768,000 $2,532,000 $1,847,000 $1,936,000 $2,319,000 $3,714,000 $3,551,000 $3,216,000 $3,144,000 $4,746,000 $3,410,000 Other Liabilities 0 0 0 153,000 210,000 242,000 265,000 292,000 395,000 443,000 502,000 487,000 578,000 Long-Term Debt 1,259,000 1,324,000 1,304,000 1,247,000 1,251,000 1,256,000 1,273,000 1,282,000 467,000 433,000 393,000 409,000 74,000Total Liabilities $2,666,000 $2,782,000 $3,072,000 $3,932,000 $3,308,000 $3,434,000 $3,857,000 $5,288,000 $4,413,000 $4,092,000 $4,039,000 $5,642,000 $4,062,000Shareholders Equity $324,000 $383,000 $196,000 $431,000 $353,000 $550,000 $761,000 $1,197,000 $1,470,000 $2,230,000 $2,527,000 $2,672,000 $2,918,000Liabilities & Shareholders Equity $2,990,000 $3,165,000 $3,268,000 $4,363,000 $3,661,000 $3,984,000 $4,618,000 $6,485,000 $5,883,000 $6,322,000 $6,566,000 $8,314,000 $6,980,000Balance Sheet MetricsBook Value per Share $0.78 $0.91 $0.48 $1.04 $0.86 $1.33 $1.83 $2.88 $3.53 $5.31 $5.92 $6.24 $6.80Cash & Equivalents per Share (2) 3.20 3.39 2.97 4.88 3.47 4.03 4.60 7.48 5.16 5.67 5.44 8.71 6.36Days COGS in Inventory 28.3 29.2 38.2 25.5 30.0 30.7 35.4 24.3 30.9 32.6 36.8 23.8 30.9Inventory Turns 3 3 2 4 3 3 3 4 3 3 2 4 3Days Sales in Receivables 9.1 12.4 11.1 9.1 10.8 12.1 13.3 11.3 12.8 13.2 12.8 11.3 11.0Days COGS in Payables 48 53 62 53 48 54 61 57 54 58 63 61 58FootnotesFiscal year ends in December. E = Morgan Stanley Research Estimates.Source: Morgan Stanley Research 52
  • 53. MORGAN STANLEY RESEARCH July 13, 2009 Amazon.comExhibit 80AMZN – Historical Cash Flow Statement(US$ in Thousands, Except per Share Data) F2006A F2007A F2008A F2009E 3/06 6/06 9/06 12/06 3/07 6/07 9/07 12/07 3/08 6/08 9/08 12/08 3/09Net Income $51,000 $22,000 $19,000 $98,000 $111,000 $78,000 $80,000 $207,000 $143,000 $158,000 $118,000 $226,000 $177,000 Depreciation 40,000 43,000 63,000 59,000 62,000 60,000 61,000 63,000 65,000 70,000 76,000 76,000 87,000 Amortization 0 0 0 0 0 0 0 0 0 0 0 0 0 Tax Benefit from Stock Options 0 0 0 (64,000) (24,000) (35,000) (34,000) (163,000) (64,000) (43,000) (53,000) 1,000 (49,000) Earnings in Unconsolidated Equity Interests 0 0 0 0 0 0 0 0 0 0 0 0 0 Stock-Based Compensation 11,000 30,000 30,000 30,000 34,000 46,000 51,000 54,000 54,000 73,000 70,000 78,000 67,000 Non-Cash Interest Expense 1,000 1,000 1,000 0 0 0 0 0 0 0 0 0 0 Remeasurements 3,000 (12,000) (1,000) 0 3,000 5,000 3,000 (1,000) (1,000) 0 0 1,000 0 Deferred Taxes 10,000 (2,000) 7,000 8,000 2,000 (2,000) (2,000) (97,000) (19,000) (10,000) (17,000) 41,000 0 (Gain) / Loss on Sale of Securities 0 (1,000) (3,000) 0 0 0 0 0 (3,000) 0 1,000 0 (2,000) Acquisition-Related and Restructuring Charges 0 0 0 0 0 0 0 0 0 0 0 0 0 Other Non-Cash Charges 5,000 3,000 2,000 2,000 0 3,000 3,000 3,000 6,000 (36,000) (17,000) (11,000) 13,000Funds From Operations $121,000 $84,000 $118,000 $133,000 $188,000 $155,000 $162,000 $66,000 $181,000 $212,000 $178,000 $412,000 $293,000 (Inc.) Dec. in Inventories 33,000 30,000 (218,000) (127,000) 126,000 25,000 (223,000) (231,000) 148,000 (35,000) (243,000) (102,000) 107,000 (Inc.) Dec. in Accounts Receivable and Other 50,000 16,000 (53,000) (116,000) 66,000 (10,000) (73,000) (237,000) 139,000 (25,000) (9,000) (323,000) 167,000 Inc. (Dec.) in Accounts Payable (442,000) 4,000 252,000 588,000 (602,000) 82,000 304,000 1,144,000 (1,003,000) 116,000 362,000 1,337,000 (1,129,000) Inc. (Dec.) in Accrued and Other Liabilities (71,000) 1,000 27,000 246,000 (58,000) 31,000 58,000 399,000 (125,000) 62,000 101,000 209,000 (122,000) Addition to Unearned Revenue 54,000 38,000 39,000 75,000 45,000 64,000 56,000 79,000 79,000 87,000 121,000 162,000 206,000 Amortization of Unearned Revenue (48,000) (43,000) (35,000) (55,000) (44,000) (48,000) (47,000) (71,000) (64,000) (70,000) (86,000) (124,000) (107,000) Inc. (Dec.) in Interest Payable 0 0 0 0 0 0 0 0 0 0 0 0 0Change in Net Working Capital ($424,000) $46,000 $12,000 $611,000 ($467,000) $144,000 $75,000 $1,083,000 ($826,000) $135,000 $246,000 $1,159,000 ($878,000)Cash Flow from Operations ($303,000) $130,000 $130,000 $744,000 ($279,000) $299,000 $237,000 $1,149,000 ($645,000) $347,000 $424,000 $1,571,000 ($585,000) Capital Expenditures (46,000) (58,000) (62,000) (50,000) (34,000) (47,000) (69,000) (73,000) (61,000) (69,000) (102,000) (101,000) (55,000) Acquisitions, Net of Cash Acquired (28,000) 0 (2,000) (2,000) (1,000) (22,000) (24,000) (29,000) (355,000) (44,000) (8,000) (87,000) (15,000) Purchases of Marketable Securities (130,000) (232,000) (227,000) (1,340,000) (514,000) (180,000) (83,000) (153,000) (382,000) (369,000) (478,000) (448,000) (391,000) Purchases of Other Investments 0 0 0 0 0 0 0 0 0 0 0 0 0 Proceeds from Sales of PP&E 0 0 0 0 0 0 0 0 0 0 0 0 0 Proceeds from Sales of Marketable Securities 288,000 249,000 438,000 869,000 784,000 161,000 210,000 115,000 271,000 181,000 582,000 271,000 314,000 Proceeds from Sales of Other Investments 0 0 0 0 0 0 0 0 0 0 0 0 0Net Cash Used in Investing Activities $84,000 ($41,000) $147,000 ($523,000) $235,000 ($88,000) $34,000 ($140,000) ($527,000) ($301,000) ($6,000) ($365,000) ($147,000) Debt Issuance / (Repayment) (310,000) (21,000) (42,000) (7,000) (17,000) (29,000) (29,000) (11,000) 26,000 (35,000) (295,000) (15,000) (343,000) Common Stock Dividends 0 0 0 0 0 0 0 0 0 0 0 0 0 Proceeds from Sale of Common Stock 7,000 7,000 4,000 18,000 9,000 35,000 35,000 12,000 2,000 6,000 2,000 (99,000) 3,000 Repurchase of Common Stock (Treasury Shares) 0 0 (252,000) 0 (248,000) 0 0 0 0 0 0 0 0 Other 7,000 87,000 22,000 81,000 24,000 35,000 67,000 167,000 64,000 43,000 53,000 50,000 49,000Net Cash Provided by Financing Activities ($296,000) $73,000 ($268,000) $92,000 ($232,000) $41,000 $73,000 $168,000 $92,000 $14,000 ($240,000) ($64,000) ($291,000) Effect of Exchange Rate Changes 9,000 14,000 1,000 16,000 2,000 4,000 18,000 (4,000) 37,000 (8,000) (76,000) (23,000) (45,000)Inc. (Dec.) in Cash and Cash Equivalents ($506,000) $176,000 $10,000 $329,000 ($274,000) $256,000 $362,000 $1,173,000 ($1,043,000) $52,000 $102,000 $1,119,000 ($1,068,000) Beginning Cash and Cash Equivalents 1,013,000 507,000 683,000 693,000 1,022,000 748,000 1,004,000 1,366,000 2,539,000 1,496,000 1,548,000 1,650,000 2,769,000Ending Cash and Cash Equivalents $507,000 $683,000 $693,000 $1,022,000 $748,000 $1,004,000 $1,366,000 $2,539,000 $1,496,000 $1,548,000 $1,650,000 $2,769,000 $1,701,000FootnotesFiscal year ends in December. E = Morgan Stanley Research Estimates.Source: Morgan Stanley Research 53
  • 54. MORGAN STANLEY RESEARCH July 13, 2009 Amazon.comExhibit 81AMZN — Discounted Cash Flow Valuation(US$ in Millions, Except per Share Data) Actual Calendar Year ending Decem ber 31, Projected Calendar Year ending Decem ber 31, 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018Revenue $8,490 $10,711 $14,836 $19,166 $21,968 $25,057 $28,725 $33,501 $38,233 $42,870 $47,318 $51,408 $54,945 $57,799 % Growth 23% 26% 39% 29% 15% 14% 15% 17% 14% 12% 10% 9% 7% 5%EBITDA $679 $706 $1,095 $1,381 $1,569 $1,816 $2,218 $2,684 $3,201 $3,730 $4,248 $4,742 $5,208 $5,584 % Growth 64% 4% 55% 26% 14% 16% 22% 21% 19% 17% 14% 12% 10% 7% % of Revenue 8% 7% 7% 7.2% 7.1% 7.2% 7.7% 8.0% 8.4% 8.7% 9.0% 9.2% 9.5% 9.7%Cash Taxes from Operations (1) ($72) ($297) ($589) ($480) ($394) ($399) ($520) ($653) ($805) ($959) ($1,109) ($1,251) ($1,385) ($1,494) Cash Tax Rate as % of EBITDA 11% 42% 54% 35% 25% 22% 23% 24% 25% 26% 26% 26% 27% 27%Capital Expenditures ($203) ($216) ($223) ($333) ($311) ($363) ($402) ($452) ($497) ($536) ($568) ($591) ($604) ($607) % Growth 128% 6% 3% 49% (7%) 17% 11% 12% 10% 8% 6% 4% 2% 0% % of Revenue 2% 2% 2% 2% 1% 1% 1% 1% 1% 1% 1% 1% 1% 1%Change in Net Working Capital $154 $245 $835 $714 $448 $337 $43 $186 $178 $139 $86 $39 $15 ($14) % of Revenue 2% 2% 6% 4% 2% 1% 0% 1% 0% 0% 0% 0% 0% (0%)Unlevered Free Cash Flow $558 $438 $1,118 $1,282 $1,312 $1,391 $1,340 $1,765 $2,077 $2,374 $2,657 $2,939 $3,233 $3,468 NPV at 3/31/09 Valuation Date at 11.2% Hurdle Rate 950 1,218 1,055 1,250 1,322 1,359 1,368 1,361 1,346 1,299 Perpetuity Grow th Rate / Term inal Value at 11.2% Hurdle Rate 5.0% 5.5% 6.0% 6.5% 7.0% Hurdle $61,711 $67,444 $74,279 $82,569 $92,832 Rate Equity Value as of 3/31/09 10.7% $40,374 $42,899 $45,961 $49,752 $54,567 Term inal Value / Im plied EBITDA Multiple 11.0% 38,664 40,927 43,646 46,977 51,151 11.1x 12.1x 13.3x 14.8x 16.6x 11.2% 37,095 39,130 41,557 44,501 48,145 $61,711 $67,444 $74,279 $82,569 $92,832 11.5% 35,649 37,487 39,663 42,277 45,480 11.7% 34,314 35,980 37,937 40,270 43,100 DCF VALUATION FOR 3/31/09 - 10 YEAR CASH FLOW NPV of Cash Flow s $12,527 Hurdle Plus: NPV of Terminal Value (6.0% Grow th) 26,375 Rate Equity Value per Share as of 3/31/09 (2) Plus: Cash, Equivalents and Equity Investments 2,730 10.7% $92 $98 $105 $114 $125 Less: Debt and Minority Interest (74) 11.0% 88 94 100 107 117 Im plied Equity Value $41,557 11.2% 85 89 95 102 110 Fully Diluted Shares Outstanding (MM) 438 11.5% 81 86 91 97 104 Im plied Equity Value per Share (2) $95 11.7% 78 82 87 92 98Footnotes(1) Existing NOLs applied in future years.(2) Equity value per share based on treasury share method diluted share count as if implied valuation price w as used for calculation.Source: Morgan Stanley ResearchRisks specific to Amazon.com include: a longer than anticipated recession, potential impact of relative media share loss to emergingdigital players like Apple iTunes and Netflix, expense management, forex headwinds, slowing third-party sales, limited traction innewer initiatives (digital downloads, Web Services, etc.). 54
  • 55. MORGAN STANLEY RESEARCH July 13, 2009 Amazon.comExhibit 82AMZN — Discounted Equity Valuation(US$ In Millions, Except per Share Data) Dow nside Revenue Grow th Model (Base) Revenue Grow th Upside Revenue Grow thC2008-C2011E Revenue CAGR 10% 14% 18%Implied C2011E Revenue $25,853 $28,725 $31,598Net Margin Sensitivity 3% 4% 5% 3% 4% 5% 3% 4% 5%Implied C2011E Net Income $827 $1,086 $1,344 $919 $1,207 $1,494 $1,011 $1,327 $1,643Implied C2011E EPS $1.87 $2.45 $3.03 $2.08 $2.72 $3.37 $2.28 $3.00 $3.71C2008-C2011E EPS CAGR (3%) 6% 14% 1% 10% 18% 4% 14% 22% Discount CY+1 Equity Value / Rate P/E Equity Value per Share (1) 10.0% 20.0x $14,691 $19,281 $23,871 $16,323 $21,424 $26,524 $17,956 $23,566 $29,176 $34 $44 $55 $37 $49 $61 $41 $54 $67 25.0 $18,364 $24,102 $29,839 $20,404 $26,780 $33,155 $22,445 $29,457 $36,470 $42 $55 $68 $47 $61 $76 $51 $67 $83 30.0 $22,037 $28,922 $35,807 $24,485 $32,135 $39,786 $26,934 $35,349 $43,764 $50 $66 $82 $56 $73 $91 $62 $81 $100 35.0 $25,709 $33,742 $41,775 $28,566 $37,491 $46,417 $31,423 $41,240 $51,058 $59 $77 $95 $65 $86 $106 $72 $94 $117 15.0% 20.0x $13,898 $18,240 $22,582 $15,442 $20,266 $25,091 $16,986 $22,293 $27,600 $32 $42 $52 $35 $46 $57 $39 $51 $63 25.0 $17,372 $22,800 $28,227 $19,302 $25,333 $31,364 $21,232 $27,866 $34,500 $40 $52 $64 $44 $58 $72 $49 $64 $79 30.0 $20,846 $27,360 $33,873 $23,163 $30,399 $37,636 $25,479 $33,439 $41,400 $48 $63 $77 $53 $69 $86 $58 $76 $95 35.0 $24,321 $31,919 $39,518 $27,023 $35,466 $43,909 $29,725 $39,013 $48,300 $56 $73 $90 $62 $81 $100 $68 $89 $110 20.0% 20.0x $13,178 $17,295 $21,413 $14,642 $19,217 $23,792 $16,106 $21,139 $26,171 $30 $40 $49 $33 $44 $54 $37 $48 $60 25.0 $16,472 $21,619 $26,766 $18,303 $24,021 $29,740 $20,133 $26,423 $32,714 $38 $49 $61 $42 $55 $68 $46 $60 $75 30.0 $19,767 $25,943 $32,119 $21,963 $28,825 $35,688 $24,159 $31,708 $39,256 $45 $59 $73 $50 $66 $82 $55 $72 $90 35.0 $23,061 $30,267 $37,472 $25,624 $33,630 $41,636 $28,186 $36,993 $45,799 $53 $69 $86 $59 $77 $95 $64 $85 $105Footnotes(1) Equity value per share based on treasury share method diluted share count as if implied valuation price w as used for calculation.Source: Morgan Stanley Research 55
  • 56. MORGAN STANLEY RESEARCH July 13, 2009 Amazon.com Morgan Stanley ModelWare is a proprietary analytic framework that helps clients uncover value, adjusting for distortions and ambiguities created by local accounting regulations. For example, ModelWare EPS adjusts for one-time events, capitalizes operating leases (where their use is significant), and converts inventory from LIFO costing to a FIFO basis. ModelWare also emphasizes the separation of operating performance of a company from its financing for a more complete view of how a company generates earnings. Disclosure SectionThe information and opinions in Morgan Stanley Research were prepared by Morgan Stanley & Co. Incorporated, and/or Morgan Stanley C.T.V.M. S.A.and their affiliates (collectively, "Morgan Stanley").For important disclosures, stock price charts and rating histories regarding companies that are the subject of this report, please see the MorganStanley Research Disclosure Website at www.morganstanley.com/researchdisclosures, or contact your investment representative or Morgan StanleyResearch at 1585 Broadway, (Attention: Equity Research Management), New York, NY, 10036 USA.Analyst CertificationThe following analysts hereby certify that their views about the companies and their securities discussed in this report are accurately expressed andthat they have not received and will not receive direct or indirect compensation in exchange for expressing specific recommendations or views in thisreport: Mary Meeker.Unless otherwise stated, the individuals listed on the cover page of this report are research analysts.Global Research Conflict Management PolicyMorgan Stanley Research has been published in accordance with our conflict management policy, which is available atwww.morganstanley.com/institutional/research/conflictpolicies.Important US Regulatory Disclosures on Subject CompaniesThe following analyst, strategist, or research associate (or a household member) owns securities (or related derivatives) in a company that he or shecovers or recommends in Morgan Stanley Research: Mary Meeker - Amazon.com (common stock), eBay (common stock), Yahoo! (common stock).Morgan Stanley policy prohibits research analysts, strategists and research associates from investing in securities in their sub industry as defined bythe Global Industry Classification Standard ("GICS," which was developed by and is the exclusive property of MSCI and S&P). Analysts maynevertheless own such securities to the extent acquired under a prior policy or in a merger, fund distribution or other involuntary acquisition.As of June 30, 2009, Morgan Stanley beneficially owned 1% or more of a class of common equity securities of the following companies covered inMorgan Stanley Research: Amazon.com, eBay, Google, GSI COMMERCE.As of June 30, 2009, Morgan Stanley held a net long or short position of US$1 million or more of the debt securities of the following issuers covered inMorgan Stanley Research (including where guarantor of the securities): eBay, GSI COMMERCE, Yahoo!.Within the last 12 months, Morgan Stanley has received compensation for investment banking services from Dice Holdings, Inc., eBay, Google, GSICOMMERCE.In the next 3 months, Morgan Stanley expects to receive or intends to seek compensation for investment banking services from Amazon.com, DiceHoldings, Inc., eBay, Google, GSI COMMERCE, TechTarget, Inc., WebMD Health Corp., Yahoo!.Within the last 12 months, Morgan Stanley & Co. Incorporated has received compensation for products and services other than investment bankingservices from eBay, Google.Within the last 12 months, Morgan Stanley has provided or is providing investment banking services to, or has an investment banking clientrelationship with, the following company: Amazon.com, Dice Holdings, Inc., eBay, Google, GSI COMMERCE, TechTarget, Inc., WebMD Health Corp.,Yahoo!.Within the last 12 months, Morgan Stanley has either provided or is providing non-investment banking, securities-related services to and/or in the pasthas entered into an agreement to provide services or has a client relationship with the following company: eBay, Google.The research analysts, strategists, or research associates principally responsible for the preparation of Morgan Stanley Research have receivedcompensation based upon various factors, including quality of research, investor client feedback, stock picking, competitive factors, firm revenues andoverall investment banking revenues.An employee or director of Morgan Stanley is a director of Yahoo!.Morgan Stanley & Co. Incorporated makes a market in the securities of Amazon.com, Dice Holdings, Inc., drugstore.com, eBay, Google, GSICOMMERCE, TechTarget, Inc., WebMD Health Corp., Yahoo!.Certain disclosures listed above are also for compliance with applicable regulations in non-US jurisdictions.STOCK RATINGSMorgan Stanley uses a relative rating system using terms such as Overweight, Equal-weight, Not-Rated or Underweight (see definitions below).Morgan Stanley does not assign ratings of Buy, Hold or Sell to the stocks we cover. Overweight, Equal-weight, Not-Rated and Underweight are not theequivalent of buy, hold and sell. Investors should carefully read the definitions of all ratings used in Morgan Stanley Research. In addition, sinceMorgan Stanley Research contains more complete information concerning the analysts views, investors should carefully read Morgan StanleyResearch, in its entirety, and not infer the contents from the rating alone. In any case, ratings (or research) should not be used or relied upon asinvestment advice. An investors decision to buy or sell a stock should depend on individual circumstances (such as the investors existing holdings)and other considerations.Global Stock Ratings Distribution(as of June 30, 2009)For disclosure purposes only (in accordance with NASD and NYSE requirements), we include the category headings of Buy, Hold, and Sell alongsideour ratings of Overweight, Equal-weight, Not-Rated and Underweight. Morgan Stanley does not assign ratings of Buy, Hold or Sell to the stocks wecover. Overweight, Equal-weight, Not-Rated and Underweight are not the equivalent of buy, hold, and sell but represent recommended relativeweightings (see definitions below). To satisfy regulatory requirements, we correspond Overweight, our most positive stock rating, with a buyrecommendation; we correspond Equal-weight and Not-Rated to hold and Underweight to sell recommendations, respectively. 56
  • 57. MORGAN STANLEY RESEARCH July 13, 2009 Amazon.com Coverage Universe Investment Banking Clients (IBC) % of % of % of RatingStock Rating Category Count Total Count Total IBC CategoryOverweight/Buy 739 32% 235 38% 32%Equal-weight/Hold 1022 45% 290 47% 28%Not-Rated/Hold 31 1% 7 1% 23%Underweight/Sell 485 21% 87 14% 18%Total 2,277 619Data include common stock and ADRs currently assigned ratings. An investors decision to buy or sell a stock should depend on individualcircumstances (such as the investors existing holdings) and other considerations. Investment Banking Clients are companies from whom MorganStanley or an affiliate received investment banking compensation in the last 12 months.Analyst Stock RatingsOverweight (O). The stocks total return is expected to exceed the average total return of the analysts industry (or industry teams) coverage universe,on a risk-adjusted basis, over the next 12-18 months.Equal-weight (E). The stocks total return is expected to be in line with the average total return of the analysts industry (or industry teams) coverageuniverse, on a risk-adjusted basis, over the next 12-18 months.Not-Rated (NR). Currently the analyst does not have adequate conviction about the stocks total return relative to the average total return of theanalysts industry (or industry teams) coverage universe, on a risk-adjusted basis, over the next 12-18 months.Underweight (U). The stocks total return is expected to be below the average total return of the analysts industry (or industry teams) coverageuniverse, on a risk-adjusted basis, over the next 12-18 months.Unless otherwise specified, the time frame for price targets included in Morgan Stanley Research is 12 to 18 months.Analyst Industry ViewsAttractive (A): The analyst expects the performance of his or her industry coverage universe over the next 12-18 months to be attractive vs. therelevant broad market benchmark, as indicated below.In-Line (I): The analyst expects the performance of his or her industry coverage universe over the next 12-18 months to be in line with the relevantbroad market benchmark, as indicated below.Cautious (C): The analyst views the performance of his or her industry coverage universe over the next 12-18 months with caution vs. the relevantbroad market benchmark, as indicated below.Benchmarks for each region are as follows: North America - S&P 500; Latin America - relevant MSCI country index or MSCI Latin America Index;Europe - MSCI Europe; Japan - TOPIX; Asia - relevant MSCI country index..Important Disclosures for Morgan Stanley Smith Barney LLC CustomersCiti Investment Research & Analysis (CIRA) research reports may be available about the companies that are the subject of this Morgan Stanley research report. Ask yourFinancial Advisor or use Research Center to view any available CIRA research reports in addition to Morgan Stanley research reports. In addition to the disclosures on thisresearch report and on the Morgan Stanley disclosure website (www.morganstanley.com/researchdisclosures), important disclosures regarding the relationship betweenthe companies that are the subject of this report and Morgan Stanley Smith Barney LLC, Citigroup Global Markets Inc. or any of its affiliates, are available athttps://www.citigroupgeo.com/geopublic/Disclosures/index_a.html.This Morgan Stanley research report has been reviewed and approved on behalf of Morgan Stanley Smith Barney LLC. This review and approval was conducted by thesame person who reviewed this research report on behalf of Morgan Stanley. This could create a conflict of interest.Other Important DisclosuresMorgan Stanley produces a research product called a "Tactical Idea." Views contained in a "Tactical Idea" on a particular stock may be contrary to the recommendations orviews expressed in this or other research on the same stock. This may be the result of differing time horizons, methodologies, market events, or other factors. For allresearch available on a particular stock, please contact your sales representative or go to Client Link at www.morganstanley.com.For a discussion, if applicable, of the valuation methods used to determine the price targets included in this summary and the risks related to achieving these targets, pleaserefer to the latest relevant published research on these stocks.Morgan Stanley Research does not provide individually tailored investment advice. Morgan Stanley Research has been prepared without regard to the individual financialcircumstances and objectives of persons who receive it. The securities/instruments discussed in Morgan Stanley Research may not be suitable for all investors. MorganStanley recommends that investors independently evaluate particular investments and strategies, and encourages investors to seek the advice of a financial adviser. Theappropriateness of a particular investment or strategy will depend on an investors individual circumstances and objectives. The securities, instruments, or strategiesdiscussed in Morgan Stanley Research may not be suitable for all investors, and certain investors may not be eligible to purchase or participate in some or all of them.Morgan Stanley Research is not an offer to buy or sell or the solicitation of an offer to buy or sell any security/instrument or to participate in any particular trading strategy.The "Important US Regulatory Disclosures on Subject Companies" section in Morgan Stanley Research lists all companies mentioned where Morgan Stanley owns 1% ormore of a class of common securities of the companies. For all other companies mentioned in Morgan Stanley Research, Morgan Stanley may have an investment of lessthan 1% in securities or derivatives of securities of companies and may trade them in ways different from those discussed in Morgan Stanley Research. Employees ofMorgan Stanley not involved in the preparation of Morgan Stanley Research may have investments in securities or derivatives of securities of companies mentioned andmay trade them in ways different from those discussed in Morgan Stanley Research. Derivatives may be issued by Morgan Stanley or associated personsMorgan Stanley and its affiliate companies do business that relates to companies/instruments covered in Morgan Stanley Research, including market making andspecialized trading, risk arbitrage and other proprietary trading, fund management, commercial banking, extension of credit, investment services and investment banking.Morgan Stanley sells to and buys from customers the securities/instruments of companies covered in Morgan Stanley Research on a principal basis.With the exception of information regarding Morgan Stanley, research prepared by Morgan Stanley Research personnel are based on public information. Morgan Stanleymakes every effort to use reliable, comprehensive information, but we make no representation that it is accurate or complete. We have no obligation to tell you whenopinions or information in Morgan Stanley Research change apart from when we intend to discontinue research coverage of a subject company. Facts and views presentedin Morgan Stanley Research have not been reviewed by, and may not reflect information known to, professionals in other Morgan Stanley business areas, includinginvestment banking personnel.Morgan Stanley Research personnel conduct site visits from time to time but are prohibited from accepting payment or reimbursement by the company of travel expensesfor such visits.The value of and income from your investments may vary because of changes in interest rates or foreign exchange rates, securities prices or market indexes, operational orfinancial conditions of companies or other factors. There may be time limitations on the exercise of options or other rights in your securities transactions. Past performanceis not necessarily a guide to future performance. Estimates of future performance are based on assumptions that may not be realized. Unless otherwise stated, the coverpage provides the closing price on the primary exchange for the subject companys securities/instruments.To our readers in Taiwan: Information on securities/instruments that trade in Taiwan is distributed by Morgan Stanley Taiwan Limited ("MSTL"). Such information is for yourreference only. Information on any securities/instruments issued by a company owned by the government of or incorporated in the PRC and listed in on the Stock Exchangeof Hong Kong ("SEHK"), namely the H-shares, including the component company stocks of the Stock Exchange of Hong Kong ("SEHK")s Hang Seng China EnterpriseIndex; or any securities/instruments issued by a company that is 30% or more directly- or indirectly-owned by the government of or a company incorporated in the PRC and 57
  • 58. MORGAN STANLEY RESEARCH July 13, 2009 Amazon.comtraded on an exchange in Hong Kong or Macau, namely SEHKs Red Chip shares, including the component company of the SEHKs China-affiliated Corp Index isdistributed only to Taiwan Securities Investment Trust Enterprises ("SITE"). The reader should independently evaluate the investment risks and is solely responsible fortheir investment decisions. Morgan Stanley Research may not be distributed to the public media or quoted or used by the public media without the express written consentof Morgan Stanley. Information on securities/instruments that do not trade in Taiwan is for informational purposes only and is not to be construed as a recommendation ora solicitation to trade in such securities/instruments. MSTL may not execute transactions for clients in these securities/instruments.To our readers in Hong Kong: Information is distributed in Hong Kong by and on behalf of, and is attributable to, Morgan Stanley Asia Limited as part of its regulatedactivities in Hong Kong. If you have any queries concerning Morgan Stanley Research, please contact our Hong Kong sales representatives.Morgan Stanley Research is disseminated in Japan by Morgan Stanley Japan Securities Co., Ltd.; in Hong Kong by Morgan Stanley Asia Limited (which acceptsresponsibility for its contents); in Singapore by Morgan Stanley Asia (Singapore) Pte. (Registration number 199206298Z) and/or Morgan Stanley Asia (Singapore)Securities Pte Ltd (Registration number 200008434H), regulated by the Monetary Authority of Singapore, which accepts responsibility for its contents; in Australia to"wholesale clients" within the meaning of the Australian Corporations Act by Morgan Stanley Australia Limited A.B.N. 67 003 734 576, holder of Australian financial serviceslicense No. 233742, which accepts responsibility for its contents; in Australia to “wholesale clients” and "retail clients" within the meaning of the Australian Corporations Actby Morgan Stanley Smith Barney Australia Pty Ltd (A.B.N. 19 009 145 555, holder of Australian financial services license No. 240813, which accepts responsibility for itscontents; in Korea by Morgan Stanley & Co International plc, Seoul Branch; in India by Morgan Stanley India Company Private Limited; in Canada by Morgan StanleyCanada Limited, which has approved of, and has agreed to take responsibility for, the contents of Morgan Stanley Research in Canada; in Germany by Morgan StanleyBank AG, Frankfurt am Main, regulated by Bundesanstalt fuer Finanzdienstleistungsaufsicht (BaFin); in Spain by Morgan Stanley, S.V., S.A., a Morgan Stanley groupcompany, which is supervised by the Spanish Securities Markets Commission (CNMV) and states that Morgan Stanley Research has been written and distributed inaccordance with the rules of conduct applicable to financial research as established under Spanish regulations; in the United States by Morgan Stanley & Co. Incorporated,which accepts responsibility for its contents. Morgan Stanley & Co. International plc, authorized and regulated by Financial Services Authority, disseminates in the UKresearch that it has prepared, and approves solely for the purposes of section 21 of the Financial Services and Markets Act 2000, research which has been prepared by anyof its affiliates. Private U.K. investors should obtain the advice of their Morgan Stanley & Co. International plc representative about the investments concerned. RMBMorgan Stanley (Proprietary) Limited is a member of the JSE Limited and regulated by the Financial Services Board in South Africa. RMB Morgan Stanley (Proprietary)Limited is a joint venture owned equally by Morgan Stanley International Holdings Inc. and RMB Investment Advisory (Proprietary) Limited, which is wholly owned byFirstRand Limited.The information in Morgan Stanley Research is being communicated by Morgan Stanley & Co. International plc (DIFC Branch), regulated by the Dubai Financial ServicesAuthority (the DFSA), and is directed at wholesale customers only, as defined by the DFSA. This research will only be made available to a wholesale customer who we aresatisfied meets the regulatory criteria to be a client.The information in Morgan Stanley Research is being communicated by Morgan Stanley & Co. International plc (QFC Branch), regulated by the Qatar Financial CentreRegulatory Authority (the QFCRA), and is directed at business customers and market counterparties only and is not intended for Retail Customers as defined by theQFCRA.As required by the Capital Markets Board of Turkey, investment information, comments and recommendations stated here, are not within the scope of investment advisoryactivity. Investment advisory service is provided in accordance with a contract of engagement on investment advisory concluded between brokerage houses, portfoliomanagement companies, non-deposit banks and clients. Comments and recommendations stated here rely on the individual opinions of the ones providing thesecomments and recommendations. These opinions may not fit to your financial status, risk and return preferences. For this reason, to make an investment decision by relyingsolely to this information stated here may not bring about outcomes that fit your expectations.The trademarks and service marks contained in Morgan Stanley Research are the property of their respective owners. Third-party data providers make no warranties orrepresentations of any kind relating to the accuracy, completeness, or timeliness of the data they provide and shall not have liability for any damages of any kind relating tosuch data. The Global Industry Classification Standard ("GICS") was developed by and is the exclusive property of MSCI and S&P.Morgan Stanley Research, or any portion thereof may not be reprinted, sold or redistributed without the written consent of Morgan Stanley.Morgan Stanley Research is disseminated and available primarily electronically, and, in some cases, in printed form.Additional information on recommended securities/instruments is available on request. 58
  • 59. MORGAN STANLEY RESEARCHThe Americas Europe Japan Asia/Pacific1585 Broadway 20 Bank Street, Canary Wharf 4-20-3 Ebisu, Shibuya-ku 1 Austin Road WestNew York, NY 10036-8293 London E14 4AD Tokyo 150-6008 KowloonUnited States United Kingdom Japan Hong KongTel: +1 (1) 212 761 4000 Tel: +44 (0) 20 7 425 8000 Tel: +81 (0) 3 5424 5000 Tel: +852 2848 5200Industry Coverage:Internet & Consumer SoftwareCompany (Ticker) Rating (as of) Price (07/10/2009)Mary MeekerAmazon.com (AMZN.O) O (03/18/2002) $77.63Dice Holdings, Inc. (DHX.N) E (02/29/2008) $4GSI COMMERCE (GSIC.O) E (04/30/2009) $14.94Google (GOOG.O) O (09/28/2004) $414.4TechTarget, Inc. (TTGT.O) E (06/26/2007) $4.3WebMD Health Corp. (WBMD.O) E (05/12/2008) $29.02Yahoo! (YHOO.O) NA (05/04/2008) $14.93drugstore.com (DSCM.O) E (03/18/2002) $1.59eBay (EBAY.O) E (10/02/2008) $16.3Stock Ratings are subject to change. Please see latest research for each company.© 2009 Morgan Stanley