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    20100323 amazon v9 20100323 amazon v9 Presentation Transcript

    • MW-CH4107-20061025-106
      Competitive overview
      Connected World/Global Web
      March 30, 2010
    • 1
      Best Buy continues to gain share in the overall CE market despite Amazon’s impressive
      business and financial performance
      1
      Amazon is well positioned to deliver against customers’ needs for low prices and wide
      assortment, but ill-suited to provide the physical immersive experience they prefer
      2
      Amazon has made enhancements to their existing businesses and continues to create new
      business models and profit pools, including marketplace, Kindle, and Amazon Web Services
      3
      Despite their impressive performance, Amazon has limitations and risks, including
      impending changes to state sales tax laws and new competitive pressures
      4
      Amazon executive summary
      SOURCE: Analyst reports, BBY Competitive Strategies Group, Team analysis
    • 2
      • Amazon.com consistently outsells Bestbuy.com in every major product category except laptops, where Dell dominates, Best Buy is second, and Amazon trails in third
      • Amazon.com has over 60% share in movie sales and over 70% in music; entertainment overall is Amazon’s strongest category as they have 50% market share compared to Best Buy’s 5%
      • Best Buy has made strides in A/V equipment, which includes TVs, gaining four points of share year over year and actually beating Amazon in 4Q09
      Amazon outpaces Best Buy in online CE share growth…
      1
      Online market share, CE
      Percent of market
      Amazon
      Best Buy
      03
      2002
      07
      08
      09
      06
      05
      04
      SOURCE: Comscore
    • 3
      4
      …but despite Amazon’s rapid online growth, Best Buy continues to outpace Amazon’s overall share growth in the CE market
      1
      Net share gain
      (2004-2009)
      US Market share
      % of total CE market (offline and online)
      CAGR
      44%
      3.7%
      0.7
      0.8
      1.4
      2.3
      3.4
      4.4
      3%
      2.0%
      5%
      6.0%
      Other
      retailers
      -4%
      -11.7%
      66.3
      65.5
      65.2
      63.4
      59.3
      53.5
      05
      06
      2004
      08
      09
      07
      SOURCE: Stevenson Traqline
    • 4
      y
      Amazon’s consistent revenue growth and healthy operating cash flow have earned it an industry-leading earnings multiple
      1
      Amazon
      Best Buy
      Total revenue
      $ Billions
      Avg. stock price
      $ per share
      +11% p.a.
      Amazon
      120
      +32% p.a.
      49.7
      45.0
      40.0
      80
      35.9
      24.5
      19.2
      14.8
      10.7
      40
      BBY
      09
      08
      07
      2006
      0
      Mar
      10
      Jan
      Nov
      Sep
      Jul
      May
      Mar
      09
      Operating cash flow
      $ Billions
      • Amazon’s ability to drive revenue growth with creative business models and produce incredible amounts of cash make them an attractive play to Wall St.
      • When combined with their flexible and compressed SG&A structure, Amazon becomes an investment that commands a high multiple
      • AMZN currently trades at 65x earnings, far ahead of any competitor, including BBY at 14x, Apple at 23x, and Walmart at 15x
      +3% p.a.
      +67% p.a.
      09
      08
      07
      2006
      SOURCE: Company financials
    • 5
      Amazon’s performance is driven by their ability to keep SG&A costs low, a result of their flexible SG&A structure
      1
      SG&A costs
      % of sales
      Amazon SG&A costs
      % of sales
      -1% p.a.
      20.2%
      19.8%
      19.3%
      19.1%
      18.8%
      Fulfillment
      0%
      8.4%
      1.7%
      Marketing
      2.8%
      07
      08
      06
      2005
      2009
      Technology and
      content
      1.2%
      5.1%
      Best Buy SG&A costs
      % of sales
      +1% p.a.
      9.3%
      Stores**
      0%
      21.3%
      20.8%
      20.3%
      19.7%
      19.8%
      Other general
      and administrative
      7.2%
      1.3%
      Total SG&A
      19.4%
      17.6%
      2005
      07
      06
      2009
      08
      * Figures are for year ending Dec. 31, 2009 for Amazon and Q3 projected fiscal year 2009 for BBY
      ** Stores includes store labor, rent and taxes, but does not include D & A
      Source: Amazon 10-K, BBY internal data
    • 6
      Best Buy continues to gain share in the overall CE market despite Amazon’s impressive
      business and financial performance
      1
      Amazon is well positioned to deliver against customers’ needs for low prices and wide
      assortment, but ill-suited to provide the physical immersive experience they prefer
      2
      Amazon has made enhancements to their existing businesses and continues to create new
      business models and profit pools, including marketplace, Kindle, and Amazon Web Services
      3
      Despite their impressive performance, Amazon has limitations and risks, including
      impending changes to state sales tax laws and new competitive pressures
      4
      Amazon executive summary
      SOURCE: Analyst reports, BBY Competitive Strategies Group, Team analysis
    • 7
      Amazon continues to win on price…and product assortment
      2
      Price comparison by SKUs1
      Percentage; 2010
      Price per SKU of DSLR cameras, 10-11MP
      USD; 2009
      Tied
      Best Buy lower
      82
      Amazon lower
      1 Based on a price comparison of 128 overlapping SKUs
      SOURCE: Best Buy Competitive Strategies Group
    • 8
      But fails to meet many other customer needs…
      2
      % of online shoppers who consider it important
      Why Amazon is ill-equipped to address it
      • Without physical stores, Amazon has no way of getting it’s inventory in the hands of customers pre-purchase
      • Amazon cannot offer the “connected” experience of showing how products interact; you can buy a router and a home theater system on Amazon, but you can’t see it at work
      Physical inventory to handle and experience
      XX%
      • Amazon has no Blue Shirt equivalent and has no face-to-face interaction with their customers
      • Even if Amazon were to implement an online customer-facing sales force, they would be unable to demonstrate products in the same way an in-store staff can
      Experienced and knowledgeable staff to answer questions
      YY%
      • To return an Amazon product, a customer is forced to ship the product back to Amazon’s warehouse
      • This becomes especially problematic around the holidays as purchases have a higher likelihood of being returned
      Physical store for returns
      ZZ%
      • While Best Buy can offer service and installation packages with devices sold in-store, Amazon is unable to offer in-house servicing
      • As more consumers look to buy “connected world” solutions, having a trusted in-house installation and service offering is an increasingly important factor
      In-house service offering
      VV%
    • 9
      m
      =
      X
      Although consumers spend more time per visit on Bestbuy.com, they visit Amazon more often, resulting in 4x as much time spent on Amazon.com per month
      2
      Time on site per visit
      Minutes
      +37%
      Time spent on site per month
      Minutes
      Amazon.com
      Bestbuy.com
      -74%
      Number of visits per month
      Number
      Amazon.com
      Bestbuy.com
      -81%
      Amazon.com
      Bestbuy.com
      Source: iConsumer clickstream analysis
    • 10
      m
      Amazon’s conversion rate among online shoppers is higher than Bestbuy.com, and we are losing significant value to Amazon
      2
      …moreover, estimates suggest we lost $570M in value to Amazon last year
      …and of those that make a purchase at BBY or AMZN, 75% go to AMZN…
      29% of Bestbuy.com visitors also visit Amazon…
      Where BBY.com visitors make their purchase
      Percent; 2009
      Lost value from bestbuy.com visitor non-buyers
      $ Millions
      Total BBY.com visitors
      Percent; 2009
      100
      100
      2,000
      Also visit
      Amazon
      Bestbuy.com
      Amazon.com
      570
      29
      Dell.com
      537
      Visit
      Bestbuy.com
      only
      213
      Walmart.com
      75
      Amazon.com
      71
      680
      All others
      Total BBY.com visitors
      Visitors that do make purchase
      Dollar Share
      Source: iConsumer clickstream analysis, Comscore
    • 11
      Best Buy continues to gain share in the overall CE market despite Amazon’s impressive
      business and financial performance
      1
      Amazon is well positioned to deliver against customers’ needs for low prices and wide
      assortment, but ill-suited to provide the physical immersive experience they prefer
      2
      Amazon has made enhancements to their existing businesses and continue to create new
      business models and profit pools, including marketplace, Kindle, and Amazon Web Services
      3
      Despite their impressive performance, Amazon has limitations and risks, including
      impending changes to state sales tax laws and new competitive pressures
      4
      Amazon executive summary
      SOURCE: Analyst reports, BBY Competitive Strategies Group, Team analysis
    • 12
      Originally a pure-play retailer, Amazon has built a diversified set of businesses through internal development and M&A
      3
      Brands/products/acquisitions
      Strategy
      a
      • Amazon continues to fulfill Bezos’ original mission to sell to any consumer any product at any time by expanding their product assortment (Amazon Fresh), acquiring new retail outlets (Zappos), and creating new business models to leverage third party vendors and affiliates (marketplace and Amazon Associates)
      E-commerce
      Marketplace
      b
      Computing services
      EC2 Cloud
      Data storage (S2)
      • Amazon Web Services’ computing solutions not only provide a high-margin auxiliary revenue stream, but also lay the groundwork for potential consumer solutions based on the cloud experience
      • Amazon’s SVP of Web Services proclaimed that “Amazon at it’s heart, is a technology company”
      CloudFront
      c
      Information/ Social ntwk.
      • From early on, Amazon has incorporated large amounts of information into the e-commerce experience in the form of product reviews and collaborative filtering
      • Aware that customers value this radical transparency that information provides, Amazon has invested heavily in information sites, like IMDb and Alexa, as well as social networking sites like Shelfari
      d
      • With the Kindle, Amazon revolutionized the e-book, connecting to consumers to content and realizing steady revenue streams in the process
      • Additionally, Amazon has made an effort to expand their other downloadable media offerings, inlcuding Amazon MP3, which current offers over 8 million songs, and Amazon Video on Demand, which offers streaming movies and TV
      Downloadable media
    • 13
      s
      Amazon drives revenue from a variety of sources, although traditional retail still provides over 50%
      3
      Amazon revenue breakdown
      $ Billion
      Web Services & Others
      $24B
      0.5
      Web Services & Other
      • Revenue from Amazon Web Services, which provides storage, cloud computing, database, payments, and other products
      • Drives ~1-2% of profitability
      3.6
      Affiliates
      Affiliates
      • Revenue from third parties that use APIs to sell Amazon’s inventory
      • Drives 10-12% of profitability (post-commission)
      Marketplace
      7.7
      Marketplace
      • Revenue from selling third-party merchants’ inventory on Amazon.com
      • Drives ~33-34% of profitability
      Traditional retail
      Traditional retail
      12.5
      • Revenue from Amazon selling their own inventory to customers
      • Includes sales of physical goods, all downloadable media, Kindle device and content sales, etc.
      • Drives ~54-56% of overall profitability
      2009
      SOURCE: Best Buy Competitive Strategies Group
    • 14
      d
      Amazon continues to fulfill its mission to sell anything to anyone, while also building profitable business models around the engine
      3a
      Amazon Associates
      Amazon Marketplace
      Amazon.com
      • Amazon associates uses open APIs to allow third party merchants to advertise Amazon products on their site
      • Merchants receive a commission for each sale they generate
      • When customers click on the advertisement, they are directed to Amazon.com
      • Increases customer traffic to Amazon.com
      • Estimated to generate ~15% of overall revenue and ~10-12% of profitability after commissions
      • Amazon’s marketplace allows third party sellers to upload their inventory to Amazon.com and sell their products alongside Amazon’s own inventory
      • Amazon charges a 6-15% commission depending on the product sold as well as closing fees
      • Increases customer choice and provides a new revenue stream
      • Estimated to generate ~32% of overall revenue and ~33-35% of profitability
      Tools & Industrial
      Apparel
      Physical media
      Sporting Goods
      Digital downloads
      Books
      Toys & Kids
      Home & Garden
      Grocery & Beauty
      Consumer Electronics
      Kindle
      SOURCE: Amazon.com, BBY.com
    • 15
      Amazon’s marketplace allows third party merchants to sell alongside Amazon and provides ~30% of overall profitability
      3a
      How it works
      5
      4
      Payment is routed to Amazon first, who collects 6-15% commission and various fees, then sends remainder to Target
      Customer decides to purchase the Target product, and pays via Amazon.com
      6
      Order is sent to Target for fulfillment (Amazon offers fulfillment services)
      1
      3
      2
      Target uploads inventory to Amazon.com marketplace
      Customer can view “more buying choices” and find Target’s listing for the same product
      Amazon posts Target’s listing for the same product alongside their inventory and other third party merchants
      How it makes money…
      Marketplace
      Amazon as seller
      84%
      83%
      2%
      6%
      14%
      11%
      0.56
      1.73
      3.19
      3.26
      Profit
      Price
      Proc.
      Fee
      Seller rev
      Price
      COGS
      Shipping
      Profit
      SOURCE: Team Analysis, Amazon.com, Amazon Financials,
    • 16
      Amazon Web Services has already attracted prominent clients and is estimated to generate ~$400M in revenue per year…
      3b
      AWS products
      What it does?
      Elastic Compute Cloud (EC2)
      • Provides resizable compute capacity in the cloud
      • Designed to make web-scale computing easier for developers
      • Amazon Web Services’ revenue is estimated at $400M per year and growing
      • AWS already boasts an impressive list of clients, including ESPN, eHarmony.com, and Eli Lilly
      • S3 storage is estimated to hold 82 billion objects and can receive 100,000 requests per second
      • Hundreds of thousands of developers currently using S3 storage functionality
      • In a 2010 FastCompany comparison between Amazon, Apple, and Google, Amazon was selected as having the superior web service offering
      • Margins for AWS are estimated at ~45%
      CloudFront
      • Web service for high-speed content delivery
      • Integrates with other AWS products
      Virtual Private Cloud
      • Provides a bridge between a company’s existing IT systems and the Amazon cloud via a virtual private network (VPN)
      Simple Storage Service (S3)
      • Data storage infrastructure
      • Web-based interface to store and retrieve objects
      Database services
      • Highly scalable database storage with less internal administrative oversight required
      Flexible payments services (FPS)
      • Built on top of Amazon’s own payments structure, it gives e-commerce engine a payment tool they can integrate into their stie
      Simple Queue Service (SQS)
      • Scalable structure for storing messages as they travel between computers
      SOURCE: Amazon.com, Analyst reports, FastCompany.com
    • 17
      Amazon has acquired and integrated a host of informational and social networking sites into their existing business
      3c
      How Amazon uses it
      What is it?
      • Internet database with a wealth of information regarding movies and TV shows, including episode summaries and community forums for contributors to voice their opinions
      • Acquired boxofficemojo.com, which provides in-depth information and statistics on movies
      • Amazon has used IMDb as a advertising mechanism; for example, if someone searches for information on Avatar, they will be presented with a one-click reroute to Amazon where they can buy the DVD
      • Still operates as an independently-branded site
      • Company that collects and publishes statistics on browsing behavior, including web traffic broken down by various demographics
      • Under Amazon Web Services, Alexa remains relatively unconnected to Amazon’s e-commerce business models
      • Human search engine for users to post and answer questions
      • Users get “experience points” depending on how often they contribute; has developed into a social network of sorts
      • Co-branded with Amazon (Askville by Amazon)
      • Amazon-related questions are amongst the most popular on the site
      • Users upload a virtual bookshelf with all their favorite titles
      • Users can rate, review, discuss, and suggest books to other users
      • When looking at any given title, Shelfari has a link to Amazon to buy the physical book or a digital Kindle edition
      • Amazon also has a stake in Shelfari’s main competitor, LibraryThing
      • Free web hosting site for wikis1
      • Users can browse different categories and follow wikis they find interesting
      • Monetized through advertising revenue
      • Limited connection to Amazon currently
      1 Amazon does not own Wikia, but has invested $10M
      SOURCE: Amazon.com, Company sites
    • 18
      Amazon has expanded their digital media offering with Kindle, Amazon Video on Demand, and Amazon MP3
      3d
      What is it?
      How is it monetized?
      Performance
      • Amazon’s e-reader that allows customers to read digital books, magazines, blogs, and newspapers; competes with other e-readers and traditional book sales
      • Kindle device sales
      • Digital book revenues
      • Commissions off newspaper and magazine subscription sales
      • No revenue numbers released; unit sales estimated in the “millions”
      • Kindle is widely considered the market leading e-reader; Credit Suisse estimates that Amazon currently has 90% of the digital book market
      • Amazon’s streaming and downloadable video site; allows customers to watch on computers and TVs; competes with Netflix and free services like Hulu
      • Digital movie rentals
      • Downloadable and streaming TV/movie revenues
      • Widely believed to be well behind Netflix in market share
      • Amazon VOD recently became accessible on Roku digital video players
      • Amazon’s streaming and downloadable music site; competes with iTunes, Napster, and other download sites
      • Downloadable and streaming music revenues
      • Estimated at having 8% market share, well behind iTunes near 70% share
      • Has over 11 millions songs in its current catalog
      • First store to sell without digital rights management (DRM)
      SOURCE: Amazon.com, Analyst reports, FastCompany.com
    • 19
      Best Buy continues to gain share in the overall CE market despite Amazon’s impressive
      business and financial performance
      1
      Amazon is well positioned to deliver against customers’ needs for low prices and wide
      assortment, but ill-suited to provide the physical immersive experience they prefer
      2
      Amazon has made enhancements to their existing businesses and continues to create new
      business models and profit pools, including marketplace, Kindle, and Amazon Web Services
      3
      Despite their impressive performance, Amazon has limitations and risks, including
      impending changes to state sales tax laws and new competitive pressures
      4
      Amazon executive summary
      SOURCE: Analyst reports, BBY Competitive Strategies Group, Team analysis
    • 20
      Despite their impressive performance, Amazon is not without challenges and difficulties, including…
      4
      Amazon’s current advantage
      Risks/limitations
      • Amazon currently enjoys “remote seller” status in states where it lacks a physical presence, allowing them to avoid charging sales taxes to customers in most states
      • Four states have recently passed laws designed to collect sales tax from e-commerce engines that enjoy “remote seller” status
      • Six additional states, including California, are considering similar regulations; Amazon’s tax advantage is slowly eroding
      Changing state tax laws
      • The Kindle is widely considered the leading device among e-readers; no sales numbers have been released, but estimated to be in the “millions”
      • Credit Suisse estimates that Amazon has ~90% of the digital book market
      • Apple’s iPad debuts on April 3 and has already sold out its initial order supply
      • The iPad, although slightly more expensive than the Kindle, will have much greater functionality than the Kindle, including access to a wider array of media
      • Amazon has developed a Kindle application for the iPad in anticipation of the iPad taking significant share from Kindle devices
      Apple’s iPad
      • Amazon’s lack of physical stores have allowed them to keep their SG&A costs low and flexible and their prices down
      • Customers’ number one complaint with online shopping is the lack of a physical store to try the product and get your questions answered; with no plans to open physical stores, Amazon will be unable to address this concern
      Lack of physical stores
    • 21
      Amazon is a formidable competitor, but a closer look reveals strategic advantages for Best Buy
      4
      Amazon is/has…
      But…
      • Continuing to beat us in online CE sales
      • Best Buy gained 3 points of share in the overall CE market last year while Amazon gained 1 point
      • Beating us on price for 82% of SKUs
      • Customers say not being able to interact with a knowledgeable employee is their biggest frustration with online shopping and our Blue Shirts fit that need
      • A great collaborative filtering engine that produces recommendations and product bundles
      • We actually have better and more comprehensive information to leverage with nearly a billion total visits (in-store, online, RewardZone, services, etc.)
      • A marketplace that provides 30% of their item sales and profitability
      • We can develop our own marketplace worth $XM
      • We have Remix, which gives 3rd party merchants access to our product library
      • A digital content offering, including Amazon Video on Demand and Amazon mp3
      • They only have 8% market share in digital music
      • We have Napster and Cinema Now
      • A tax advantage in most states as no sales tax is levied on e-commerce
      • Four states have already enacted laws designed to capture this tax and six more, including California, are considering following suit
      • A Web Services business that provides cloud computing, storage, and payments products
      • Their products are largely B2B with limited application for consumers
      SOURCE: Analyst reports, BBY Competitive Strategies Group, Team analysis
    • 22
      BACKUP/APPENDIX
    • 23
      d
      • Amazon’s recommendations and customized content based on purchase history and in-cart items create an immediate connection with the consumer upon log-in
      • Bestbuy.com’s splash page provides standard content despite an extensive purchase history and 2 items in the cart
      Amazon.com effectively uses customer information to provide recommendations and typically-bundled products…
      3c
      SOURCE: Amazon.com, BBY.com
    • 24
      Amazon has developed the Kindle, connecting consumers to books and other media electronically
      3d
      Kindle
      Magazines
      Blogs
      $1.99/month
      $2.99/month
      $259
      Books
      Newspapers
      Non-revenue “connected” features
      $13.99/month
      $9.40
      SOURCE: Amazon.com
    • 25
      Additionally, Amazon is slowly losing grip of their sales tax-exempt status, with additional legislation pending
      4
      How we got here
      Recent/upcoming changes
      Consumer reaction
      • Under federal law, remote sellers are required to collect and pay sales taxes in any state in which they have a physical presence; Amazon, with almost no physical presence has been successful in establishing “remote seller” status in most states
      • As of July 1, 2008, New York state required sales taxes to be collected from e-retailers that use local marketing affiliates
      • North Carolina and Rhode Island passed similar measures in 2009
      • In 1999, Amazon tries to sue the state of New York on ground the new statute is unconstitutional; case is thrown out
      • Marketplace sellers must pay sales tax and often include it in the price listed
      • In February, Colorado passed a law requiring e-commerce sites to either collect sales taxes or provide the state with sales information so it can collect taxes from consumers directly; Amazon has severed ties with all Colorado marketing affiliates as of March 15
      • Six other states are considering similar provisions, including California, Connecticut, Illinois, Maryland, Virginia, and Vermont
      • Due to increasing budget constraints, more states are likely to look at remote seller sales taxes as a potential revenue source
      • 23 states have come together to try to create a national sales tax that treats online retailers the same as brick-and-mortar retailers
      • Estimates of lost sales tax revenue are as high as $12 Billion by 2012
      • In the first half of 2009, after New York passed the new regulations, the conversion rate for online retailers in the state fell by 11.4%, a much bigger drop than the 7.4% seen across the country
      • Potential PR problems for Amazon as they respond to new regulations, including cancelling Colorado affiliate relationships despite no provision including those entities as a physical presence
    • 26
      Despite the Kindle’s success, analysts believe that the debut of the iPad could have disastrous effects on Kindle sales…
      4
      Amazon Kindle
      Analyst / expert opinions
      • $259-$489
      • Sold exclusively by Amazon
      • Wi-Fi and 3G capabilities depending on model
      • Access to 450,000 digital books, many newspapers, magazines, and blogs
      • Can store up to 350,000 books
      • No internet or application functionality
      • Among consumers looking for an e-reader device, the iPad was seriously considered by 15%, while the Kindle stayed close at 14%
      • Comscore
      • 37% of potential iPad customers were planning to use it as an e-reader
      • Comscore March 23, 2010
      • Amazon has braced itself for reduced Kindle device sales by developing a Kindle application for the iPad, allowing Amazon to receive revenues from iPad users
      Apple iPad
      • $499-$829
      • Will be sold at Apple stores as well as third party retailers
      • Has Wi-Fi and 3G capabilities, depending on model and data package
      • Access to 150,000 apps from AppStore
      • Will feature an Amazon-created Kindle application
      • iPad sales will surpass all-time Kindle sales within three months of its debut
      • FBR Capital report
      • Amazon’s share of the e-book market will fall from 90% to 35% over the next five years
      • Credit Suisse analyst report
      SOURCE: Amazon.com, Apple.com, Analyst reports