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Amazon.com
          the
               Hidden
               Empire
Three digital engines to reshape and dominate retail
Amazon.com:
a digital shop around the corner…
… and a digital colossus.
Did you know:
all these companies belong to Amazon…
Did you know: Amazon is also…


              AmazonBasics
              Amazon-branded electronic products



              AmazonFresh
              sells and delivers groceries in Seattle



              AmazonStudios
              online social movie studio



              Amazon WarehouseDeals
              offers discounts on refurbished products
Did you know: Amazon has had one of the
                fastest growths in the Internet’s history…

                                                       Revenues reached within first 5 years

                                                                                                                                       $2,8 bn




                                                                                        $1,5 bn




                                         $0,4 bn



                                            eBay                                        Google                                        Amazon

Amazon and eBay results from 1995 to 2000, Google from 1998 to 2003.
Even though Zynga and Groupon appear to have an even quicker growth, they haven‟t been compared because 1- sales have not been officially disclosed 2- they haven‟t reach their fifth year
Did you know: Amazon Web Services drives
these companies…
Did you know:
                Amazon.com is a giant…

                                                                                               E-commerce
                  Y/Y growth for Q1 2011 +38%                                3 × growth of        market


                                           Market cap $90 bn                 2 × market cap
                                              Customers 137 m                2 × # customers
                                            Employees 33,700                 15 × more than
                                Annual revenue $34 bn                        16% more than
                                   Internet traffic rank 16th                before
                                                      Retail brand 1st       before
                                                Paid out $1.2 bn             to buy

Source: Amazon.com, Alexa, Brandz. Market capitalization as of April 2011.
Why? A vision…

      From 1994, Jeff Bezos knew he could create a retail website
   that would not have the limitations physical businesses encounter.

“You could build a store online that simply
         could not exist in any other way.
      You could build a true superstore with
  exhaustive selection; and customers value
                                 selection.”
                                    Jeff Bezos
… served by great execution & innovation
      Digital Engine: A digital lever providing a significant advantage
                                to outperform one's competitors




High fixed and variable costs                        Negligible variable costs
No real-time metrics                                 Real-time optimization
Slow innovation process                              A/B testing and full-size prototypes
Limited reach                                        No physical frontier: worldwide market
Limited space                                        Unlimited inventory and categories
Slow inventory turnover                              Ever-improving metrics & optimization


One by one, Jeff Bezos carefully assessed the true advantages the Internet
        would give him, and pushed them to their boundaries
Digital engine #1
                             No limits

How Amazon fosters a very classical business
model with the Internet’s specific advantages.
Not that disruptive of a model:
“sell and deliver stuff to customers”
  Amazon perfectly understood the old-economy retail cocktail:
   low prices, large selection, convenience/customer experience.


                                    “I can't imagine that ten years from
                                    now [customers] are going to say:
                                    „I really love Amazon, but I wish
                                    their prices were a little higher‟”
    Low          Large
   prices       selection           Jeff Bezos




      Convenience
Jeff Bezos’ 3 big ideas




1     Digital enables limitless inventory

2     Digital boosts customer care

3     Digital allows high margin, lowest prices
In 15 years,
Amazon went from 1 category (books) to 16 main categories



1                             LIMITLESS INVENTORY
Amazon began with books…

                 Competition                                     Product                     Search

           Market was large and                           A book does not have to     Search would make it
               fragmented.                                be accurately described:    easy for customers to
                                                            it is a universal and     find books among the
             Contrary to the                                    simple object.           entire database.
           concentrated music
        industry, no player would                          Book distributors were      Amazon repeatedly
        have the power to freeze                            already exchanging       appears first on Google‟s
            out a new entrant.                               digitalized listing.         results page.




Source: Robert Spector, Amazon.com: Get Big Fast (2002)
… and needed to get big fast

    Buying power                        Brand & trust              Cost management


With great size comes a                                            It is logical to amortize
                                      Trust is hard earned,
better ability to negotiate                                        high fixed costs over a
                                         and easily lost
   volume discounts.                                                    great number of
                                    It involved establishing a             customers.
   Suppliers ignore
                                    world-class brand before
  Amazon.com at their                                              Variable costs are very
                                       barnesandnoble.com
      own risk.                                                     low on the Internet.




       Long-term focus: “market share now equals revenue later”
                              Netscape cofounder Marc Andreessen
Create a digital driven supply chain

                  Hiring from the expert:

                Amazon poached Walmart‟s employees:
                    • Richard Dalzell as its Chief Information Officer
                    • Jimmy Wright as its Chief Logistics Officer
                They were responsible for Walmart‟s secret weapon:
                    • A computerized supply chain
                    • An impressive supply-and-distribution network
                Walmart sued Amazon for violation of trade secrets law in 1998.



              1995                                       1997                            2010




          Garage                                  2 fulfillment centers
         400 sq feet                                300,000 sq feet               50 fulfillment centers
                                                                                   26,000,000 sq feet

Source: Amazon.com. Warehouse image: seanau.com
Limitless categories too
                                                                 Books, Music and DVD/Video             Others

                                              100%
              Media vs. others in the U.S.1




                                              80%


                                              60%


                                              40%


                                              20%


                                               0%
                                                     1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010


                                                3 categories                                                     16 categories


              By introducing two new product categories every year for almost a decade,
              Amazon‟s market share represents one third of U.S. e-commerce sales.2
1Amazon.com   2RBC
Case study: from books to music (1995-1998)

                Contrary to books, Amazon.com was no first-mover in music e-retailing.
                   But the company went back to work and used the same cocktail:


                                                                   Convenience
                                                                   “most efficient
                                                                  song search of
                                       Large                      the web” (NYT)      Low prices
                                      selection                                       up to 30 %
                                   130k titles, 280                                   discount on
                                     sub-genres                                      some albums


                                                          Largest online seller of music…
                                                               in 120 days!
        Amazon acquired CDNow in 2002 and began operating its website
Source: Robert Spector, Amazon.com: Get Big Fast (2002)
Build, buy, partner: accelerate development

        Build                          Buy                         Partner

  From time to time,          When competitors are       In some vertical markets,
Amazon simply created        already well established,       Amazon offers its
   a new category.           Amazon may buy out an        technology service and
                                   incumbent.            e-commerce expertise to
  In May 2011, Amazon                                          third parties.
launched MyHabit, even       Quidsi (Diapers + Soap)
though VentePrivée was            acquired for             Co-branded webstore
    the market leader.          $540 m in 2010.              with Toys “R” Us.




                                                          2000: exclusivity for 10 years
                                                          2006: ended by a lawsuit



                Thanks to this strategy, Amazon had been able to
                            offer massive inventory
Case study: why did Amazon.com
                buy Zappos for $1.2 bn in 2009?

                                                                                     Revenue                        $1 bn (2009)
                                                                                     Customers                     11.5 m (2009)
                                                                                     Female audience                    69%


                                Technology                                                                    Synergy
                          Amazing supply-chain
                       and logistics management                                  Legendary customer service: ranked #1 in 20101
                        (using autonomous robots                                   (dedicated customer service Twitter account)
                         and proprietary software)
                                                                                       One-of-a-kind customer-centric culture
                                                                                            with highly skilled employees

                                                                                   Niche markets for 10 years before acquisition
                                                                                   97% of sales were apparel/footwear in 20092




                             With Zappos, Amazon tries to reach a new audience (young women)
                                                and acquires know-how.

1NRF   Foundation/American Express Customers' Choice survey 2AdWeek Photo of the Kiva robot from Joshua Dalsimer
Gravity fuels gravity


                      More
                    customers


     Lower prices
                                      More
                                   distribution
                                    channels
       Larger
      selection
                                   Larger reach
       Greater
     convenience




                    More sellers
“Be afraid of our customers, because those are the folks who have the
                  money. Our competitors are never going to send us money.” Jeff Bezos


          2                                                  CUSTOMER CARE ON STEROIDS
Jeff Bezos delivering a package to Amazon.com‟s millionth customer in October 1997 (credits: Amazon.com).
Invest in customers first

   “If you do build a great experience, customers tell each other about that.
                   Word of mouth is very powerful.” Jeff Bezos


Customer focus                        Frugality                     Innovation

“We start with the              “Amazon is spending             “I think frugality drives
customer and work               money on things that            innovation, just like
backward.”                      matter to customers.”           other constraints do.”


Following a bottom-up           Frugality is part of the        Amazon is always
approach, every                 company‟s DNA:                  looking for simple
decision at Amazon is           Amazon is continually           solutions in order to
driven by the customer‟s        looking for ways to do          provide lower prices to its
needs.                          things cost-effectively.        customer.



   Amazon created a trusted, informative and loyal relationship with its customers.
Data & human driven customer service

                    Amazon‟s customer service was ranked #1 in 20091 and 20112


                          WHY                                                            HOW
        1996: “If you make customers unhappy on the
          Internet, they can each tell 6,000 friends”                          Machines       “We do 90% of our customer
                           Jeff Bezos                                                             service by e-mail rather
                                                                                                       than by telephone”
                                                                                                               Jeff Bezos
                                                                                                    Amazon developed its
                  • Fix customer‟s problems                                                       own software to manage
                  • Identify recurring issues                                                              e-mail centers.
                  • Track the behavior of merchants

                                                                                                                  Human
                                                                               Every employee, even the CEO,
                                                                               spends two days every two years
        Customer service is the only human-to-human                            on the service desk to
           interaction for an e-commerce website.                              answer calls and help customers.


1Customer   Service Champs From BusinessWeek 22011 Temkin Experience Ratings
Customer-centric innovations:
e-commerce easier than commerce
                                 • 1995: Customer reviews
                                 • 1997: Recommendations & bundles
              Select             • 2001: Look inside the book
                                 • 2003: Search inside the book




               Order            • 1997: 1-Click Ordering




                                 • 2001: Where‟s my stuff
             Receive             • 2002: Free Super Saver Shipping



     Amazon was a first-mover for most of e-commerce‟s
            now ubiquitous best-practices.
Customer centric innovations:
     pushing boundaries further

                   Very much like Google, Amazon is always                  1-Click ordering
User experience    innovating to improve its users‟ experience and           Amazon Prime
                   make them feel at home.                                     Vouchers



                   One-to-one marketing to tailor the content to the     “Your Recent History”
  Personalized
                   customer, help him discover new products and         “Customers Who Bought
        stores     provide unique experiences.                           This Item Also Bought”



                   Detailed and safe step-by-step buying process with   “You can always remove
                   A-to-Z Safe Buying Protection.                         it later” [from the cart]
          Trust    Amazon won and maintained customers‟                   “Shopping with us is
                   confidence.                                                   safe”




             Amazon.com implements all its consumers‟ hidden needs
         to become their first destination when thinking of buying online.
Case study: 1-Click Ordering is
the easiest way to buy

       Conversion
         funnel               Each step of the funnel carries a risk to lose potential
                              customers and lead to shopping cart abandonments.




      Conversion             Amazon monitored each step to improve its conversion
      optimization           rate, a tactic that is now pervasive in the industry.




         1-Click             • Patented in 1997, and licensed to Apple in 2000
                             • Allows to bypass the shopping cart: it‟s only one step!
        Ordering             • Increased Amazon‟s conversion rate




    With 1-Click, Amazon revolutionized the buying process by
                taking convenience to extremes.
International: sky’s the limit?


     1. Amazon exported its U.S. model and                 International vs U.S. net sales
        established subsidiaries to six countries:
                                                                  International   U.S.
                     United Kingdom      1998           100%
                           Germany       1998
                              France     2000
                               Japan     2000            50%
                             Canada      2002
                               China     2004
                                 Italy   2010
                                                          0%
     2. Each subsidiary subsequently started to                1998 2001 2004 2007 2010
        reference new categories one after another



              Contrary to Walmart, which failed to enter the German and South Korean
                 markets, Amazon‟s international expansion has been successful.


Source: Amazon.com
Case study: how mobile devices promote
    Amazon.com’s ubiquity




    From home                                   Everywhere
                                      (even from a brick & mortar shop)

   Full experience            Handy             Entertainment        Opportunities

    Main source for                                                      Amazon
 referencing products        Comparison          New way to
                                                                       Payments is
(books, music, movies)       pricing with      navigate through
                                                                      exploring NFC
                          barcode scanning      products with
 Associates advertise                                                  Payments to
                            from Amazon            Amazon
Amazon‟s products on                                                     develop
                             PriceCheck        Windowshop App
     other sites.                                                     m-commerce




        Amazon created a seamless & integrated shopping experience.
Assuming there‟s no sales tax and free shipping,
                       Amazon is significantly cheaper than its competitors




                                                                                  Specialty retailer




                      Amazon can really push the loss leader tactic to its end.



         3                          HIGH MARGIN, LOWEST PRICES
Source: Wells Fargo
Logistics, Amazon’s secret recipe
                     “None of these things are visible on the website, but they lead to a much better customer
                                        experience and a lower cost structure” Jeff Bezos

                               As a pure-player, Amazon leverages its digital advantage to
                                              optimize its supply chain.

                                                                                                   Fast moving items are stored in all
                                                                                                   the FCs (fulfillment center).
                                                                                                   Hard-to-find items are kept in small
                                                                                      Amazon       quantities in one or two FCs.
                                                                                     warehouse


                                  Automatically chooses the                                        Easily movable items (e.g. media)
                                  cheapest origin for the                                          are stored in highly automated
                                  customer‟s order in real-time.                                   facilities.
  Customers                                                                           Amazon       Extensive use of tracking
                                  It will re-optimize it based on                    warehouse
                                  the other customers‟ orders.
                                                                                                   Drop shipping: when applicable,
                                                                                                   Amazon provides packages and
                                                                                                   asks the supplier to ship the product
                                                                                                   himself .
                                                                                     Third-party   Third-party sellers follow the same
                                                                                       seller
                                                                                                   principle, which increases margins.
Source: Colby Ronald Chiles and Marguarette Thi Dau (2005). FC: Fulfillment center
Digital = cash flow = low prices

                        On average, a product stays:         70 days on Best Buy‟s shelf
                                                             33 days on Amazon‟s one

                            Product delivered                                    Product paid for    Customer
                              by suppliers                                         to suppliers     buys & pays



                                                                                                          70
                                                                                          Cash debt
                                                     Customer
                                                    buys & pays



                                Day 0                   33
                                                                  Cash flow


            Leveraging its high positive cash flow, Amazon is able to maximize margins
                      and beat all other retailers when it comes to pricing.

         1996: Barnes & Noble signs a deal with America Online to become its exclusive Bookseller
         1997: Amazon slashes prices up to 40 % on its best-selling prices and doubles its inventory to 2.5 m
Source: Amazon, BestBuy, Cnet
Case study: delegating the Long Tail

        In 2000, Amazon launched its Marketplace: it allowed third-party sellers to sell and
        reference their products side-by-side with Amazon‟s items.
        Amazon Marketplace represents 33% of total units shipped1 by Amazon and 2 m sellers worldwide2.



                                                   Amazon leverages its third-party sellers:

                                                     1. Best-selling products are kept in stock by Amazon
                  Better stock
                                                     2. Long-tail items are provided by third-party sellers
                  management
                                                   Self-improving: Amazon can quickly identify new top selling items
                                                   because all sales go through the platform.



                                                   Increasing competition between sellers and offering second-hand
                  Lower prices                     items let Amazon reinforce its ability to provide lower prices.




                    Ten years ago, experts thought Amazon was crazy to cannibalize its own sales.
                            However, it was a way to offer Long Tail items at lower cost.
1 Amazon.com   Q1 2011 results 2InternetRetailer
Financing margin optimization
                        Amazon.com lost a staggering $3 bn between 1995 and 2003

                                        (IPO)
                                        1997                                                   2003



                                                                                                         -200




                                                                                                                      Profit (Millions)
                                                                                                         -600


                           2000: “We were hoping to build a
                          small, profitable company, and […]                                             -1 000
                           what we've done is build a large,
                                        unprofitable company”
                                                    Jeff Bezos
                                                                                                         -1 400

                     • By going public in 1997, Amazon acknowledged that only the stock market would be able to
                       provide the kind of financing it was looking for.
                     • Thanks to ever improving business metrics, investors’ trust remained and was instrumental in
                       helping Amazon‟s development.
Source: Amazon.com
A data-driven company
                                                  Amazon pioneered A/B testing in 1997.
                        “Online, we can show half of our customers one thing and half of customers another,
                         and very quickly get some results back on how people actually behave.” Jeff Bezos



                                               [                                                              ]       (in weeks)




                                               [                                                              ]     (in seconds)




                            In 2001, for the first time in its history, Amazon implemented a
                             software to measure its costs for each shipped product.

                                                  As a result, Amazon started dereferencing its so-called CRAP
                      C.R.A.P.                    (Can‟t Realize Any Profit) products.

                                                  In 2000, Jeff Bezos discovered it took 15 minutes to pack a best-
                                                  selling $25 folding chair, which obliterated the margin.
                                                  He then negotiated with the manufacturer, who agreed to send it
                                                  pre-packaged for ¢25.
Source: Robert Spector, Amazon.com: Get Big Fast (2002)
Sharing cost centers

               Amazon.com brand                                                         Fulfillment     Computing resources

               Amazon was one of the
                                                                             With FBA (Fulfillment by
                  pioneers of online                                                                     S3 (file storage) and
                                                                              Amazon), sellers lets
                affiliation marketing1                                                                  EC2 (compute capacity)
                                                                              Amazon handle their
                leveraging its brand.                                                                     launched in 2006.
                                                                                    logistics.
                Amazon Associates is                                                                     Amazon monetized its
                                                                               It includes storage,
                “Tupperware party on                                                                     know-how in scalability
                                                                             packaging, shipping and
                 steroids” Forrester‟s                                                                       and reliability.
                                                                                customer service.
                    Chris Charron




1Affiliation   is a sales technique in which a website gets paid to promote Amazon.com‟s products.
Insourcing the value chain

                                                   • 2005: Amazon buys print-on-demand company
                                                     BookSurge (now CreateSpace).
            Supplier                               • Provides cover design, copyediting, press
                                                     release creation, etc.


                                                   • 2000: 70% of its software development
                                                     concerns distribution centers.
       Distribution                                • 2010: Amazon adds 13 fulfillment centers (out
                                                     of 52 already existing).



                                                  • Always owns the customer account
                                                  • Even with third-party sellers



                                                   • “We employ our own bicycle couriers in China.”
                                                     Jeff Bezos
            Delivery                               • For Amazon Fresh (home grocery delivery),
                                                     implemented its own delivery network



Source: Amazon.com Q4 2010 transcript, Wired, CreateSpace. Image: Atomic Taco
Case study: circumventing distributers (1997)

1995: Jeff Bezos chooses Seattle to establish its headquarters.

                         Seattle is about a six-hour drive from Roseburg,
                         Oregon; where the leading book distributor Ingram
                         runs the largest distribution center in the USA.



         Publishers             Distributors     Amazon.com             Fulfillers


1997: to reduce variable costs, Amazon starts to circumvent
distributers.




  Negotiating with publishers         Building a warehouse       Hiring Walmart executives

          Publishers                   Amazon.com                       Fulfillers
Next step: digital cultural goods market


                                         While the ebook market is expected to grow by more than
                                         300%1 by 2015, the printed books market will shrink by 4.7%




                                         US consumers will spend more on online music than on
                                         recorded music by 20122.



                                         US DVD sales plunged 20% in Q1 20113, while streaming and
                                         subscription services (including Netflix) rose 33%.



             With 43% of its sales coming from media, Amazon’s vision is at risk would
                              it fail to rule over the digital goods market.

Sales forecast from 1Goldman Sachs, 2Strategy Analytics, 3DEG (2011)
Digital goods further improve margins

      Value chain                       Inventory                       No shipping

Because there are fewer              With PoD (Print on
                                                                    Amazon makes some
intermediaries, Amazon              Demand) and digital
                                                                    products free to attract
 can take a larger share          storage, inventory costs
                                                                       new customers.
in the digital retail price.         become negligible.
                                                                   One free app per day on
  Creative destruction:           Amazon will circumvent
                                                                   Amazon App Store, free
 Amazon will be able to            distributors but also
                                                                   5 GB on Amazon Cloud
sell additional services to        publishers to directly
                                                                           Drive…
    content producers.                reach authors.


   Operating margin in 2010
                     35%
              28%              • Amazon‟s global operating margins remain very low
       22%
                               • Amazon‟s sales ($34 bn) still represent a drop in Walmart‟s
 4%                              bucket ($422 bn), which is now a strong player in the e-
                                 retail market
Amazon eBay   Apple Google
Digital goods domination underway?
                                     In each digital market, Amazon fights for monopoly.

      Market leadership




                          New entry                                                        Mature business

Amazon.com bought Audible in 2008.
Digital engine #2
      Customer accounts

Amazon’s main strength lies in its ability to
                control the cash register.
A trusted relationship is a competitive asset

                     Amazon‟s primary challenge was to acquire its customers’
                                            confidence



                                           137
                     Number of customers
                         (millions)                  Amazon benefits from a loyal
                                                    customer base: 2/3 of the sales
                                  41               comes from returning customers
                        1
                       1997      2004      2011




          “Commerce is the simple find it, buy it, ship it action.
          E-merchandising is much more about customer behavior online”
          Jeff Bezos (1998)
Source: Amazon.com
Opportunity: digital shuffles the payments
               market



             200 m
                                                                       Establishing barriers to entry
                        137 m
                                     94 m                              Market players need to acquire customers accounts very quickly.
                                                                       Barriers to entry are being built up: new entrants will have to
                                                 20 m
                                                                       support incumbent‟s payment method.
             Apple     Amazon Paypal            Netflix                2007: Amazon launches Amazon Payments to directly compete
                    Number of customer accounts
                                                                       with PayPal



                                                                       Positioning in the payments market
                                                                       Worldwide payments represented $600 bn of revenues (and
                                                                       $331 trillions in value1) in 2010.

                                                                       Mobile payments are expected to quadruple by 2014, reaching
                                                                       $630 bn in value2.



Source: Apple, BusinessWeek, Amazon.com, Paypal, Netflix. 1BCG 2Juniper Research
Customer loyalty: 3 main approaches

  Recurring usage             Seamless integration                       Lock-in

    Recurring usage                                                Lock-in occurs when
                                 Vertical integration
    captivates users‟                                             circumstances prevent
                                creates a consistent
       attention.                                                  users from leaving a
                               experience that is very
                                                                         platform.
    Facebook tries to          appealing (halo effect).
  leverage it to invade                                          DRM makes it extremely
                              It may require building its
other markets (streaming                                         difficult for users to read
                                     own device
    with Warner Bros,                                            their ebooks on another
                                  (Kindle and iPod).
   Facebook Credits)                                                       platform.




       Short term advantage                               Long lasting advantage
       Low constraint                                             High constraint
Amazon uses all three approaches:
                  1 recurring usage
                   Why are sellers still using Amazon?
                                            • Nonsense to ignore Amazon‟s 137 m customers
                                            • Profit from a reliable and optimized technology


                           Sellers
                                        $   • It takes time to develop as trusted a brand as Amazon‟s
                                              (Amazon is the leading retail brand, before Walmart1)




                   How is Amazon increasing recurring usage?
                                            • Creating ecosystems (Kindle and rumored tablet)
                                            • Storing users‟ media library (Instant Video, Kindle)
                        Customers           • Special offers every day (Amazon Video on Demand)
                                            • Ever-changing personalized store
1Brandz   (2011). Icons from Ahasoft.
Amazon uses all three approaches:
                2 seamless integration
                 How does Amazon integrate sellers?
                                    • Monitor seller ratings posted by customers
                                    • Expel sellers with bad ratings to ensure quality and protect the
                                      Amazon brand
                                    • Offer its Fulfillment by Amazon program to further improve the
                       Sellers
                                      customer experience




                 How is the user experience vertically integrated?
                                    • From the customer point-of-view, sellers are fairly invisible and
                                      commoditized
                                    • On most products, customers can profit from Amazon Prime
                      Customers
                                      and Free Super Saver Shipping

Icons from Ahasoft.
Amazon uses all three approaches:
                3 lock-in
                 How are sellers locked in?
                                     • As Amazon puts it, their customers are in fact Amazon‟s
                                       customers.
                                     • Third party sellers do not own the customer accounts. Thus
                                       their position is very risky.
                       Sellers
                                     • The more business they generate through the Amazon
                                       marketplace, the more complicated it will become to ensure
                                       the same level of customer experience (building
                                       infrastructure, customer service…).




                 How are customers locked in?
                                     • Digital content: Kindle ebooks proprietary format
                                     • Amazon Prime program: annual subscription to get free 2-
                                       day shipping
                      Customers

Icons from Ahasoft.
The big picture: an app store model

                                                Commoditized sellers




                                                Amazon.com aims at
                                                being the only place
                                                where you discover and
                                                buy goods (digital &
                                                physical)



                                                Multiple entry points:
                                                • Affiliation
                                                • Mobile apps


Icons from Ahasoft.
Digital engine #3
                         Ecosystem

In the end, Amazon is building an ecosystem
        to achieve digital supremacy, just like
                              Apple & Google.
Success is
                                                     “how well we defy easy
                                                     analogy”
                                                     Jeff Bezos




                   The Kindle is a service, not a device.
“Amazon’s iTunes” is made to acquire customers and build up an ecosystem.
A device dedicated to reading

                                                                   Optimized for readers
                                                                   Even if it‟s a minor object, the
                                                                   Kindle substantially disrupts our
                                                                   reading experience with:
                                                                   •   3G access to the Kindle Store
                                                                   •   E-ink reflective screen causing
                                                                       no eyestrains
                                                                   •   1 month battery life




      À la Braun design
  With an unobtrusive design, the
Kindle blends into readers‟ hands.




      Instead of trying to replace the printed book or the iPad, the Kindle device is focusing
           on a few very differentiated features, dedicated to the reading experience.
A service, not a device
                      “The vision for Kindle is every book ever in print in any language – all
                                  available in less than 60 seconds.” Jeff Bezos

                                                                                          Amazon struggles with publishers to implement its
                                                                                          vision:
                                                                                          • Lowering prices, even if it requires temporarily selling at a loss
                                                                                          • Increasing selection: 900,000 books available
                                                                                          • Pressuring them with Print on Demand and auto-publishing



                                                                                          Like iTunes, it is a seamlessly integrated ecosystem.
                                                                                          Amazon wants to become a one-stop shop:
                                                                                          • Kindle‟s 3G chip
                                                                                          • Access to the ebook catalog through the Kindle or the apps




                                                                                          Even if the Kindle is the best device to read for a long
                                                                                          time, it is more of a platform than a device:
                                                                                          • A device-agnostic experience thanks to mobile and desktop
                                                                                            application (Whispersync1)
                                                                                          • A streamlined interface and user experience dedicated to
                                                                                            reading on many devices
1Whispersync   enables a seamless synchronization of the reading progress and bookmarks across devices. Icons from Oxygen.
An entry point to harness the market


                                                                                                                 Barnes & Noble Nook
              Sony Librié                                           Amazon Kindle                                   Cybook Opus        Kobo eReader


                2004                                                      2007                                           2009             2010

          Ebooks sales:                                          6% of Amazon‟s                                         115 ebooks sold for
           microscopic                                           book units sold1                                      every 100 paperbacks2


              Staying ahead of retailers                                                                  Harnessing the market
              Books are Amazon’s DNA.                                                                     “We‟ve been selling e-Books for ten
              To demonstrate its resolve, it needed to                                                    years, but we needed an electron
              push its digital advantage to its end:                                                      microscope to find the sales. […]

              • Digital distribution: every book                                                          Three years ago we said, „Look, what we
                available in less than 60 seconds                                                         need to do is create a perfect, integrated,
              • Value chain: Amazon now integrates                                                        streamlined customer experience all the
                retail and distribution                                                                   way through.‟” Jeff Bezos (2008)


                                      “[And] if we can get other devices to also be able
                                             to buy Kindle books, that’s great.”3
1PaidContent 2Amazon.com 3Despite   Jeff Bezos‟ stance, currently only Amazon‟s official apps enable purchasing via Amazon.
Creating an ebooks ecosystem

                            Now that Amazon has reached a critical mass,
                    it is trying to create an ecosystem to increase its footprint.




                           Towards users
                                                            Towards authors
                       • massive selection
                                                        Higher royalty share
                       • great device
                                                        (35% or 75%)
                       • low prices




                                             Customer loyalty
                                        Kindle owners buy
                                        70% more books than prior
                                        to owning the device1.

1 Paidcontent
Kindle v4
                    Even if Amazon faces strong competition from the iPad,
               it will never compromise on the long-form reading experience.




   Color screen
The Mirasol technology
     delivers color and
                 video.




                                                                       Shopping
                                                                       Users can subscribe
                                                                       to book categories
Store your music, videos, photos, files                                                              EC2 (Elastic Compute Cloud)
    Rent a hard drive in the cloud                                                                       Rent a virtual computer: from $0.02 per hour1

    5 GB free, then $1 per GB per year1                                                                  S3 (Simple Storage Service)
                                                                                                         Rent a virtual hard disk: about $0.01 per GB1

                                                                                                         MT (Mechanical Turk)
                                                                                                         Rent human brains (“artificial artificial intelligence”)




                Even though AWS is primarily a B2B offer, the Amazon cloud will ultimately
                                     be geared toward end-users.




1These   are simplified rates, other rates (including data transfer, requests…) apply. See the AWS website for more information.
Cloud computing drives innovation

   Entrepreneurs won‟t be able to launch new products and services without the cloud:




                        Security                                                 SaaS
                   Users want a                                                Offers great
                  guaranteed level                                            value to end-
                    of security.                                                  users.




                              Scalable      Cheaper            Flexible
                                                                               Reliable
                       Grow efficiently     No initial or    Pay-as-you go
                                                                              Data storage
                        and reliably.     overhead costs    Ramp up quickly




                Cloud computing lets developers & companies focus on their core offer.

SaaS: software as a service
First step: develop a comprehensive B2B offer
 Developers needed a reliable and scalable architecture available as an on-demand service.

              Seeing that there was a short-term strategic opportunity,
             Amazon was a first-mover in the cloud computing market

             “It was never a matter of selling excess capacity”
             Werner Vogels, CTO Amazon.com

             Cloud computing monetizes Amazon‟s know-how in scalability and reliability. This
             business is expected to become even bigger than its retail activities.



              AWS slowly emerges as the most fully-fledged platform,
                     and is becoming the de facto standard.


 2006                2007                  2008                               2010




EC2, S3
Next step: the personal cloud

                In a digital content paradigm, the base foundation is the cloud.
                   Amazon is building up its expertise thanks to its AWS offer.




                               Devices (hardware and software) are commoditized
                             (Amazon Cloud Player already works on iOS devices1).
1TechCrunch
Amazon cloud’s long-term strategy focuses
    on B2C
1     Cloud encompasses infrastructure (uphill) and usage (downhill)



           Cloud infrastructure
         Google can boast as much
                                              +             Consumer usage
                                                           Apple’s digital content
       experience in cloud technologies                     approach is strong


2     Amazon is approaching the market with a two-fold strategy
                                The B2C cloud market
                                 will flourish thanks to
                                  pervasive fiber and
                                 wireless connectivity.



3     By introducing new devices, Amazon reaches more customers



          Kindle                  Amazon Media Center              Amazon Tablet
Four future products to show where Amazon is heading…
Amazon.com, the Hidden Empire
Amazon.com, the Hidden Empire
Amazon.com, the Hidden Empire
Amazon.com, the Hidden Empire
Annexes
How to use this document?
This work is licensed under the Creative Commons BY-NC-SA license to allow for
further contributions by experts and users in the coming months.
To view a copy of this Attribution – NonCommercial – ShareAlike 3.0 Unported license,
visit http://creativecommons.org/licenses/by-nc-sa/3.0/ or send a letter to Creative
Commons, 1712nd Street, Suite300, San Francisco, California, 94105, USA.



You are free to share and remix/adapt the work




You must cite this document:
Stéphane Distinguin, Amazon.com: the Hidden Empire, faberNovel, May 2011.




You may not use this work for commercial purposes. You may distribute a modified
work under the same or similar license.
Acknowledgments
• To our faberNovel contributors:
    •   Stéphane Distinguin (@fano)
    •   Cyril Vart (@cyrilvart)
    •   Matthieu Lecomte (@MatthieuLecomte)
    •   Mathilde Natier (@mathildenat)
    •   Julian Nachtigal (@julian)
    •   Charles-Axel Dein (@d3in)
    •   Axel Le Pennec (@axxou)


• To the following blogs and websites:
    •   Quora                  •   Gizmodo                •   Michel de Guilhermier's Blog
    •   TechCrunch             •   SilliconAlleyInsider   •   Presse Citron
    •   ReadWriteWeb           •   Blog Kindle            •   Le Journal Du Net
    •   FastCompany            •   Amazon Strategies      •   Zdnet
    •   Business Insider       •   Kindle Post            •   Clubic
    •   Wired                  •   MacGénération          •   01Net
    •   Mashable               •   eBouquin               •   PC Inpact
    •   VentureBeat            •   LaFeuille              •   PCWorld.fr
    •   GigaOM                 •   Teleread               •   Le Figaro Electro Business blog
    •   Engadget               •   cdixon.org             •   Écrans
Contact us


If you want to enhance your business with “digital
engines”, do not hesitate to contact faberNovel's experts:
Paris cyril.vart@fabernovel.com
Paris matthieu.lecomte@fabernovel.com
San Francisco julian.nachtigal@fabernovel.com
Moscow adrien.henni@fabernovel.com
New York john.geraci@fabernovel.com

For all press inquiries, please contact:
nawel.hamitouche@fabernovel.com
@fabernovel
www.fabernovel.com

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Amazon.com, the Hidden Empire

  • 1. Amazon.com the Hidden Empire Three digital engines to reshape and dominate retail
  • 2. Amazon.com: a digital shop around the corner…
  • 3. … and a digital colossus.
  • 4. Did you know: all these companies belong to Amazon…
  • 5. Did you know: Amazon is also… AmazonBasics Amazon-branded electronic products AmazonFresh sells and delivers groceries in Seattle AmazonStudios online social movie studio Amazon WarehouseDeals offers discounts on refurbished products
  • 6. Did you know: Amazon has had one of the fastest growths in the Internet’s history… Revenues reached within first 5 years $2,8 bn $1,5 bn $0,4 bn eBay Google Amazon Amazon and eBay results from 1995 to 2000, Google from 1998 to 2003. Even though Zynga and Groupon appear to have an even quicker growth, they haven‟t been compared because 1- sales have not been officially disclosed 2- they haven‟t reach their fifth year
  • 7. Did you know: Amazon Web Services drives these companies…
  • 8. Did you know: Amazon.com is a giant… E-commerce Y/Y growth for Q1 2011 +38% 3 × growth of market Market cap $90 bn 2 × market cap Customers 137 m 2 × # customers Employees 33,700 15 × more than Annual revenue $34 bn 16% more than Internet traffic rank 16th before Retail brand 1st before Paid out $1.2 bn to buy Source: Amazon.com, Alexa, Brandz. Market capitalization as of April 2011.
  • 9. Why? A vision… From 1994, Jeff Bezos knew he could create a retail website that would not have the limitations physical businesses encounter. “You could build a store online that simply could not exist in any other way. You could build a true superstore with exhaustive selection; and customers value selection.” Jeff Bezos
  • 10. … served by great execution & innovation Digital Engine: A digital lever providing a significant advantage to outperform one's competitors High fixed and variable costs Negligible variable costs No real-time metrics Real-time optimization Slow innovation process A/B testing and full-size prototypes Limited reach No physical frontier: worldwide market Limited space Unlimited inventory and categories Slow inventory turnover Ever-improving metrics & optimization One by one, Jeff Bezos carefully assessed the true advantages the Internet would give him, and pushed them to their boundaries
  • 11. Digital engine #1 No limits How Amazon fosters a very classical business model with the Internet’s specific advantages.
  • 12. Not that disruptive of a model: “sell and deliver stuff to customers” Amazon perfectly understood the old-economy retail cocktail: low prices, large selection, convenience/customer experience. “I can't imagine that ten years from now [customers] are going to say: „I really love Amazon, but I wish their prices were a little higher‟” Low Large prices selection Jeff Bezos Convenience
  • 13. Jeff Bezos’ 3 big ideas 1 Digital enables limitless inventory 2 Digital boosts customer care 3 Digital allows high margin, lowest prices
  • 14. In 15 years, Amazon went from 1 category (books) to 16 main categories 1 LIMITLESS INVENTORY
  • 15. Amazon began with books… Competition Product Search Market was large and A book does not have to Search would make it fragmented. be accurately described: easy for customers to it is a universal and find books among the Contrary to the simple object. entire database. concentrated music industry, no player would Book distributors were Amazon repeatedly have the power to freeze already exchanging appears first on Google‟s out a new entrant. digitalized listing. results page. Source: Robert Spector, Amazon.com: Get Big Fast (2002)
  • 16. … and needed to get big fast Buying power Brand & trust Cost management With great size comes a It is logical to amortize Trust is hard earned, better ability to negotiate high fixed costs over a and easily lost volume discounts. great number of It involved establishing a customers. Suppliers ignore world-class brand before Amazon.com at their Variable costs are very barnesandnoble.com own risk. low on the Internet. Long-term focus: “market share now equals revenue later” Netscape cofounder Marc Andreessen
  • 17. Create a digital driven supply chain Hiring from the expert: Amazon poached Walmart‟s employees: • Richard Dalzell as its Chief Information Officer • Jimmy Wright as its Chief Logistics Officer They were responsible for Walmart‟s secret weapon: • A computerized supply chain • An impressive supply-and-distribution network Walmart sued Amazon for violation of trade secrets law in 1998. 1995 1997 2010 Garage 2 fulfillment centers 400 sq feet 300,000 sq feet 50 fulfillment centers 26,000,000 sq feet Source: Amazon.com. Warehouse image: seanau.com
  • 18. Limitless categories too Books, Music and DVD/Video Others 100% Media vs. others in the U.S.1 80% 60% 40% 20% 0% 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 3 categories 16 categories By introducing two new product categories every year for almost a decade, Amazon‟s market share represents one third of U.S. e-commerce sales.2 1Amazon.com 2RBC
  • 19. Case study: from books to music (1995-1998) Contrary to books, Amazon.com was no first-mover in music e-retailing. But the company went back to work and used the same cocktail: Convenience “most efficient song search of Large the web” (NYT) Low prices selection up to 30 % 130k titles, 280 discount on sub-genres some albums Largest online seller of music… in 120 days! Amazon acquired CDNow in 2002 and began operating its website Source: Robert Spector, Amazon.com: Get Big Fast (2002)
  • 20. Build, buy, partner: accelerate development Build Buy Partner From time to time, When competitors are In some vertical markets, Amazon simply created already well established, Amazon offers its a new category. Amazon may buy out an technology service and incumbent. e-commerce expertise to In May 2011, Amazon third parties. launched MyHabit, even Quidsi (Diapers + Soap) though VentePrivée was acquired for Co-branded webstore the market leader. $540 m in 2010. with Toys “R” Us. 2000: exclusivity for 10 years 2006: ended by a lawsuit Thanks to this strategy, Amazon had been able to offer massive inventory
  • 21. Case study: why did Amazon.com buy Zappos for $1.2 bn in 2009? Revenue $1 bn (2009) Customers 11.5 m (2009) Female audience 69% Technology Synergy Amazing supply-chain and logistics management Legendary customer service: ranked #1 in 20101 (using autonomous robots (dedicated customer service Twitter account) and proprietary software) One-of-a-kind customer-centric culture with highly skilled employees Niche markets for 10 years before acquisition 97% of sales were apparel/footwear in 20092 With Zappos, Amazon tries to reach a new audience (young women) and acquires know-how. 1NRF Foundation/American Express Customers' Choice survey 2AdWeek Photo of the Kiva robot from Joshua Dalsimer
  • 22. Gravity fuels gravity More customers Lower prices More distribution channels Larger selection Larger reach Greater convenience More sellers
  • 23. “Be afraid of our customers, because those are the folks who have the money. Our competitors are never going to send us money.” Jeff Bezos 2 CUSTOMER CARE ON STEROIDS Jeff Bezos delivering a package to Amazon.com‟s millionth customer in October 1997 (credits: Amazon.com).
  • 24. Invest in customers first “If you do build a great experience, customers tell each other about that. Word of mouth is very powerful.” Jeff Bezos Customer focus Frugality Innovation “We start with the “Amazon is spending “I think frugality drives customer and work money on things that innovation, just like backward.” matter to customers.” other constraints do.” Following a bottom-up Frugality is part of the Amazon is always approach, every company‟s DNA: looking for simple decision at Amazon is Amazon is continually solutions in order to driven by the customer‟s looking for ways to do provide lower prices to its needs. things cost-effectively. customer. Amazon created a trusted, informative and loyal relationship with its customers.
  • 25. Data & human driven customer service Amazon‟s customer service was ranked #1 in 20091 and 20112 WHY HOW 1996: “If you make customers unhappy on the Internet, they can each tell 6,000 friends” Machines “We do 90% of our customer Jeff Bezos service by e-mail rather than by telephone” Jeff Bezos Amazon developed its • Fix customer‟s problems own software to manage • Identify recurring issues e-mail centers. • Track the behavior of merchants Human Every employee, even the CEO, spends two days every two years Customer service is the only human-to-human on the service desk to interaction for an e-commerce website. answer calls and help customers. 1Customer Service Champs From BusinessWeek 22011 Temkin Experience Ratings
  • 26. Customer-centric innovations: e-commerce easier than commerce • 1995: Customer reviews • 1997: Recommendations & bundles Select • 2001: Look inside the book • 2003: Search inside the book Order • 1997: 1-Click Ordering • 2001: Where‟s my stuff Receive • 2002: Free Super Saver Shipping Amazon was a first-mover for most of e-commerce‟s now ubiquitous best-practices.
  • 27. Customer centric innovations: pushing boundaries further Very much like Google, Amazon is always 1-Click ordering User experience innovating to improve its users‟ experience and Amazon Prime make them feel at home. Vouchers One-to-one marketing to tailor the content to the “Your Recent History” Personalized customer, help him discover new products and “Customers Who Bought stores provide unique experiences. This Item Also Bought” Detailed and safe step-by-step buying process with “You can always remove A-to-Z Safe Buying Protection. it later” [from the cart] Trust Amazon won and maintained customers‟ “Shopping with us is confidence. safe” Amazon.com implements all its consumers‟ hidden needs to become their first destination when thinking of buying online.
  • 28. Case study: 1-Click Ordering is the easiest way to buy Conversion funnel Each step of the funnel carries a risk to lose potential customers and lead to shopping cart abandonments. Conversion Amazon monitored each step to improve its conversion optimization rate, a tactic that is now pervasive in the industry. 1-Click • Patented in 1997, and licensed to Apple in 2000 • Allows to bypass the shopping cart: it‟s only one step! Ordering • Increased Amazon‟s conversion rate With 1-Click, Amazon revolutionized the buying process by taking convenience to extremes.
  • 29. International: sky’s the limit? 1. Amazon exported its U.S. model and International vs U.S. net sales established subsidiaries to six countries: International U.S. United Kingdom 1998 100% Germany 1998 France 2000 Japan 2000 50% Canada 2002 China 2004 Italy 2010 0% 2. Each subsidiary subsequently started to 1998 2001 2004 2007 2010 reference new categories one after another Contrary to Walmart, which failed to enter the German and South Korean markets, Amazon‟s international expansion has been successful. Source: Amazon.com
  • 30. Case study: how mobile devices promote Amazon.com’s ubiquity From home Everywhere (even from a brick & mortar shop) Full experience Handy Entertainment Opportunities Main source for Amazon referencing products Comparison New way to Payments is (books, music, movies) pricing with navigate through exploring NFC barcode scanning products with Associates advertise Payments to from Amazon Amazon Amazon‟s products on develop PriceCheck Windowshop App other sites. m-commerce Amazon created a seamless & integrated shopping experience.
  • 31. Assuming there‟s no sales tax and free shipping, Amazon is significantly cheaper than its competitors Specialty retailer Amazon can really push the loss leader tactic to its end. 3 HIGH MARGIN, LOWEST PRICES Source: Wells Fargo
  • 32. Logistics, Amazon’s secret recipe “None of these things are visible on the website, but they lead to a much better customer experience and a lower cost structure” Jeff Bezos As a pure-player, Amazon leverages its digital advantage to optimize its supply chain. Fast moving items are stored in all the FCs (fulfillment center). Hard-to-find items are kept in small Amazon quantities in one or two FCs. warehouse Automatically chooses the Easily movable items (e.g. media) cheapest origin for the are stored in highly automated customer‟s order in real-time. facilities. Customers Amazon Extensive use of tracking It will re-optimize it based on warehouse the other customers‟ orders. Drop shipping: when applicable, Amazon provides packages and asks the supplier to ship the product himself . Third-party Third-party sellers follow the same seller principle, which increases margins. Source: Colby Ronald Chiles and Marguarette Thi Dau (2005). FC: Fulfillment center
  • 33. Digital = cash flow = low prices On average, a product stays: 70 days on Best Buy‟s shelf 33 days on Amazon‟s one Product delivered Product paid for Customer by suppliers to suppliers buys & pays 70 Cash debt Customer buys & pays Day 0 33 Cash flow Leveraging its high positive cash flow, Amazon is able to maximize margins and beat all other retailers when it comes to pricing. 1996: Barnes & Noble signs a deal with America Online to become its exclusive Bookseller 1997: Amazon slashes prices up to 40 % on its best-selling prices and doubles its inventory to 2.5 m Source: Amazon, BestBuy, Cnet
  • 34. Case study: delegating the Long Tail In 2000, Amazon launched its Marketplace: it allowed third-party sellers to sell and reference their products side-by-side with Amazon‟s items. Amazon Marketplace represents 33% of total units shipped1 by Amazon and 2 m sellers worldwide2. Amazon leverages its third-party sellers: 1. Best-selling products are kept in stock by Amazon Better stock 2. Long-tail items are provided by third-party sellers management Self-improving: Amazon can quickly identify new top selling items because all sales go through the platform. Increasing competition between sellers and offering second-hand Lower prices items let Amazon reinforce its ability to provide lower prices. Ten years ago, experts thought Amazon was crazy to cannibalize its own sales. However, it was a way to offer Long Tail items at lower cost. 1 Amazon.com Q1 2011 results 2InternetRetailer
  • 35. Financing margin optimization Amazon.com lost a staggering $3 bn between 1995 and 2003 (IPO) 1997 2003 -200 Profit (Millions) -600 2000: “We were hoping to build a small, profitable company, and […] -1 000 what we've done is build a large, unprofitable company” Jeff Bezos -1 400 • By going public in 1997, Amazon acknowledged that only the stock market would be able to provide the kind of financing it was looking for. • Thanks to ever improving business metrics, investors’ trust remained and was instrumental in helping Amazon‟s development. Source: Amazon.com
  • 36. A data-driven company Amazon pioneered A/B testing in 1997. “Online, we can show half of our customers one thing and half of customers another, and very quickly get some results back on how people actually behave.” Jeff Bezos [ ] (in weeks) [ ] (in seconds) In 2001, for the first time in its history, Amazon implemented a software to measure its costs for each shipped product. As a result, Amazon started dereferencing its so-called CRAP C.R.A.P. (Can‟t Realize Any Profit) products. In 2000, Jeff Bezos discovered it took 15 minutes to pack a best- selling $25 folding chair, which obliterated the margin. He then negotiated with the manufacturer, who agreed to send it pre-packaged for ¢25. Source: Robert Spector, Amazon.com: Get Big Fast (2002)
  • 37. Sharing cost centers Amazon.com brand Fulfillment Computing resources Amazon was one of the With FBA (Fulfillment by pioneers of online S3 (file storage) and Amazon), sellers lets affiliation marketing1 EC2 (compute capacity) Amazon handle their leveraging its brand. launched in 2006. logistics. Amazon Associates is Amazon monetized its It includes storage, “Tupperware party on know-how in scalability packaging, shipping and steroids” Forrester‟s and reliability. customer service. Chris Charron 1Affiliation is a sales technique in which a website gets paid to promote Amazon.com‟s products.
  • 38. Insourcing the value chain • 2005: Amazon buys print-on-demand company BookSurge (now CreateSpace). Supplier • Provides cover design, copyediting, press release creation, etc. • 2000: 70% of its software development concerns distribution centers. Distribution • 2010: Amazon adds 13 fulfillment centers (out of 52 already existing). • Always owns the customer account • Even with third-party sellers • “We employ our own bicycle couriers in China.” Jeff Bezos Delivery • For Amazon Fresh (home grocery delivery), implemented its own delivery network Source: Amazon.com Q4 2010 transcript, Wired, CreateSpace. Image: Atomic Taco
  • 39. Case study: circumventing distributers (1997) 1995: Jeff Bezos chooses Seattle to establish its headquarters. Seattle is about a six-hour drive from Roseburg, Oregon; where the leading book distributor Ingram runs the largest distribution center in the USA. Publishers Distributors Amazon.com Fulfillers 1997: to reduce variable costs, Amazon starts to circumvent distributers. Negotiating with publishers Building a warehouse Hiring Walmart executives Publishers Amazon.com Fulfillers
  • 40. Next step: digital cultural goods market While the ebook market is expected to grow by more than 300%1 by 2015, the printed books market will shrink by 4.7% US consumers will spend more on online music than on recorded music by 20122. US DVD sales plunged 20% in Q1 20113, while streaming and subscription services (including Netflix) rose 33%. With 43% of its sales coming from media, Amazon’s vision is at risk would it fail to rule over the digital goods market. Sales forecast from 1Goldman Sachs, 2Strategy Analytics, 3DEG (2011)
  • 41. Digital goods further improve margins Value chain Inventory No shipping Because there are fewer With PoD (Print on Amazon makes some intermediaries, Amazon Demand) and digital products free to attract can take a larger share storage, inventory costs new customers. in the digital retail price. become negligible. One free app per day on Creative destruction: Amazon will circumvent Amazon App Store, free Amazon will be able to distributors but also 5 GB on Amazon Cloud sell additional services to publishers to directly Drive… content producers. reach authors. Operating margin in 2010 35% 28% • Amazon‟s global operating margins remain very low 22% • Amazon‟s sales ($34 bn) still represent a drop in Walmart‟s 4% bucket ($422 bn), which is now a strong player in the e- retail market Amazon eBay Apple Google
  • 42. Digital goods domination underway? In each digital market, Amazon fights for monopoly. Market leadership New entry Mature business Amazon.com bought Audible in 2008.
  • 43. Digital engine #2 Customer accounts Amazon’s main strength lies in its ability to control the cash register.
  • 44. A trusted relationship is a competitive asset Amazon‟s primary challenge was to acquire its customers’ confidence 137 Number of customers (millions) Amazon benefits from a loyal customer base: 2/3 of the sales 41 comes from returning customers 1 1997 2004 2011 “Commerce is the simple find it, buy it, ship it action. E-merchandising is much more about customer behavior online” Jeff Bezos (1998) Source: Amazon.com
  • 45. Opportunity: digital shuffles the payments market 200 m Establishing barriers to entry 137 m 94 m Market players need to acquire customers accounts very quickly. Barriers to entry are being built up: new entrants will have to 20 m support incumbent‟s payment method. Apple Amazon Paypal Netflix 2007: Amazon launches Amazon Payments to directly compete Number of customer accounts with PayPal Positioning in the payments market Worldwide payments represented $600 bn of revenues (and $331 trillions in value1) in 2010. Mobile payments are expected to quadruple by 2014, reaching $630 bn in value2. Source: Apple, BusinessWeek, Amazon.com, Paypal, Netflix. 1BCG 2Juniper Research
  • 46. Customer loyalty: 3 main approaches Recurring usage Seamless integration Lock-in Recurring usage Lock-in occurs when Vertical integration captivates users‟ circumstances prevent creates a consistent attention. users from leaving a experience that is very platform. Facebook tries to appealing (halo effect). leverage it to invade DRM makes it extremely It may require building its other markets (streaming difficult for users to read own device with Warner Bros, their ebooks on another (Kindle and iPod). Facebook Credits) platform. Short term advantage Long lasting advantage Low constraint High constraint
  • 47. Amazon uses all three approaches: 1 recurring usage Why are sellers still using Amazon? • Nonsense to ignore Amazon‟s 137 m customers • Profit from a reliable and optimized technology Sellers $ • It takes time to develop as trusted a brand as Amazon‟s (Amazon is the leading retail brand, before Walmart1) How is Amazon increasing recurring usage? • Creating ecosystems (Kindle and rumored tablet) • Storing users‟ media library (Instant Video, Kindle) Customers • Special offers every day (Amazon Video on Demand) • Ever-changing personalized store 1Brandz (2011). Icons from Ahasoft.
  • 48. Amazon uses all three approaches: 2 seamless integration How does Amazon integrate sellers? • Monitor seller ratings posted by customers • Expel sellers with bad ratings to ensure quality and protect the Amazon brand • Offer its Fulfillment by Amazon program to further improve the Sellers customer experience How is the user experience vertically integrated? • From the customer point-of-view, sellers are fairly invisible and commoditized • On most products, customers can profit from Amazon Prime Customers and Free Super Saver Shipping Icons from Ahasoft.
  • 49. Amazon uses all three approaches: 3 lock-in How are sellers locked in? • As Amazon puts it, their customers are in fact Amazon‟s customers. • Third party sellers do not own the customer accounts. Thus their position is very risky. Sellers • The more business they generate through the Amazon marketplace, the more complicated it will become to ensure the same level of customer experience (building infrastructure, customer service…). How are customers locked in? • Digital content: Kindle ebooks proprietary format • Amazon Prime program: annual subscription to get free 2- day shipping Customers Icons from Ahasoft.
  • 50. The big picture: an app store model Commoditized sellers Amazon.com aims at being the only place where you discover and buy goods (digital & physical) Multiple entry points: • Affiliation • Mobile apps Icons from Ahasoft.
  • 51. Digital engine #3 Ecosystem In the end, Amazon is building an ecosystem to achieve digital supremacy, just like Apple & Google.
  • 52. Success is “how well we defy easy analogy” Jeff Bezos The Kindle is a service, not a device. “Amazon’s iTunes” is made to acquire customers and build up an ecosystem.
  • 53. A device dedicated to reading Optimized for readers Even if it‟s a minor object, the Kindle substantially disrupts our reading experience with: • 3G access to the Kindle Store • E-ink reflective screen causing no eyestrains • 1 month battery life À la Braun design With an unobtrusive design, the Kindle blends into readers‟ hands. Instead of trying to replace the printed book or the iPad, the Kindle device is focusing on a few very differentiated features, dedicated to the reading experience.
  • 54. A service, not a device “The vision for Kindle is every book ever in print in any language – all available in less than 60 seconds.” Jeff Bezos Amazon struggles with publishers to implement its vision: • Lowering prices, even if it requires temporarily selling at a loss • Increasing selection: 900,000 books available • Pressuring them with Print on Demand and auto-publishing Like iTunes, it is a seamlessly integrated ecosystem. Amazon wants to become a one-stop shop: • Kindle‟s 3G chip • Access to the ebook catalog through the Kindle or the apps Even if the Kindle is the best device to read for a long time, it is more of a platform than a device: • A device-agnostic experience thanks to mobile and desktop application (Whispersync1) • A streamlined interface and user experience dedicated to reading on many devices 1Whispersync enables a seamless synchronization of the reading progress and bookmarks across devices. Icons from Oxygen.
  • 55. An entry point to harness the market Barnes & Noble Nook Sony Librié Amazon Kindle Cybook Opus Kobo eReader 2004 2007 2009 2010 Ebooks sales: 6% of Amazon‟s 115 ebooks sold for microscopic book units sold1 every 100 paperbacks2 Staying ahead of retailers Harnessing the market Books are Amazon’s DNA. “We‟ve been selling e-Books for ten To demonstrate its resolve, it needed to years, but we needed an electron push its digital advantage to its end: microscope to find the sales. […] • Digital distribution: every book Three years ago we said, „Look, what we available in less than 60 seconds need to do is create a perfect, integrated, • Value chain: Amazon now integrates streamlined customer experience all the retail and distribution way through.‟” Jeff Bezos (2008) “[And] if we can get other devices to also be able to buy Kindle books, that’s great.”3 1PaidContent 2Amazon.com 3Despite Jeff Bezos‟ stance, currently only Amazon‟s official apps enable purchasing via Amazon.
  • 56. Creating an ebooks ecosystem Now that Amazon has reached a critical mass, it is trying to create an ecosystem to increase its footprint. Towards users Towards authors • massive selection Higher royalty share • great device (35% or 75%) • low prices Customer loyalty Kindle owners buy 70% more books than prior to owning the device1. 1 Paidcontent
  • 57. Kindle v4 Even if Amazon faces strong competition from the iPad, it will never compromise on the long-form reading experience. Color screen The Mirasol technology delivers color and video. Shopping Users can subscribe to book categories
  • 58. Store your music, videos, photos, files EC2 (Elastic Compute Cloud) Rent a hard drive in the cloud Rent a virtual computer: from $0.02 per hour1 5 GB free, then $1 per GB per year1 S3 (Simple Storage Service) Rent a virtual hard disk: about $0.01 per GB1 MT (Mechanical Turk) Rent human brains (“artificial artificial intelligence”) Even though AWS is primarily a B2B offer, the Amazon cloud will ultimately be geared toward end-users. 1These are simplified rates, other rates (including data transfer, requests…) apply. See the AWS website for more information.
  • 59. Cloud computing drives innovation Entrepreneurs won‟t be able to launch new products and services without the cloud: Security SaaS Users want a Offers great guaranteed level value to end- of security. users. Scalable Cheaper Flexible Reliable Grow efficiently No initial or Pay-as-you go Data storage and reliably. overhead costs Ramp up quickly Cloud computing lets developers & companies focus on their core offer. SaaS: software as a service
  • 60. First step: develop a comprehensive B2B offer Developers needed a reliable and scalable architecture available as an on-demand service. Seeing that there was a short-term strategic opportunity, Amazon was a first-mover in the cloud computing market “It was never a matter of selling excess capacity” Werner Vogels, CTO Amazon.com Cloud computing monetizes Amazon‟s know-how in scalability and reliability. This business is expected to become even bigger than its retail activities. AWS slowly emerges as the most fully-fledged platform, and is becoming the de facto standard. 2006 2007 2008 2010 EC2, S3
  • 61. Next step: the personal cloud In a digital content paradigm, the base foundation is the cloud. Amazon is building up its expertise thanks to its AWS offer. Devices (hardware and software) are commoditized (Amazon Cloud Player already works on iOS devices1). 1TechCrunch
  • 62. Amazon cloud’s long-term strategy focuses on B2C 1 Cloud encompasses infrastructure (uphill) and usage (downhill) Cloud infrastructure Google can boast as much + Consumer usage Apple’s digital content experience in cloud technologies approach is strong 2 Amazon is approaching the market with a two-fold strategy The B2C cloud market will flourish thanks to pervasive fiber and wireless connectivity. 3 By introducing new devices, Amazon reaches more customers Kindle Amazon Media Center Amazon Tablet
  • 63. Four future products to show where Amazon is heading…
  • 69. How to use this document? This work is licensed under the Creative Commons BY-NC-SA license to allow for further contributions by experts and users in the coming months. To view a copy of this Attribution – NonCommercial – ShareAlike 3.0 Unported license, visit http://creativecommons.org/licenses/by-nc-sa/3.0/ or send a letter to Creative Commons, 1712nd Street, Suite300, San Francisco, California, 94105, USA. You are free to share and remix/adapt the work You must cite this document: Stéphane Distinguin, Amazon.com: the Hidden Empire, faberNovel, May 2011. You may not use this work for commercial purposes. You may distribute a modified work under the same or similar license.
  • 70. Acknowledgments • To our faberNovel contributors: • Stéphane Distinguin (@fano) • Cyril Vart (@cyrilvart) • Matthieu Lecomte (@MatthieuLecomte) • Mathilde Natier (@mathildenat) • Julian Nachtigal (@julian) • Charles-Axel Dein (@d3in) • Axel Le Pennec (@axxou) • To the following blogs and websites: • Quora • Gizmodo • Michel de Guilhermier's Blog • TechCrunch • SilliconAlleyInsider • Presse Citron • ReadWriteWeb • Blog Kindle • Le Journal Du Net • FastCompany • Amazon Strategies • Zdnet • Business Insider • Kindle Post • Clubic • Wired • MacGénération • 01Net • Mashable • eBouquin • PC Inpact • VentureBeat • LaFeuille • PCWorld.fr • GigaOM • Teleread • Le Figaro Electro Business blog • Engadget • cdixon.org • Écrans
  • 71. Contact us If you want to enhance your business with “digital engines”, do not hesitate to contact faberNovel's experts: Paris cyril.vart@fabernovel.com Paris matthieu.lecomte@fabernovel.com San Francisco julian.nachtigal@fabernovel.com Moscow adrien.henni@fabernovel.com New York john.geraci@fabernovel.com For all press inquiries, please contact: nawel.hamitouche@fabernovel.com