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        mazon.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…

                Y/Y growth for Q2 2012 +29%                                               2 × growth of      E-commerce
                                                                                                                market

                                       Market cap $105 bn                                 1,7 × market cap
                                             Customers 152 m                              4 × # customers
                                           Employees 51,300                               13 × more than
                               Annual revenue $48 bn                                      27% more than
                                  Internet traffic rank 11th                              before
                                                      Retail brand 1st                    before
                                                Paid out $1.2 bn                          to buy
                                                Paid out $775 m                           to buy
Source: Amazon.com, Alexa, Brandz. Market capitalization as of the 5th of November 2012
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                           24 m (2011)
                                                                                     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.

Impossible d'afficher
l'image. Votre
ordinateur manque
peut-être de
mémoire pour ouvrir



                          Conversion
l'image ou l'image
est endommagée.
Redémarrez
l'ordinateur, puis
ouvrez à nouveau le
                                                 Amazon monitored each step to improve its conversion
                                                 rate, a tactic that is now pervasive in the industry.
fichier. Si le x rouge



                          optimization
est toujours affiché,
vous devrez peut-
être supprimer
l'image avant de la
réinsérer.




                              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:
                     United Kingdom      1998                     International   U.S.
                           Germany       1998          100%
                              France     2000
                               Japan     2000
                             Canada      2002           50%
                               China     2004
                                 Italy   2010
                               Spain     2011
                                                         0%
      2.  Each subsidiary subsequently started to             1998 2001 2004 2007 2010 2011
          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.
Case study: Kindle store for Kindle readers

Shopping the Kindle Store on your Kindle is a convenient way to find and buy
e-books, newspapers and magazines.
Case study: the newly-released “Kindle Fire”
 is Amazon’s Trojan Horse …
The Kindle Fire can be used to purchase e-books but also games, movies,
and potentially anything that Amazon sells on its website.




  Wal-Mart is worried about customers who browse in stores and then buy
       from online competitors and will stop selling Amazon's Kindle.
Case study: … and shows Apple-like strategy

  From Commerce to           From Hardware to
      Hardware                  Commerce

AMAZON - Kindle Fire          APPLE - IPad
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
Case study: circumventing distributers (2012)

   Amazon has installed metal lockers in grocery, convenience and drugstore
   outlets that can accept packages for customers for a later pickup.




•  Amazon wants to eliminate the uncertainty of home delivery with its new locker service.
•  Amazon sends you an email with a pickup code, which you enter on a touchscreen to
   open the door of the locker containing your package.
•  By combining same-day delivery and delivery lockers, Amazon is steadily chipping
   away at reasons to walk into a store at all.
Case study: Amazon explores continuously
 new business models (1/2)
The online retailer offers a new option for students who want to rent
textbooks each semester.




           Amazon promises up to 70% savings to subscribers.
Case study: Amazon explores continuously
 new business models (2/2)
In the U.S., Amazon has decided to publish physical formats of
successful e-books on which it has exclusive publisher rights through its
service Kindle Direct Publishing.
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)
Case study: Kindle Premium Membership for
 $79 per year
Kindle Premium Membership is a 100% integrated offer creating a
consistent experience and captivating user’s attention.
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 2011


                     35%       •  Amazon’s global operating margins remain very low
              31%
       20%                     •  Amazon’s sales ($48 bn) still represent a drop in Walmart’s
                                  bucket ($419 bn), which is now a strong player in the e-
 2%
                                  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


                     Number of customers
                         (millions)
                                            152
                                     137             Amazon benefits from a loyal
                                                    customer base: 2/3 of the sales
                                                   comes from returning customers
                              41
                       1
                      1997   2004    2011   2012



          “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

                400 m                                                  Establishing barriers to entry
                                                                       Market players need to acquire customers accounts very quickly.
                            152 m
                                        100 m
                                                                       Barriers to entry are being built up: new entrants will have to support
                                                     30 m              incumbent’s payment method.

                 Apple     Amazon Paypal            Netflix            2007: Amazon launches Amazon Payments to directly compete with
                        Number of customer accounts                    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.


                                                                       Amazon Kindle: the ultimate integration
                                                                       With customers’ details account pre-loaded, customers have
                                                                       nothing else to do but start using the device.

                                                                       The Kindle represents Amazon’s most direct channel to the
                                                                       customer !


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 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.
Devices 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




                                                                               Backlit screen for
         Kindle                        Kindle Paperwhite                       reading in the dark


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.
…and devices dedicated to broad digital
content                         Optimized for
                                                                    digital age
                                                                    The Kindle Fire is optimized
                                                                    for consuming digital
                                                                    content from Amazon with:
                                                                    •    Wi-Fi access to Amazon
                                                                         store (22 millions of
                                                                         books, magazines,
                                                                         videos and apps)
                                                                    •    7’’ HD screen
                                                                    •    11h of battery life




   Kindle Fire                         Kindle Fire HD
Kindle Fire is not a low-cost iPad, it is a high quality device dedicated to the digital
                 content experience (music, books, videos, apps)
And coming soon in Europe, Kindle Fire 8,9’’
                                                    Front camera




                                                                           Movies,
                                                                           photos, TV
                                                                           shows, music,
                                                                           apps, ebooks,
                                                                           etc.

1920*1200
HD screen



                                                                             Dolby audio
                                 Kindle Fire HD 8,9’’


    Last Kindle to be released in mid-November, to compete directly with the iPad.
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
                                                                                          •  Kindle Fire’s WiFi access (and 4G on the 8,9’’)
                                                                                          •  Direct access to the ebook, movies, music catalogs and apps
                                                                                             on Amazon through the Kindle


                                                                                          Even if the Kindle is the best device to read and browse
                                                                                          digital content 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 and consuming digital content 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.
An aggressive pricing strategy to gain market
                  shares

                                                                                                            Amazon Kindle Fire is sold at
                                                                                                            loss

                                                                                                            Amazon’s Kindle Fire cost around
                                                                                                            $210 to produce but is sold at $1991.

                                                                                                            However, over the first 6 months of
                                                                                                            use of the product, Amazon makes
                                                                                                            $1362 of margin on average on every
                                                                                                            Kindle Fire by selling digital content to
                                                                                                            its customers.


                                                                                                     Positive margins on content




                                                                                                      Negative margins on device
1Business   Insider, Amazon Will Lose Millions Selling The Kindle Fire, But That's The Point 2AllThingsD, Amazon Makes More Than $100 Off Each Kindle Fire
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 Fire HD 8,9’’
                Even if Amazon faces strong competition from the iPad,
     it will never compromise on the long-form media consuming experience.




                                                                 1-click
  No setup
                                                                 Shopping
  required                                                       Kindle Fire HD is
 Kindle Fire HD                                                  seamlessly
8,9’’ is delivered                                               integrated with
    ready to use                                                 Amazon's content
                                                                 stores so users can
                                                                 buy directly digital
                                                                 media
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
A tripartite strategy




1     The Kindle ecosystem

2     Same-day delivery

3     Supply to small and medium businesses
1. Growing the Kindle ecosystem


                         An aggressive strategy
                         highlighting Amazon’s future
                         steps

                         1.  Kindle are sold at loss in order
                             to attract customers and sell
                             more digital content.
                         2.  For the first time, Amazon TV
                             ads were displayed to
                             consumers
                         3.  Amazon is developing
                             international partnership with
                             retailers (Darty in France) to sell
                             more Kindles
2. The Holy Grail: same-day delivery




    Amazon’s ultimate                Amazon move: building
competitor: brick-and-mortar         warehouses close to city
           stores                           centers

 Consumers are impatient and        Risky bet: Amazon will pay states
 prefer most of the time to go to   taxes it did not pay before but it will
 local stores as they offer         get closer to the same-day delivery
 immediate delivery even though     promise.
 they may be more expensive than    Warehouses are currently being built
 online stores.                     in:
                                    California, Indiana, New Jersey,
                                    Tennessee, South Carolina, Virginia
3. Supplying small and medium businesses
with essentials goods
In April 2012, Amazon launched AmazonSupply, a B2B e-commerce website
              dedicated to selling essential goods to businesses


     1    600,000+                     scientific, industrial and
                                       business supplies

     2    Possibility to apply for a credit

     3    Order by phone

     4    Free two-day shipping for orders over 50$

 Amazon could develop a lock-in strategy for small to mid-size businesses

                                      Develop self-                 Become a
    Offer
                   Build a B2B          service
eProcurement
                   marketplace         merchant
                                                                    “universal
 capabilities                                                        fulfiller”
                                       capability
Amazon’s long term bold vision



  #1     ANYTHING
  #2     ANYWHERE
  #3     ANYTIME
But, there is a but….




    Amazon is not           It is fundamentally a
everywhere (yet) and         retail business with
competition is starting   low margins. Amazon
  to wake-up slowly.       needs to reinforce its
                                                     Amazon growing its
  Recently Walmart            digital media and     tentacular business in
    stopped selling             digital services
                                                     every directions may
   Kindles as it was         offering where high     raise the question of
 attracting customers        margins lie so as to    abuse of dominant
         online.           finance and hold its            position.
                              market position.
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
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Amazon.com: the Hidden Empire - Update 2013

  • 1. ••• mazon.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… Y/Y growth for Q2 2012 +29% 2 × growth of E-commerce market Market cap $105 bn 1,7 × market cap Customers 152 m 4 × # customers Employees 51,300 13 × more than Annual revenue $48 bn 27% more than Internet traffic rank 11th before Retail brand 1st before Paid out $1.2 bn to buy Paid out $775 m to buy Source: Amazon.com, Alexa, Brandz. Market capitalization as of the 5th of November 2012
  • 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 24 m (2011) 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. Impossible d'afficher l'image. Votre ordinateur manque peut-être de mémoire pour ouvrir Conversion l'image ou l'image est endommagée. Redémarrez l'ordinateur, puis ouvrez à nouveau le Amazon monitored each step to improve its conversion rate, a tactic that is now pervasive in the industry. fichier. Si le x rouge optimization est toujours affiché, vous devrez peut- être supprimer l'image avant de la réinsérer. 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: United Kingdom 1998 International U.S. Germany 1998 100% France 2000 Japan 2000 Canada 2002 50% China 2004 Italy 2010 Spain 2011 0% 2.  Each subsidiary subsequently started to 1998 2001 2004 2007 2010 2011 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. Case study: Kindle store for Kindle readers Shopping the Kindle Store on your Kindle is a convenient way to find and buy e-books, newspapers and magazines.
  • 32. Case study: the newly-released “Kindle Fire” is Amazon’s Trojan Horse … The Kindle Fire can be used to purchase e-books but also games, movies, and potentially anything that Amazon sells on its website. Wal-Mart is worried about customers who browse in stores and then buy from online competitors and will stop selling Amazon's Kindle.
  • 33. Case study: … and shows Apple-like strategy From Commerce to From Hardware to Hardware Commerce AMAZON - Kindle Fire APPLE - IPad
  • 34. 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
  • 35. 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
  • 36. 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
  • 37. 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
  • 38. 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
  • 39. 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)
  • 40. 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.
  • 41. 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
  • 42. 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
  • 43. Case study: circumventing distributers (2012) Amazon has installed metal lockers in grocery, convenience and drugstore outlets that can accept packages for customers for a later pickup. •  Amazon wants to eliminate the uncertainty of home delivery with its new locker service. •  Amazon sends you an email with a pickup code, which you enter on a touchscreen to open the door of the locker containing your package. •  By combining same-day delivery and delivery lockers, Amazon is steadily chipping away at reasons to walk into a store at all.
  • 44. Case study: Amazon explores continuously new business models (1/2) The online retailer offers a new option for students who want to rent textbooks each semester. Amazon promises up to 70% savings to subscribers.
  • 45. Case study: Amazon explores continuously new business models (2/2) In the U.S., Amazon has decided to publish physical formats of successful e-books on which it has exclusive publisher rights through its service Kindle Direct Publishing.
  • 46. 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)
  • 47. Case study: Kindle Premium Membership for $79 per year Kindle Premium Membership is a 100% integrated offer creating a consistent experience and captivating user’s attention.
  • 48. 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 2011 35% •  Amazon’s global operating margins remain very low 31% 20% •  Amazon’s sales ($48 bn) still represent a drop in Walmart’s bucket ($419 bn), which is now a strong player in the e- 2% retail market Amazon eBay Apple Google
  • 49. Digital goods domination underway? In each digital market, Amazon fights for monopoly. Market leadership New entry Mature business Amazon.com bought Audible in 2008.
  • 50. Digital engine #2 Customer accounts Amazon’s main strength lies in its ability to control the cash register.
  • 51. A trusted relationship is a competitive asset Amazon’s primary challenge was to acquire its customers’ confidence Number of customers (millions) 152 137 Amazon benefits from a loyal customer base: 2/3 of the sales comes from returning customers 41 1 1997 2004 2011 2012 “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
  • 52. Opportunity: digital shuffles the payments market 400 m Establishing barriers to entry Market players need to acquire customers accounts very quickly. 152 m 100 m Barriers to entry are being built up: new entrants will have to support 30 m incumbent’s payment method. Apple Amazon Paypal Netflix 2007: Amazon launches Amazon Payments to directly compete with Number of customer accounts 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. Amazon Kindle: the ultimate integration With customers’ details account pre-loaded, customers have nothing else to do but start using the device. The Kindle represents Amazon’s most direct channel to the customer ! Source: Apple, BusinessWeek, Amazon.com, Paypal, Netflix. 1BCG 2Juniper Research
  • 53. 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
  • 54. 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 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.
  • 55. 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.
  • 56. 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.
  • 57. 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.
  • 58. Digital engine #3 Ecosystem In the end, Amazon is building an ecosystem to achieve digital supremacy, just like Apple & Google.
  • 59. 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.
  • 60. Devices 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 Backlit screen for Kindle Kindle Paperwhite reading in the dark 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.
  • 61. …and devices dedicated to broad digital content Optimized for digital age The Kindle Fire is optimized for consuming digital content from Amazon with: •  Wi-Fi access to Amazon store (22 millions of books, magazines, videos and apps) •  7’’ HD screen •  11h of battery life Kindle Fire Kindle Fire HD Kindle Fire is not a low-cost iPad, it is a high quality device dedicated to the digital content experience (music, books, videos, apps)
  • 62. And coming soon in Europe, Kindle Fire 8,9’’ Front camera Movies, photos, TV shows, music, apps, ebooks, etc. 1920*1200 HD screen Dolby audio Kindle Fire HD 8,9’’ Last Kindle to be released in mid-November, to compete directly with the iPad.
  • 63. 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 •  Kindle Fire’s WiFi access (and 4G on the 8,9’’) •  Direct access to the ebook, movies, music catalogs and apps on Amazon through the Kindle Even if the Kindle is the best device to read and browse digital content 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 and consuming digital content on many devices 1Whispersync enables a seamless synchronization of the reading progress and bookmarks across devices. Icons from Oxygen.
  • 64. 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.
  • 65. An aggressive pricing strategy to gain market shares Amazon Kindle Fire is sold at loss Amazon’s Kindle Fire cost around $210 to produce but is sold at $1991. However, over the first 6 months of use of the product, Amazon makes $1362 of margin on average on every Kindle Fire by selling digital content to its customers. Positive margins on content Negative margins on device 1Business Insider, Amazon Will Lose Millions Selling The Kindle Fire, But That's The Point 2AllThingsD, Amazon Makes More Than $100 Off Each Kindle Fire
  • 66. 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
  • 67. Kindle Fire HD 8,9’’ Even if Amazon faces strong competition from the iPad, it will never compromise on the long-form media consuming experience. 1-click No setup Shopping required Kindle Fire HD is Kindle Fire HD seamlessly 8,9’’ is delivered integrated with ready to use Amazon's content stores so users can buy directly digital media
  • 68. 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.
  • 69. 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
  • 70. 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
  • 71. 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
  • 72. 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
  • 73.
  • 74. A tripartite strategy 1 The Kindle ecosystem 2 Same-day delivery 3 Supply to small and medium businesses
  • 75. 1. Growing the Kindle ecosystem An aggressive strategy highlighting Amazon’s future steps 1.  Kindle are sold at loss in order to attract customers and sell more digital content. 2.  For the first time, Amazon TV ads were displayed to consumers 3.  Amazon is developing international partnership with retailers (Darty in France) to sell more Kindles
  • 76. 2. The Holy Grail: same-day delivery Amazon’s ultimate Amazon move: building competitor: brick-and-mortar warehouses close to city stores centers Consumers are impatient and Risky bet: Amazon will pay states prefer most of the time to go to taxes it did not pay before but it will local stores as they offer get closer to the same-day delivery immediate delivery even though promise. they may be more expensive than Warehouses are currently being built online stores. in: California, Indiana, New Jersey, Tennessee, South Carolina, Virginia
  • 77. 3. Supplying small and medium businesses with essentials goods In April 2012, Amazon launched AmazonSupply, a B2B e-commerce website dedicated to selling essential goods to businesses 1 600,000+ scientific, industrial and business supplies 2 Possibility to apply for a credit 3 Order by phone 4 Free two-day shipping for orders over 50$ Amazon could develop a lock-in strategy for small to mid-size businesses Develop self- Become a Offer Build a B2B service eProcurement marketplace merchant “universal capabilities fulfiller” capability
  • 78. Amazon’s long term bold vision #1 ANYTHING #2 ANYWHERE #3 ANYTIME
  • 79. But, there is a but…. Amazon is not It is fundamentally a everywhere (yet) and retail business with competition is starting low margins. Amazon to wake-up slowly. needs to reinforce its Amazon growing its Recently Walmart digital media and tentacular business in stopped selling digital services every directions may Kindles as it was offering where high raise the question of attracting customers margins lie so as to abuse of dominant online. finance and hold its position. market position.
  • 81. 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.
  • 82. 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
  • 83. 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: Guillaume.ladvie@fabernovel.com