AMAZON.COM Expanding Beyond Books
eff Bezos, the CEO of Amazon.com, was pleased that his three year-old online start-up, www.amazon.com, had gone from being an underground sensation for book-lovers on the World Wide Web (WWW) to one of the most admired Internet retailers on Wall Street. To date, his attempts to transform the traditional book-retailing format through technology that taps the interactive nature of the Internet has been very successful. Although his company garnered rave reviews from respected Wall Street Analysts, Bezos clearly understood that this was not the moment to dwell on the past. In the fast moving world of the Internet, he and his firm continued to face many formidable challenges. This case describes how Bezos has managed to build a rapidly growing retail business on the Internet and the challenges he and his top management currently face as other industry giants such as Barnes & Noble, and Bertelsman, the German Publishing Conglomerate, attempt to imitate his model of competition.
In 1994, Jeffrey Bezos, a computer science and electrical-engineering graduate from Princeton University, was the youngest senior vice-president in the history of D.E. Shaw, a Wall Streetbased investment bank. During the summer of 1994, one important statistic about the Internet caught his attention, and imagination—Internet usage was growing at 2300 percent a year. His reaction: “Anything that’s growing that fast is going to be ubiquitous very quickly. It was my wake-up call.” He left his job at D.E. Shaw and drew up a list of 20 possible products that could be sold on the Internet. He quickly narrowed his prospects to music and books. Both shared a potential advantage for online sale: far too many titles for a single store to stock. He chose books. There are so many of them! There are 1.5 million English-language books in print, 3 million books in all languages worldwide. This volume defined the opportunity. Consumers keep demonstrating that they value authoritative selection. The biggest phenomenon in retailing is the big-format store—the "category killer"—whether it's selling books, toys, or music. But the largest physical bookstore in the world has only 175,000 titles. ... With some 4,200 US publishers and the two biggest booksellers, Barnes & Noble and Borders Group Inc., accounting for less than 12% of total sales, there aren't any 800-pound gorillas in book selling.1
This case was prepared by Professor Suresh Kotha, University of Washington Business School for class discussion rather than to illustrate either effective or ineffective handling of administrative situations. All rights reserved 1 “Who’s writing the book on web business?” Fast Company, October-November, 1996, p. 132-133.
In contrast, the music industry had only six major record companies that controlled the distribution of records and CDs sold in the United States. With such control, these firms had the potential to lock out a new business threatening the traditional record store format. To start his new venture, Bezos left New York City to move West, either to Boulder, Seattle, or Portland. As he drove west, he refined and fine-tuned his thoughts as well as his business plan. In doing so, he concluded that Seattle was his final destination. Recalls Bezos: It sounds counterintuitive, but physical location is very important for the success of a virtual business. We could have started Amazon.com anywhere. We chose Seattle because it met a rigorous set of criteria. It had to be a place with lots of technical talent. It had to be near a place with large numbers of books. It had to be a nice place to live—great people won't work in places they don't want to live. Finally, it had to be in a small state. In the mail-order business, you have to charge sales tax to customers who live in any state where you have a business presence. It made no sense for us to be in California or New York. ... Obviously...