Dotcom Boom and Bust

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AMAZON.COM BOOM AND BUST

Amazon.com is one of the web’s most exciting and instructive stories. Started in a garage by Jeff Bzos in 1995, it has since grown to become the largest Internet retailer, with the highest levels of customer satisfaction, the fastest revenue growth rates, and finally, after nine years, profitable. One of the Internet “Big Four” companies, along with Yahoo, eBay and Google, few would have thought it possible when Amazon first opened for business that an online bookstore would become one of the premiere general retailers in the world. But Amazon’s ability to maintain operations at a sufficiently profitable level is a fact that continues to worry investors in 2005. Critics are of two minds: either Amazon will become the online Wal-Mart (and suffer from its huge size just as Wal-Mart does) or it will fail to deliver superior growth and profits because it has spread itself too thin, taken on too many product lines, and given away too much revenue to customers by offering free shipping and superior service. Supporters, and Bezos himself, counter that Amazon has become the Web’s largest retailer on a revenue basis by focusing on the customer, not short-term profits, and that it will ultimately become one of the most profitable by following the same strategy. Amazon certainly has had a roller coaster ride in its ten brief years. In December 1999, Jeff Bezos graced the cover of Time magazine as its Person of the Year. In the same month, Amazon’s stock reached a peak of $113 per share. In January 2001, Amazon reported a whopping $1.411 billion as its overall loss for the year. Its stock hit a low of $6 a share. Amazon laid off 1,300 employees, constituting about 15% of its workforce. Questions about its long-term viability abounded. Bezos promised he would make the company profitable in two years, but few believed this was possible. But, in 2003, Amazon reported soaring sales; it achieved its first annual profit ever (about $35 million), and its stock price more than doubled to $25 a share. The good news continued into 2004 when Amazon reported profits of $588 million on $6.92 billion in revenue. How was Amazon able to turn around its business from a $1.4 billion annual loss to a $588 million profitable operation despite the dot.com stock market crash and the withdrawal of venture capital funding for e-commerce companies? The story of Amazon.com, the most well-known e-commerce company in the United States, in many ways mirrors the story of e-commerce itself. In 1994, Jeff Bezos, then a 29-year-old senior vice president at D.E. Shaw, a Wall Street investment bank, read that Internet usage was growing at 2,300% per year. To Bezos, that number represented an extraordinary opportunity. He quit his job and investigated what products he might be able to sell successfully online. He quickly hit upon books—with over 3 million in print at any one time, no physical bookstore could stock more than a small percentage. A “virtual bookstore” could offer a much greater selection. He also felt consumers would feel less need to actually “touch and feel” a book before buying it. The comparative dynamics of the book publishing, distributing, and retailing industry were also favourable. With over 2,500 publishers in the United States, and the two largest retailers, Barnes and Noble and Borders, accounting for only 12% of total sales, there were no “800-pound gorillas” in the market. The existence of two large distributors, Ingram Books and Baker and Taylor, meant that Amazon would have to stock only minimal inventory. Bezos easily raised several million dollars from private investors and in July 1995, Amazon.com opened for business on the Web. Amazon offered consumers four compelling reasons to shop there: (1) selection (a database of 1.1 million titles), (2) convenience (shop anytime, anywhere, with ordering simplified by Amazon’s patented “1-Click” express shopping technology), (3) price (high discounts on...
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