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CASE STUDY Amazon.com® 2007-early 2009 Gary J. Stockport This case study is concerned with the continual roll-out of Amazon's global strategy through the development of resources and strategic capabilities. [tis about global dominance through the development and use of technology ‘and acquisitions and alliances to offer an increasing array of products and services and continually enhancing ‘eustomer experience. The case discusses the widening of Amazon's business through serving three distinct and rent groups of customers. The case highlights a number of potentially disruptive technologies including Kindle cloud computing . reduction 2008, Amazon.com had a market capitalisation of USS29.4 billion’ (£19.36 or €21.4bn) (see radix 6) and employed around 20.700 employees. was a truly global company and it had established in Canada, the UK, Germany, Prance, Japan and ‘and 47 per cent of consolidated sales were out- lis home country (see Appendix 2). The company everything from books to jewellery to digital music ithad recently established itself as a major player in computing with the development and provision of inthe cloud’. hua faced many challenges over the years. Ithad ea signlficant challenges such as the technology bursting’ during April 2000 as well as deteriorating older sentiment at various times. The organisation survived and overcame all these challenges, and even the ‘eye of the recent global nancial crisis, Amazon, ed {o make strategic investment decisions for the erm, CBO Jeff Bezos pointed out: ‘When we plant @ it tends to take § to 7 years before It has a meaningful ‘on the economics of the company.” 2009 rolled on, some strategic Issues that Bezos ‘entifed and needed to consider included the 20,66 «€0.73 (© How might depressed consumer sentiment in the global Sinancial eis lect its growth? (© Is the continued heavy investment in technology and innovation the right strategy for building and maintain- ing Amazon's sustainable competitive advantage? © What is the optimal balance between catering. for the novds of Amazon's different customer groups? As ‘Amazon developed from being Just an online retailer toa web services provider for sellers and now moving, Into providing web technology infrastructure develop- ‘ment, it may face challenges in trying to reconcile lis vision of being ‘customer-centric’ through having {0 consider which group(s) of customers should take priority. ‘© Generally, is Amazon's business model the right model looking ahead five years or more? ‘The founder ~ Jeff Bezos At the age of 14, Jeff Bezos, the stepson of petroleum. ‘engineer, admitted to wanting to become an astronaut or 1 physicist, or something that would allow him to use cutting edge technology. During his high school years he ounded his frst venture, the DREAM Insite, which was ‘summer school programme aimed at stimulating creative thinking in youngsters By the age of 30, Jelf Bezos, the Princeton ‘summa cum laude’ graduate with a Bachelor degree in Hletrical ly isan update of @ number of case studies written about Amazon.com and published in earlier editions of this of the case was written by Professor Gary J. Stockport and MBA students Trica Ong, Celina Chien, Eun-Ah Lee, [Markl Ws, Mary Ngusaru and Michael Yoo: Business School, The Universit of Western Australia. ts intended as a basis. discussion and not as an illustration of good or bad practice. © Gary . Stockport 2010, Nott be reproduced oF quoted 574 awazon con® 2007-caRty 2008 Engineering and Computer Science, was the youngest ‘Senior Vice Presitent of D. Shaw running a Wall Street hedge fund. Whilst working at Shaw, Besos eame up with te statistic that the electronic word, kmown as the World Wide Web. would grow at an incredible rate of 2300 per cent monthly. Beas, stunned by these growth figures, fel Ariven to act quickly, saying: ‘I decided that when I was vighty, [ wouldn't regret quitting a Wall Street job when | was thirty, but when 1 was eighty I might really regret this great epportuniy.” ‘Afier quitting his job, Bezos drove his wile, MacKenzie, land their dog across the US in a Chevy Blazer that his stepfather had donated, arriving in Seattle on 5 July 1994. Bezos hal already chown hooks as his preferred product ‘due to their low price point and the size of the global market, estimated at over USS80 billion at the time. He believed web-based technology would provide customers ‘with a much larger range of tts at thetr fingertips as ‘well as enable better organisation and presentation of the imulions of books. Seattle was a logical choice to locate the business as ‘vas close to Ingram Books, the largest US book distributor. It also had access to a large supply of computer software talent. Furthermore, the State of Washington had a more favourable sales tax climate. Over the next 12 months, whilt operating from the garage of his rented home, ‘ews, his wile, and three others established relationships with shippers and wholesalers, developed the soltware ‘ni tried to raise money. The business went ‘ive’ with an online store in July 1995, Early growth exos believed the power ofthe internet lay in continuous communication and word of mouth, which mode brand Ing even more important. As a result, he chose to name his site alter the world’s largest river. believing Amazon | ‘would become the biggest bookshop in the world. Beas Pointed oat: “A brand for a compiny is lke @ regitation for a person. You earn reputation by trying to do hard things weil In 1995, Aman had no significant online rivils and although Barnes and Noble had @ 14 per cent market share of traditional retail bookstores, it had no oniine Prevence, Once launched, it tok less than a year for ‘Amazon 10 be recognised as the web's largest and best ‘online bookstore with over | milion tiles During thisearly srowth period, Heaos did a fot of the manual work himse' ‘such as loading and unloading packages in the back of his Chevy Blazer and detivering them to the Post Office. Unable io raise critical funds needed to grow the business fiom his existing contacts in New York's money market, Beas relied on private investment of $1.2 million and Silicon Valley funding fora further $8 mallion, ‘an initial public offering (IPO) comprising 3 raised $50 million and enabled an aggressive ofthe business. Vision ‘The vision behind Amazon has progressively Since it started in 1995, What hogan as the goal the world's biggest and best online bookstore Into a store where customers could buy “ai «capital &, [also wanted to become the ‘customer-centric’ company. Bezos added: ‘Our goal is to be Barth's most customer-centric pany. I will leave it to others to say if we've that. But why? The answer is three things. fs that customer-cenirie means figuring out customers want by asking them, then fi hhow to give it to them, and then giving tt to ‘That's the traditional meaning of customer: ‘and we're focused on it. The second is inuova ‘behalf of customers, figuring out what they dont they want and giving it to them. The third ‘unigue to the Internet, is the idea of personal redecorating the store for each and every customer. If we have 10,7 million customers... ‘we should have 10.7 million stores. Defining the business ‘The core of what defined Amazon. as reflect in the I Letter to Sharcholders, has remained over the yeas {etter contained a series of core commitments such as ‘emphasis on longer torm market leadership, Extras Ware reproduced opposite. From originally serving just website retail ‘Amazon in 2009 served three distinet groups of © Constmercustomers: through its retail websites. Am provided a wide range of merchanglse, low price, ‘convenience to iis consumers; © ‘Soller customers: sellers thet sold their products ‘on Amazon's websites or on thete own brand: and fatiled their orders using Amazon's fal facilites: © Developer customers: customers that used Amazon services which provided access io Amazons ted ‘infrastructure that enabled them i create virtually type of business. See Appendix 3 for « more analysis defining Amazon's business. (Central to Amazon's strateey was growth. Figure shows Amazon's approach of achleving growth t AMAZON.COM® 2007-EARLY 2009 575 1997 LETTER TO SHAREHOLDERS 4th Peragroph) ‘of cur emphasis on the long term, we may make decisions and weigh tradeatts differently than some ‘Accordingly, we want te share with you our fundamental management and decision-making approach jou. ur shareholders, may confirm that it's consistent with your investment philosephy: continue to focus relentlessly on our customers ‘continue to make irvesiment decisions in light of long-term market leadership continue to measure our programs ang the effectiveness of our investments analytically, te jettison those no provide acceptable returns, and to step up our imvostment in those that work best. We will continue to rom both our successes and our failures. ‘make bold rather than timid investment decisions where we see a sulficien! probability of gaining markt ‘advantages. Some ol these investments will pay of, others will not, and we wll have earned another Lesson in either case. of future cash flows, wel take the cash flows. lorced te chocse between optimising the appearance of cur GAAP accounting and maximising the present ot 1977 wetter to Sharenotders reprinted ne 2002 and susequent Arua Resorts, 41 Amazon's Strategy Lowe cost Lower structure prices, Selection and Customer experience Teale rgaly dame by Jo Bezos in 05. rie” and continually improving the experience by ollering lower prices and wider ‘This in turn fed back to the increasing use of websites (trafic) by customers and sellers. which ack to growing resources for innovation for Jeustomer experience, and so the Virtuous’ cycle |. Amazon's braad mantra was to relentlessly ‘enstomer by shaping the customer experience. logo had continually evolved over the past tomatch Amazon's shilting business offerings. tad built three pillar strategy to guide and vision, These pillars were selection, price and with its foundation on innovation. ‘© Seletion: Amazon ollered the widest selection of products, from its vast selection of retail products to Amazon's software and Cloud Computing oflerings: ‘© Price; Amason was committed to price leadership and to ‘consistently and continuousty offer this with nosacriice ‘toquality. Porexample. Amazon offered ve shipping offers tocustomers along with a guarantee of on-time delivery: ‘© Convenience: Amazon continually strived to “please” Us customers. For example, Amazon dedicated many resources to understanding what its customers wanted by offering customer review and feedback forms on all of its products. ‘These three pillars were supported by Amazon's continual ‘commitment 10 Innovation and investing in the future, esos conclude: “There's more to innovation ahead of us than innovation behind us. Underpinning innovation was, ‘te emphasis upon technology. Fulfilment Although Amuaoa was commonly regarded as an online business productshd tobe physically shippe tocustomers. Amazon's many fulflment centres were typically strategically located ina number of cities In North America, Europe ‘and Asia, offen near sieports. In total, they comprised some 19.7 million square feet of properties all ovéF the world (see Appendix 4). In 2008. Amazon.com opened a new £600,000 square fet fulfilment centre in Hazleton, PA to serve Amazon's Northeast customers. Another new facility {n Goodyear, Arizona of more than 500,000 square fect ‘was also opened. ‘S76 awazon.cons 2007-€4.y 2009 Daring 2008, Amazon launched “Frustration-Pree Packaging. a new initative designed to make easter for ‘customers to take products rom thee packages. rustation- Free Packaging was launched in the 1S with 14 bese rodct from leading manufacturers ncn Psber- Price, Mitel, Micosolt and electronics manlocturr Transcend. ‘Amagon intend to expand this nitlative ross its oter~ ‘national sites during 2009, Aman tad always taken a strategie approach to recruit- Ing. As mentioned earlier, located in Seattle as there was large supply of computer sofware talent available. Over the years. it had continually strengthened Ke management cam. For example. during 1997 Richard Dalya. a former ‘WalMart Vice President joined as Chie Information Oficer 10} He brought expertise in merchandising and logistics sgatems, supply chain ystems, international retain acd merchandising systems and commercial decision support ‘and lata mining systems. Other senior managers Had been ecrutied from a variety of companies such as AledSigna, ‘Apple, Black and Decker Delt Atnes and Micros ‘Mace generally. Amazon recraited ‘tightly’ around their ned to service the customer. Hezos wed: Companies get skil-focused, instead of customer-needs focused. When (companies) think about extending thet business into some new area, the frst question ks “why should we do that we don'thave any sills in that arcaThat approach pus aint icuimeon a company. because the word changes and hat used ote euttng- cede sill have tarnd int something your customers ‘may not need anymore. A much mace stable strategy fs to start with ‘what do my customers nce" Then do an Inventory ofthe gaps in your aki. Culturally, Bems cosured that his company was never ‘ated with the status quo and never too comfortable ‘and he emphastint:‘l ask our people to wake up alco ‘aod tered (about the customer) every moeing.’ He alo ‘pointed out: ‘customers are the folks who ave the money. ‘Our competitors ure never golng 1 send ws money Technolagy, technology, technology Despite proyresne change inte isn, Be typical response akout the main diference between conventonal etal and his bene was ‘The thre ment porn siogs etal are cation, location, location. The thee most important things for ‘our consumer busines are tecnakgy, technology technology, Thats what tak the place of realestate oarbusives. ‘ecormmendstionsaf what other customers pa 4 new customer found a product they tn. In many ways. Amazoa had built the u powerful and other organisations had aed similar market data on suc a large see, by claiming tha: Amazon's continual emphasts pe tec ‘number of major outcomes between 2007 teat Inching Kinde, impcoving Amin Web Series ‘igtal content and enhancing accessbilty Kindte ‘Amazon developed and marketed an innovate st slectronic reading device called. Amon Kinde the Amazon brand. This device was unwell in ‘quarter of 2007 and enabled custoenrstodownidl ‘magazines, newspapers and blogs. Amazon Kindle’ wireless delivery system, used nations high speod data network and Kindle users could easy ‘access to the Kindle Store where over 90,0 bod available, There were o additional charges foe feces or service commitment fr customers 0th truly convenient value efor Amen’ hook, ‘Amazon had increased the number ‘available to Kindle from 90,000 to 190,000 books being added every day. Amazon built with partners such as Simon & Schuster, n Publishers. making even more titles avail- ‘Yuelling’ interest in this revolutionary ty 2009. Amazon launched Kindle 2, an on. of the original, product with longer la new ‘Text-to-Speech’ feature. Amazon was ayer in the professionally narrated audiobooks hits subsidiaries Audible and Brilliance, and ih feature would be likely to introduce erato the convenience oflistening to books and d the peofessionally narrated audiobooks won farther enhanced Kindle for iPhone and Jn March 2009. which allowed customers 10 240,000 books. Services lsruptive technological innovations released between 2007 and early 2009 were through P Services (AWS). AWS products were examples ‘and sofware in their own data centres and fim accessible via the internet, The trend in Cloud thas been compared to the development of ety network more than a century ago, whereby fis stopped having to prodice their own power and Ephgged into a national electric grid, In the same and organisations can now corinect (9 Fofcomputing resources 10 fuel theie information ing needs on the internet. The benedt. of mach was that companies with access to hug: ‘of scale can sell their hardware or software Power to users on a “pay as you use” basis far thin a user could individually. Ifthe internet iy could facilitate this discupive technology, jcomputers 2s we know them today may become sand producis such as Kindle or “dumb terminals’ tte thee place. ero{bigtechnology names had already embraced Compating revolution, including Google, IBM. tems. However. Amazon's C2 was commonly as being te most popular and more eommercial- Any ofits competitor's offerings. Products that eased included AWS Premium Support, Amazon ‘Tork, Amazon EBS, Amazon Cloudront and Sets on AWS Preiium Support provided I customers with technical assistance and released. new that enabled developers to build eren more sad fault resiicnt applications on the sntemet. AMAZON.COME 2007-EARLY 2029 S77 These new capabilities were amongst the top requests froin developers. During the third quarter of 2008, Amazon Mechanical ‘Turk launched a new set of web-based tools that made it ‘easier for businesses to outsource work to an on-demand workforce to businesses worldwide, These web tools allowed customers to utilise the internet to outsource thousands of tasks, manage a virtual workforce and eastly download work results. This technology opened up the service to a wider range of customers because it no longer required clients to have programming skills. With these new web-based tools, any business could submit work that required human intelligence to a weekforce of hundreds of thousands of wotkers from over 100 countries in just 2 few minutes. This enabled businesses to get important ‘work done quickly and inexpensively, Im the same quarter (third quarter of 2008). Amazon's Innovative AWS division launched the Amazon Elastic lock Store (Amazon ERS). a new and improved storage feature for C2 that provided unlimited storage potential tocllents using the Amazon BC2 service. ‘The last quarter of 2008 was a busy and productive ‘one for AWS. BC2 was upgraded for compatibility with ‘Micresoft products such as Micrasoft Windows Servee and Microsoft SQL Server, and provided even greater flexibility for deploying solutions in the AWS “cova, AWS also launched Amazon CloudFront, a high- performance, self-service, pay-as-you-go method of disrtbut- ing data over the internet at high data transfer speeds. Adam Selipsky. Vice President of Product Management and Developer Relations at AWS claimed: Our customers asked us for a way to globally distribute their most frequently accessed content with all the ‘benefits that AWS provides: low. pay-as-you-go pricing, high performance and reliability! AWS alko introduced Public Data Sets on AWS, which ‘enabled developers and researchers to costellectively ‘create, share and consume large sets of data fre of change. AWS had been working to lower the barriers to entry for ‘ellow scientists for the past tive years. and Public Data Seis on AWS would provide virtually free resources to researchers. By increasing the number of people with sccess to important and useful dav, and making it easy to compute on that data with cost-efficient scevices such as ‘Amazon BC2, AWS hoped to fuel innovation and further accelerate the pace of new discoveries. AWS was voted thefith mostinfluential itech product of 2008 by 2D Net. Peter De Santis, General Manager of C2 concluded: For aver 2 years, we've focused on deliver: lng w costelective, web scale inrastructure to developers. aiving them complete festility in the kinds of solutions they deliver” ‘B78 AMAZON.COM 2007-EARLY 2009 Digital contents ‘Another significant expansion for Amazon between 2007 and eatly 2009 was in ts digital cootent olferings. During 2007. Amazon launched a MP3 Music Store, « digital ‘music downloads store. All MP3 contents on the Amazon MP3 store were offered without Digital Rights Manage- ‘ment (DRM) software. so customers could listen to these MP3s without any restrictions. EMI music, one of the major ‘music providers, joined this launch and the Warner Music Group had become another supplier by the end of 2007. ‘Ths DRAMice partnership with major music providers helped Amaaon establish its strategic position as the ‘work's largest selection of DRM-ree MP'3. From early 2008, Amazon made DRMiee MP3 musie downloads from Sony Music Entertainment available to ‘customers on Amazon MP3. Consequently. Amaaoa MP3 ‘became the only retale to offer customers DRM fre MP 3s {rom all the major music labels. as well as over 33.000 Independent labels. It also announced in January 2008 an ‘international roll-out of Amazon MP3, where every song was playable on virtually any digital music capable device, ‘including the PC, Mack, iPod®. iPhone! and HlackBerry®. ‘ater in the year, Amazon launched & New Artists Store featuring comprehensive artist content, including fall album, discographies, CDs, DRM-ree MP3 and einyt catalogue selection along with community features such as artist Images, biographies wnd related products, In September 2008, Amazon's subsidiary IMDb.com announced that users could wateh over 6000 fall length feature films and TV episodes fr free on IMDb.com. This Included new stores devoted to customers’ favourite TV series ana children’s programming. I roll-out a Geeman version in November. www.imdb.de, specially to help German-speaking movie and TV lovers easily find informa. tion for thei favourite films and TV shows, ‘Accessibility Many technology developments were aimed at enbancing ‘customer accessibility. For example, during early 2008, Amazon launched a new feature, Amazon Currency ‘Converter, on its webste allowing international customers to pay for thetr purchases inthe currency oftheir payment ‘card, instead of US dollars. This enabled international ‘customers to purchase eligible items from its website with sreater ease and certainty. Along similar lines, Amazon launched "Bl Me ate's next eneration payments service for its customers to complete purchases instantly online without using a crit card. With its flesible financing programmes Bill Me Later, Inc. was a ‘eader inthe digital payments industry Is network included ‘hundreds of top-tier merchants including Borders. Bluefly, Continental Airlines. LUXURY, Fujitsu, Jetue, Toshiba, Toys Us. US Aieways, Walmart.com and Zappos. In Ape 2008, Amazon.com ‘anew service that allowed customers 1 find and buy products sold on addliion of TextBuylt to Amazon's Including its mobile ite and mobil could mow shop virtually anywhere ‘message o their mobile device's web) Im order to expand Amazon's FT clients. Amazon Payments announce encral availabilty of Amazon Flexible (Amazon FPS). This effectively allowed ‘accept payments from Amazon's ‘and enabled developers to monetise enabled it to quickly rollout its activites (see Appendix 5) During 2007, i launched new sites that served customers with fon shoe and handbag items. It provided shipping, ‘a 110 percent price guarantee’ on 1nd convenient navigation and search 250 brands and 15,000 styles of shoes and Endless.com operated "24-hour-a-day phone support’, which enhanced and ‘customer shopping experience. By mid-2007, It ‘ower 50 new brands to is existing selection. ‘Amazon launched two music stores, Blowout Store and Go Indie Musie Store. ‘Thomas May. Amazon's senior music editor, 44 decreasing. number of bricks-and-mortat land increasing demand for the selection af ‘music offered on Amazon. Go Indie Music Store ‘nwsic buyers with hundreds of titles from more 30 independent music labels. ‘Amazon All Business Centre war introdaced now category store, providing one-stop star-up businesses as well as growing busines. sore offered various solutions targeted at ent needs and some of the key offerings were customer laptops. software solutions, furniture and stationery. store also provided customers with services such Amazon Web Services, Fulllient and Amazon ‘Accounts. ‘Amazon continuously expanded globally via ts ‘national network, After the initial"Success of Jewellry, Amazon launched its Jewellery & Watches: {in the UK, Germany, Prance and Japan. Amazon's jewellery business had remarkable growth in the second quarter ‘of 2007, 260 per cent in diamond sales, 169 per cent ‘and 107 per cent in sterling silver de various brands, such as Cri yand Technomarine. lnunched its Offce Supplies Store, ition that offered competitive the classroom. home siice. smell paeverything in-between’. This new jon of more thar: $00,000 products cturers, Including both well ibrandssuch as Avery. Hammermill, into auto parts, launcbing tts angle shopping destination for accessories and protective gear: "The ton of more than 500,000 products wlicturers, Including top beans Uke Harley Davidson, Suauki and | 2008, Amaron unvelled the Software new category store featuring essential titingual software products. With, jin English accompanied by some Spanish featured an extensive selection of ofiware as well aseducational offerings "The Amazon Software en Espanol tobe the destination for Hispanic eon- meet he needs ofthe nearly 1.6 milion ysineses inthe US. dof” 2009 with the launch of Amaon's fore which offered customers everything {oatendan event. host an inagurs- ch the milestone eceasion from home. Bh included Amazon's PC Casual Game which fered over 600 game titles to sme portals such as Vahioo Games. alliances, Zio arly 2009 period, strategically aligned pdaliances remained a key way for Amazon thology development. applications and services, These alliances benefited ess through, for example, accesso capital, ertise and Amazon's. hu of acquisitions included: © customer company aequired Pabric.com. aleuting sflre custom measured and cut fabrics, 5, Sewing tools and accessories, This el Pakrc.ccm to further expand its selec. and accessories while enabling Amazon.com a wider variety of products nthe band hobby segment AWAZON.COM® 2007-EaRLY 2009 579 In October 2008, Amazon acquieed Reflexive Bntertsioment, 42 PC casual game distributor and developer, Rellexive’s CPO lars Brubaker announced ts acquisition with the ‘expectation that Reflexive would serve a broader range of customers vie Amazon's distribution channel. ‘Amazon.com also completed its acquisition of AbeBooks, an online markeiplace fur books, with over 110 milion primarily used, rare and out-of print books listed for sale by thousands of independent booksellers from around the world. AbeBooks added milions of customers to Amazon's ‘existing consumer base and expanded its geographic reach with AbeDock’s global websites (AbeBooks.com, AbeRlooksca, AbeReoksco.ak, AbeBooks de, AbelLooks.e AbeBlooksit and Iberitro.com). Abeliooks.com also had alates in Germany and the US, Competitors Based on Amazon's Annual Report (20098), it was possible to Mleify se diferent types of competitors Firstly, there were physical-world retailers, publishers, vendors. lsiributors, manufacturers and producers of Amazon's ‘products, fxampls included Wal-Mart and Bares & Noble ‘Seconily. there were ether online e-commerce and mobile e-commerce sites, incuding sites that sold or distributed digital content A major player Bay, had acleved less than balf of Amazon's sales, but earned much higher netincome and net profit margin (see Appendix 1). John. Donahoe, CED ofeay, recently announced that it would facus on the ‘sevontery market... as a part of its effort to transform lis core marketplace business’ (Morrison, 2009), Thirdly, there were indirect competitors including media compas, ‘eb portals, comparison shepping websites and web search ‘engines. Fourthly, there were companies that provided e-commerce services, including website developient, fulfilment and customer services. Fiftly, there were com panies that provided inkastructure web services or other Information storage or computing services or products, ‘As Amauon entered into the web infrastructure industry, ‘ovo new competitors were Apple and Google. Finely, there ‘ere companies that designed. manufactured, marketed ‘or sold digital media devices. Again. Apple and Google were ‘competitors within this category. Appendix 6 provides a ‘comparison of some competitor's revenue. Key financiats Appenilix 2 presents sales and income a allocated to North America and International Segments 2001-8. Capital expenditure and cash In bne with Amazon's mission to become the arth's mest ‘customer-centric company for ts Unree primary customer 580 aMazow.com® 2007-EAnLy 200 sets: consumers, sellers aiid developers’ (Amazon.com, 2009a), Amazon continued to invest heavily in technology innovation. Beaos pointed out: We transform much of customer experience ~ such as ‘unmatched selection, extensive product information. Personalized recommendations, and other new software features ~ into largely a fied expense. With customer ‘experience cosis largely xed, our costs as a percentage ‘of sales can shrink rapidly as we grow our business. This commitment to invest heavily in technology mnove- tion was reflected in the high rate of year-on-year growth Jn technology and content operating expenses and cost of internal-ase software and website development (see Appendix 7). During 2008, US$LO33 million was spent ‘on the development and enhancement of vartous areas of {technology and content. including seer platforms, web services digital inidatives as well as technology infrastrac- ture, In 2008. Amazon had also capitalised US$187 millon of internal-use software and website development cost ‘This amount represented an increase of 45 per cent (rom ts 2007 level ($129m, Another stated strategic financial focus for Amazon ‘was on ‘Lang term, sustainable growth in free cash flow’ (Amazon.com, 200%a). Typically, Amazon offered short Figure 2 Amazon share price 2006-9 relative to market [Rete ~— mana Toran — "oR credit terms to its customers and enj terms feom supplers, the value ef ‘mately 26 days. ‘This: operational ‘Amazon to use funds collected frame of working capital, As a consequence junction with other cash management was able to maintain a strong cash bw its continuous investment. in ‘Amason’s long term debt data aly relying less on long term debe to operations activities (see Appendix 7) ‘Share price Since listing in 1997, Amazon had yet to shareholders. Investors hal therefore to price fuetuations for investor return | Amtzon’s share price relative to the make Doubts about Amamon's plan to spending to build its new Web Se capacity combined with investors! ‘apparent lack of payoll in Amazon's resulted in its stoek price falling elese 2004 to 2006 (Sage, 2006). Conse ‘Amazon was forced (o iavest in is ted expansion at a slower rate in onder to dex DJI and IXIC a i ahd adc ta CATT Int this slowdown of investment in innova list lbng, ‘I telieve you have to be willing to if you're going to innovate’, Beas said remarked that he was able to ignore Wall Strvet, the press, and others about to pre-2007 lovels and was supported sentiment due to positive returns being the market 1d ~ mixed opinions J. Amazon warmed that the global financial [amplify the strategic and financial risks it faced te likely to make general trading conditions ing during 2009. However. analysts were ‘whether Amazon would be able to ‘weather er than ts peers. For example a senior asalyst ©, Bemsiein predicted that Amazon would tweulperform is competition. ability (o maintain strong cash low whist reliance on borrowed funds for day-to-day shas seen it gain favourable commentary from the ‘AMAZON.COM® 2007-EARLY 2007 581 ‘fits plans to redeem US$335 milion of the outstanding principal on (ts convertible subordinated notes due by the end of March 2009 further conflaned the strength ‘ofits cash position and was well recelved by the market (Kelleher, 2009). However, other analysts were Kean to point out that fas Amazon's survival bad been reliant om ses growth, « significant reduction in th sales growth rate would have a considerable impact on Amazon's cash flow and future ability to invest in technology innovation, Symptoms of decreasing consumer demand were refloted in Amazon's 2008 December quarter revenue, which had only grown by 18 per cent in comparison to 40 por cent in the last ‘quarter of 2007. Amazon's international sales contribution, currently a 447 per cent. was expected to increase to 50 per cent ofits ‘consolidated slesin the near future (Amanen.com, 2009) Whilst this would spread the risk of a slow-down in North American markets. t woukl also increase Amazon's ‘exposure to foretgn exchange risk. which amounted t0 a loss of 8$320 milboa in fourth quarter in 2008 alone. ‘Clearly, there was much for Beans to consider, mn, Amazon'srecent announcement Pi Warcsser, AMID Claud Frat takes, Younet om, 60, IX 1 Peer comparison 2008 Jnéusty:Etaling (620) Market ap Netincome Net pref _ampany rome Seles USOm __Empleyees___USDm UsOm margin ‘anazon com, ne 19:166.00 2ame «9A As ‘is.00 241% ay Ire Bul 26 14200 1ng08.78 rear 083% Pricolire com incorporated gc) 1700 321043 1347 104um Ticketmaster Ertetainvent, nc vais eon 29.99 95 BAe Oversick com, nc ‘47 1038 21605 i265 1S Valve Vision Medi, Ine as ee 1176 2245, 28% United Fuel & Energy Corporation ub.06 “an 351 su Ts ued Commorca SA zone 26 307 375 09% Oigtal River. Inc 20 128 oat a2 ao 61 DeNACo, Li. air “s 1513.08 BR Be Ft (exh i Dow Jaros Cerosty Report fr Amasoncom he $82 AMAZON.coM® z007-EARLY 2008 APPENDIX 2 Sales and income as allocated to segments, 2001-08 Noxth Amerie Net sales Cost a sales (ross prot Direct segment operating expenses (1) Segment operating income loss International Net saiee Costa sates Gross profit Direct segment operating expenses (1 Segment operacing income toss) Consotida Net sales Costa estos ‘Gross profit Direct segment operating expenses Segment operating income lash ‘Stock-based compensation ‘Other operating income lexpense] Income floss rom operations Total nor-epersting income lexpensel net ‘Benefit (provision) for income taxes ‘Cumslative effect of change in accountng principle Net income loss) Segment highlights: Y/Y net sales grow: North America Internstional| Consolidated ‘VEY grass profit growth: North America International Censolidated “1 eagemant aporatng income growth North America International Censotidated Net sales min ‘North America International ‘roa Margin North america International Censoiidated Soares: Compiled irom various eres. si0228 1733 AI 2980 oS 1% 53% 4” 26% 199 2a 38% x ed 2% a 37 m% ra 59% Bum ca Re B% a 26 20% a 20 tte 0 “2 25% 5 260% 192 29 smn Sie 1267 im 2% ar 3.007 7 8450 ist 2009 tara 5 “7

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