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Amazon.com: the Hidden Empire - Update 2013

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Fabernovel
Fabernovel

Our "most favorited" 2011 study revealing Amazon.com's strategies for dominating online retail has been updated to include analyses on all of the company's latest moves, and insights into where they may be going next. Follow us on Twitter: @faberNovel

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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
Amazon.com: the Hidden Empire - Update 2013
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
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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
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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
  • 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
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