Amazon.comIn 1994, with a handful of programmers and a few thousand dollars in workstations andservers, Jeff Bezos set out to change the retail world when he created Amazon.com (ticker:AMZN). Shel Kaphan, Amazon’s first programmer, assisted by others, including Paul Barton-Davis, used a collection of tools to create Web pages based on a database of 1 millionbook titles compiled from the Library of Congress and Books in Print databases. Kaphannotes that “Amazon was dependent on commercial and free database systems, as well asHTTP server software from commercial and free sources. Many of the programming toolswere free software” [Collett 2002]. In July 1995, Amazon opened its Web site for sales. Using heavily discounted book prices (20 to 30 percent below common retail prices); Amazonadvertised heavily and became the leading celebrity of the Internet and e-commerce.Sales and RelationshipsAmazon made its initial mark selling books, and many people still think of the company interms of books. However, almost from the start, the company has worked to expand intoadditional areas—striving to become a global retailer of almost anything. Some of the mainevents include: 1995 books, 1998 music and DVD/video, 1999 auctions, electronics, toys,zShops/MarketPlace, home improvement, software, and video games [1999 annual report].By the end of 1999, the company had forged partnerships with several other onlinestores, including Ashford.com, Audible, Della.com, drugstore.com, Gear.com, Greenlight.com, HomeGrocer.com, Kozmo.com, living.com, NextCard.com, Pets.com, and Sothebys. Of course, most of those firms and Web sites later died in the dot-com crash of2000/2001.Amazon also established partnerships with several large retailers, including Target,Toys ‘R’ Us, Babies ‘R’ Us, and Circuit City. Effectively, Amazon became a service organization to manage the online presence of these large retailers. However, it also uses its distribution system to deliver the products. The Circuit City arrangement was slightly differentfrom the others—customers could pick up their items directly from their local stores [HeunAugust 2001]. After Circuit City went under, the relationship ended.By mid-2003, the Web sales and fulfillment services amounted to 20 percent of Amazon’s sales. Bezos points out that most companies realize that only a small fraction of theirtotal sales (5 to 10 percent) will come from online systems, so it makes sense to have Amazon run those portions [Murphy 2003].In 2001, Amazon took over the Web site run by its bricks-and-mortar rival Borders.In 2000, Borders lost $18.4 million on total online sales of $27.4 million [Heun April 2001].Also in 2001, Amazon partnered with Expedia to offer travel services directly from the Amazon site. However, in this case, the Amazon portion consists of little more than an advertising link to the Expedia services [Kontzer 2001]. The deals in 2001 continued with a twistwhen Amazon licensed its search technology to AOL. AOL invested $100 million in Amazonand payed an undisclosed license fee to use the search-and-personalization service onShop@AOL [Heun July 2001]. In 2003, Amazon launched a subsidiary just to sell its Websales and fulfillment technology to other firms. Bezos noted that Amazon spends about $200million a year on information technology (a total of $900 million to mid-2003). The purposeof the subsidiary is to help recover some of those costs—although Bezos believes they werecritically necessary expenditures [Murphy 2003].2With so many diverse products, and relationships, it might be tempting to keep everything separate. However, Amazon perceives advantages from showing the entire site tocustomers as a single, broad entity. Yes, customers click to the various stores to find individual items. But, run a search and you will quickly see that it identifies products from anydivision. Additionally, the company is experimenting with cross sales. In 2002, the ProjectRuby test site began selling name-brand clothing and accessories. Customers who spent $50or more on apparel received a $30 gift certificate for use anywhere else on Amazon [Hayes2002].By 2004, 25 percent of Amazon’s sales were for its partners. But, one of Amazon’smajor relationships took a really bad turn in 2004 when Toys ‘R’ Us sued Amazon and Amazon countersued. The complaint by Toys ‘R’ Us alleges that it had signed a ten-year exclusivity contract with Amazon and had so far paid Amazon $200 million for the right to be theexclusive supplier of toys at Amazon.com. David Schwartz, senior VP and general counselfor Toys ‘R’ Us stated that “We don’t intend to pay for exclusivity we’re not getting” [Claburn May 2004]. Amazon’s initial response was that “We believe we can have multiplesellers in the toy category, increase selection, and offer products that (Toys ‘R’ Us) doesn’thave” [Claburn May 2004]. The lawsuit counters that at least one product (a Monopolygame) appears to be for sale by third-party suppliers as well as Toys ‘R’ Us. A month later,Amazon countersued, alleging that Toys ‘R’ Us experienced “chronic failure” to maintainsufficient stock to meet demand. The court documents noted that Toys ‘R’ Us had been outof stock on 20 percent of its most popular products [Claburn June 2004]. Although the dispute sounds damaging, it is conceivable that both parties are using the courts as a means torenegotiate the base contract.Small merchants accelerated a shift to Amazon’s marketplace technology. By 2007,Amazon was simply the largest marketplace on the Web. For example, John Wieber wasselling $1 million a year in refurbished computers through eBay. But increased competitionand eBay’s rising prices convinced him to switch to direct sales through Amazon. Similarsmall merchants noted that although the fees on Amazon are hefty, they do not have to paya listing fee. Plus, eBay shoppers only want to buy things at bargain-basement prices(Mangalindan 2005).In 2010, Target ended its contract with Amazon and launched its own Web servers.Amazon does not report sales separately for its partners such as Target, so it is difficult todetermine what impact the change might have on Amazon. However, Amazon has manyother sellers who offer similar products.Digital ContentAmazon has been expanding its offerings in digital content—in many ways extending competition against Apple, but also leading the way in digital books. Although it was not thefirst manufacturer, Amazon is reportedly the largest seller of e-readers with the Kindle.Amazon does not report sales separately for the Kindle. Amazon also noted in 2011 that ebooks for its Kindle reader have overtaken sales of paperback books as the most popularformat. The e-books had already exceeded hard-cover books the year before [Wu 2011]. Formany of these reasons, Borders, a bricks-and-mortar competitor to Amazon went under in2011.Amazon is also working to expand sales of music. The Web site has relatively standard pricing on current songs, but often offers discounts on older albums. By 2011, Amazonwas also trying to expand into video streaming. Customers who pay $79 a year to join the3Prime program gain faster shipping, and also access to a library of digital movies and TVshows. Unfortunately, with limited ties to the movie studios, the offerings initially wererelatively thin. However, other video streaming sites, including Netflix and Hulu, were alsostruggling to develop long-term contracts with studios. In September 2011, Amazon announced a deal with Fox to offer movies and TV shows owned by the studio. At the sametime, Netflix announced a similar deal with the Dreamworks studio. It will take time forstudios to determine strategies on streaming video services and for consumers to makechoices [Woo and Kung 2011].In late 2011, Amazon released its own version of a tablet computer. The companycontinued to sell the Kindle e-book reader, but the tablet focused on audio and video, usinga color LCD display screen with a touch interface. Although it lacked features available onthe market-leading Applet iPad, the Kindle table carried a price that was about half that ofthe iPad and other competitors ($200). The obvious goal was to provide a device that encourages customers to purchase more digital content directly from Amazon [Peers 2011].Sales TaxesSales taxes have been a long-term issue with Amazon. The Annual Report notes that several states filed formal complaints with the company in March 2003. The basis for the individual suits is not detailed, but the basic legal position is that any company that has aphysical presence in a state (“nexus” by the terms of a U.S. Supreme Court ruling), is subject to that state’s laws and must then collect the required sales taxes and remit them tothe state. The challenge is that the level of presence has never been clearly defined. Amazon argues that it has no physical presence in most states and is therefore not required tocollect taxes. The most recent challenges are based on Amazon’s “affiliate” program. Amazon pays a small commission to people who run Web sites and redirect traffic to the Amazonsite. For instance, a site might mention a book and then include a link to the book on theAmazon site. Several states have passed laws claiming that these relationships constitute a“sales force” and open up Amazon to taxation within any state where these affiliates reside.In response, Amazon dropped the affiliate program in several states, has initiated a legalchallenge in the state of New York, and in 2011, negotiated a new deal signed into law inCalifornia [Letzing 2011]. In the California deal, Amazon obtained a delay in collecting taxes for at least a year, in exchange for locating a new distribution center in the state andcreating at least 10,000 full-time jobs. Amazon is also asking the U.S. Congress to create anew federal law to deal with the sales-tax issue. However, because the state sales tax issueis driven by the interstate commerce clause in the U.S. Constitution, a simple law will notalter the underlying principles. However, if Congress desired, it might create a FederalSales tax law with some method of apportioning the money to states. But, do not bet on anymajor tax laws during a Presidential election year.Information TechnologyIn the first years, Amazon intentionally kept its Web site systems separate from its orderfulfillment system. The separation was partly due to the fact that the programmers did nothave the technical ability to connect them, and partly because the company wanted to improve security by keeping the order systems off the Web.By 1997, Amazon’s sales had reached $148 million for the year. The big book database was being run on Digital Alpha servers. Applications were still custom written in4house. By early 2000, the company had over 100 separate database instances running on avariety of servers—handling terabytes of data.In 2000, Amazon decided to overhaul its entire system. The company spent $200million on new applications, including analysis software from E.piphany, logistics fromManugistics, and a new DBMS from Oracle. The company also signed deals with SAS fordata mining and analysis [Collett 2002]. But, one of its biggest deals was with Excelon forbusiness-to-business integration systems. The system enables suppliers to communicate inreal time, even if they do not have sophisticated IT departments. It provides a direct connection to Amazon’s ERP system either through programming connections or through aWeb browser [Konicki 2000].About the same time (May 2000), Amazon inked a deal with HP to supply new servers and IT services [Goodridge and Nelson 2000]. The new systems ran the open-sourceLinux operating system. Already by the third quarter of 2001, Amazon was able to reduceits IT costs by 24 percent from the same quarter in 2000 [Collett 2002].By 2004, the supply chain system at Amazon was a critical factor in its success. Jeffrey Wilke, Senior VP of worldwide operations, observed that “When we think about howwe’re going to grow our company, we focus on price, selection, and availability. All three depend critically on the supply chain” [Bacheldor 2004]. Almost the entire system was builtfrom scratch, customized to Amazon’s needs. When a customer places an order, the systemimmediately connects to the distribution centers, determines the best way to ship the product, and provides the details to the customer in under two minutes. The entire process isautomatic.Dr. Russell Allgor moved from Bayer Chemical to Amazon and built an 800,000equation computer model of the company’s sprawling operation. When implemented, thegoal of the model was to help accomplish almost everything from scheduling Christmasovertime to rerouting trucks in a snowstorm. Allgor’s preliminary work focused on one ofAmazon’s most vexing problems: How to keep inventory at a minimum, while ensuring thatwhen someone orders several products, they can be shipped in a single box, preferably fromthe warehouse — the company had six — that is nearest the customer [Hansell, 2001]. Dr.Allgor’s analysis is simple, but heretical to Amazon veterans. Amazon should increase itsholdings of best sellers and stop holding slow-selling titles. It would still sell these titles butorder them after the customer does. Lyn Blake, a vice president who previously ran Amazon’s book department and now oversees company relations with manufacturers, disagreeswith this perspective. “I worry about the customer’s perspective if we suddenly have a lot ofitems that are not available for quick delivery.”Amazon’s merchant and MarketPlace systems are powerful tools that enable smallerstores to sell their products through Amazon’s system. Amazon continually works to improve the connections on those systems. This system caused problems in 2001—the mainissue was that the data on the merchant Web sites was being updated only once every eighthours. The merchant’s link to Amazon’s main database servers, and internal applicationstransfer the data onto the displayed page as requested. As customers purchased items, theinventory quantities were altered in the main servers, but the current totals were nottransferred to the display pages until several hours later. Consequently, customers wouldbe told that an item was in stock, even it had sold out several hours ago. To solve the problem, Amazon installed Excelon’s ObjectStore database in 2002. The system functions as acache management server, reducing the update times from eight hours down to two5minutes. Paul Kotas, engineering director for the Merchants@Group noted that “with thegrowth of this business, we needed a zero-latency solution” [Whiting 2002].In 2003, Amazon added a simple object access protocol (SOAP) gateway so that retailers could easily build automated connections to the system. Data is passed as XML documents and automatically converted to Amazon’s format [Babcock 2003].One of the most successful technologies introduced by Amazon is the affinity list.When someone purchases an item, system makes recommendations based on similar itemspurchased by other customers. The system uses basic data mining and statistical tools toquickly run correlations and display the suggested products. Kaphan notes that “There wasalways a vision to make the service as useful as possible to each user and to take advantageof the ability of the computer to help analyze a lot of data to show people things they weremost likely to be interested in” [Collett 2002]. The system also remembers every purchasemade by a customer. So, the Amazon programmers created the Instant Order Update feature, that reminds customers if they have already purchased an item in their cart. Bezonotes that “Customers lead busy lives and cannot always remember if they’ve already purchased a particular item.” He also observed that “When we launched Instant Order Update,we were able to measure with statistical significance that the feature slightly reduced sales.Good for customers? Definitely. Good for shareowners? Yes, in the long run” [2003 annualreport].Capital expenditures for software and Web site development are not cheap: $176million, $146 million, and $128 million for 2010, 2009, and 2008 respectively (2010 AnnualReport). But, in comparison, in 2010, net income tax provisions were $352 million.New ServicesAmazon requires huge data centers and high-speed Internet connections to run its systems.Through vast economies of scale, Amazon is able to achieve incredibly low prices for datastorage and bandwidth. Around 2005, the company decided that it could leverage those lowcosts into a new business selling Internet-based services. The company offers an online datastorage service called S3. For a monthly fee of about 15 cents per gigabyte stored plus 15cents per gigabyte of data transferred, any person or company can transfer and store dataon Amazon servers [Markoff 2006]. Through a similar service (EC2), any company can usethe company’s Web servers to deliver digital content to customers. The company essentiallyserves as a Web host, but instead of paying fixed costs, you pay 10 cents per virtual serverper hour plus bandwidth costs. Amazon’s network can handle bursts up to 1 gigabit per second. The system creates virtual servers, running the Linux kernel, and you can run anysoftware you want [Gralla 2006]. By 2011, the company had several locations providing S3and EC2 Web services. It also offered online relational database services using eitherMySQL or the Oracle DBMS. Anyone can pay to store data in the DBMS, with charges being levied per hour, per data stored, and per data transferred. The point is that Amazonhandles all of the maintenance and other companies avoid fixed costs. Even governmentagencies are adopting the benefits of storing data in these cloud services—including thoserun by Amazon. For example, the U.S. Treasury Department moved is public Web sites tothe Amazon cloud. [Pratt 2011].Perhaps the most unusual service is Mturk. The name derives from an 18-centuryjoke where a “mechanical” chess-playing machine surprised European leaders and royaltyby beating many expert players. The trick was that a human was hidden under the boardand moved the pieces with magnets. Amazon’s trick is to use human power to solve prob6lems. Companies post projects on the Mturk site and offer to pay a price for piecemeal work.Any individual can sign up and perform a task and get paid based on the amount of workcompleted. Amazon takes a 10 percent commission above the fee. For example, the companyCasting Words places audio files on the site and pays people 42 cents to transcribe one minute of audio files into text [Markoff 2006].The Amazon EC2 and S3 services suffered some problems in the summer of 2011. Aconfiguration error during an upgrade in the East Coast facility triggered a cascade thatdelayed all services in the facility. Internet services including Foursquare and Reddit thatused the facility were impacted by the problems for almost a week [Tibken 2011]. Amazonengineers learned a lot from the problems and the same issue is unlikely to occur again[http://aws.amazon.com/message/65648/]. But, the outage points out the risks involved inany centralized system. Ironically, the main problems were caused by algorithms designedto copy data to multiple servers to reduce risks. On the other hand, with multiple facilities,Amazon provides the ability to spread content and risk across multiple locations.Adam Selipsky, vice president of product management and developer relations atAmazon Web Services observed that “"Amazon is fundamentally a technology company;we’ve spent more than one and a half billion dollars investing in technology and content.We began by retailing books, but it was never in our business plan to stay with that”[Gralla 2006].Financial PerformanceWhen Amazon started, it spent huge amounts of money not only building infrastructure,but also buying market share. It took Amazon nine years to achieve profitability. And theprofits started to arrive only after the company changed its pricing model—focusing on retail prices for popular items and smaller discounts for all books. In the process, the company lost almost $3 billion. It was not until 2009 that Amazon had generated enough profitsto cover all of its prior losses (ignoring interest rates and debt).YearNet SalesNet Income201034,2041,152200924,509902200819,166645200714,835476200610,71119020058,49035920046,92158820035,2643520023,933(149)20013,122(567)20002,762(1,411)19991,640(720)1998610(125)1997148(31)199616(6)19950.5(0.3)($Million. Source: Annual Reports.)Debt (LT)1,5611,1928961,2821,2471,4801,8351,9192,2772,1562,1271,4663487700Equity6,8645,2572,6721,197431246(227)(1,036)(1,353)(1,440)(967)2661392931Employees33,70024,30020,70017,00013,90012,0009,0007,8007,5007,8009,0007,6002,1006147The company’s financial position has improved since 2000. Most of the improvementis due to increases in sales—which is good. But, those sales increased largely by sellingproducts for other firms, and from one more twist. Amazon no longer discounts most of thebooks that it sells. In fact, it is generally more expensive to purchase books from Amazonthan to buy them from your local bookstore. For competitive online pricing, checkwww.campusi.com, which searches multiple Web sites for the best price, but the selectionmight not be as large.Another source of increased sales is the international market (largely Britain, Europe and Japan). Notice in the table that media sales (books, audio, and movies) are higherin the International market than in North America. More products are sold in North America, but clearly the growth path is the international market.Net Sales 2010North AmericaMedia$6,881Electronics + gen. merch.10,998Other828($Million. Source: 2010 Annual Report)International$8,0077,365125Out of curiosity, where did all of that money go? In 2003, Bezos noted that $900 million went to business technology; $300 million was spent on the fulfillment centers; and$700 million on marketing and customer acquisition [Murphy 2003]. That last part largelyrepresents selling books at a loss or offering free shipping while trying to attract customers.Those numbers add up to the $1.9 billion debt, but what happened to the other $1 billion innet losses? Interestingly, according to the 2010 Annual Report, Amazon still runs a loss onshipping. In 2010, the company declared shipping revenue of $1.2 billion, against outboundshipping costs of $2.6 billion, for a net loss of $1.4 billion!Amazon continues to expand aggressively. In 2011, Amazon estimated revenue increases of 28-39 percent but increased operating expenses by about 38 percent. TomSzkutak, Amazon’s finance chief noted that “When you add something to the magnitude of23 fulfillment centers, mostly in the course of the second half of last year, you have addedcosts and you’re not as productive on those assets for some time,” [Wu 2011].For the longer term, Amazon’s leaders clearly indicate that they are aware of thestiff competition—both from bricks-and-mortar retailers and from online rivals includingsmall start-ups and established rivals including Apple and Google.Case Study Guided Questions1. What is the core success of Amazon? Describe the competitive advantage of Amazon that make them successful.2. Identify at least 5 information systems technology that Amazon used to support their business processes. Describe how are theyused?3. Discuss Amazon’s Build, Buy and Outsource Strategies for their information systems and technology. Provide examples from thecase for each strategy.4. By looking at the current practices and business processes, identify potential problems you can see (ethics, security, management,change, systems) that Amazon may need to consider in the future? Also discuss how should Amazon deals with it?8Additional ReadingBabcock, Charles, “Amazon Makes Online Merchandising Easier,” Information Week, September 15, 2003.Bacheldor, Beth, “From Scratch: Amazon Keeps Supply Chain Close To Home,” InformationWeek, March 5, 2004.Claburn, Thomas, “Amazon.com And Toys ‘R’ Us Are On The Outs,” Information Week, May31, 2004.Claburn, Thomas, “Why Amazon Is Suing Toys ‘R’ Us,” Information Week, June 29, 2004.Collett, Stacy, “The Web’s Best-seller,” Computerworld, September 30, 2002.Goodridge, Elisabeth and Matthew G. Nelson, “Update: Amazon Drops Sun, Compaq ForHP,” Information Week, May 31, 2000.Gralla, Preston, “Computing in the Cloud,” Computerworld, December 21, 2006.Hansell, Saul. “A Front-Row Seat as Amazon Gets Serious,” The New York Times, May 20,2001, http://www.n…