Sources: Amazon Inc. – 1998 Proxy Statement
Amazon Inc. - 1998 Letters to Shareholders
Amazon Inc. - 1998 Annual Report
I. Company Overview and Business Strategy
Amazon.com, Inc. ("Amazon.com" or the "Company"), founded by Jeffrey P. Bezos in 1994 and launched online in July 1995, has rapidly established itself as a leader in online retail. Initially known as the "Internet's number one book, music and video retailer," Amazon.com's strategic objective is to "become the best place to buy, find and discover any product or service available online." (10-K, p. 3). The Company aims to achieve this by continually enhancing its brand, expanding its customer base, and leveraging its electronic commerce expertise to become customers' preferred online shopping destination globally.
Key Highlights of Business Strategy:
Customer-Centric Approach: Amazon.com prioritizes a superior shopping experience through value, high customer service, and personalization. This includes features like "1-Click ordering, personalized shopping services and easy-to-use search and browse features." (10-K, p. 3).
Broad Selection and Convenience: The Company offers over 4.7 million titles (books, music CDs, videos, DVDs, computer games, and other products) through searchable catalogs and various browsing options.
Technological Innovation: Amazon.com is a "proven technology leader," continuously developing electronic commerce innovations to enhance the customer experience.
Global Expansion: Recognizing the Internet as a significant global medium for online commerce, Amazon.com has expanded internationally, notably launching Amazon.co.uk and Amazon.de in October 1998.
Aggressive Investment: The Company intends to "invest aggressively to build the foundation for a multi-billion-dollar revenue company serving tens of millions of customers with operational excellence and high efficiency." (Shareholder Letter, p. 2). This strategy prioritizes long-term market leadership over short-term profitability.
II. 1998 Performance and Growth
1998 marked a period of substantial growth and expansion for Amazon.com, demonstrating rapid scaling in sales, customer acquisition, and infrastructure development.
Financial and Operational Achievements (1998 vs. 1997):
Net Sales: Skyrocketed by 313% from $147.8 million in 1997 to $610 million in 1998. The fourth quarter of 1998 alone saw "25% of our fourth-quarter 1998 sales was derived from Amazon.co.uk, Amazon.de, and music, video, and gift sales on Amazon.com, all very new businesses." (Shareholder Letter, p. 1).
Customer Accounts: Cumulative customer accounts increased by over 300%, from 1.5 million at the end of 1997 to 6.2 million at the end of 1998.
Repeat Purchases: The percentage of orders from repeat customers grew from over 58% in Q4 1997 to over 64% in Q4 1998, indicating strong customer loyalty.
Product Expansion: Successfully launched music (June 1998) and video (November 1998) stores, quickly becoming the number one online sellers in these categories. An "enhanced holiday gift store" was also launched.
International Presence: Re-launched European sites (Amazon.co.uk and Amazon.de) in October 1998, which significantly increased sales and established Amazon.com as the "number one online bookseller in these markets." (10-K, p. 4).
Infrastructure Growth:Employee base grew from approximately 600 to over 2,100.
Leased a "highly-mechanized distribution center of approximately 323,000 square feet in Fernley, Nevada" (Shareholder Letter, p. 1) to more than double distribution capacity, expected to begin operations in 1999.
Inventories rose from $9 million to $30 million, improving product availability and enabling direct purchasing from manufacturers for better cost control.
Financial Strength: "Cash and investment balances, following our May 1998 high yield debt offering and early 1999 convertible debt offering, now stand at well over $1.5 billion (on a pro forma basis), affording us substantial financial strength and strategic flexibility." (Shareholder Letter, p. 1). The business model is described as "cash-favored and capital-efficient," allowing a billion-dollar sales rate with relatively low inventory and fixed asset investments.
Net Loss: Despite significant revenue growth, the Company incurred a net loss of $124.5 million in 1998, a substantial increase from $31.0 million in 1997. This is attributed to aggressive investment in marketing, infrastructure, and product/geographic expansion, as well as lower gross margins on new product categories like music and video. The accumulated deficit as of December 31, 1998, was $162.1 million.
III. Key Business Components and Innovations
Amazon.com's rapid growth is underpinned by its innovative approach to online retail and core business components:
Web Site Features:Browsing and Search: Offers a "simple, easy-to-use fashion intended to enhance product search and selection" (10-K, p. 3) with interactive, searchable catalogs and advanced search tools.
Reviews and Content: Enhances the shopping experience with "cover art, synopses, annotations, reviews by editorial staff and other customers, and interviews by authors and artists." (10-K, p. 4).
Recommendations and Personalization: Key features include "greeting customers by name, instant and personalized recommendations, bestseller and chart-topper listings, personal notification services, purchase pattern filtering." (10-K, p. 4).
1-Click Technology: A streamlined ordering process allowing customers to place an order with a single click, leveraging securely stored shipping and billing information.
Secure Transactions: Utilizes "secure server software for secure commerce transactions" encrypting personal information. (10-K, p. 4).
Fulfillment and Distribution: Emphasizes "rapid and reliable fulfillment of customer orders." (10-K, p. 4). The Company sources products from a network of distributors, publishers, labels, and manufacturers, with Ingram being the single largest supplier (40% of inventory purchases in 1998). A new highly mechanized distribution facility in Nevada aims to reduce shipping times and increase inventory for rapid shipment.
Marketing and Promotion: Strategies focus on brand strengthening, traffic generation, customer loyalty, and repeat purchases through "personalized programs and services" and "flexible merchandising." (10-K, p. 5).
Associates Program: Extends market presence by enabling approximately 200,000 affiliated websites (including Yahoo!, AOL, Microsoft) to sell Amazon.com products with fulfillment by Amazon.
Advantage Program: A free program for independent publishers, authors, artists, and labels to increase visibility and sales of their titles.
Customer Service: Committed to establishing and maintaining long-term customer relationships through "strong customer support and service operations and staff," offering email support and "24 hours a day, 7 days a week" telephone service. (10-K, p. 5).
Technology Development: Focuses on creating and enhancing proprietary software for "site management, search, customer interaction, recommendation, transaction-processing and fulfillment services and systems." (10-K, p. 5).
IV. Risks and Challenges
Amazon.com operates in a "new, rapidly evolving and intensely competitive" market (10-K, p. 6) and faces several significant risks:
Limited Operating History and Anticipated Losses: As an "early-stage online commerce company," Amazon.com has a "relatively short operating history" and an "evolving and unpredictable business model." (10-K, p. 7). It has incurred significant losses since inception and expects to continue incurring "substantial operating losses for the foreseeable future" due to heavy investment in marketing, infrastructure, and acquisitions.
Intense Competition: Competitors include:
Online booksellers, music, and video vendors.
Web portals and search engines (Yahoo!, AOL) involved in online commerce.
Traditional publishers, distributors, and retailers (Barnes & Noble, Bertelsmann), many with "significant brand awareness, sales volume and customer bases." (10-K, p. 6).
Recent industry consolidation, such as Bertelsmann's stake in barnesandnoble.com and Barnes & Noble's pending acquisition of Ingram (Amazon's largest supplier), pose substantial competitive threats.
Unpredictability of Revenues and Seasonality: Revenue forecasting is difficult, and fixed expenses make quick adjustments to spending challenging if revenues fall short. The business is subject to seasonality, with increased sales in the fourth calendar quarter.
System Interruption Risks: Reliance on a single leased facility for hardware makes operations vulnerable to damage, interruptions, and delays. The Company lacks "backup systems or a formal disaster recovery plan." (10-K, p. 7).
Managing Rapid Growth: The rapid expansion of operations, product offerings, and international presence places "significant strain on our management, operational facilities and financial resources." (10-K, p. 8).
Risks of Entering New Business Areas: Expanding into new products and services requires significant expense and carries the risk of lower gross margins compared to existing business.
International Expansion Risks: Little experience in foreign markets, high costs to establish international facilities, and potential regulatory changes in foreign jurisdictions.
Dependency on Key Personnel: Reliance on senior management, particularly Jeffrey P. Bezos.
Reliance on a Small Number of Suppliers: A majority of products are purchased from three major vendors, with Ingram being the largest. Barnes & Noble's pending acquisition of Ingram creates a significant risk regarding future supply terms.
Highly Leveraged: Significant indebtedness, including $348.1 million as of December 31, 1998, and an additional $1.25 billion from Convertible Notes issued in February 1999.
Governmental Regulation and Legal Uncertainties: Uncertainty regarding taxation, content, privacy, and intellectual property laws in online commerce. The Company is also involved in litigation, including a trade secrets lawsuit filed by Wal-Mart.
Year 2000 Non-Compliance: Potential for undiscovered errors in internal systems and, more critically, reliance on external suppliers and the general internet infrastructure for Year 2000 compliance.
Stock Price Volatility: The Company's stock price is highly volatile, influenced by operating results, competitive announcements, and broad market fluctuations.
V. Leadership and Corporate Governance
Executive Leadership: Led by Jeffrey P. Bezos (35), President, CEO, and Chairman of the Board. Key executive officers include Joy D. Covey (CFO), Richard L. Dalzell (CIO), Sheldon J. Kaphan (CTO), John D. Risher (SVP Product Development), Kavitark R. Shriram (VP Business Development), and Jimmy M. Wright (VP Chief Logistics Officer). Many executives joined recently, bringing experience from companies like D.E. Shaw & Co., Wal-Mart, Microsoft, Netscape, and Intuit.
Board of Directors: Comprises five members: Jeffrey P. Bezos, Tom A. Alberg (Madrona Investment Group), Scott D. Cook (Founder of Intuit, Inc.), L. John Doerr (General Partner, Kleiner Perkins Caufield & Byers), and Patricia Q. Stonesifer (Chairman of the Gates Library Foundation, former Microsoft SVP). Directors do not receive cash compensation but are reimbursed for expenses and compensated through stock options.
Compensation Philosophy: Aims to attract and retain outstanding employees and align their financial interests with long-term stockholder value. Executive compensation combines relatively low base salaries with "significant stock option grant[s]" (Proxy, p. 8), tying compensation to Company performance and encouraging an "owner" mindset.
Shareholder Ownership: As of March 1, 1998, Jeffrey P. Bezos held approximately 41.0% of Common Stock. All Directors and Executive Officers as a group held 60.6%. Kleiner Perkins Caufield & Byers held 11.4%.
Stock Splits: The Company effected a 2-for-1 stock split in June 1998 and a 3-for-1 stock split in January 1999, both in the form of stock dividends.
Authorized Shares Increase: In May 1998, stockholders were asked to approve an increase in authorized common stock from 100 million to 300 million shares, to provide flexibility for future corporate purposes such as acquisitions, equity incentives, and financing. This was subject to approval at the annual meeting on May 28, 1998. The Board further approved increasing authorized shares to 1.5 billion common and 150 million preferred in February 1999, pending stockholder approval in May 1999.
VI. Future Outlook and Goals for 1999
Amazon.com remains highly optimistic about the enormous e-commerce opportunity. The 1999 plan focuses on aggressive investment to build a foundation for a multi-billion-dollar revenue company.
Key Goals for 1999:
Distribution Capacity: Build out significant infrastructure to support sales growth, speedy access, and deep inventory.
Systems Capacity: Expand systems to meet near-term growth, restructure for multi-billion-dollar scale and tens of millions of customers, and build features for new initiatives, while maintaining 24x7 availability.
Brand Promise: Build wide, strong customer relationships during this critical period.
Expanded Product and Service Offerings: Continue enhancing existing offerings and adding new initiatives, such as the recently launched Amazon.com Auctions.
Bench Strength and Processes: Invest in teams, processes, communication, and people development practices to manage the increasing complexity of the business.
Amazon.com acknowledges "aggressive, capable and well-funded competition; the growth challenges and execution risk associated with our own expansion; and the need for large continuing investments to meet an expanding market opportunity." (Shareholder Letter, p. 2). The Company emphasizes its long-term investment approach, prioritizing "market leadership considerations rather than short-term profitability considerations or short-term Wall Street reactions." (Shareholder Letter, p. 2).
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