Amazon.com: 1999 Annual Stockholder Meeting Proxy Statement
Date: December 31, 1999 (with some subsequent events noted up to March 2000 and September 2000 for accounting policy changes).
Sources: Amazon Inc. - 1999 Proxy Statement
Amazon Inc. - 1999 Letters to Shareholders
Amazon Inc. - 1999 Annual Reports
Amazon Inc. - 1999 Form 10-K/A
Executive Summary
Amazon.com (referred to as "the Company" or "Amazon") has experienced phenomenal growth since its incorporation in July 1994 and the launch of its website in July 1995. By the end of 1999, Amazon had served over 17 million customers in 150+ countries, solidifying its position as the "world's leading online retailer." The Company's business model is explicitly geared towards long-term market leadership and customer obsession, prioritizing growth and market share over short-term profitability, as articulated by CEO Jeff Bezos in both his 1997 and 1999 shareholder letters.
1999 was a year of significant expansion, marked by substantial revenue growth, a rapidly increasing customer base, diversification into numerous new product categories, and a massive expansion of its distribution and customer service infrastructure. While sales surged by 169% to $1.64 billion, the Company continued to incur substantial net losses ($719.9 million in 1999), reflecting aggressive investments in growth, technology, and acquisitions. Amazon's strategy relies on its "e-commerce platform" – comprising brand, customers, technology, distribution, expertise, and a dedicated team – to drive future expansion and eventual profitability.
Key Themes & Important Facts
1. Rapid Growth and Market Leadership
Amazon's growth trajectory in 1999 was exceptional:
Sales Growth: Net sales increased by 169% from $609.8 million in 1998 to $1.64 billion in 1999. As Jeff Bezos states, "Sales grew from $610 million in 1998 to $1.64 billion – a 169 percent increase."
Customer Base Expansion: Cumulative customer accounts grew from 6.2 million in 1998 to 16.9 million in 1999, adding 10.7 million new customers.
Repeat Purchases: The percentage of orders from repeat customers increased from over 64% in Q4 1998 to over 73% in Q4 1999, highlighting customer loyalty.
International Presence: Sales outside the US accounted for 22% ($358 million) of net sales in 1999. Amazon.co.uk and Amazon.de (launched October 1998) were ranked #1 and #2 most popular online retail domains in Europe, with Amazon.com being #3.
Rapid Fulfillment: The Company grew revenues "90 percent in just three months in the fourth quarter, while shipping well over 99 percent of our holiday orders in time for the holidays."
2. Diversification Beyond Books
While Amazon started as an online bookseller, 1999 marked a significant shift towards becoming a "place where people can come to find and discover anything and everything they might want to buy online."
New Product Offerings: Major initiatives in 1999 included the launch of online stores for Toys, Consumer Electronics, Home Improvement, Software, and Video Games, in addition to existing Music and DVD/Video categories (launched in 1998).
Marketplace Services: Introduced Amazon.com Auctions (March 1999), zShops (October 1999), and sothebys.amazon.com (November 1999), which collectively surpassed 1 million registered users and 1.5 million listings by Q4 1999.
Amazon.com Commerce Network: Established strategic alliances with e-commerce companies like drugstore.com, Greenlight.com, living.com, Audible, Ashford.com, NextCard, and Pets.com. These partnerships allow Amazon to offer an expanded product and service selection, generate revenue from partners, and participate in their future success through minority investments.
3. Investment in Infrastructure and Technology
Amazon aggressively expanded its operational capabilities to support its growth:
Distribution Capacity: Worldwide distribution capacity grew from approximately 300,000 square feet to over 5 million square feet in less than 12 months, with 8 new distribution centers added in 1999 (6 in US, 2 international).
Customer Service: Expanded to five customer service centers globally, with plans for more in 2000.
Technology & Innovation: Continued investment in proprietary technologies and licensed solutions, including "1-Click technology, personalized shopping services, easy-to-use search and browse features, secure payment protections and wireless access to our stores (Amazon Anywhere)."
Capital Efficiency: Jeff Bezos emphasizes the capital efficiency of their model, noting they "don't need to build physical stores or stock those stores with inventory, and our centralized distribution model has allowed us to build a business with a fourth quarter run rate of over $2 billion in annualized sales but requiring just $220 million in inventory and $318 million in fixed assets."
4. Financial Performance and "Long-Term" Philosophy
Despite significant growth, Amazon continued to report substantial losses, consistent with its long-term investment strategy:
Net Loss: Amazon incurred a net loss of $719.9 million in 1999, an increase from $124.5 million in 1998 and $31.0 million in 1997.
Operating Loss: Loss from operations surged to $605.7 million in 1999, compared to $109.0 million in 1998.
Gross Margin: Gross margin decreased to 17.7% in 1999 from 21.9% in 1998, attributed to the introduction of new product lines (toys, electronics) and inventory-related charges of approximately $39 million in Q4 1999.
Debt & Liquidity: Amazon incurred significant debt, with long-term debt reaching $1.47 billion by December 31, 1999. In February 1999, the Company issued $1.25 billion in Convertible Subordinated Notes. In February 2000, an additional €690 million (approx. $680.7 million) in PEACS notes were issued.
Long-Term Focus: Jeff Bezos reiterates Amazon's core philosophy from its 1997 letter: "We believe that a fundamental measure of our success will be the shareholder value we create over the long term. This value will be a direct result of our ability to extend and solidify our current market leadership position." He stresses making "investment decisions in light of long-term market leadership considerations rather than short-term profitability considerations or short-term Wall Street reactions."
GAAP vs. Cash Flows: Bezos explicitly states their prioritization: "When forced to choose between optimizing the appearance of our GAAP accounting and maximizing the present value of future cash flows, we'll take the cash flows."
5. Risks and Challenges
The Company acknowledges several significant risks inherent in its rapidly evolving business:
Limited Operating History & Sustained Losses: "We have a relatively short operating history upon which you can evaluate our business and prospects... We are incurring substantial operating losses and may continue to incur such losses for the foreseeable future."
Indebtedness: "Our significant amount of indebtedness could affect our business," making it difficult to obtain future financing, limiting flexibility, and potentially leading to default if cash flow is inadequate. Currency exchange risk on Euro-denominated debt is also noted.
Forecasting Difficulty & Fluctuations: "We cannot accurately forecast revenues of our business. We may experience significant fluctuations in our quarterly operating results." Expenses are largely fixed, making quick adjustments difficult if revenues fall short.
Intense Competition: The online commerce market is "new, rapidly evolving and intensely competitive," with many competitors having "longer operating histories, larger customer bases, greater brand recognition and significantly greater financial, marketing and other resources."
System Interruptions: Reliance on a single leased facility in Seattle for computer hardware poses a risk of "system interruptions, delays and loss of critical data" due to various events (fire, flood, etc.), as they lack formal backup systems or a disaster recovery plan.
Operational Strain: Rapid growth strains "management, operational and financial resources," requiring continuous improvement in systems, procedures, and staffing.
Inventory Risk: Significant inventory risks exist due to "seasonality, new product launches, rapid changes in product cycles and changes in consumer tastes," exacerbated by currently "not well integrated" inventory management systems and manual processes.
New Business Areas: Expansion into new areas requires "significant additional expense and could strain our management, financial and operational resources."
International Expansion Risks: Selling and operating abroad involve risks such as "currency exchange rate fluctuations, local economic and political conditions, restrictive governmental actions," and competition from local companies.
Acquisition and Alliance Integration: Business combinations and strategic alliances create risks like "difficulty assimilating the operations, technology and personnel of combined companies" and potential "impairment of relationships with existing employees, customers and business partners."
Intellectual Property: Challenges in protecting their own IP and defending against claims of infringing third-party IP.
Regulatory Environment: Evolving government regulation of internet commerce, including taxation (sales taxes, VAT), product liability claims (especially with new product lines like toys), and potential liability for fraudulent activities on marketplace services (Auctions, zShops, Payments).
Year 2000 (Y2K) Implications: While systems were tested and no significant problems occurred to date, "problems arising from the year 2000 issue will not cause a material adverse effect on our operating results or financial condition" cannot be guaranteed, with third-party systems posing the greatest risk.
Key Personnel
Jeffrey P. Bezos: Founder, Chief Executive Officer, and Chairman of the Board. Continues to emphasize the long-term vision and customer-centric approach.
Joseph Galli, Jr.: Joined June 1999 as President and Chief Operating Officer.
Warren C. Jenson: Joined September 1999 as Senior Vice President, Chief Financial Officer, and Chief Accounting Officer.
John D. Risher: Senior Vice President and General Manager, US Retail Group (since Feb 2000).
Diego Piacentini: Senior Vice President and General Manager, International (since Feb 2000).
This briefing highlights Amazon's aggressive expansion strategy, its commitment to a customer-centric long-term vision despite mounting losses, and the significant operational and financial challenges it faced at the close of the millennium. The Company's leadership firmly believes its growing platform and continuous innovation will lead to eventual profitability and long-term shareholder value.
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