Case Study: Amazon.com In 1994, a 29-year-old financial analyst and fund manager named Jeff Bezos became intrigued by the rapid growth of the Internet. Looking for a way to capitalize on this hot new marketing tool, he made a list of 20 products that might sell well on the Internet. After some intense analysis, he determined that books were at the top of that list. Although Bezos liked the name Abracadabra, he decided to call his online bookshop Amazon.com Today, Amazon.com has more than 100 million customers and sells billions of dollars' worth of all types of merchandise. When he started, Bezos had no experience in the bookselling business, but he realized that books had an ideal shipping profile for online sales. He believed that many customers would be willing to buy books without inspecting them in person and that books could be impulse purchase items if properly promoted on a Web site. By accepting orders on its Web site, Bezos believed that Amazon.com could reduce transaction costs in the sale to the customer. Several million book titles are in print at any one time throughout the world, and more than a million of those are in English. However, the largest physical bookstore cannot stock more than 200,000 books and carries even fewer titles because bookstores stock more than one copy of each title. Having a wide selection was important because Bezos believed it would help create a network economic effect. People would visit Amazon.com whenever they wanted to buy a book because it would be the most likely store (physical or online) to have a particular title. After becoming satisfied customers, people would return to Amazon.com to buy more books and would eventually stop looking elsewhere. The structure of the supply side of the book business was equally important to Amazon.com's success. Music CDs, which were second on Bezos' list, were produced by a few major recording companies who could easily control Amazon.com's supply. In contrast, there were a large number of book publishers, none of which held a dominant position in the bookselling marketplace. Thus, it was unlikely that a single supplier could restrict Bezos' supply of books or enter his market as a competitor. He decided to locate his firm in Seattle, close to a large pool of programming talent and near one of the largest book distribution warehouses in the world. These supply factors were important because Bezos wanted to develop efficiencies that would allow Amazon.com to reduce transaction costs for its purchases as well as its sales transactions Bezos encouraged early customers to submit reviews and ratings of books, which he posted with the publisher's information about the book and with reviews written by Amazon.com employees. This customer participation served as a substitute for the comer bookshop staff's friendly advice and recommendations. Bezos saw the power of the Internet in reaching small, highly focused market segments, but he realized that his comprehensive bookstore could not be all things to all people. Therefore, he created a sales associate program in which Web sites devoted to a particular topic, such as model railroading, could provide links to Amazon.com books that related to that topic. In retum, Amazon.com remits a percentage of the referred sales to the owner of the referring site. Although Bezos original vision was to create an online bookstore with the world's best selection, Amazon has moved into other product lines where opportunities for network economic effects and transaction cost reductions looked promising. In 1998, Amazon.com began selling music CDs and videos, first on VHS tape, and then later on DVD. More recently, Amazon added MP3 music downloads. Today, Amazon offers thousands of products in dozens of categories. By paying attention to every process involved in buying, promoting, selling, and shipping consumer goods, and by working to improve each process continually, Bezos and Amazon.com became one of the first highly visible success stories in electronic commerce. In fact, Amazon.com now generates significant revenue by supplying other sellers of consumer goods with the technology to sell those goods online. One of its first partnerships was with Toys'R'Us, a company that had experienced difficulties in selling online and making deliveries on time in the 1999 holiday shopping season Toys"R"Us signed an agreement with Amazon.com in 2000 that placed Toys"R"Us products on the Amazon.com Web site. Amazon.com would accept the orders on its Web site and would ship products to customers for Toys"R"Us in exchange for a percentage of each sale. Amazon.com also agreed not to sell toys itself or on behalf of other partners for whom it might provide online sales services in the future. For example, when Amazon agreed to sell Target products online, it could not sell Target's toy lines on its Web site. (Target is the third-largest toy retailer in the world, behind Walmart and Toys"R"Us.) In addition to the online sales services Amazon.com provides to Toys"R"Us, Target, CDNow, and other large companies, it provides similar services to many smaller companies with its Amazon Marketplace offering. In Amazon Marketplace, small retailers become members of an online shopping mall on Amazon's site. Toys"R"Us sales exceeded $300 million by 2004 on the Amazon.com site. Both Toys'R'Us and Amazon.com benefited from the network economics effect they obtained by having toys available for sale on Amazon.com's well-known electronic commerce site. Many small toy retailers in the Amazon Marketplace program also benefited because shoppers visited the Amazon.com site looking for toys. When a site visitor searched for a toy, the Amazon Marketplace retailers' offerings were presented on the search results page along with results from Toys"R"Us and Amazon.com. (a) In 2009, Amazon.com purchased Zappos, a highly successful shoe retailer that was started in 1999. Since the purchase, Amazon.com has kept Zappos operating under its own brand as a separate Web site. Discuss a rationale for Amazon.com's decision not to subsume Zappos operations into the Amazon com Web site. (10 marks) (6) Toys"R"Us sales exceeded $300 million by 2004 on the Amazon.com site. Explain how Amazon, Toys"R"Us, and other toy sellers who participated in Amazon's Marketplace retailer program benefitted from the network effect as a result of the relationship between Amazon and Toys"R"Us. (15 marks)