MHE-FTR-068

1 2 6026 1 28X
R E VI S E D: DE C E MB E R 1 6 , 20 1 9

FRANK T. ROTHAERMEL MH0068

[Link], Inc.

It is always Day One. Day Two is stasis. Followed by irrelevance. Followed by excruciating, painful decline.
Followed by death. And that is why it is always Day One.1

— Jef Bezos, Founder and CEO, [Link]

November 27, 2019, 8:28 pm. It was late on a rainy and cold fall evening in Seattle, the day before Thanksgiving.
The offices were still humming with Amazon employees working frantically to make sure that Cyber Monday2 and
the subsequent holiday season would be successful.

Jeff Bezos, founder and CEO of [Link], Inc. was in a reflective mood. When he founded Amazon just
twenty-five years earlier, he began by selling books online. He created a makeshift office out of a garage in a Seattle
suburb and furnished it with desks made out of discarded wood doors. His fledgling online startup had become
one of the world’s most valuable companies active in everything from e-commerce, cloud computing, consumer
electronics, and online advertising to media entertainment, groceries, and, of course, books.

In 2019, Amazon’s market cap reached roughly $1 trillion, making it one of the most valuable tech compa-
nies globally. In the same year, revenues stood at $266 billion, and profits at over $13 billion (Exhibits 1 and 2).
Although [Link] had succeeded beyond his wildest dreams, Jeff Bezos worried about what the next few years
would bring for Amazon, including impending government regulation, continued diversification, and international
competition.

Struggling to make sense of it all, Bezos got up to grab a much-needed can of Monster Energy Lo-Carb drink
out of his office fridge. He opened the can, took a sip, sat back down, took out a legal pad, and began to jot down
some talking points for an upcoming investor call.

A Brief History of Amazon

After graduating with a degree in computer science from Princeton University, Jeff Bezos started out as an
analyst at D. E. Shaw, a hedge fund company in New York. In the early 1990s, he noticed the rapid growth of the
internet and was drawn to its potential for a new era of retail services. Still, he needed a product that would lend
itself easily to online sales in order to break ground in this new arena. Brainstorming many possible ideas, Bezos
settled on books, which are easily sourced, warehoused, and shipped by mail. Books are also an ideal commodity

Professor Frank T. Rothaermel prepared this case from public sources. This case is developed for the purpose of class discussion. This case is not intended to be
used for any kind of endorsement, source of data, or depiction of efficient or inefficient management. All opinions expressed, and all errors and omissions, are
entirely the author’s. © by Rothaermel, 2019.

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 [Link], Inc.

because they are identical products regardless of where they are purchased (in a brick-and-mortar bookstore or
online). This in turn reduced customer uncertainty about transacting online, which was new at the time. Also, an
internet store can carry a significantly larger inventory of books than typical bricks-and-mortar establishments. To
work full time on his new business plan, Bezos quit his job and moved from New York City to Seattle, Washington.

In 1994, Jeff Bezos founded [Link] (initially named Cadabra, before settling on Amazon). Amazon.
com’s website went live in 1995 and became an instant success with booklovers everywhere. In pursuing its mis-
sion “to be earth’s most customer-centric company,” Amazon has focused on providing superior customer service,
which is primarily what sets it apart from other internet merchants. Amazon’s pioneering one-click shopping, user-
generated book and product reviews, and e-mail based order verification and tracking system also contributed to
its customer-centric mission. As a result, the startup quickly outgrew the Bezos’ 400-square-foot garage in Bellevue,
Washington. Within a short two years, Amazon’s book sales exceeded those of even its largest bricks-and-mortar
bookstores.

Amazon completed a successful initial public offering (IPO) on May 16, 1997. Exhibit 3 shows Amazon’s nor-
malized stock performance vs. the NASDAQ-100 index since its IPO.

Over the next few years, Amazon executed a series of strategic alliances as well as acquisitions to rapidly expand
its product and service offerings. For instance, Amazon entered online video sales through the purchase of IMDb
(Internet Movie Database) and expanded into Europe with the acquisition of online booksellers BookPage and
Telebook.3 Internationally, Amazon added warehouses as well as country-specific sites in 1998 in the United
Kingdom ([Link]) and Germany ([Link]) to accommodate its growing popularity in Europe. French
([Link]) and Japanese ([Link]) Amazon sites debuted in 2000. In 1998, Amazon purchased [Link],
China’s largest online book, music, and video retailer as a way to gain footing in the world’s largest internet market.4

In the spring of 2000, the dot-com bubble burst, with the NASDAQ-100 index losing some 80 percent of its
value within a few short weeks. To survive the shakeout of the dot-com companies, Amazon went through a large
restructuring effort in 2001 by focusing even more on cost-cutting and efficient processes, resulting in a $150 mil-
lion charge and a 15 percent reduction in its workforce.

Although Amazon began as a book and CD e-tailer, it went on to become a global online trading platform. In
2000, it started Marketplace, which allows independent third-party sellers to access Amazon customers globally.
It also allows vendors to use Amazon warehouses, logistics expertise, and tracking of deliveries and other services
that the company offers its Prime customers. In its first year of operation, independent third-party sellers, mostly
small- and medium-sized businesses, were responsible for a mere 3 percent of all sales in the Amazon platform.
Marketplace had grown to over 2.5 million non-Amazon vendors by 2019, which were responsible for some 60
percent of all transactions on Amazon (Exhibit 4).

The Amazon website lists an estimated 350 million products sold by third-party vendors. Some critics, how-
ever, allege that with the tremendous growth of Marketplace that Amazon lost control over its platform, and that
[Link] is rife with counterfeits and unsafe products sold by unscrupulous vendors. Just in 2017, Nike had
agreed to sell its products directly to [Link], a major win by the tech company to attract top-notch brands to
its site. In 2019, Nike, however, reversed this decision by announcing that it will no longer sell directly to Amazon.
com. Rather, Nike wants to focus on its own direct-to-consumer online channel ([Link]). Amazon also sells its
own line of consumer products (Amazon Basics) as well as electronics such as e-readers, tablets, and voice-enabled
wireless devices such as Echo.

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 [Link], Inc.

In 2005, Amazon launched its Prime membership service. Subscribers initially paid $79 (and then $99 starting
in 2014) a year to receive free two-day shipping, as well as access to Amazon’s video and music streaming services.
By 2019, over 100 million Americans were signed up for Prime membership (which now costs $119 a year). In the
same year, Amazon raised the bar on customer expectations yet again by promising to deliver many of its products
free-of-charge to Prime members within one day, rather than the customary two-day delivery. Although offering
one-day free shipping for Prime members raises the bar on customer service to which Walmart and others need to
respond, it does not come cheap. The investment to make one-day free shipping a reality in the United States alone
is estimated to be between $800 million and $1 billion.

In 2007, Amazon ventured into hardware development with the release of the first-generation Kindle, which
sold out in less than six hours. This was not surprising because Amazon sells its Kindle devices at or even below
cost.5 The Kindle e-reader has transformed the publishing industry. Amazon holds a two-thirds market share in
e-books and now sells more e-books than print books. Amazon’s losses from sales of computer hardware were more
than offset by the sales of e-books, movies, and other digital content sold through the Kindle.

To provide a more seamless reading and educational experience, Amazon complemented the Kindle line of
tablets and e-readers with the purchase of Audible, a digital provider of audiobooks, for $300 million in 2008.6
In 2013, Amazon also acquired the website [Link], a book-sharing social network that provides user-
generated book reviews and reading lists, for an undisclosed amount.7

In 2008, Amazon acquired Zappos, an online shoe company known for exceptional customer service, for $1
billion. Amazon runs Zappos as an independent subsidiary with its own site ([Link]), and imports many of its
ideas such as paying employees after orientation to leave the company if they are not fully committed to Amazon’s
mission.

In 2011, Amazon launched its own advertising network in order to generate targeted ads for its online custom-
ers. By 2019, total digital ad spending surpassed offline spending for the first time and is expected to reach $200
billion by 2021. Facebook and Google have captured most of the growth in online advertising spending over the
past few years (with $100 billion in 2018). Yet, Amazon has grown rapidly in the online advertising space with $10
billion in revenues (in 2018), although it remains a distant third to Facebook and Google, the dominant players in
this industry.

Some industry observers view Amazon as a “search engine with a warehouse attached to it.”8 For instance, a
customer browsing Amazon for a particular item but did not end up purchasing anything is tagged and then served
an ad for that particular item when the customer returns to shop at a later stage (i.e., micro-targeting of online ads).
Amazon is using its fine-grained customer data to expand its in-house ad platform (dubbed Amazon Sponsored
Links) to replace the ads that Google traditionally supplied on its website. Given that Amazon knows what a cus-
tomer buys at what price and when, and what a customer only looks at but does not buy, Amazon’s data quality
exceeds that of Google or Facebook because they don’t have such type of data that reveals customer preferences.

In 2012, Amazon’s acquired Kiva Systems for $775 million to more fully automate its fulfillment centers in
order to guarantee same-day or overnight deliveries of packages. The use of tens of thousands of robots also has the
potential for Amazon to shave off more than $1 billion in operating Amazon’s fulfillment centers.

In 2014, Amazon launched the Fire smartphone. The device boasted features that included hands-free scrolling,
holographic images, and software that uses the phone’s camera to detect merchandise that the user might want to
purchase on Amazon’s site. Despite the promise and the launch fanfare, the device proved to be a major disappoint-
ment. In the same year, Amazon launched Fire TV, one of the first systems fully optimized for streaming video,
games, and other online applications. In contrast to the Fire Phone, the Fire TV turned out to be hugely successful.

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 [Link], Inc.

In an extension of its video-streaming capability, Amazon has also expanded into the realm of video gaming
through its acquisition of Twitch Interactive in 2014. Twitch broadcasts video of consumers playing a variety of
video games or engaging in other activities, and it is the fourth-largest source of internet traffic behind only Netflix,
Google, and Apple. Amazon has made an active push into video gaming, expanding the number of programmers it
employs and introducing several new video games as part of its Fire TV offering.9

Launched also in 2014, Echo is powered by Amazon’s Alexa, an artificial intelligence (AI)-based digital assis-
tant that marks Amazon’s foray into augmented reality. Based on simple voice commands, Alexa plays any songs
requested, reads aloud audiobooks, shares the latest news and weather forecast, and can control a home’s thermo-
stat and lights, and even can turn on the home alarm or the yard’s sprinkler system. By 2019, Amazon had sold
more than 100 million Alexa-enabled devices, holding some 70 percent in the U.S. smart speaker market, while
Google Home holds some 25 percent, and Apple’s HomePod has less than 5 percent.

In 2015, Amazon began opening brick-and-mortar stores in the United States. These physical retail stores enable
next day delivery for many items, pickup of online orders, and exchange or return purchases. In the same year, the
Seattle-based tech company introduced AmazonCampus, a student-centered program. As part of this new campus
initiative, Amazon offers its Prime membership to students (Prime Student) free for a six-month trial period and
then charges a discounted $6.49 a month (or about $78 per year). Prime Student guarantees unlimited next-day
delivery of any goods ordered online, besides all the other Prime membership benefits (free streaming of media
content, lending one e-book a month for free, discounts on hardware, etc.).

To accomplish next-day delivery, Amazon is using delivery centers on campus called which also serve as con-
venient return centers. Perhaps more important, having a central delivery hub on campus makes addressing the
“last-mile problem” (that is delivering a package to a student’s dorm room or apartment) moot. In logistics, the
last-mile problem is the most expensive part of overall shipping cost; with a central hub, Amazon does not need
UPS or FedEx to make the final delivery. All these process innovations allow Amazon to offer Prime Student at
low cost and high convenience.

In 2016, Amazon demonstrated the feasibility of its new Prime Air service, which used drones to deliver its
smaller packages. Customers would receive their packages in less than 30 minutes after ordering. In the same year,
the Seattle-based tech company also tested AmazonGo, where the purchase of goods, checkout, and payment are
automated, thus transactions are being tracked while the consumer is shopping and there is no delay when exiting
the store. In 2017, Amazon acquired Whole Foods Market for $14 billion, a U.S.-based organic grocer with some
500 stores nationwide. In 2019, Amazon announced next-day deliveries for its U.S.-based Prime members.

In 2018, Amazon opened their cashier-less grocery stores Amazon Go to the public. As customers walk in,
they scan their phones at a kiosk and walk out with items they wish to purchase which are automatically charged
to their Amazon accounts. The technology relies on video streaming, computer vision, and sensors that identify
and track customers.

Also, in 2017, Amazon introduced its Rewards Visa credit card for Prime members, with users receiving a five
percent discount for purchases at [Link] and 2 percent discounts on gas stations, restaurants, drugstores,
and elsewhere. The credit card is free of charge.

In 2019, Amazon withdrew from China, where tech companies Tmall (owned by Alibaba) and NetEase Kaola
are the dominant players in the global online market. At the same time, Amazon made additional investments in
the Middle East by launching its first Arabic-language site under its own brand ([Link]).

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of McGraw-Hill Education.

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 [Link], Inc.

In addition to diversifying its products, services, and geography, Amazon also integrated vertically. By develop-
ing its own streaming video content with Prime Video, Amazon integrated into media production. To compete
more effectively with Netflix and other entertainment companies, Amazon began creating its own original content
in 2015. Amazon spent some $6 billion on original content in 2019 while Netflix spent $15 billion, outspending
all media companies by a wide margin.

Exhibit 5 depicts Amazon’s key strategic initiatives and stock market valuation over the years.

Amazon Web Services (AWS)

Amazon Web Services (AWS) is Amazon’s full-feature, cloud-based service offering computing and storage
capacity, content delivery, data management, software, networking, payment and billing systems, and other applica-
tions.10 Launched in 2006, the unit came about as Amazon struggled in the early 2000s when access to sufficient
computing capacity became a bottleneck. To address this problem, Amazon built a set of in-house infrastructure
services that would allow its retail business not to rely on third-party vendors. Amazon, however, only needed its
full computing capacity for about six weeks of the year, that is, during each holiday season.

Amazon’s executives quickly realized that such on-demand web services and computing power would be valu-
able and useful for other companies and formed a business around the infrastructure. Subsequently, entities ranging
from tech startups to government agencies (such as the CIA) have rented server space, storage, and computing
capability from AWS. AWS clients pay as they go for this to meet their computing services and infrastructure needs.
AWS’s pay-as-you-go business model allows successful startups such as Uber, Lyft, Snap, or Pinterest to scale rap-
idly expand without the need to build out their own computing capacity.

AWS’s revenues grew from $3 billion in 2013 to 26 billion in 2018, and are estimated to be $47 billion by 2020
(Exhibit 6). AWS is by far Amazon’s most profitable business endeavor: Amazon’s total revenues stood at some
$240 billion in 2018, with retail bringing in $203 billion, AWS $26 billion, and online advertising the remaining
$10 billion (Exhibit 2). Amazon’s profits that year were $12 billion, with AWS bringing in $7 billion and retail
just $5 billion. AWS’s profit margin is approximately 26 percent while the online retailing profit margin is a mere
2 percent. Indeed, while Amazon is barely profitable in its online retailing operation in the United States, it is
losing money internationally. One reason why [Link] is barely profitable is that is the company spends the
most in absolute dollars on research and development (R&D; $23 billion in 2018) in the United States, ahead of
Alphabet, Google’s parent company, which spent $21 billion in R&D in 2018. AWS contributed not only 60 per-
cent of Amazon’s total profit (despite bringing in some 11 percent of total revenues), it is growing by more than
40 percent a year.

Given its successful SAAS business model, AWS has become Amazon’s cash cow, which allows Amazon to
undertake various strategic initiatives such as paying $14 billion for Whole Foods Market (in 2017) and funding the
money-losing international retail expansion as well as original content development for Prime Video (see Exhibit 5
for more examples of recent strategic initiatives).

Although AWS is growing fast, its growth rate has slowed in recent years. Moreover, with Microsoft’s Azure,
Google’s Cloud, as well as IBM’s and now Apple’s stronger push into cloud computing, competition is intensifying.
In addition, many competitors such as Netflix or Disney—both current customers of AWS—may shift to Azure or
another cloud services provider for strategic reasons.18

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 [Link], Inc.

Amazon’s Reputation and Workplace Culture

Amazon is known to have a unique and strong workplace culture, driven by a relentless pace and ever-increasing
performance demands on its employees.11 Jeff Bezos describes Amazon’s culture and management system as “Day
One Thinking,” which is to start off each day thinking the company is a fledgling startup, and employees must
challenge all previously held beliefs. Jeff Bezos explained his management mantra in a letter to shareholders: “Day
Two is stasis. Followed by irrelevance. Followed by excruciating, painful decline. Followed by death. And that is
why it is always Day One.”12 Day One is also the name of Amazon’s main headquarters building on the company’s
South Lake Union campus in Seattle.

New Amazon recruits are told to become the best Amazonians they can be, and they should not only memorize
but also internalize Amazon’s “sacred” 14 Leadership Principles. The trainers go on to emphasize that although
the “worship of the Leadership Principles” makes Amazon quite peculiar, its employees use the Leadership
Principles daily, whether they are discussing new ideas for a project or deciding on how to best solve a problem.
To help internalize the leadership principles, each new recruit is handed a wallet-size laminated card containing
the principles; moreover, the leadership principles are found on every wall in every office and conference room
(Exhibit 7). Salaried employees reported that they frequently work 80 hours or more a week to get their jobs done,
and rarely take a vacation. Amazon one of the few companies that still uses a “rank-and-yank” system in evaluating
its employees against each other, with the lowest performers being terminated.

The public perception of Amazon and its workplace culture, however, vary widely. In 2017, The Economist
reported that consumers voted Amazon as the most well-regarded company in the United States.13 In 2019, The
Wall Street Journal (WSJ) crowned Amazon as the best-managed company in America due to its relentless focus on
innovation to provide customer value.14 Amazon also rated highest for creating jobs of the future in fields such as
artificial intelligence (AI), machine learning, augmented reality, and robotics.

Overall, Amazon has created hundreds of thousands of jobs in recent years. Indeed, within four years, Amazon
has more than quadrupled its workforce, up from some 150,000 people in 2015 to 650,000 people in 2019. Amazon
also scores high on employee creativity (in the WSJ report), because it does not allow PowerPoint presentations;
rather executives need to prepare a maximum six-page written memo discussing any proposal, including a mock-up
press release and expected FAQs (frequently asked questions by consumers). Meetings generally begin with a 30
minutes quiet phase where each participant studies the proposal, which ensures some level of preparedness for each
attendee. For example, Amazon’s Alexa, the most popular AI-assistant home speaker in the United States, started
with such an idea memo.15

Yet, ever since the publication of an expose by The New York Times (in 2015) alleging that Amazon is a “bruis-
ing workplace,” the tech company’s reputation has been affected negatively.16 Amazon has been criticized by social
activists and labor unions for perceived shortcomings in corporate social responsibility and for its treatment of
workers. Yet, Amazon unilaterally raised its minimum wage for U.S. employees to $15 per hour (in 2018), despite
the federal minimum wage standing at $7.25. In 2018, however, when Seattle’s city council voted unanimously to
pass a measure that would have required the city’s largest companies (i.e., Amazon) to pay a tax of close to $300
per employee to combat homelessness, Jeff Bezos balked.17 In response, Amazon announced that it had halted
construction on its new headquarters tower in Seattle, and was now considering locations more conducive to busi-
ness. Within a month, the city council voted to repeal the tax measure.

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 [Link], Inc.

Competitors and Industry Convergence

The list of Amazon’s competitors keeps increasing rapidly, as this passage from the company’s 2018 report
makes clear:18

The worldwide marketplace in which we compete is evolving rapidly and intensely competitive, and we face a
broad array of competitors from many different industry sectors around the world. Our current and potential
competitors include:

(1) physical, e-commerce, and omnichannel retailers, publishers, vendors, distributors, manufacturers, and
producers of the products we offer and sell to consumers and businesses;

(2) publishers, producers, and distributors of physical, digital, and interactive media of all types and all
distribution channels;

(3) web search engines, comparison shopping websites, social networks, web portals, and other online and
app-based means of discovering, using, or acquiring goods and services, either directly or in collaboration
with other retailers;

(4) companies that provide e-commerce services, including website development, advertising, fulfillment,
customer service, and payment processing;

(5) companies that provide fulfillment and logistics services for themselves or for third parties, whether
online or offline;

(6) companies that provide information technology services or products, including on-premises or
cloud-based infrastructure and other services; and

(7) companies that design, manufacture, market, or sell consumer electronics, telecommunication, and
electronic devices.

Amazon continues to morph through vertical integration and continued diversification in products, services,
activities, and geographies. Amazon started out as an online book retailer but has grown into a massive discount
internet vendor (earning the “the everything store”), streaming multimedia, offering cloud computing services
(AWS), and manufacturing its own electronics and telecommunication devices (e.g., Kindle and Alexa line of
products).

As such, three competitors stand out: Walmart in retail, Microsoft in cloud computing, and Google in online
search and advertising as well as AI-enabled ecosystems. Exhibit 8 shows the market capitalization of the top-five
most valuable tech firms (Apple, Microsoft, Alphabet, Amazon, and Facebook) as well as the market capitalization
of Walmart.

WALMART
Carrying the moniker “the everything store,” Amazon has become the largest online retailer in the United
States with some 50 percent market share (which equates to about 10 percent of the total retail market share in the
country). And in 2019, online retail had grown to about 20 percent of total retail sales in the United States and is
expected to rise further.

At the same time, Walmart is the largest brick-and-mortar retailer by sales, not only in the United States but also
globally. In total, Walmart has over 11,000 stores worldwide, and employs more than two million people, making
it the largest private-sector employer in the United States.

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 [Link], Inc.

In 2019, Walmart’s revenues stood at over $520 billion, and its market cap reached $340 billion. Walmart’s
retail stores in the U.S. have been growing same-store-sales between three to five percent each year since 2015. The
majority of Walmart’s revenues in the United States came from groceries (56 percent), making it the largest grocer
in the country. The second-largest revenue source for the Bentonville, Arkansas retailer was general merchandise
(33 percent), and health and wellness items (33 percent).

Walmart has invested heavily in the e-commerce space. It operates several online shopping sites including
its eponymous site [Link] as well as [Link] and [Link]. [Link] was launched in 2000. The
e-commerce site allows users to order products online, view availability at nearby stores, and same-day pick up
from stores. Walmart offers free two-day shipping for any order above $35 on its website, which includes over two
million items. Also, popular is the option to order items online and pick them up (via a drive-through) on the com-
mute home from work. In addition, much like [Link] albeit at a much smaller scale, [Link] is an open
platform for third-party vendors to sell their items and avail themselves of Walmart’s online services, among others.

In 2016, Walmart acquired e-commerce startup [Link] for $3.3 billion. [Link]’s business model was that
“prices drop as you shop,” providing discounts for larger purchases. In 2019, however, Walmart folded [Link]
into its main U.S. e-commerce business. In 2018, Walmart acquired Flipkart, India’s largest online retailer, for $16
billion. Walmart also owns about 10 percent in the Chinese online retailer [Link].

In 2019, Walmart’s e-commerce business accounted for some $26 billion in revenues (or about 5 percent of
Walmart’s total) but is growing fast at an estimated annual rate of 40 percent.

MICROSOFT
In 2019, Microsoft had revenues of $130 billion and a market cap of over $1 trillion. Under CEO Satya Nadella,
Microsoft—Amazon’s neighbor in Redmond across Lake Washington—has completely transformed itself as a
company to focus on an open, software as a service business model. The company’s cloud computing service,
Microsoft’s Azure, which reported revenues of some $23 billion in sales (in 2018), is Amazon Web Services’
strongest competitor.

Of particular concern to future AWS performance vis-à-vis Azure is the fact that, in October 2019, the Pentagon
awarded Microsoft a $10 billion contract to build a large cloud-computing system (called “JEDI” for Joint Enterprise
Defense Infrastructure; it is one of the initiatives of the U.S. government to modernize its computer infrastructure).
This contract was hotly contested, and AWS was widely considered the odds-on favorite to win the contract.

ALPHABET’S GOOGLE
Google is the undisputed leader in online search, holding a 90 percent market share in the U.S. and some
95 percent in the EU. Google’s business lines include online search and advertising, YouTube, Maps, Android,
Chrome, cloud and apps services, and the reintegrated Nest, a smart-home company. The business is led by CEO
Sundar Pichai and continues to generate 99 percent of Alphabet’s total revenues, garnering $140 billion in 2019.
Alphabet’s market cap stood at over $900 billion in 2019.

Google (GOOG) is both a competitor to as well as a collaborator with Amazon. For instance, Amazon’s tab-
lets run on the Android operating system. Moreover, Amazon also sells Google products on its website including
Google Pixel phones. However, many view Google as Amazon’s main competitor, given their overlapping activities
in some of the same businesses such as online search and advertising and AI-enabled ecosystems (e.g., Alexa vs.
Google Assistant).

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 [Link], Inc.

THE “STREAMING WARS”

The media and entertainment industry in the U.S. alone is estimated to be worth one trillion dollars. Industry
convergence in this arena is captured by the term “streaming wars,” which is the fight for subscriptions to video
streaming services. The current wave of disruption in the media entertainment industry started in the 2000s,
bypassing old-line cable content providers for direct online streaming via the internet. Now a multitude of devices—
TV, PC, laptop, tablet, smartphone—provides a screen for online streaming.

In 2019, Netflix remains the industry leader at 150 million subscribers worldwide, with 61 million in the United
States. Amazon Prime has over 100 million subscribers who enjoy its complimentary streaming services. To exploit
the new opportunities due to technological changes such as streaming video online, Google acquired YouTube (in
2006), while Comcast, the largest U.S. cable operator, purchased NBCUniversal (in 2011). Comcast’s acquisition
helps it integrate delivery services and content, with the goal of establishing itself as a new player in the media
industry.

Other media companies such as Disney have pulled their content from Netflix and, in 2019, began to offer their
own stand-alone streaming services (that is, Disney+, ESPN+, and Hulu). Amazon announced that its Fire Kindle
TVs will carry Disney+. Also, in 2019, Apple launched Apple TV+, a subscription-based streaming service.

Tech giants such as Apple and Amazon have increasingly pushed into the content business as well, offering their
own fully integrated and proprietary solutions. But developing original content is pricey. HBO, for instance, spent
about $10 million per one-hour of content for its hit series Game of Thrones. Amazon spends more than $5 billion
per year on acquiring content, while Apple TV has also spent billions to build up its library of content.

Challenges
Jeff Bezos looked at his digital office clock; it stood at 10:33 pm. He took the final sip from his Monster Energy
low-carb drink and stared at the ideas he had scribbled down on the yellow legal pad to address the three areas that
for sure would keep him occupied over the Thanksgiving holiday…

• Impending government regulation. Big tech (that is Apple, Facebook, and Google) in general, and Amazon,
in particular, is facing more and more regulatory threats, not only in the EU but now also in the U.S. First,
Amazon’s critics allege that the company behaves in an anti-competitive fashion because it not only owns
and operates the largest online retail platform but also sells goods (e.g., Amazon Basics, its own private
label) on the platform. Critics allege that Amazon uses data it gathers from its over 2.5 million vendors,
many of them small and medium enterprises, and then offers products that sell well on its site, rang-
ing from laptop stands to suitcases and batteries at acceptable value, combined with rock-bottom prices.
Second, critics also singled out Amazon for not paying a “fair share” of taxes, despite its revenues of more
than $265 billion (in 2019). Third, Amazon now employs some 650,000 people and is the second largest
private employers in the United States, behind Walmart which employs two million people. Critics allege
that Amazon underpays its workers and that its working conditions in its large warehouses are akin to
modern sweatshops.

• Continued diversification. Amazon continues to diversify, both through vertical integration as well as hori-
zontal diversification. First, Amazon is a fully vertically integrated retailer, from online ordering to physi-
cal delivery of goods. Second, Amazon creates and distributes media entertainment. Third, Amazon Web
Services (AWS) as the largest cloud computing provider has morphed into an indispensable backbone of
the internet. Many organizations, ranging from the CIA to Wikipedia and Netflix, cannot function without
AWS. As such, critics assert that Amazon as the largest online retail platform and the largest cloud com-
puting provider has become more like a utility that offers a service that companies need to stay in business,

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 [Link], Inc.

and thus should be regulated like a public utility offering power, for example. In addition, some Amazon
antagonists go further and demand the breakup of the company, that is, to separate the online retail plat-
form from its cloud computing business, and do not allow Amazon to both run the online platform and to
sell its own, private-label goods at the same time.

• International competition. Although Amazon is strong in some international markets such as Germany, it
continues to struggle in major growth markets in emerging economies such as India where it competes
against Flipkart (a startup formed by former Amazon employees, and acquired by Walmart) and China
where Amazon could not compete against Alibaba and other local e-commerce companies, and thus exited
from the country.

At 11:15 pm, Jeff Bezos pulled his Honda Accord out of Amazon’s parking garage and kept thinking about the
issues his company needs to address going forward…

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 [Link], Inc.

EXHIBIT 1 Amazon’s Annual Revenue and Net Income ($ million), 1996–2019

Revenue Net Income

$300,000

$250,000

$200,000

$150,000

$100,000

$50,000

$0

–$50,000
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

Source: Depiction of publicly available data.

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 [Link], Inc.

EXHIBIT 2 Amazon’s Key Financial Data ($ millions, except EPS data), 2014–2018
Fiscal Year 2014 2015 2016 2017 2018

Cash and short-term 17,416 19,808 25,981 32,315 41,668

investments
Receivables-total 3,300 4,400 6,561 9,692 13,310

Inventories-total 8,299 10,243 11,461 16,047 16,655

Property, plant, and equip- 16,967 21,838 29,114 48,866 61,797

ment-total (net)
Depreciation, depletion, and 5,763 8,215 13,327 19,707 33,973
amortization (accumulated)
Assets-total 54,505 64,747 83,402 131,310 162,648

Accounts payable 16,459 20,397 25,309 34,616 38,192

Long-term debt 12,489 14,183 15,213 37,926 39,787

Liabilities-total 43,764 51,363 64,117 103,601 119,099

Stockholders’ equity-total 10,741 13,384 19,285 27,709 43,549

Sales (net) 88,988 107,006 135,987 177,866 232,887

Cost of goods sold 59,152 66,751 81,865 103,134 127,056

Selling general, and 25,925 32,951 43,369 61,612 81,014

administrative expense
Income taxes 483 869 1,671 798 756

Income before extraordinary -241 596 2,371 3033 10,073

items
Net income (loss) -241 596 2,371 3033 10,073

Earnings per share (basic) -0.52 1.28 5.01 6.32 20.68

excluding extraordinary items
Earnings per share (diluted) -0.52 1.25 4.9 6.15 20.14
excluding extraordinary items

Source: Tabulation of publicly available data.

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 [Link], Inc.

EXHIBIT 3 Normalized Stock Performance of Amazon vs. NASDAQ-100 Index since IPO (in % change),
1997-2019

[Link] Inc
NASDAQ-100

1.50K%
1.40K%

1.00K%

500.0K%
335.1%

0.00%

2012 2014 2016 2018

Source: Depiction of publicly available data.

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 [Link], Inc.

EXHIBIT 4 Merchandise sold by Amazon (orange) and Independent Third-Party Vendors (blue) on
[Link], 2000-2018

100%

90%

80%

70%

60%

50%

40%

30%

20%

10%

0%
2000 2002 2004 2006 2008 2010 2012 2014 2016 2018

Source: Depiction of publicly available data.

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 [Link], Inc.

EXHIBIT 5 Amazon Key Events and Market Capitalization ($ billion), 1994–2019

2019
Amazon
Next-Day
2018 Prime
Amazon close to $1 trillion
market cap ($995bn)
$1,000bn
2011
First Kindle
Fire Tablet 2014
Amazon
1994 Echo 2016
2006
Amazon founded Amazon Go
Amazon Web
Services (AWS)

$750bn
2012 2017
2010 Acquired Kiva Acquired
Amazon Systems Whole
(warehouse 2015
1997 Price Foods
2005 robotics) Amazon
Amazon IPO Check
Amazon Campus
app
Prime

$500bn

1998
2013
Amazon’s first non-U.S.
2007 first
sites (.[Link] and .de)
first Kindle Reader, drone
Amazon Fresh delivery

$250bn
2000
Amazon Marketplace

$0

1994 2000 2005 2010 2015 2019

Source: Depiction of publicly available data.

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of McGraw-Hill Education.

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 [Link], Inc.

EXHIBIT 6 Amazon Web Services (AWS) Annual Sales ($ million), 2013–2020

$50

$45

$40

$35

$30

$25

$20

$15

$10

$5

$0
2013 2014 2015 2016 2017 2018 2019 2020

* 2019 and 2020 are estimates.

Source: Depiction of publicly available data. Trendline added.

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 [Link], Inc.

EXHIBIT 7 Amazon’s Leadership Principles

Leaders. . .

. . . obsess over customers.

. . . take ownership.
. . . invent and simplify.
. . . are right a lot.
. . . learn and are curious.
. . . hire and develop the best talent.
. . . insist on the highest standards.
. . . think big.
. . . have a bias for action.
. . . are frugal.
. . . earn trust.
. . . dive deep.
. . . have backbone; they disagree and commit.
. . . deliver results.

Source: [Link]

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 [Link], Inc.

EXHIBIT 8 Market Capitalization of Top-5 Most Valuable Tech Firms and Walmart ($ billion, as of
October 28, 2019)

$1,200
$1,100 $1,125

$1,000
$881 $886

$800

$600 $547

$400
$338

$200

$0
Microsoft Corp
Walmart Inc

Facebook Inc

[Link], Inc

Alphabet Inc

Apple Inc

Source: Depiction of publicly available data.

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 [Link], Inc.

Endnotes

1 As quoted in: C. Duhigg, “Is Amazon Unstoppable? Politicians want to rein in the retail giant. But Jef Bezos, the master
of cutthroat capitalism, is ready to fght back,” New Yorker, October 10, 2019.
2 Cyber Monday is the Monday after the Thanksgiving holiday in the United States; a day where online retailers entice
shoppers with special bargains.
3 “[Link] Splits Stock, Makes Acquisitions,” Reuters News, April 27, 1998.
4 G. Wiles, “[Link] to Acquire China’s [Link] for $75 Million,” Bloomberg, August 19, 2004 http:// bloom.
bg/13SHPx5.
5 “Amazon’s Jef Bezos Confrms Kindles Are Sold at Cost,” All Things D, last modifed October 12, 2012,
[Link]
6 F. Paul, “Amazon to Buy Audible for $300 million,” Reuters, last modifed January 31, 2008.
7 A. Petri, “Goodreads? Amazon? Nooooo!” Washington Post, March 28, 2013.
8 S. Galloway, “Amazon Takes Over the World,” Wall Street Journal, September 22, 2017.
9 D. MacMillan, and G. Bensinger, “Amazon to Buy Video Site Twitch for $970 Million,” Wall Street Journal, last modifed
August 26, 2014.
10 “Amazon Web Services,” [Link]
11 J. Kantor and D. Streitfeld, “Inside Amazon: Wrestling Big Ideas in a Bruising Workplace,” New York Times,
August 15, 2015.
12 As quoted in: C. Duhigg, “Is Amazon Unstoppable? Politicians want to rein in the retail giant. But Jef Bezos, the master
of cutthroat capitalism, is ready to fght back,” New Yorker, October 10, 2019.
13 “Amazon, The World’s Most Remarkable Firm, Is Just Getting Started,” Economist, March 25, 2017.
14 C. Cutter, “The Best-Managed Companies of 2019—and How They Got That Way,” Wall Street Journal,
November 22, 2019.
15 C. Cutter, “The Best-Managed Companies of 2019—and How They Got That Way,” Wall Street Journal,
November 22, 2019.
16 J. Kantor and D. Streitfeld, “Inside Amazon: Wrestling Big Ideas in a Bruising Workplace,” New York Times,
August 15, 2015.
17 C. Duhigg, “Is Amazon Unstoppable? Politicians want to rein in the retail giant. But Jef Bezos, the master of cutthroat
capitalism, is ready to fght back,” New Yorker, October 10, 2019.
18 2018 Amazon Annual report, page 4 “Competition.”
2018 Amazon Annual report, page 4 “Competition.”

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