Amazon.com's Business Model and its Evolution
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Case Code: BSTR486 Case Length: 22 Pages Period: 1996-2016 Pub Date: 2016 Teaching Note: Available |
Price: Rs.600 Organization: Amazon.com Industry: E-commerce Countries: US; Global Themes: Business Model Innovation, Blue Ocean Strategy |
Abstract Case Intro 1 Case Intro 2 Excerpts
Introduction
In 2015, Seattle-based e-commerce giant Amazon.com, Inc.(Amazon) surprised investors by posting an unanticipated second quarterly profit in a row after struggling with profitability the previous year. In the third quarter ended September 30, 2015, Amazon’s revenues increased by 20% to US$23.2 billion, while net income was US $79 million, compared with a net loss of US$437 million in the corresponding quarter of the previous year. The revenue growth was attributed to the company's rapidly growing cloud-computing business, higher sales in North America, and initiatives to attract more customers. On the back of these unexpected quarterly results, Amazon shares surged, making it the most valuable retailer in the world surpassing Wal- Mart Stores Inc 1 as of July 2015. "They are showing investors that if they want to deliver profits, they can. Amazon is a dominant online retailer, well on its way to becoming one of the world's largest retailers," said Michael Pachter, analyst at Wedbush Securities Inc.
Launched as an online bookstore in 1995, Amazon quickly expanded beyond books to include all types of consumer goods. The company constantly innovated with its business model and moved from consumer electronics to cloud computing services and later into the technology business. Amazon's business model was built around low prices, a vast selection, fast and reliable delivery, and a convenient online customer experience. Besides offering customers a vast selection of products at low prices, Amazon also provided marketing and promotional services for third-party retailers and web services for developers. It was Amazon’s relentless focus on value and selection along with innovations around shipping and handling cost reductions that had made it a leader in e-commerce, opined analysts.
Amazon reinvested much of its free cash flow in its growth. The company’s strategy was to put long-term investment, market gains, and value creation ahead of short-term profits. Amazon constantly plowed cash back into the business and continued building new businesses in the hope of getting greater returns in the future. Though the strategy helped the company in capturing a larger share of the e-commerce sector, it was consistently reporting losses. In the third quarter of 2014, Amazon spent about 12% of its revenues on technology and content including new-product development and licensing for music and video streaming. That led to the biggest quarterly loss the company had suffered in 14 years. Despite the lack of profits, Amazon's shareholders backed the strategy of the CEO, Jeff Bezos, of being indifferent to short-term earnings in anticipation of future profits...
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