URGENT HOMEWORK due in an hour

Cases

C1. 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 60 million customers and sells billions of dollars worth of all types of merchandise.

When he started, Bezos had no experience in the book-selling 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 book-selling

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 corner 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 return, 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, then later on DVD. More recently, Amazon added

MP3 music downloads. Today, Amazon offers thousands of products in more than a dozen

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 Wal-Mart and Toys R Us.)

In addition to the online sales services Amazon.com provides to Toys R Us, Target, Borders,

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.

Required:

1. In 2004, Toys R Us sued Amazon.com for violating terms of the agreement between the

companies; specifically, Toys R Us objected to Amazon.com’s permitting Amazon

Marketplace retailers to sell toys (Note: when the lawsuit was filed, Amazon Marketplace

was called “zShops”). Amazon.com responded by filing a countersuit. After more than two

years of litigation, a New Jersey Superior Court judge ruled that the agreement had been

violated by both parties. The judge ordered that the agreement be terminated and denied

both companies’ claims for monetary damages. Amazon.com appealed the ruling. In 2009,

an appellate court affirmed the lower court ruling but reversed the ruling on damages, which

had awarded Toys R Us $93 million plus interest. In June 2009, the two companies finally

agreed in an out of court settlement that Amazon.com would pay damages of $51 million.

Use your favorite search engine and the links in the Online Companion for Case C1 to

review the courts’ findings and rulings. Prepare a report of about 200 words in which you

summarize each company’s arguments and the rationale given by the judges for their decisions.

Conclude the report by stating what you believe the outcome of the dispute should

have been and why.

2. Outline the advantages and disadvantages that Amazon.com would have considered before

it made the agreement with Toys R Us to limit competing toy sales. In about 200 words,

summarize these advantages and disadvantages, then evaluate Amazon.com’s decision to

enter such an agreement.

3. In about 200 words, outline specific recommendations you would have made to

Amazon.com in 2004 for negotiating a settlement with Toys R Us that would have benefited

both companies and avoided litigation.

4. In 2009, Amazon.com purchased Zappos, a highly successful shoe retailer that was started

in 1999. Many industry observers believe that the design and layout of the Zappos Web site

has been an important element in the company’s success. Visit the Zappos site and compare

its layout and operation to the Amazon.com site. Determine whether Amazon.com

should fold Zappos into its Web site or keep it operating in its current form. State and justify

your position in the form of a memo to Amazon.com top management of about 300 words.

Note: Your instructor might assign you to a group to complete this case and might ask you to

prepare a formal presentation of your results to your class.