Amazon Case Studies

9-803-098 REV: FEBRUARY 13, 2003 STIG LESCHLY MICHAEL J. ROBERTS WILLIAM A. SAHLMAN Amazon. com—2002 Jeff Bezos looked out the open doorway of his office and stared at the “problem of the day,” which his assistant Sarah had posted on the whiteboard in the hallway. It was Friday, September 13, 2002, and the whiteboard read: ”You have 10 bottles with 100 pills each in them. In nine of the bottles, each pill weighs 10 mg. In one bottle, each pill weighs 9 mg. These pills are poisonous. You have a digital scale that reads out in mg.

Can you determine which bottle contains the poison with only one weight measurement? ” Bezos—founder, chairman, and CEO of Amazon. com—normally enjoyed trying to solve these brainteasers. But today his mind was occupied with weightier concerns. Bezos had an unwavering vision that had guided the company’s efforts since its founding. In Bezos’s words, “We’re building a place where people can come to find and discover anything they might want to buy online. ” Indeed, this vision of breadth and selection lay behind the choice of the name “Amazon,” the name of the world’s largest river.

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Yet, throughout its eight-year history, in the face of changing economics, uncertain financial markets, and a constantly evolving set of competitors, exactly how the company could best deliver on this vision remained a key question for Bezos: We started with books, but our focus on serving the customer has led us to embrace selection, price, and convenience as the three key dimensions that define the customer experience. In order to fill out selection—and present our customers with a variety of price points, including used products—we have opened up our Web site to other sellers, including big companies, small businesses, and individuals.

Since its founding in 1994, the company’s business model had evolved through several stages. Initially, Amazon had been a pure online book retailer. Amazon had modest inventories and depended on a small number of large distributors to source its vast selection. Over time, however, this retail model evolved to incorporate a far wider variety of products, including music, video, electronics, and kitchen items, as well as deeper investments in physical distribution.

By mid-1999, however, it was clear that if Amazon was to deliver on its vision of ultimate selection, it would have to augment its retail commerce model with a second strategy, the “marketplace initiative. ” The first manifestation of this model was Amazon auctions, launched in March of 1999. This was followed by several other initiatives, all of which were characterized by the feature that Amazon did not own the goods being sold and, in many cases, did not take responsibility for the tasks that comprised order fulfillment.

Rather, the company had developed a wide variety of commerce ____________________________________________________________ ____________________________________________________ Senior Lecturers Stig Leschly and Michael J. Roberts and Professor William A. Sahlman prepared this case with the assistance of Research Associate Todd Thedinga. HBS cases are developed solely as the basis for class discussion. Cases are not intended to serve as endorsements, sources of primary data, or illustrations of effective or ineffective management. Copyright © 2003 President and Fellows of Harvard College.

To order copies or request permission to reproduce materials, call 1-800-545-7685, write Harvard Business School Publishing, Boston, MA 02163, or go to http://www. hbsp. harvard. edu. No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means—electronic, mechanical, photocopying, recording, or otherwise—without the permission of Harvard Business School. 803-098 Amazon. com—2002 models in which it served as an e-commerce outsourcing partner for individuals as well as small and big companies.

It earned fees for bringing buyers and sellers together and for providing a technology platform, distribution, and marketing services. By the spring of 2002, Amazon had just completed its first cash-flow-positive 12-month period and was operating several distinct businesses under each of the “retail” and “marketplace” umbrellas. The reaction to Amazon’s marketplace initiative in the financial markets had been generally positive. Indeed, Amazon’s stock was up 52% for the year (as of mid-September 2002) versus a 35% drop in the NASDAQ index. Still, doubts clearly remained in some observers’ minds.

For example, Holly Becker, an equity analyst at Lehman Brothers, had reservations about Amazon’s model. In a report issued in February 2002 she said, in part: The used business appears to be an excellent complement to Amazon’s core retail offering. The used business allows Amazon to participate in a growing market that leverages all of the inherent benefits of the Internet . . . a truly virtual model, used eliminates a large portion of fulfillment costs and inventory risk, and therefore provides higher margins . . . but . . . we believe used is detrimental to Amazon’s franchise in the long term.

The company’s point of difference, market share, and service capabilities are far greater in new products than used . . . we believe cannibalization is likely in the longer term. 1 While the company had made dramatic strides in expanding the range of products it offered, there were still many categories in which it participated little or not at all. Thus, a key element of enhancing selection was to constantly expand the range of products sold on the site. In the fall of 2002, Bezos and his senior team were evaluating a proposal to dramatically expand the company’s offerings in the apparel area.

One option was for Amazon to buy directly from branded manufacturers (e. g. , Levis) and to perform the same full range of functions that it did with respect to books, music, and videos. Another approach involved Amazon’s approaching one or more retailers with the goal of operating their Web sites. A final option called for Amazon to strike partnership deals with a range of retailers and to provide their goods for sale in an apparel store on the Amazon Web site. This would represent the next major step in Amazon’s evolution and make demands on Amazon’s scarce resources.

Bezos explained: Our typical model is to find a category that we want to be in and then decide how we want to participate. Once committed to a category, we seek a commerce model that makes sense given who our potential partners might be and given our ability to add value in that particular category. Apparel is a huge opportunity. It’s a $203 billion U. S. market segment, almost 10 times the size of the U. S. book-market segment. But it is also a very complex business. Products come in sizes and colors. Products are branded. There’s fashion risk and seasonal inventory issues.

In many ways, the business is much more complicated than any of the categories in which we currently operate. Background on Bezos and the Founding of Amazon Bezos was a 1986 summa cum laude graduate of Princeton, with a B. S. degree in computer science and electrical engineering. Upon graduation, Bezos went to work at a telecom start-up. Bezos then went to work for D. E. Shaw, a quantitative hedge fund, where he helped develop mathematical 1 Holly Becker, “Amazon. com, Inc. ,” Lehman Brothers Research Report, February 5, 2002, pp. 3–4. 2 Amazon. com—2002 803-098 models.

Intrigued by the emergence of the Internet in the early 1990s, Bezos investigated 20 retail categories where he thought significant revenue might migrate to the Internet. After force-ranking these categories, Bezos focused on bookselling. He considered books an especially promising online opportunity in part because the vast number of stock-keeping units (titles) offered the possibility of compiling a vastly more extensive selection than that available in a traditional retail store. Bezos believed that this relative selection advantage was greatest in the books category.

In 1994, in one of the touchstone scenes of Internet lore, Bezos, his wife MacKenzie, and their dog left New York and set out west in a Chevy Blazer donated by Bezos’s father. As his wife drove, Bezos typed out a business plan. He decided to locate his business in Seattle, in part because of its proximity to software talent and the Oregon warehouse of the leading book distributor, Ingram Book Distributors. 2 The Retail Model Amazon opened for business in July of 1995 as “Earth’s Biggest Bookstore. ” The company’s initial selection of 1 million titles increased quickly to 2. 5 million.

Amazon sourced the best-selling 35% of its titles, which accounted for 60% of its orders, from a single, large distributor, Ingram Book Distributors. Amazon sourced the remaining 40% of orders from other distributors and publishers. Amazon stocked relatively few titles, generally best sellers. Ordering its books on demand allowed Amazon to limit working capital and warehousing investments. 3 By the end of the first quarter of 1996, Amazon had achieved $875,000 in sales. The company roughly doubled this volume during each of the next four quarters and reached approximately $16 million in sales during the first quarter of 1997.

At this point, Amazon had nearly 340,000 unique customers and daily site visits of 80,000. 4 Shortly after the first quarter of 1997, Amazon went public. The company raised $42 million in its IPO and ended its first day of trading with a market capitalization of $560 million. Bezos owned 42% of the company. At the time of the IPO, Amazon dealt exclusively in books. It carried no CDs or other products. A significant element of Amazon’s appeal to investors, one often highlighted by Wall Street equity analysts, was the remarkable cash flow cycle associated with its operations. See Exhibit 1 for Amazon historical financials through the second quarter of 2002 and Exhibit 2 for perspectives on Amazon’s business model at the time of the IPO. ) During the remainder of 1997, Internet usage and e-commerce penetration continued to grow. Amazon finished the year with $148 million in revenues and $31 million in losses. (See Exhibit 3 for e-commerce statistics. ) Expanding Its Product Range In June of 1998, Amazon expanded beyond books and began selling music. Amazon’s entry was soon rewarded; within months, it became the largest online music retailer in the world.

Continuing to grow, Amazon entered the video/DVD business in November 1998. (See Exhibit 4 for a timeline of Amazon’s entry into various categories. ) In entering the music and video categories, Amazon 2 William A. Sahlman and Laurence E. Katz, “Amazon. com—Going Public,” HBS Case No. 899-003 (Boston: Harvard Business School Publishing, November 18, 1998), p. 2. 3 Ibid. 4 Ibid. 3 803-098 Amazon. com—2002 extended the fully integrated business model that it had developed in books. For both these categories, Amazon completed the full range of commerce functions, including buying, warehousing, merchandising, shipping, and customer service.

At year-end 1998, the company’s stock price stood at $53 per share, a 3,700% increase from the (adjusted) IPO price of $1. 50. Amazon’s year-end market capitalization was $17 billion. 5 (See Exhibit 5 for history of Amazon stock price and market capitalization. ) On December 16, 1998, Henry Blodget, a well-known Wall Street equity analyst, called for Amazon’s stock, then trading at $40, to reach $67. Within weeks, the stock exceeded Blodget’s prediction and, as an emblem of the height of the Internet stock frenzy of the late 1990s, reached $105 in late April 1999 and again in December 1999.

Blodget’s December 1998 report reasoned: Amazon is in the early stages of building a global electronic retailing franchise that could generate $10 billion in revenue and EPS of $10 within five years. . . . Although Amazon’s stock price is, in our opinion 1) incredibly expensive relative to near-term expectations and 2) scary to buy, we believe that the company’s opportunity is large enough to support a market capitalization much higher than the current valuation. 6 Through 1999, as the Internet continued to gather momentum, Amazon increased its commitments to new categories.

As Amazon expanded, the private and public equity markets funded Internet-related companies to an unprecedented degree. (See Exhibit 5 for data on capital market activity. ) During the last half of 1999, Amazon launched toys, electronic products, tools, and software. During 2000, it added lawn and patio and kitchen products, as well as cell phones and wireless services. In addition, the company was also expanding overseas, adding dedicated sites for the United Kingdom, Germany, Japan, and others. (See Exhibit 4 for an outline of Amazon’s international expansion. Thus, by mid-2002, Amazon’s retail sales were spread among segments as follows: Category U. S. Books, Music, Video U. S. Electronics, Tools, Kitchen International Services Source: Company SEC filings. % Sales Revenue 2Q 02 51% 16% 27% 6% Investing in Distribution In preparation for the Christmas 1999 season, Amazon decided to invest in its warehouse and fulfillment capabilities. The company built five U. S. warehouse and distribution facilities and several customer service centers. (See Exhibit 4 for timeline of Amazon’s buildout of these facilities. The investments were primarily designed to ensure that Amazon could meet its 1999 holiday volume; 5 All references to Amazon’s stock prices have been adjusted to account for the three stock splits since Amazon’s IPO. These stock splits have resulted since the IPO in a 12-fold increase in the number of shares outstanding. The original Amazon stock offering price was $18. 6 Henry Blodget, “Amazon. com,” CIBC Oppenheimer Equity Research Report, December 16, 1998, pp. 1–2. 4 Amazon. com—2002 803-098 oreover, the investments increased Amazon’s distribution capability in product categories where it could not rely on third-party distributors to the same degree that it did in the book business. Supporting the Business with Technology Throughout its evolution, one of the company’s key efforts was around technology. Bezos estimated that the company had invested $800 million in building out and integrating the technology that ran its Web site, customer service unit, payment processing systems, and warehouse operations. For example, Amazon had made a number of innovations in customer-facing technology.

These included one-click buying, which it had patented, and “tabs,” which had become the dominant user interface mode of organizing e-commerce on the Web. Amazon had pioneered the use of Web site personalization and customization so that, for example, customers were greeted by name when they arrived at Amazon. com, offered personalized special offers in their gold box, and presented with recommendations based on their prior purchases and predicted preferences. Additionally, Amazon’s technology stored customers’ addresses, credit card information, gift recipients, and payment preferences.

These features made it easier for consumers to buy and raised the costs of their switching to competitors. At the same time, Amazon had made deep investments in its e-commerce infrastructure, investments that allowed the company to operate a fully integrated e-commerce operation including payment processing systems and customer service operations. Amazon had also built an enormous database of product and customer information that supported many of its information-driven functions, such as customer service and Web site serving.

In the words of one observer, “Amazon has built much of this on its own, to very high standards of security, reliability, and scalability. They run the largest, most sophisticated e-commerce operation in the world. ” The Marketplace Model Entering the Auction Space In early 1999, Bezos saw the potential power of auctions to expand the sources and selection of products available to Amazon customers: “As always, we were committed to selling a broad array of products, and auctions was a terrific way for us to partner with other sellers to expand selection. Bezos pushed his IT organization to develop auction capability, which debuted on the Amazon site in March 1999. While similar in some respects to eBay’s offering, Amazon’s auction site guaranteed buyers financial protection from fraud and also provided access to Amazon’s experienced customer service phone representatives. In November of that same year, Amazon launched a partnership with Sotheby’s oriented toward Web-based auctions of higher-end arts and antiques. (See Exhibit 6 for eBay financial data and Exhibit 7 for comparison of Amazon and eBay fee structure and for financial and operating comparison of Amazon and eBay. It was estimated that there would be approximately 450 million online auctions conducted in the United States in 2002, generating $12 billon in gross merchandise sales and $900 million in revenues for the companies that hosted these auctions. Further, analysts estimated that gross merchandise 5 803-098 Amazon. com—2002 sales would grow 42% between 2002 and 2003. Globally (including the United States), gross merchandise sales were estimated at $16 billion in 2002, growing to $23 billion in 2003. 7 zShops

In the fall of 1999, Amazon introduced zShops, an area on the Web site that, like auctions, facilitated transactions between customers and third-party sellers. zShops offered small and medium-sized merchants the opportunity to operate storefronts within Amazon’s Web site. Within these stores, merchants could upload, maintain, and merchandise up to 40,000 items. Merchants that operated zShops sold goods at a fixed price. Merchant Relationships In early 1999, Amazon also began entering into a series of partnerships with other Internet retailers, including Drugstore. com, Living. com, Greenlight. com, and Wine. om. Generally, these firms became affiliates of Amazon and paid Amazon placement and referral fees for advertising themselves on the Amazon site. In many instances, these deals involved Amazon’s purchasing equity in the partner. Amazon generally referred to these early merchant relations as the Amazon Commerce Network. Amazon also initiated a series of relationships with retailers that did not operate exclusively or primarily on the Web. While Amazon’s relationships with these merchants varied considerably, Amazon’s partnership with Toys “R” Us illustrated the degree to which Amazon was committed to partnering.

Under a 10-year deal, Amazon agreed to house Toys “R” Us inventory, ship goods to customers, process payments, and perform post-sale customer service. Amazon developed and maintained the toys tab inside the Amazon Web site. Toys “R” Us retained responsibility for buying and pricing inventory. Evolving Commerce Models Bezos reflected on the growth and variety of Amazon’s relationships with other merchants and, generally, on the role of commerce partnerships at Amazon: There are things we’ll never be able to do that partners can do effortlessly.

Likewise, we bring certain skills and a customer base to the table that would be very difficult for partners to acquire. The toys category is a good example. The toy business is incredibly seasonal. You need to order your inventory in March, eight months before all the sales occur. Then, as Christmas approaches and a few toys get hot, a few privileged retailers get some of the lastminute shipments that come in from the overseas locations where most toys are manufactured. Toys “R” Us had a huge advantage in this inventory management and sourcing dynamic, and it became clear that our customers would be better off if we partnered.

As we began to look to partnerships in the toys category, Toys “R” Us was learning that it was much harder to operate a Web-based business than they thought. I have tremendous respect for the traditional retailing business. Good retailers are extremely skilled at picking real estate locations and figuring out how to get people to linger in their stores. Traditional 7 Steve Weinstein and Chad Bartley, “eBay: morning note,” Pacific Crest Securities Research, October 1, 2002. 6 Amazon. com—2002 803-098 etailers focus on such fine-grained details as how many lumens of light they need to make people feel safe in their parking lots. But, doing business on the Web has its own difficult and distinct set of challenges that we’ve worked hard to figure out. Technology is the backbone of it, and it is completely different than what you need to be good at as a traditional retailer. Take fulfillment, for example. Physical retail chains have multiple distribution centers that deliver pallets of products to hundreds of stores around the country.

Online, you don’t ship pallets to stores— there are no physical stores. Instead, you have a few centralized distribution centers that pick and pack millions of unique product combinations and ship them directly to millions of customers’ homes. The technology, processes, and competencies needed to run this operation differ fundamentally from traditional distribution functions. Another difference is how to help customers find and discover products. It’s enormously difficult to design and continually improve a Web interface that effectively helps customers find, research, and buy a product online.

Traditional retailers know how to solve these problems in a physical store, but that knowledge does not translate directly to the Web. We also believe that our brand has a lot of value in our partnerships with traditional retailers. In the physical world, convenience equals location. You might believe that you run the best taco stand in the world, and others might even agree. But if it sat at the top of Mount Rainier, you just wouldn’t do a lot of business. In the online world, the importance of location changes. Every place is equally convenient. So, you need more than mere convenience.

Our brand—more importantly the customer experience it stands for—is an advantage. It differentiates our location from so many others. In late 1999 and early 2000, traditional retailers began to realize how difficult it was to do a good job on the Web. They also realized that, rather than accounting for half or more of their business, the Web would perhaps account for 5% of their volume. With these insights, retailers became more interested in outsourcing their online presence, and we began to do deals with companies where we would be responsible for significant portions of their online operation.

Bezos reflected on what Amazon had learned from its early experiences with commerce partnerships: One of the things we had to learn through zShops and auctions was that we needed to think of ourselves as serving two different sets of customers. We pride ourselves on being customer-centric, but for years, “customers” meant “buyers. ” As we began to operate auctions and zShops, we realized that these third-party sellers were equally important customers. And, it took a little while for the organization to learn what their needs were and how we could best meet them.

Integrating the Businesses Throughout 1999 and into 2000, the marketplace initiative operated as a separate business unit within the company. The focus of the marketplace initiative on third-party sellers was a source of tension in various parts of the organization. One observer commented: From the beginning, Amazon was fanatical about creating a high-quality, Web-based customer experience. Amazon invented one-click shopping, user-friendly browsing, personalized recommendations, fully integrated customer service, and so on. Every employee 7 803-098

Amazon. com—2002 in the company spent most of December packing boxes in the warehouses to make sure no customer was let down. So, the premise of the marketplace initiative, this notion that a thirdparty seller would be responsible for significant parts of that customer experience, seemed to many in the company to run counter to Amazon’s core culture and customer orientation. Amazon’s initial choice in organizing third-party commerce on its Web site was to contain it in distinct areas of the Web site, specifically in tabs titled “auctions” and “zShops. To customers, Amazon’s traditional product lines remained distinct and separated from inventory and commerce related to third-party sellers. For example, to buy a book from Amazon, users continued to go to the books tab. Alternatively, to buy a used book from another merchant, customers visited the auctions or zShops tabs on the Web site. In January of 2000, that changed. In a pivotal Saturday morning meeting, senior managers in charge of the marketplace initiative met with Bezos at his home to discuss what was working and what was not.

The key insight that emerged in the discussion was the need to give Amazon’s thirdparty sellers access to the “product-detail” pages inside Amazon’s traditional stores for books, music, video, and other products. Bezos recalled: “At the end of the day, we realized that what was most important to the marketplace sellers was demand—access to prospective buyers. So, the idea of the single store was to give them a level of access equal to our own—listing their goods right alongside ours. ” As the place on the Web site where customers bought products from Amazon, these productdetail pages accounted for the large majority of Amazon’s traffic.

The plan, all agreed, should be to let Amazon’s partner merchants sell their products on the same pages where Amazon sold its own goods. Bezos called this move the “single-store” strategy. Each store at Amazon—the boundaries of which were generally set by the tabs on the Web site—would have as its sole mission the delivery of selection, low prices, and high in-stock availability to its customers. The general managers of each of these “single stores” would display, in an integrated way, goods sold by all sellers with whom Amazon did business.

To implement the single-store model, Amazon developed a single product-detail page on which multiple sellers would showcase their goods. For example, a product page for a CD would include the permanent information related to a particular title, such as the artist, song lists, and cover art (which Amazon kept in an extensive database it had developed for all books, CDs, and video, as well as other products it sold). On that permanent page, various examples of that product could appear for sale. Some of these examples would be for sale by Amazon and shipped out of Amazon’s distribution centers.

Third-party sellers would hold other examples for sale. In electronics, for example, a product page for a Palm Pilot would merchandise Amazon’s offering alongside offerings by J Electronics and used products by small businesses and individuals. Bezos reorganized the company to support the new single-store strategy. General managers for each store would be accountable for store-specific income statements that reflected both commerce related to Amazon’s operations and commerce related to activities on Amazon’s platform of thirdparty sellers.

Prior to this reorganization, Amazon’s general managers for certain categories had been responsible only for Amazon’s traditional retail commerce; separate management teams had run the auctions, zShops, and other third-party initiatives. Bezos described the thinking that lay behind this organizational change: When you have something big—our retail business—and something small—our thenemerging marketplace business—it is hard to get people focused on the little thing, no matter how strategically important it is. People are incredibly busy, and they simply have bigger fish Amazon. com—2002 803-098 to fry most of the time. We couldn’t really integrate the businesses until the marketplace piece was big enough and demonstrably important enough to demand their attention. In the wake of the changes in 2000, many in the organization began to think of Amazon as a platform for commerce rather than as a retailer. Bezos, certainly, was unequivocal in his determination to deliver price and selection to Amazon’s loyal customer base and willing, in the pursuit of that goal, to redesign Amazon’s business model accordingly.

He spoke repeatedly of the need to manage for the long term and toward the vision of Amazon’s becoming the place for consumers to find and discover anything they might want to buy online. In early 2001, the company announced it would lay off 1,300 employees, or 15% of its workforce. At the same time, the company announced the closing of one major distribution center and a customer service center. The company took a restructuring charge of more than $150 million to account for these and other moves. 8 Executing the Single-Store Vision

Implementing the single-store vision required Amazon to develop multiple ways of partnering with and supporting the commerce of third-party sellers, which ranged from small merchants to large corporations. Small Businesses and Individuals In launching zShops and auctions, Amazon attracted thousands of small merchants and individuals to its site. The introduction of the single detail page offered to these merchants the opportunity to merchandise their products on the highly trafficked Web pages that historically had sold only Amazon products.

The single detail page, in effect, invited Amazon’s base of small merchants and individual sellers to migrate from the auctions and zShops area of the Web site to the very core of Amazon’s site traffic and to display their products side by side with Amazon’s own merchandise. (See Exhibit 8 for example. ) zShop book merchants, for example, were given automated tools to migrate their catalogs of millions of used and out-of-print books onto the new single product pages inside the Amazon books tab.

A similar transformation took place across all of Amazon’s stores where small merchants, many already active in the zShops area of the site, began to list used, refurbished, collected, and discounted products adjacent to Amazon’s product offerings. To serve individual sellers, Amazon introduced a feature that allowed individuals to list a single item for sale on Amazon’s product pages. (See Exhibit 7 for the fee schedules that Amazon offered to small businesses that wanted to sell products on Amazon’s detail pages, in zShops, and in auctions. Large Business Sellers As the company pushed to continually expand its product lines and as the single-store strategy took shape, Amazon developed multiple partnership strategies with large companies. Most of Amazon’s commerce partnerships with large companies fell into one of four categories: 8 Kathy Mulady, “Big Layoffs at Amazon. com Don’t Mean Trouble for Overall Economy,” Seattle Post Intelligencer, January 31, 2001, p. A1. 9 803-098 Amazon. com—2002 [email protected] om Under this commerce arrangement, Amazon entered into partnerships with large retailers such as J Electronics, Office Depot, Circuit City, and Toys “R” Us. Under the terms of these arrangements, partners could sell their products on Amazon’s Web site while still performing many of the commerce functions themselves. In these deals for example, merchants retained ownership and possession of inventory and set prices on their inventory. Merchants benefited from getting access to Amazon’s customer base and from displaying inventory on Amazon’s high-conversion site.

In addition to improving its selection and customer experience, Amazon received a small fixed fee to cover oversight and setup expenses and a commission on items sold. Merchants. com Under the merchants. com program, Amazon operated third-party Web sites on behalf of a variety of merchants. Thus, in contrast to the [email protected] com program, the goods were not merchandised on Amazon’s site but appeared on the partner’s own, separate site. For example, Amazon developed and maintained on behalf of Target Corporation. In certain merchants. om arrangements, including the relationship with Target, Amazon took inventory into its distribution centers and completed most fulfillment functions, from shipping to customer service and returns. Merchants benefited under these arrangements, in part, from their use of Amazon’s infrastructure and technology platform. From its merchants. com partners, Amazon received a fixed fee—which varied in size depending on the scope of services performed by Amazon—as well as a commission on products sold. Syndicated stores Like its merchants. om program, Amazon’s syndicated-stores arrange­ ments involved Amazon’s operating Web sites on behalf of partners. However, unlike the merchants. com model, the syndicated-stores program charged Amazon with responsibility for all product development and operational tasks in support of the Web site, including buying, stocking, pricing, shipping, and servicing product. Amazon operated syndicated stores on behalf of Borders, Virgin Records, and Waterstones (the British version of Borders). Under this model, Amazon essentially offered its partners a fully integrated and completely outsourced commerce solution.

In operating syndicated stores, Amazon’s role was invisible to the customer, except for a “powered by Amazon” tagline at the bottom of the site’s homepage. Initially, Amazon operated syndicated stores primarily on behalf of book and music retailers for whom Amazon could launch and operate a fully scaled and integrated online operation on the basis of its own experience in book and music online retailing. In this format, Amazon collected and booked all revenue and expenses associated with commerce in the syndicated store.

Amazon’s partners received a share of revenues generated by the syndicated stores. This arrangement generally allowed Amazon’s partners to quickly reach profitability in their online efforts, since Amazon carried all significant expenses and investments associated with the operation. Marketing deals Lastly, Amazon was involved in a number of marketing relationships. In these cases, Amazon promoted its partners’ products or services on its Web site and, in some cases, allowed its customers to click over to its partners’ Web sites.

An example of such an arrangement was drugstore. com. Amazon charged its marketing partners based either on the number of customers exposed to the partner’s marketing message or on the number of customers referred from Amazon to the partner. The Economics of the Single Store While most of the details of the fee structures that Amazon negotiated with its large merchants remained confidential and subject to specific contracts, analysts estimated that Amazon’s fee structure ranged from a maximum of 15% of revenues (in partnerships where Amazon took 0 Amazon. com—2002 803-098 inventory and completed fulfillment tasks) to a minimum of 5% of revenues (in partnerships where Amazon did not complete significant functions associated with inventory management and fulfillment). 9 By the middle of 2002, Amazon generated significant business across all of its thirdparty commerce models, including both its individually negotiated relationships with large merchants and its general programs from small businesses and individual sellers. For example, Amazon reported that third-party transactions ccounted for 20% of its North American units sold in the second quarter of 2002. Bezos and his senior team had given considerable thought to the diversification of commerce models at Amazon and to the challenges of creating the proper internal incentives for Amazon’s general managers. (See Exhibit 9 for an analyst’s summary of the unit economics to Amazon of selling its own inventory versus enabling third-party commerce. ) Bezos commented: One of the keys to making this work is to try to get our economics to the point where we are agnostic about whether customers buy from us or from a third party.

In the end, if we satisfy our customers and partners, they’ll remain loyal to us, and we should have no angst about cannibalizing our own business. To this end, we have tried to engineer fee structures for thirdparty transactions in such a way that they provide the correct incentives for the managers who are responsible for their own P. Our primary concern is the customer experience, not shortterm economics. Our view is that a better customer experience will drive more people to our site more often, creating a larger absolute market. The Apparel Opportunity

In the fall of 2002, against this backdrop, Bezos was juggling a number of proposals to take Amazon more deeply into the apparel business. Amazon’s only apparel offering was a small selection of goods offered by zShop merchants. Part of the impetus for Amazon’s interest in the apparel category was its size. Amazon estimated the U. S. apparel market segment at $203 billion per year. Various analysts estimated that the online component of the apparel business represented roughly 3% of the total market segment. Online apparel commerce was forecasted to grow at 34% from 2002–2007. See Exhibit 3 for details of online spending forecast. ) Table A Market Segment Size ($ billions, 2002 est. ) U. S. Market Segment Books Books, Music, Video, and DVDs Home Apparel Home Improvement Electronics Total Retail Source: Casewriter analysis. Amazon U. S. Market Segment Share ~ 5% ~ 3% ; 1% ~0% ; 1% ; 1% ; 1% $23 $49 $109 $203 $148 $103 $1,628 9 The New York Times, November 1, 2002, p. C4. 11 803-098 Amazon. com—2002 One approach to the category would be for Amazon to buy, stock, merchandise, and ship apparel in much the same way that Amazon ran its book, music, video, and electronics businesses.

As an alternative to this integrated approach, Amazon could seek simply to manage Web sites on behalf of large apparel companies that, in many cases, struggled with the execution of maintaining large Web sites. A variety of other models, all of which involved Amazon’s completing some but not all of the functions required to sell apparel online, were also under consideration. One involved Amazon’s selecting and negotiating partnerships with significant apparel companies. (See Exhibit 10 for financial data on a variety of retailers. The apparel industry was structured around a complicated mix of department stores (e. g. , Macy’s and Nordstrom’s), integrated manufacturers and retailers (e. g. , the Gap), and branded manufacturers (e. g. , Levi’s). For any partners that fit Amazon’s chosen strategy for entering the category, Amazon would need to negotiate an operating and financial arrangement that met the needs of both parties. Bezos reflected on the opportunities and challenges that apparel represented: We are committed to expanding selection for our customers.

Clearly, apparel is a large and growing category for online commerce, and thus, important for us to participate in. The hard question is how to go about sourcing, merchandising, and servicing an authoritative, large selection of merchandise. Conceptually, the answer is bounded, at one extreme, by a strategy of stocking a full range of products into our distribution centers and, at another extreme, by organizing a store exclusively around partnerships with various apparel players who, in combination, provide full selection. Looking Ahead

As his team and he debated the apparel strategy, Bezos also reflected on Amazon’s long-term expansion strategy. Conversations about expansion criteria and the prioritization and sequencing of opportunities often occupied Bezos and his senior team. Some argued that Amazon, still only responsible for less than 1% of the U. S. market in its existing categories, should focus on domestic growth of its existing business lines. Yet others advocated a focus on international expansion, which by the second quarter of 2002 accounted for 27% of Amazon’s revenue. See Exhibit 11 for data on international markets. ) In all these conversations—and regardless of how they balanced domestic and international growth—Bezos and his team debated the criteria by which they would prioritize certain categories over others as targets for expansion. “We are committed to expanding across categories,” explained Bezos. “That’s not a hard issue. What is difficult is deciding which opportunities to pursue when. ” 12 803-098 -13­ Exhibit 1a Amazon Historical Financials Fiscal Year Ending December 31, 1998 1999 2000 Quarters Ended Fiscal Year 2002 31-Mar 30-Jun

HISTORICAL BALANCE SHEETS (in thousands) ASSETS Current assets: Cash and cash equivalents Marketable securities Inventories Prepaid expenses and other current assets Total current assets Fixed assets, net Goodwill, net Other intangibles, net Investments in equity-method investees Other equity investments Other assets Total assets LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT) Current liabilities: Accounts payable Accrued expenses and other current liabilities Unearned revenue Interest payable Current portion of long-term debt and other Total current liabilities Long-term debt and other

Accumulated deficit Total stockholders’ equity (deficit) Total liabilities and stockholders’ equity (deficit) 1997 2001 $ 110,119 15,256 8,971 3,363 137,709 9,726 2,409 149,844 $ 71,583 301,862 29,501 21,308 424,254 29,791 174,052 4,586 7,740 8,037 648,460 $ 133,309 572,879 220,646 79,643 1,006,477 $ 822,435 278,087 174,563 86,044 1,361,129 366,416 158,990 96,335 52,073 40,177 60,049 2,135,169 $ 540,282 456,303 143,722 67,613 1,207,920 $ 296,689 448,569 138,996 70,019 954,273 $ 270,438 553,141 126,794 93,204 1,043,577 $ $ 317,613 534,699 195,445 226,727 144,735 40,154 $ 2,465,850 271,751 45,367 34,382 10,387 17,972 49,768 $ 1,637,547 256,403 70,811 6,959 8,643 16,770 48,069 $ 1,361,928 249,452 70,811 5,585 3,188 15,288 47,146 $ 1,435,047 $ $ 33,027 $ 8,871 816 177 1,660 44,551 76,702 (37,514) 28,591 149,844 $ 113,273 $ 463,026 $ 485,383 $ 444,748 47,484 176,208 272,683 305,064 54,790 131,117 87,978 10 24,888 69,196 68,632 808 14,322 16,577 14,992 161,575 733,234 974,956 921,414 348,140 1,466,338 2,127,464 2,156,133 (162,060) (882,028) (2,293,301) (2,860,578) 138,745 266,278 (967,251) (1,440,000) 648,460 $ 2,465,850 $ 2,135,169 $ 1,637,547 314,616 $ 296,368 232,898 236,234 79,361 69,128 16,197 44,396 13,958 14,406 657,030 660,532 2,152,273 2,218,426 (2,883,728) (2,977,281) (1,447,375) (1,443,911) $ 1,361,928 $ 1,435,047 Quarters Ended Fiscal Year 2002 31-Mar 30-Jun $ 847,422 $ 805,605 624,297 587,438 223,125 218,167 26. 3% 27. 1% HISTORICAL INCOME STATEMENTS (in thousands, except share data) Net sales Cost f sales Gross profit Gross margin Operating expenses: Fulfillment Marketing Technology and content General and administrative Stock-based compensation Amortization of goodwill and other intangibles a Restructuring-related and other charges Total operating expenses b Lease expense included in above Income (loss) from operations Interest income Interest expense Other income (expense), net Other gains (losses), net Total non-operating expenses, net Income (loss) before equity in losses of equity-method investees Equity in losses of equity-method investees, net Net income (loss) Common Shares Outstanding Earnings (loss)/share 997 $ 147,787 118,969 28,818 19. 5% Fiscal Year Ending December 31, 1998 1999 2000 2001 $ 609,819 $ 1,639,839 $ 2,761,983 $ 3,122,433 1,349,194 2,323,875 476,155 2,106,206 133,664 290,645 655,777 798,558 21. 9% 17. 7% 23. 7% 25. 6% 15,944 24,133 13,384 6,741 1,211 61,413 2,100 (32,595) 1,901 (326) 1,575 65,227 67,427 46,424 15,618 1,889 42,599 3,535 242,719 8,500 (109,055) 14,053 (26,639) (12,586) 237,312 175,838 159,722 70,144 30,618 214,694 8,072 896,400 43,000 (605,755) 45,451 (84,566) 1,671 (37,444) 14,509 179,980 269,326 108,962 24,797 321,772 200,311 1,519,657 98,000 (863,880) 40,821 (130,921) (10,058) (142,639) (242,797) 374,250 138,283 241,165 89,862 4,637 181,033 181,585 1,210,815 81,000 (412,257) 29,103 (139,232) (1,900) (2,141) (114,170) 89,815 32,244 55,497 20,911 10,931 1,979 9,974 221,351 15,000 1,774 5,652 (35,244) 95 5,516 (23,981) 85,751 28,832 58,165 19,425 23,148 1,374 0 216,695 16,000 1,472 5,650 (35,651) (402) (63,454) (93,857) (31,020) $ (31,020) 287,292 $ (0. 11) (121,641) (2,905) $ (124,546) 318,544 $ (0. 39) 643,199) (76,769) $ (719,968) 345,178 $ (2. 09) (1,106,677) (304,596) $ (1,411,273) 357,186 $ (3. 95) (526,427) (30,327) $ (567,277) 373,218 $ (1. 52) (22,207) (1,744) $ (23,150) 375,109 $ (0. 06) (92,385) (1,168) $ (93,553) 380,304 $ (0. 25) aAmazon’s restructuring charges in 2000 and 2001 related primarily to the company’s efforts to reduce operating costs by closing certain fulfillment and customer service centers and consolidating these operations. bLease expenses for rental of office and distribution center facilities. 803-098 -14­ Exhibit 1a (continued)

HISTORICAL STATEMENTS OF CASH FLOW (in thousands) 1997 CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD OPERATING ACITIVITIES: Net income (loss) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation of fixed assets and other amortization Stock-based compensation Equity in losses of equity method investees, net Amortization of goodwill and other intangibles Non-cash restructuring-related and other Loss (gain) on sale of marketable securities, net Other losses (gains), net Non-cash interest expense and ther Cumulative effect of change in accounting principle Changes in operating assets and liabilities Inventories Prepaid expenses and other current assets Accounts payable Accrued expenses and other current liabilities Unearned Revenue Amortization of previously unearned revenue Interest payable Net cash provided by (used in) operating activities INVESTING ACTIVITIES: Sales and maturities of marketable securities Purchases of marketable securities Purchases of fixed assets, including internal-use software and web-site development Investments in equity-method investees and other investments Net cash provided by (used in) investing activities FINANCING ACTIVITIES: Proceeds from exercise of stock options Proceeds from issuance of common stock, net of issuance costs Proceeds from long-term debt and other Repayment of long-term debt Repayment of capital lease obligation and other Financing costs Net cash provided by (used in) financing activities Effect of exchange-rate on cash and cash equivalents Net increase (decrease) in cash and cash equivalents CASH AND CASH EQUIVALENTS, END OF PERIOD SUPPLEMENTAL CASH FLOW INFORMATION: Fixed assets acquired under capital leases Fixed assets acquired under financing agreements E quity securities received for commercial agreements Stock issued in connection with business acquisitions Cash paid for interest Fiscal Year Ending December 31, 1998 1999 2000 $ 110,119 $ 71,583 $ 133,309 (124,546) (719,968) (1,411,273) 2001 822,435 (567,277) $ Quarters Ended Fiscal Year 2002 31-Mar 30-Jun $ 540,282 $ 296,689 (23,150) (93,553) 9,421 2,386 2,905 42,599 1,561 271 23,970 (20,513) (16,758) 78,674 31,232 (167) 31,035 36,806 30,618 76,769 214,694 8,072 8,688 29,171 (172,069) (54,927) 330,166 95,839 6,225 (5,837) 24,878 (90,875) 4,460 24,797 304,596 321,772 200,311 (280) 142,639 24,766 46,083 (8,585) 22,357 93,967 97,818 (108,211) 34,341 (130,442) 84,709 4,637 30,327 181,033 73,293 (1,335) 2,141 26,629 10,523 30,628 20,732 (44,438) 50,031 114,738 (135,808) (345) (119,782) 20,940 10,931 1,744 1,979 (376) (5,516) 7,061 (801) 4,674 (3,320) (128,286) (65,861) 28,716 (37,333) (52,435) (241,033) 20,970 23,148 1,168 1,374 (437) 63,454 7,464 16,420 (13,430) (27,418) (12,489) 20,688 (30,921) 28,199 4,637 227,789 (504,435) (28,333) (19,019) (323,998) 2,064,101 (2,359,398) (287,055) (369,607) (951,959) 545,724 (184,455) (134,758) (62,533) 163,978 370,377 (567,152) (50,321) (6,198) (253,294) 136,575 (134,227) (4,854) (2,506) 213,336 (299,877) (7,440) (93,981) $ ,983 64,469 8,383 325,987 1,263,639 (75,000) (175,744) (3,108) (13,142) (7,783) (35,151) 254,462 1,104,071 (35) 489 (38,536) 61,726 71,583 $ 133,309 $ 44,697 681,499 (16,927) (16,122) 693,147 (37,557) 689,126 822,435 $ 16,625 99,831 10,000 (19,575) 106,881 (15,958) (282,153) 540,282 $ 7,409 (4,563) 2,846 (2,900) (243,593) 296,689 $ 42,866 (3,432) 39,434 23,659 (26,251) 270,438 $ 217,241 26,629 $ 25,850 5,608 54,402 774,409 30,526 $ 4,459 4,844 106,848 32,130 67,252 $ 4,597 1,000 331 5,000 112,184 $ 924 80,483 $ 1,211 566 Source: Company. 803-098 -15­ Exhibit 1b (in thousands) Amazon Historical Segment Information Year Ended December 31, 1999 2000 2001 Quarters Ended Fiscal Year 2002 31-Mar 30-Jun

Revenue North America Books, Music and DVD/Video Electronics, Tools and Kitchen N. A. Retail International Services a Net Sales Gross Profit North American Books, Music and DVD/Video margin Electronics, Tools and Kitchen margin N. A. Retail International margin Services a margin Gross Profit Pro forma income (loss) from operations North American Books, Music and DVD/Video Electronics, Tools and Kitchen N. A. Retail International Servicesa Pro forma income (loss) from operations $ 1,308,292 150,654 1,458,946 167,743 13,150 1,639,839 $ 1,698,266 484,151 2,182,417 381,075 198,491 2,761,983 $ 1,688,752 547,190 2,235,942 661,374 225,117 3,122,433 $ 43,038 126,203 569,241 225,520 52,661 847,422 $ 411,727 128,431 540,158 218,457 46,990 805,605 262,871 na (20,086) na 242,785 35,575 na 12,285 na 290,645 417,452 25% 44,655 9% 462,107 77,436 20% 116,234 59% 655,777 453,129 27% 78,384 14% 531,513 140,606 21% 126,439 56% 798,558 123,135 25% 19,423 14% 142,558 49,004 23% 31,563 52% 223,125 123,673 25% 18,518 14% 142,191 47,369 23 % 28,607 53% 218,167 (31,000) (163,827) (194,827) (79,223) (78,321) $ (352,371) $ 100% 71,441 (269,890) (198,449) (145,070) 26,519 (317,000) $ 100% 19,800 12,600 156,753 (140,685) 16,068 (103,112) 42,042 (45,002) 100% 24,700 13,200 $ 46,363 (20,756) 25,607 (11,264) 10,315 24,658 $ 100% 26,000 3,100 9,093 (18,498) 30,595 (10,187) 5,586 25,994 100% 27,000 2,700 Active Customersb New Customersb Source: Company reports; Holly Becker, “Amazon. com Inc. : Taking a Fresh Look,” Lehman Brothers Global Equity Research, April 9, 2002. aCommissions, fees, and other amounts earned from Amazon’s partnerships with third-party sellers were generally attributed to and reported within the relevant product category (e. g. , video). As reported here, “services” revenue includes only the portion of revenue earned from third parties that do business in categories where Amazon does not itself do business. bActuals for 2000, 2001. Lehman Brothers estimate for 2002. 803-098 -16­ Exhibit 1b (continued)

Actual Year Ended December 31, 1999 2000 Revenue Mix Books, Music and DVD/Video Electronics, Tools and Kitchen International Servicesa Total Gross Profit Mix Books, Music and DVD/Video Electronics, Tools and Kitchen International Services Total a 2001 Quarters Ended Fiscal Year 2002 31-Mar 30-Jun Estimate Quarters Ended Fiscal Year 2002 Year Ended December 31, Sep-02 31-Dec 2002 2003 80% 9% 10% 1% 100% 61% 18% 14% 7% 100% 54% 18% 21% 7% 100% 52% 15% 27% 6% 100% 51% 16% 27% 6% 100% 50% 29% 15% 6% 100% 44% 29% 19% 8% 100% 49% 28% 17% 7% 101% 45% 32% 16% 7% 100% 90% -7% 12% 4% 100% 64% 7% 12% 18% 100% 57% 10% 18% 16% 100% 55% 9% 22% 14% 100% 57% 8% 22% 13% 100% 51% 9% 26% 15% 100% 48% 11% 25% 16% 100% 52% 9% 24% 15% 100% NA NA NA NA NA Source: Company Reports; Holly Becker, “Amazon. com Inc. Taking a Fresh Look,” Lehman Brothers Global Equity Research, April 9, 2002; Jeetil Pate, “Amazon. com,” Deutsche Bank Securities, July 24, 2002. aCommissions, fees, and other amounts earned from Amazon’s partnerships with third-party sellers were generally attributed to and reported within the relevant product category (e. g. , video). As reported here, “services” revenue includes only the portion of revenue earned from third parties that do business in categories where Amazon does not itself do business. Amazon. com—2002 803-098 Exhibit 2a 1997 Analyst View Business Model Comparison Traditional Land-based Amazon. com 1 2,500,000 < 4% $300,000 50-60x 2,000 $8. 00

Superstores Titles per superstore Occupancy costs (% of sales)a Sales per operating employee Inventory turnover Sales per square foot Rent per square foot 439 175,000 12% $100,000 2-3x $250 $20 Source: William J. Gurley, “Amazon. com: The Quintessential Wave Rider,” Deutsche Morgan Grenfell, June 9, 1997, p. 21. Previously used in William A. Sahlman and Laurence E. Katz, “Amazon. com—Going Public,” HBS Case No. 899-003 (Boston: Harvard Business School Publishing, November 18, 1998, p. 2. aIncludes rental, depreciation, amortization, and pre-opening expenses. Exhibit 2b 1997 Operating Cycle of Amazon. com and Typical Book Retailer Amazon. com Operating Cycle -41 Days Day 0 16 17 58

Book Enters Inventory Customer Purchases Book Payment Received Supplier Paid Typical Book Retail Operating Cycle +78 Days Day 0 90 167 168 Book Enters Inventory Supplier Paid Customer Purchases Book Payment Received Source: William A. Sahlman and Laurence E. Katz, “Amazon. com—Going Public,” HBS Case No. 899-003 (Boston: Harvard Business School Publishing, November 18, 1998), p. 2. 17 803-098 Amazon. com—2002 Exhibit 3 Forecast: U. S. Online Retail Spending by Category ($ millions) % of All Retail in 2007 8% 9% 16% 14% 27% 35% 44% 19% 15% 5% 8% 6% 6% 19% 18% 9% 6% 2% 23% 5% 10% 21% 20% 9% 23% 14% N/A 11% 2% 4% 21% 26% 21% 9% 5% 2002e Total U. S.

Online Retail (all categories) General apparel Accessories Footwear Books Computer hardware Computer software Consumer electronics Flowers Cards Gifts Health and beauty Furniture Garden supplies Linens/home decor Major appliances Office supplies Pet supplies Small appliances Tools and hardware Jewelry/luxury goods Music Video Sporting goods Tickets Toys/video games Other General merchandise subtotal Auto/auto parts Food/beverage Airline tickets Car rental Vacation packages Hotel reservations Auto/grocery/travel subtotal 72,114 3,836 469 892 2,556 6,316 1,592 3,399 432 182 337 841 1,213 617 1,103 505 2,396 131 673 687 1,187 1,984 1,935 1,135 2,576 2,259 1,419 40,672 9,000 2,442 13,200 2,400 600 3,800 31,442 2003e 95,260 5,563 891 1,481 3,482 7,806 2,626 4,314 817 199 422 1,165 1,460 766 2,856 625 3,711 196 998 1,885 1,722 2,062 3,227 1,516 3,510 2,660 3,215 59,175 7,180 3,545 16,440 3,050 900 4,970 36,085 2004e 119,543 7,848 1,133 2,008 4,343 8,736 2,998 5,750 1,240 260 630 1,653 2,011 968 3,655 793 5,665 292 1,329 2,813 2,528 2,499 3,908 2,160 4,759 3,437 4,000 77,416 8,103 5,354 18,070 3,440 1,110 6,050 42,127 005e 148,557 10,638 1,387 2,600 4,742 9,306 3,302 7,307 1,803 317 910 2,718 2,681 1,126 4,432 938 8,498 502 1,651 4,272 3,522 2,889 4,609 2,958 5,908 4,361 5,119 98,496 9,462 9,320 19,190 3,660 1,240 7,190 50,062 2006e 180,713 13,777 1,583 3,210 5,405 9,654 3,560 8,861 2,485 365 1,264 4,175 3,446 1,247 4,957 1,049 12,442 800 1,939 6,313 4,631 3,208 5,432 3,868 6,853 5,367 6,163 122,054 10,442 15,006 20,360 3,870 1,330 7,650 58,658 2007e 217,808 17,008 1,753 3,786 5,986 9,879 3,792 10,305 3,229 403 1,678 4,950 4,258 1,344 5,375 1,126 17,639 1,089 2,185 9,030 5,745 3,432 6,274 4,822 7,595 6,434 7,123 146,238 11,117 18,230 26,632 4,668 1,622 9,299 71,570 Source: Compiled from Carrie A.

Johnson, “US eCommerce: The Next Five Years,” Forrester Research, August 2001; “Web Travel Will Hold Up in an Industry Downturn,” Forrester Brief, October 1, 2001; “Online Grocery’s Second Wind,” Forrester Report, September 2001. 18 Amazon. com—2002 803-098 Exhibit 4a Launch Dates for Amazon’s Categories, Partnerships, Distribution, and Customer Service Centers U. S. Books, Music, DVD/Video Books Music Video Magazines Other Categories Auctions Electronics Toys zShops Software Video Games Tools & Hardware Lawn & Patio Health & Beauty Kitchen Photo Services Wireless [email protected] Computers International Categories U. K. & German Books U. K. & German Music U. K. /German Auctions U. K. /German zShops U. K. /German DVD/Videos U. K. /German SW/PC & Video Games Japan Books France France SW/PC & Video Games Electronics (U. K. DE) Marketplace International (single detail page) Canada Books/Music/DVD Launch Date Jul-95 Jun-98 Nov-98 Oct-03 Distribution Center Location a Seattle, Washington New Castle, Delaware Fernley, Nevada Coffeyvill, Kansas Campbellsville, Kentucky b McDonough, Georgia Grand Forks, North Dakota Bedfordshire, U. K. Bad Hersfeld, Germany Orleans, France Customer Service Locations b Seattle, Washington Tacoma, Washington Grand Forks, North Dakota Slough, England Rogensburg, Germany Huntington, West Virginia c The Hague, Netherlands Sapporo, Japan 1996 1997 1999 1999 1999 1999 1999 1999 1999 2000 Mar-99 Jul-99 Jul-99 Oct-99 Nov-99 Nov-99 Nov-99 Apr-00 Apr-00 May-00 Oct-00 Nov-00 Nov-00 Aug-01 2000 1999 1999 1999 2000 2000 2000 Oct-98 Oct-99 Nov-99 Nov-99 Mar-00 Jul-00 Aug-00 Nov-00 May-01 May-03 Mar-03 Jun-02 Source:

Company reports; Anthony Noto and Coralie Tournier Witter, Goldman Sachs Global Equity Research, June 5, 2001. ” Amazon. com 2001 Analyst Day Handbook,” aExpanded 1997; closed 1Q 2002. bAnnounced the closure of in January 2001. cAnnounced the closure of in February 2001. Exhibit 4b Category Amazon’s International Expansion U. S. 7/95 X X X X X X X X X X X X X X X U. K. 10/98 X X X X X X X X X X Germany 10/98 X X X X X X X Japan 8/00 X X X X France 11/00 X X X X Canada 6/02 X X X Date of Market Entry Books Music DVD/Video Video Games/SW Auctions/zShops Electronics Marketplace Toys & Games Service Alliances Travel Kitchen Tools Computers Magazines Office Supplies X Source:

Company reports. 19 803-098 Amazon. com—2002 Exhibit 5a NASDAQ Index Capital Markets Overview, 1994–2001 1994 752 11. 1% 7. 8 137 3. 8 NA 417 955 26. 0 180 4. 8 33. 7 1995 925 47. 4% 9. 9 156 5. 7 NA 901 1,568 33. 7 226 9. 0 30. 2 1996 1,165 33. 5% 12. 4 166 11. 4 32% 1,151 2,098 43. 8 296 13. 6 50. 0 1997 1,469 28. 0% 17. 6 233 14. 8 38% 1,315 2,583 58. 6 143 5. 1 44. 2 1998 1,795 17. 8% 30. 7 281 19. 8 55% 1,809 3,456 83. 1 83 4. 0 43. 7 1999 2,728 165. 3% 58. 8 421 54. 5 80% 2,448 4,480 82. 5 271 23. 6 66. 8 2000 2,471 37. 6% 104. 9 614 102. 3 83% 3,333 6,366 106. 7 222 21. 6 76. 1 2001 1,954 -27. 8% 40. 3 299 37. 7 72% 1,172 3,798 70. 6 120 3. 1 40. 8

Venture Capital Annual Return Venture Capital Commitments ($B) Number of VC Funds Raising Money Venture Capital Disbursements ($B) Internet as a percent of VC Disbursements Number of New Companies VC Financed Total Number of Companies VC Financed Private Equity/LBO Funds Raised ($B) IPOs – # VC-Backed Companies IPOs – VC-Backed Companies, Amount Raised ($B) All IPOs ($B) Source: U. S. Council of Economic Advisors Economic Indicators; Venture Economics; Securities Industry Assoc. Exhibit 5b Valuation and Operating Parameters of Select Internet Companies, 1997–2001 ($ in 000) 1997 NA 1,442,204 3,117,150 NA NA 1998 9,711,036 17,054,841 23,577,701 NA NA 1999 16,247,149 26,274,924 115,267,642 416,375 7,763,199 2000 8,885,250 5,557,813 16,884,353 57,450 231,369 2001 18,548,628 4,038,219 10,209,725 67,434 1,303,901 Market Value (Year End) EBAY INC AMAZON. COM INC YAHOO INC BARNESANDNOBLE. COM INC PRICELINE. COM INC Revenue EBAY INC AMAZON. COM INC YAHOO INC BARNESANDNOBLE. COM INC PRICELINE.

COM INC Operating Income EBAY INC AMAZON. COM INC YAHOO INC BARNESANDNOBLE. COM INC PRICELINE. COM INC Operating Income as % Revenue EBAY INC AMAZON. COM INC YAHOO INC BARNESANDNOBLE. COM INC PRICELINE. COM INC Market Value as of Multiple of Revenue EBAY INC AMAZON. COM INC YAHOO INC BARNESANDNOBLE. COM INC PRICELINE. COM INC Market Value as of Multiple Operating Income EBAY INC AMAZON. COM INC YAHOO INC BARNESANDNOBLE. COM INC PRICELINE. COM INC 5,744 147,758 67,411 11,949 NA 47,352 609,996 203,270 61,834 35,237 224,724 1,639,839 588,608 202,567 482,410 431,424 2,761,983 1,110,178 320,115 1,235,396 748,821 3,122,433 717,422 404,600 1,171,753 1,561 -25,821 -947 -11,272 NA ,999 -52,096 58,383 -77,033 -110,930 23,845 -346,183 196,605 -108,795 -1,056,873 74,594 -257,337 389,707 -157,593 -50,619 227,067 35,070 34,526 -92,480 6,471 27% -17% -1% -94% NA 17% -9% 29% -125% -315% 11% -21% 33% -54% -219% 17% -9% 35% -49% -4% 30% 1% 5% -23% 1% NA 9. 8x 46. 2x NA NA 205. 1x 28. 0x 116. 0x NA NA 72. 3x 16. 0x 195. 8x 2. 1x 16. 1x 20. 6x 2. 0x 15. 2x 0. 2x 0. 2x 24. 8x 1. 3x 14. 2x 0. 2x 1. 1x NA -55. 9x -3291. 6x NA NA 1214. 0x -327. 4x 403. 8x NA NA 681. 4x -75. 9x 586. 3x -3. 8x -7. 3x 119. 1x -21. 6x 43. 3x -0. 4x -4. 6x 81. 7x 115. 1x 295. 7x -0. 7x 201. 5x Source: SEC filings and casewriter analysis. 20 Source: Exhibit 5c Mkt Value ($ Mil. ) 40,000 120,000 100,000 20,000 40,000 60,000 80,000 0 4/12/1996 7/12/1996 10/12/1996 EBAY YAHOO 1/12/1997 4/12/1997 7/12/1997 10/12/1997 1/12/1998 4/12/1998 7/12/1998 10/12/1998 1/12/1999 4/12/1999 7/12/1999 10/12/1999 1/12/2000 4/12/2000 7/12/2000 10/12/2000 1/12/2001 4/12/2001 7/12/2001 10/12/2001 1/12/2002 4/12/2002 7/12/2002 EBAY AMAZON. COM AMAZON. COM Internet Companies’ Market Values Datastream. YAHOO 803-098 -21­ 803-098 -22­ Exhibit 6 eBay, Inc. Historical Financial Results Quarters Ended Fiscal Year 2002 31-Mar 30-Jun 729,787 120,912 0 59,973 910,672 142,387 735,955 1,789,014 738,518 128,769 0 70,299 937,586 187,055 845,382 1,970,023

BALANCE SHEETS ($ in thousands) 1996 ASSETS Cash & Equivalents Net Receivables Inventories Other Current Assets Total Current Assets Net Plant, Property & Equipment Intangibles & other assets TOTAL ASSETS LIABILITIES Total Current Liabilities Long-Term Debt Deferred Taxes Minority Interest Other Liabilities TOTAL LIABILITIES TOTAL EQUITY TOTAL LIABILITIES & EQUITY INCOME STATEMENTS ($ in thousands) NET REVENUESa COST OF GOODS GROSS PROFIT R & D EXPENDITURES SELL GEN & ADMIN EXP INC BEF DEP & AMORT DEPRECIATION & AMORT NON-OPERATING INC INTEREST EXPENSE INCOME BEFORE TAX PROV FOR INC TAXES MINORITY INT (INC) OTHER INCOME NET INCOME OUTSTANDING SHARES (Adjusted) 1996 372 14 358 28 77 253 NA 1 NA 254 106 NA NA 148 122,400 103 166 0 16 285 23 0 308 1997 Fiscal Year Ending December 31, 1998 1999 2000 72,191 6,369 0 4,825 83,385 7,831 0 92,483 400,765 36,538 0 22,531 459,834 111,806 373,988 963,942 556,039 67,163 0 52,262 675,464 125,161 218,197 1,182,403 2001 723,419 101,703 0 58,683 883,805 142,349 286,998 1,678,529 3,723 1,024 0 220 4,967 652 0 5,619 91 0 55 0 0 146 162 308 1,124 305 157 0 0 1,586 4,033 5,619 8,038 0 0 0 0 8,038 84,445 92,483 88,825 15,018 0 0 7,632 111,475 852,467 963,942 37,442 11,404 0 13,248 6,549 168,643 1,013,760 1,182,403 180,139 12,008 0 37,751 19,493 249,391 1,429,138 1,678,529 202,301 9,774 0 30,332 19,002 261,409 1,527,605 1,789,014 213,221 9,808 0 30,470 20,421 273,920 1,696,103 1,970,023 Fiscal Year Ending December 31, 1997 1998 1999 2000 41,370 86,129 224,724 431,424 8,404 16,094 57,588 95,453 32,966 70,035 167,136 335,971 831 4,640 24,847 55,863 22,152 51,825 140,158 242,131 9,983 13,570 2,131 37,977 NA 805 1,145 1,433 1,054 1,799 19,474 44,787 2,371 2,191 2,319 3,374 8,666 12,373 18,141 77,957 971 4,789 8,472 32,725 320 381 102 -3,062 -314 70 NA NA 7,061 7,273 9,567 48,294 241,518 269,250 269,250 122,400 001 748,821 134,816 614,005 75,288 361,700 177,017 36,591 25,368 2,851 162,943 80,009 -7,514 NA 90,448 277,259 Quarters Ended Fiscal Year 2002 31-Mar 30-Jun 245,106 266,287 41,277 44,561 203,829 221,726 24,307 24,346 107,276 116,400 72,246 80,980 1,530 1,108 6,206 8,570 685 698 76,237 87,744 29,411 33,286 -758 150 NA NA 47,584 54,308 277,259 281,637 Source: Company reports. aeBay’s revenues were generated off gross merchandise sales of $9. 3 billion in 2001. eBay was estimated to have at least a 90% share of the market in gross merchandise sales (by auction) and auction revenues. (Source: Steve Weinstein and Chad Bartley, “eBay: morning note,” Pacific Crest Securities Research, October 1, 2002; Jeffrey R. Fieler, “eBay Inc. ” Bear Stearns Equity Research, September 20, 2002; casewriter estimates. ) Amazon. com—2002 803-098 Exhibit 7a Amazon Fees Fee Schedule for Amazon and eBay Single Detail Page Listings Transaction Fee (upon sale) Electronics, Camera & Photo All other items Note: $0. 99 + 10% of price $0. 99 + 15% of price Amazon charged the buyer a shipping charge but gave the seller a shipping credit that was generally below what it charged to the buyer (e. g. , on a standard book, Amazon charged the buyer $3. 49 and credited the seller $2. 26). Amazon told its sellers, “Shipping is required even if the shipping credit does not cover all shipping costs. Such discrepancies s

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