C3

Gallaugher
 –
 Information
 Security
 –
 http://gallaugher.com/chapters
  p.
 1
 

Amazon.com: An Empire Stretching from Cardboard Box to
Kindle to Cloud1
a draft chapter provided for comment. Will eventually be included in the Summer 2013 version of the award-winning
& low-cost textbook “Information Systems: A Manager’s Guide to Harnessing Technology”.
© Copyright 2013, John M. Gallaugher, Ph.D. – for more info see: http://www.gallaugher.com/
 
 
Draft
 version
 last
 modified:
 May
 3,
 2013
 –
 comments
 welcome
 [email protected]
 

 
INTRODUCTION:
 

 
LEARNING
 OBJECTIVES:
 
After
 studying
 this
 section
 you
 should
 be
 able
 to:
 
 

1. Appreciate
 the
 breadth
 of
 businesses
 that
 Amazon
 competes
 in.
 
2. Understand
 that
 Amazon’s
 financial
 performance
 has
 not
 been
 consistent.
 
3. Begin
 to
 recognize
 the
 reasons
 for
 this
 performance
 inconsistency
 and
 set
 the
 stage
 

for
 the
 examination
 unfolding
 in
 subsequent
 sections.
 

 
As
 CEO
 of
 tech
 industry
 research
 firm
 Forrester
 Research,
 George
 Colony
 is
 paid
 to
 predict
 
the
 future.
 
 Firms
 spend
 big
 bucks
 for
 Forrester
 reports
 that
 cover
 trends
 and
 insight
 
across
 the
 world
 of
 computing.
 
 So
 when
 Colony
 turned
 his
 attention
 to
 Amazon.com,
 the
 
Internet
 retailer
 founded
 by
 Jeff
 Bezos,
 there
 were
 a
 lot
 of
 people
 paying
 attention.
 
 Colony
 
proclaimed
 that
 the
 recently
 public
 firm
 would
 soon
 be
 “Amazon.toast”
 as
 larger
 traditional
 
retailers
 arrived
 to
 compete
 online.1
 
 Colony
 wasn’t
 the
 only
 Bezos-­‐basher.
 
 Fortune,
 The
 
Guardian,
 and
 Barron’s
 were
 among
 the
 publications
 to
 have
 labeled
 the
 firm
 
“Amazon.bomb”.
 
 Bezos’
 personal
 favorite
 came
 from
 a
 pundit
 who
 suggested
 the
 firm
 
should
 be
 renamed
 “Amazon.org”
 adopting
 the
 domain
 of
 a
 non-­‐profit
 since
 it’ll
 never
 make
 
any
 money2.
 

 
Amazon
 went
 seven
 whole
 years
 without
 turning
 a
 profit,
 losing
 over
 $3
 billion
 during
 that
 
time.
 
 The
 firm’s
 stock
 price
 had
 fallen
 from
 a
 high
 of
 $100
 a
 share
 to
 below
 $6.
 
Conventional
 wisdom
 suggested
 that
 struggling
 dot-­‐coms
 were
 doomed
 as
 retail
 giants
 
were
 poised
 to
 bring
 their
 strong
 off-­‐line
 brands
 and
 logistics
 prowess
 to
 the
 Internet,
 
establishing
 themselves
 as
 multi-­‐channel
 dominators
 standing
 athwart
 the
 bloodied
 
remains
 of
 the
 foolish
 early-­‐movers.
 

 
But
 during
 those
 seven
 years
 and
 through
 to
 this
 day,
 Bezos
 (pronounced
 BAY-­‐zose)
 
steadfastly
 refused
 to
 concentrate
 on
 the
 quarterly
 results
 Wall
 Street
 frets
 over.
 
 Instead,
 
the
 Amazon
 founder
 has
 followed
 his
 best
 reckoning
 on
 where
 markets
 and
 technology
 
were
 headed,
 postponing
 profit
 harvesting
 while
 expanding
 warehousing
 capacity,
 building
 
e-­‐commerce
 operations
 worldwide,
 growing
 one
 of
 the
 net’s
 most
 widely-­‐used
 cloud
 
computing
 platforms,
 leading
 the
 pack
 in
 eBook
 readers,
 and
 developing
 the
 first
 credible
 
threat
 to
 Apple’s
 dominant
 iPad
 in
 tablets.
 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
1
 Faculty:
 I’ll
 post
 my
 personal
 slides
 online
 at
 gallaugher.com,
 but
 there
 is
 also
 a
 wonderful
 deck
 by
 
FaberNovel
 that
 covers
 much
 of
 the
 content
 in
 this
 case.
 You
 can
 find
 it
 at:
 
http://www.fabernovel.com/en/works/97-­‐amazon-­‐com-­‐the-­‐hidden-­‐empire
 

Gallaugher
 –
 Information
 Security
 –
 http://gallaugher.com/chapters
  p.
 2
 

Tellingly,
 Amazon’s
 first
 profit
 was
 posted
 the
 week
 one-­‐time
 brick-­‐and-­‐mortar
 goliath
 
Kmart
 went
 bankrupt.
 
 Kmart
 was
 also
 the
 former
 parent
 of
 another
 giant
 of
 the
 offline
 
world,
 Borders,
 a
 firm
 that
 completely
 shuttered
 in
 the
 wake
 of
 Amazon’s
 dominance.
 
 And
 
for
 Amazon,
 profits
 continued.
 
 In
 a
 three-­‐year
 period
 following
 the
 introduction
 of
 the
 
Kindle,
 Amazon’s
 net
 income
 climbed
 from
 $476
 million
 to
 $1.15
 billion.
 
 Barnes
 &
 Noble’s
 
fell
 from
 $150
 million
 to
 $37
 million
 before
 dipping
 into
 the
 red.
 
 Punditry
 is
 a
 dangerous
 
business,
 but
 Barron’s
 made
 up
 for
 the
 dot-­‐bomb
 comment,
 putting
 Amazon
 on
 its
 cover
 
under
 a
 headline
 proclaiming
 the
 firm
 the
 world’s
 best
 retailer.
 
 Fortune
 atoned
 by
 naming
 
Bezos
 the
 “Businessperson
 of
 the
 Year”3.
 

 
Amazon’s
 future
 continues
 to
 be
 hotly
 debated
 as
 the
 firm’s
 profitability
 swings
 wildly.
 
 
Massive
 investments
 crushed
 Amazon
 profits
 in
 2012,
 with
 the
 firm
 dipping
 $39
 million
 
into
 the
 red.
 
 Yet
 stock
 performance
 during
 this
 period
 suggests
 Wall
 Street
 expects
 a
 huge
 
upside.
 And
 Amazon
 was
 recently
 named
 as
 having
 the
 “Best
 Reputation
 of
 any
 US
 
corporation.”4
 
 So
 is
 Amazon
 the
 “unstoppable
 monster
 of
 the
 tech
 industry”
 or
 a
 
“charitable
 organization
 run
 by
 elements
 of
 the
 investment
 community
 for
 the
 benefit
 of
 
customers”5?
 Both?
 Neither?
 
 

 
SIDEBAR: Jeff Bezos & the Long Term (in his own words and more)

“Our first shareholder letter, in 1997, was entitled, “It’s all about the long term.” If everything you do
needs to work on a three-year time horizon, then you’re competing against a lot of people. But if you’re
willing to invest on a seven-year time horizon, you’re now competing against a fraction of those people,
because very few companies are willing to do that. Just by lengthening the time horizon, you can
engage in endeavors that you could never otherwise pursue. At Amazon we like things to work in five to
seven years. We’re willing to plant seeds, let them grow—and we’re very stubborn. We say we’re
stubborn on vision and flexible on details.”6

Just how far ahead is Bezos’ time horizon? His personal investments include Blue Origin, a commercial
rocketry and aviation firm that intends to send humans into space. Bezos has also built a 10,000 year
clock deep inside a mountain on his ranch in West Texas. The timepiece plays an elaborate cuckoo-
like sequence, composed by musician Brian Eno, to mark every year, decade, century, millennium and
10 millennia. How’s that for a symbol of long-term thinking!7

 
Why
 Study
 Amazon.com?
 

 
Looking
 at
 the
 Internet’s
 largest
 retailer
 provides
 a
 context
 for
 introducing
 several
 critical
 
management
 concepts
 such
 as
 cash
 efficiency
 and
 channel
 conflict.
 
 We
 see
 ways
 in
 which
 
tech-­‐fueled
 operations
 can
 yield
 above-­‐average
 profits
 far
 greater
 than
 off-­‐line
 players.
 
 We
 
can
 illustrate
 advantages
 related
 to
 scale,
 the
 data
 asset,
 and
 the
 brand-­‐building
 benefits
 of
 
personalization
 and
 other
 customer
 service
 enhancements.
 
 Amazon’s
 Kindle
 business
 
allows
 us
 to
 look
 into
 the
 importance
 of
 mobile
 computing
 as
 a
 vehicle
 for
 media
 
consumption,
 a
 distribution
 channel
 for
 increased
 sales
 and
 advertising,
 a
 creator
 of
 
switching
 costs,
 a
 gathering
 point
 for
 powerful
 data,
 and
 in
 competition
 for
 platform
 
dominance.
 
 And
 the
 firm’s
 AWS
 (Amazon
 Web
 Services)
 business
 allows
 us
 to
 see
 how
 the
 
firm
 is
 building
 a
 powerhouse
 cloud
 provider,
 generating
 new
 competitive
 assets
 while
 
engaging
 in
 competition
 where
 it
 sells
 services
 to
 firms
 that
 can
 also
 be
 considered
 rivals.
 

Gallaugher
 –
 Information
 Security
 –
 http://gallaugher.com/chapters
  p.
 3
 

KEY
 TAKEAWAYS:
 
• Amazon
 is
 the
 largest
 online
 retailer,
 and
 has
 expanded
 to
 dozens
 of
 categories
 beyond
 

books.
 
 
 As
 much
 of
 the
 firm’s
 media
 business
 (books,
 music,
 video)
 becomes
 digital,
 the
 
Kindle
 business
 is
 a
 conduit
 for
 retaining
 existing
 businesses
 and
 for
 growing
 additional
 
advantages.
 And
 the
 firm’s
 AWS
 cloud
 computing
 business
 is
 one
 of
 the
 largest
 players
 
in
 that
 category.
 

• Amazon
 takes
 a
 relatively
 long-­‐view
 with
 respect
 to
 investing
 in
 initiatives
 and
 its
 
commitment
 to
 grow
 profitable
 businesses.
 
 The
 roughly
 seven-­‐year
 timeline
 is
 a
 
difficult
 one
 for
 public
 companies
 to
 maintain
 amid
 the
 pressure
 for
 consistent
 
quarterly
 profits.
 

• Amazon’s
 profitability
 has
 varied
 widely
 and
 analysts
 continue
 to
 struggle
 to
 interpret
 
the
 firm’s
 future.
 However,
 studying
 Amazon
 will
 reveal
 important
 concepts
 and
 issues
 
related
 to
 business
 and
 technology.
 

QUESTIONS
 &
 EXERCISES:
 
1. Which
 firms
 does
 Amazon
 compete
 with?
 
2. Investigate
 Amazon’s
 performance
 over
 the
 last
 five
 years.
 
 How
 has
 the
 firm
 done
 with
 

respect
 to
 revenue,
 net
 income,
 share
 price?
 How
 does
 this
 compare
 with
 competitors
 
you’ve
 mentioned
 above?
 

3. What
 are
 some
 of
 the
 advantages
 in
 having
 a
 longer
 time
 horizon?
 
 What
 are
 some
 of
 
the
 challenges?
 
 What
 needs
 to
 happen
 to
 enable
 Amazon
 to
 continue
 to
 ‘think
 long
 
term’?
 
 What
 could
 derail
 this
 approach?
 

 
THE
 EMPEROR
 OF
 E-­‐COMMERCE:
 

 
LEARNING
 OBJECTIVES:
 
After
 studying
 this
 section
 you
 should
 be
 able
 to:
 
 

1. Recognize
 how
 Amazon’s
 warehouse
 technology
 and
 systems
 are
 designed
 to
 
quickly
 and
 cost-­‐effectively
 get
 product
 from
 suppliers
 to
 customers
 with
 a
 
minimum
 of
 error.
 

2. Understand
 how
 high
 inventory
 turns
 and
 longer
 accounts
 payable
 periods
 help
 fuel
 
a
 negative
 cash
 conversion
 cycle
 at
 Amazon,
 and
 why
 this
 is
 a
 good
 thing.
 

3. Gain
 insight
 into
 various
 advantages
 that
 result
 from
 the
 firm’s
 scale
 and
 cost
 
structure.
 

4. Appreciate
 how
 data
 can
 drive
 advantages
 not
 fully
 available
 to
 off-­‐line
 firms,
 
ranging
 from
 increased
 personalization
 to
 innovation
 and
 service
 improvements.
 

5. Identify
 the
 two-­‐sides
 in
 Amazon
 Marketplace
 network
 effects,
 and
 why
 this
 is
 
important
 in
 strengthening
 the
 firm’s
 brand.
 

6. Appreciate
 how
 mobile
 access
 is
 influencing
 opportunities
 through
 additional
 
changes
 in
 how,
 where,
 and
 when
 consumers
 shop.
 

 
Amazon
 got
 its
 start
 selling
 books
 online.
 
 The
 firm’s
 first
 office
 was
 in
 a
 modest
 space
 
boasting
 a
 then
 appealing
 400
 square
 foot
 basement
 warehouse
 in
 a
 low-­‐rent
 area
 of
 
Seattle,
 where
 neighboring
 establishments
 included
 the
 local
 needle
 exchange,
 a
 pawn
 
shop,
 and
 “WigLand.”8
 
 

Gallaugher
 –
 Information
 Security
 –
 http://gallaugher.com/chapters
  p.
 4
 

 
Today
 the
 firm
 is
 decidedly
 larger.
 
 Its
 ninety
 plus
 distribution
 centers
 worldwide
 boast
 
well
 over
 26
 million
 square
 feet
 of
 warehouse
 space.
 9
 And
 Amazon
 is
 now
 the
 world’s
 
largest
 online
 retailer
 in
 dozens
 of
 categories.
 
 The
 stylized
 smile
 in
 the
 Amazon
 logo
 
doubles
 as
 an
 arrow
 pointing
 from
 A
 to
 Z
 (as
 in
 “we
 carry
 everything
 from…”).
 A
 new
 
downtown
 Seattle
 headquarters
 will
 take
 up
 three
 full
 city
 blocks
 anchored
 by
 three
 
signature
 office
 towers.
 

 
How
 does
 a
 firm
 that
 sells
 products
 that
 pretty
 much
 any
 other
 retailer
 can
 provide,
 grow
 
and
 create
 competitive
 advantages
 that
 keep
 rivals
 at
 bay?
 
 Look
 to
 the
 napkin
 –
 Amazon’s
 
headquarters
 lobby
 sports
 the
 framed
 vision
 scribbled
 out
 by
 Amazon’s
 chief
 (see
 below).
 
 

 
Figure X: Amazon’s “Wheel of Growth”, adapted from a Jeff Bezos napkin scribble (note: publisher needs to
see if permission for use is required/can be obtained – has been widely shown in Amazon Investor Relations

slides & reprinted in the media.

 
At
 the
 heart
 are
 three
 pillars
 of
 Amazon’s
 business:
 large
 selection,
 convenience,
 and
 lower
 
prices.
 
 
 Says
 Bezos
 “I
 always
 get
 the
 question,
 what’s
 going
 to
 change
 in
 10
 years?
 I
 almost
 
never
 get
 asked,
 what’s
 NOT
 going
 to
 change
 in
 the
 next
 10
 years?
 That’s
 the
 more
 important
 
question,
 because
 you
 can
 build
 a
 business
 around
 things
 that
 are
 stable.
 [Things
 like]
 low
 
prices…
 faster
 delivery[offering
 customer
 convenience].
 Vast
 selection.”10
 

 
The
 three
 pillars
 of
 selection,
 convenience,
 and
 low
 prices
 reinforce
 one
 another
 and
 work
 
together
 to
 create
 several
 additional
 assets
 for
 competitive
 advantage.
 Exceptional
 
customer
 experience
 fuels
 a
 strong
 brand
 that
 makes
 Amazon
 the
 first
 place
 most
 
consumers
 shop
 online.
 
 More
 customers
 allow
 the
 firm
 to
 provide
 more
 products,
 creating
 
scale.
 
 Amazon
 also
 opens
 its
 website
 up
 to
 third-­‐party
 sellers
 –
 and
 a
 dynamic
 where
 more
 
customers
 attract
 more
 sellers
 which
 attract
 still
 more
 customers
 (and
 so
 on).
 That
 
virtuous
 cycle
 of
 buyer-­‐seller
 growth
 is
 a
 two-­‐sided
 network
 effect,
 yet
 another
 source
 of
 
competitive
 advantage.
 
 And
 all
 this
 activity
 allows
 Bezos
 and
 Company
 to
 further
 sharpen
 

Gallaugher
 –
 Information
 Security
 –
 http://gallaugher.com/chapters
  p.
 5
 

the
 business
 battle
 sword
 by
 gathering
 an
 immensely
 valuable
 data
 asset.
 
 Each
 digital
 
movement
 is
 logged,
 and
 the
 firm
 is
 constantly
 analyzing
 what
 users
 respond
 to
 in
 order
 to
 
further
 fine-­‐tune
 the
 customer
 experience,
 squeeze
 out
 costs,
 and
 drive
 profits.
 Let’s
 look
 at
 
each
 of
 these
 items
 and
 see
 how
 Amazon’s
 bold
 tech-­‐based
 strategy
 is
 realizing
 additional
 
advantages
 in
 the
 domain
 of
 marketing,
 accounting,
 and
 operations.
 

 
Fulfillment
 Operations
 –
 Driving
 Selection,
 Customer
 Convenience,
 and
 Low-­‐Price
 

 
Amazon
 has
 always
 sold
 direct
 to
 consumers,
 but
 it
 didn’t
 always
 do
 this
 well.
 
 The
 firm’s
 
early
 warehousing
 was
 a
 shambles
 of
 inefficient,
 money-­‐burning
 processes.
 Said
 one
 
analyst,
 Amazon’s
 “inventory,
 and
 warehouse
 operating
 costs,
 [were]
 so
 high
 they
 made
 
old-­‐fashioned
 retailers
 look
 efficient.”11
 
 The
 situation
 was
 once
 so
 bad
 that
 in
 order
 to
 stay
 
in
 business
 Amazon
 had
 to
 issue
 more
 than
 $2
 billion
 in
 bonds.
 To
 fix
 the
 problem,
 Amazon
 
looked
 to
 others
 for
 talent,
 hiring
 away
 both
 the
 Chief
 Information
 Officer
 (CIO)
 and
 Chief
 
Logistics
 Officer
 from
 the
 world’s
 largest
 retailer,
 Walmart
 (Walmart
 sued,
 the
 two
 
eventually
 settled
 out
 of
 court).
 
 But
 raiding
 Walmart’s
 talent
 pool
 wasn’t
 enough.
 
 
Amazon’s
 warehouse
 and
 technology
 infrastructure
 is
 radically
 different
 than
 any
 
conventional
 retailer.
 
 While
 Walmart
 warehouses
 that
 support
 its
 superstores
 ship
 large
 
pallets
 of
 diapers
 to
 thousands
 of
 its
 retail
 locations,
 Amazon
 warehouses
 pick
 and
 pack
 
boxes
 of
 disparate
 individual
 items,
 sending
 packages
 to
 millions
 of
 homes.
 To
 build
 a
 
system
 that
 worked,
 Amazon
 focused
 on
 costs,
 data,
 and
 processes
 so
 that
 it
 could
 figure
 
out
 what
 was
 wrong
 and
 how
 it
 could
 improve.
 

 
One
 effort,
 “Get
 the
 C.R.A.P.
 out”
 focused
 on
 products
 that
 “Can’t
 Realize
 Any
 Profits”.
 
 The
 
firm’s
 Senior
 Vice
 President
 of
 North
 American
 Operations
 recalls
 visiting
 a
 Kentucky
 
warehouse
 and
 watching
 a
 staffer
 spend
 20
 minutes
 packaging
 up
 a
 folding
 chair
 –
 a
 
process
 way
 too
 inefficient
 for
 a
 firm
 with
 razor-­‐thin
 margins.
 
 To
 fix
 the
 situation,
 Amazon
 
worked
 with
 the
 vendor
 to
 get
 chairs
 in
 pre-­‐packaged,
 read-­‐to-­‐ship
 boxes,
 keeping
 the
 
product
 while
 cleaving
 costs.12
 

 
In
 order
 to
 automate
 profit-­‐pushing
 hyper-­‐efficiency,
 Amazon
 warehouses
 are
 powered
 by
 
at
 least
 as
 much
 code
 as
 the
 firm’s
 website13
 –
 nearly
 all
 of
 it
 home-­‐grown.14
 Technology
 
lets
 a
 given
 Amazon
 warehouse
 send
 out
 over
 2
 million
 packages
 a
 week
 during
 the
 holiday
 
season,
 all
 without
 elves
 or
 flying
 reindeer.15
 
 The
 firm’s
 larger
 warehouses
 are
 upwards
 of
 
a
 quarter-­‐mile
 in
 length
 and
 are
 packed
 with
 shelves
 stacked
 five
 or
 more
 rows
 high.
 
Technology
 choreographs
 hundreds
 of
 workers
 in
 what
 seems
 part
 symphony,
 part
 sprint.
 
 
 

 
When
 suppliers
 ship
 new
 products
 to
 Amazon,
 items
 are
 scanned
 and
 prepped
 for
 order
 
within
 hours
 of
 arrival.
 
 Dozens
 of
 workers
 examine
 the
 incoming
 shipments
 for
 defects.
 
 If
 
a
 problem
 is
 spotted
 in
 the
 receiving
 area,
 the
 staffer
 flips
 an
 adjacent
 warning
 light
 from
 
green
 to
 red,
 signaling
 a
 warehouse
 ‘problem
 solver’
 to
 swoop
 in,
 deal
 with
 the
 issue,
 and
 
make
 sure
 additional
 items
 can
 keep
 on
 flowing
 in.16
 

 
Amazon’s
 items
 that
 produce
 the
 most
 sales
 volume
 (think
 bestselling
 books,
 Kindles)
 
aren’t
 even
 stocked
 on
 proper
 shelves,
 instead
 pallets
 of
 goods
 are
 dropped
 in
 an
 area
 
called
 ‘mass
 land’
 for
 fast
 pick-­‐up
 that
 doesn’t
 require
 scurrying
 through
 a
 maze
 of
 shelves.
 

Gallaugher
 –
 Information
 Security
 –
 http://gallaugher.com/chapters
  p.
 6
 

 
Slower-­‐moving
 items
 are
 racked
 up
 by
 ‘shelvers’,
 who
 place
 items
 in
 available
 spaces.
 
 
Shelvers
 then
 scan
 a
 unique
 shelf
 code
 for
 that
 location
 so
 that
 Amazon’s
 systems
 know
 
where
 an
 item
 has
 been
 stocked.
 
 The
 same
 item
 might
 be
 stored
 in
 a
 dozen
 different
 places
 
throughout
 the
 warehouse,
 but
 that’s
 OK
 –
 the
 system
 knows
 where
 everything
 is.
 
 Amazon
 
has
 an
 additional
 rule
 when
 stacking
 shelves
 –
 no
 two
 similar
 products
 can
 sit
 next
 to
 each
 
other.
 
 While
 this
 makes
 Amazon’s
 shelves
 look
 like
 an
 unorganized
 hodgepodge,
 when
 a
 
product
 is
 the
 only
 one
 of
 its
 type
 in
 a
 given
 area,
 this
 actually
 reduces
 the
 chances
 that
 a
 
picker
 will
 confuse
 a
 size
 or
 color
 or
 otherwise
 grab
 the
 wrong
 thing.17
 
 Reducing
 mistakes
 
keeps
 customers
 happy
 in
 brand-­‐building
 ways,
 and
 it
 reduces
 errors
 that
 can
 crush
 
profits.
 

 
Staff
 known
 as
 warehouse
 pickers
 are
 in
 charge
 of
 building
 your
 order
 from
 a
 warehouse’s
 
inventory.
 
 Wireless
 devices
 give
 pickers
 instructions
 on
 precisely
 where
 to
 navigate
 to
 and
 
what
 items
 to
 grab
 within
 the
 maze
 of
 numbered
 isles
 and
 shelves.
 
 Pickers
 scan
 shelf
 codes
 
after
 they
 get
 each
 item,
 and
 the
 device
 prompts
 them
 with
 their
 next
 marching
 orders.
 
 
Warehouse
 software
 plots
 the
 picking
 path
 to
 minimize
 worker
 steps
 and
 maximize
 order
 
fulfillment
 efficiency.18
 
 Another
 group
 of
 ‘problem
 solvers’
 scuttle
 about
 the
 warehouse
 
with
 wheel-­‐mounted
 laptops,
 observing
 operations
 and
 offering
 coaching
 on
 how
 staff
 can
 
do
 things
 better.19
 

 
Once
 all
 items
 for
 a
 given
 order
 are
 picked,
 they
 are
 placed
 in
 orange
 bins
 that
 travel
 along
 
conveyor
 belts
 for
 packing.
 
 Software
 then
 tells
 ‘packing
 associates’
 the
 optimal
 size
 of
 
smile-­‐logoed
 Amazon
 cardboard
 box
 to
 use
 for
 a
 given
 order.
 Packed
 boxes
 are
 weighed
 
and
 the
 software
 does
 an
 additional
 check
 to
 see
 if
 the
 weight
 is
 what’s
 expected.
 
 If
 an
 
order
 is
 too
 light
 that’s
 a
 sign
 that
 a
 box
 is
 missing
 an
 item.
 

 
Systems
 only
 stamp
 names
 and
 addresses
 on
 boxes
 after
 orders
 are
 complete
 and
 boxes
 
are
 sealed.
 
 No
 floor
 workers
 know
 who
 you
 are
 or
 what
 you’ve
 ordered.
 
 Packed
 boxes
 are
 
then
 loaded
 on
 to
 separate
 trays
 that
 ride
 into
 another
 conveyor
 belt
 system,
 where
 they
 
are
 scanned
 and
 tipped
 down
 the
 correct
 chute
 among
 dozens
 of
 choices
 so
 that
 the
 box
 is
 
routed
 on
 to
 the
 correct
 truck
 for
 that
 order’s
 shipping
 provider
 and
 destination.
 Some
 
warehouses
 ship
 products
 so
 quickly
 that
 outbound
 trucks
 are
 dispatched
 with
 a
 less-­‐than
 
three
 minute
 window
 between
 them.20
 
 

 
To
 foster
 improvement,
 warehouse
 movements
 are
 continuously
 logged
 and
 productivity
 is
 
tracked
 and
 plotted.
 Input
 from
 warehouse
 ‘problem
 solvers’
 is
 also
 taken
 into
 account.
 
Says
 one
 Amazon
 exec
 “If
 we
 discover
 a
 better
 way
 of
 doing
 something,
 we
 can
 roll
 it
 out
 
across
 the
 world
 overnight.”
 21
 
 Top-­‐notch
 workers
 are
 praised
 throughout
 the
 day,
 as
 
management
 calls
 out
 the
 names
 of
 workers
 who
 hit
 or
 exceeded
 their
 goals.”
 22
 

 
Amazon
 often
 boasts
 on-­‐time
 package
 deliver
 rates
 of
 up
 to
 99.9%
 or
 more.
 Keeping
 
customers
 happy
 stems
 in
 part
 from
 setting
 expectations,
 so
 Amazon’s
 systems
 receive
 
weather
 reports,
 as
 well.
 
 Order
 a
 product
 during
 a
 pre-­‐Christmas
 snowstorm
 and
 expect
 to
 
see
 a
 message
 on
 the
 website
 indicating
 “adverse
 weather
 conditions
 are
 impacting
 
deliveries.”23
 

Gallaugher
 –
 Information
 Security
 –
 http://gallaugher.com/chapters
  p.
 7
 

 
And
 Amazon
 isn’t
 done
 with
 automation.
 
 It
 purchased
 Massachusetts-­‐based
 robotics
 firm,
 
Kiva
 Systems
 for
 over
 three
 quarters
 of
 a
 billion
 dollars.
 
 While
 most
 Amazon
 warehouses
 
aren’t
 yet
 set
 up
 for
 full
 robotic
 automation,
 Kiva’s
 robots
 were
 already
 being
 used
 in
 the
 
warehouse
 of
 Amazon-­‐subsidiary
 Zappos.
 Executives
 at
 Kiva
 say
 its
 systems
 can
 pick
 200
 
to
 400
 items
 per
 hour.
 24
 

 
Figure X: A Day in the Life of a Kiva Robot. This YouTube Video shows Kiva robots in action at a massive

warehouse. Publisher will likely need to secure permission to embed video
(http://www.youtube.com/watch?v=6KRjuuEVEZs)

 
Amazon’s
 Cash
 Conversion
 Cycle
 –
 Realizing
 Financial
 Benefits
 from
 Speed
 

 
Quickly
 moving
 products
 out
 of
 warehouses
 is
 good
 for
 customers,
 but
 Amazon’s
 speed
 
also
 offers
 another
 critical
 advantage
 over
 most
 brick
 and
 mortar
 retailers
 –
 the
 firm
 is
 
astonishingly
 efficient
 at
 managing
 cash.
 
 Here’s
 how.
 

 
When
 incoming
 inventory
 shows
 up
 at
 most
 retailers
 –
 and
 this
 is
 certainly
 true
 for
 
Amazon,
 Barnes
 and
 Noble,
 and
 Best
 Buy
 –
 those
 firms
 don’t
 pay
 their
 suppliers
 right
 away.
 
Instead
 they
 log
 payment
 due
 for
 these
 goods
 as
 an
 account
 payable,
 a
 bill
 that
 says
 when
 
payment
 is
 due
 sometime
 in
 the
 future.
 
 Accounts
 payable
 periods
 vary,
 but
 it’s
 not
 
uncommon
 for
 a
 big
 retailer
 to
 be
 able
 to
 hold
 products
 for
 a
 month
 or
 longer
 without
 
having
 to
 pay
 for
 them.
 
 However,
 when
 customers
 buy
 from
 a
 retailer,
 they
 pay
 right
 away.
 
 
Cash
 is
 collected
 immediately,
 and
 funds
 from
 credit
 cards
 and
 checks
 clear
 in
 no
 more
 
than
 a
 few
 days.
 The
 firm’s
 period
 between
 shelling
 out
 cash,
 and
 collecting
 funds
 
associated
 with
 a
 given
 operation,
 is
 referred
 to
 as
 the
 cash
 conversion
 cycle
 (CCC).
 There
 
are
 other
 factors
 that
 influence
 the
 CCC,
 but
 right
 now
 we’ll
 concentrate
 on
 the
 hugely
 
important
 time
 difference
 between
 paying
 for
 inventory
 and
 selling
 those
 goods.
 
 A
 retailer
 
wants
 this
 number
 to
 be
 as
 small
 as
 possible,
 otherwise
 unsold
 inventory
 is
 sitting
 on
 
shelves
 and
 doesn’t
 generate
 any
 cash
 until
 it’s
 sold.
 Especially
 cash-­‐crunched
 firms
 may
 

Gallaugher
 –
 Information
 Security
 –
 http://gallaugher.com/chapters
  p.
 8
 

even
 require
 short-­‐term
 loans
 to
 pay
 suppliers,
 and
 those
 firms
 that
 can’t
 generate
 cash
 
quickly
 enough
 are
 referred
 to
 as
 having
 liquidity
 problems.
 

 
While
 a
 firm’s
 cash
 conversion
 cycle
 varies
 from
 quarter
 to
 quarter,
 Barnes
 &
 Noble
 has
 
reported
 that
 its
 inventory
 has
 sat
 on
 shelves
 68
 days
 on
 average
 before
 being
 purchased.25
 
Best
 Buy
 has
 held
 inventory
 for
 as
 much
 as
 70
 days
 on
 average
 before
 a
 sale26.
 Costco
 and
 
Walmart
 sell
 goods
 more
 quickly,
 but
 they
 also
 pay
 for
 inventory
 before
 it
 is
 sold.27
 When
 
compared
 to
 these
 peers
 however,
 Amazon
 alone
 among
 them
 consistently
 reports
 a
 
negative
 cash
 conversion
 cycle
 –
 it
 actually
 sells
 goods
 before
 it
 has
 to
 pay
 its
 suppliers.
 This
 
gives
 the
 firm
 a
 special
 advantage
 since
 it
 has
 an
 additional
 pool
 of
 cash
 that
 it
 can
 put
 to
 
work
 on
 things
 like
 expanding
 operations,
 making
 interest-­‐bearing
 investments,
 and
 more.
 
 

 
Figure X: Cash Conversion Cycle (in days) among select major retailers

 
The
 efficiency
 of
 a
 firm’s
 cash
 cycle
 will
 vary
 over
 time.
 
 And
 numbers
 reported
 are
 an
 
average
 for
 all
 products
 –
 some
 products
 are
 slow
 movers,
 while
 others
 are
 sold
 very
 
quickly.
 
 But
 the
 negative
 cash
 conversion
 cycle
 is
 another
 powerful
 benefit
 that
 Amazon’s
 
fast-­‐fulfillment
 model
 offers
 it
 over
 rivals.
 
 The
 goal
 for
 Amazon:
 keep
 inventory
 turns
 high
 
(e.g.
 sell
 quickly),
 and
 pay
 suppliers
 later.
 

 
Internet
 Economics,
 Scale,
 and
 Pricing
 Power
 

 
Selling
 more
 goods
 often
 gives
 Amazon
 bargaining
 power
 with
 suppliers.
 And
 the
 size
 
(scale)
 of
 Amazon’s
 business
 provides
 the
 firm
 with
 negotiating
 leverage
 to
 secure
 lower
 
prices
 and
 longer
 payment
 terms.
 
 But
 Amazon’s
 cost-­‐structure
 for
 operations
 is
 also
 
superior
 to
 rivals.
 To
 be
 certain,
 Walmart’s
 sales
 dwarf
 Amazon’s.
 
 Walmart’s
 2012
 sales
 
figures
 were
 $446
 million.
 
 Amazon’s
 $61
 million
 2012
 sales
 are
 about
 the
 same
 as
 Target’s.
 
 
But
 Walmart
 has
 10,773
 stores
 worldwide28.
 
 Target
 has
 1,778
 stores29.
 
 Amazon
 has
 90-­‐
plus
 warehouses
 total
 and
 no
 conventional
 stores.
 
 While
 Amazon
 spends
 significantly
 on
 
software,
 automation,
 and
 expansion
 of
 its
 warehouses,
 its
 overall
 costs
 for
 things
 like
 real-­‐

Gallaugher
 –
 Information
 Security
 –
 http://gallaugher.com/chapters
  p.
 9
 

estate,
 energy,
 inventory,
 and
 security
 will
 be
 lower
 than
 brick
 and
 mortar
 rivals.
 
 And
 
employee
 efficiency
 should
 be
 greater
 as
 well,
 since
 Amazon
 shift
 workers
 are
 working
 at
 
fairly
 constant
 rates
 throughout
 the
 day,
 while
 retailer
 activity
 fluctuates
 with
 the
 ebb
 and
 
flow
 of
 customer
 visitation
 hours.
 

 
Retail
 can
 be
 a
 cut-­‐throat
 business.
 
 The
 exact
 same
 products
 in
 one
 store
 are
 often
 
available
 through
 competitors,
 so
 competition
 often
 boils
 down
 to
 whoever
 has
 the
 lowest
 
price.
 Amazon’s
 scale
 enables
 it
 to
 operate
 with
 thin
 margins,
 giving
 it
 the
 strength
 to
 
sustain
 lower
 prices.
 
 
 As
 former
 Amazon
 employee
 Eugene
 Wei
 puts
 it,
 this
 allows
 Amazon
 
to
 “to
 thin
 the
 oxygen”
 of
 competitors.30
 
 Amazon’s
 breadth
 of
 operations
 brings
 in
 cash
 
from
 other
 businesses,
 in-­‐effect
 allowing
 the
 firm
 to
 “hold
 its
 breath
 longer”
 if
 challenged
 in
 
an
 unprofitable
 price
 war.
 
 Consider
 DVD
 Empire’s
 reaction
 to
 the
 launch
 of
 the
 Amazon
 
Video
 Store.
 
 DVD
 Empire
 was,
 at
 the
 time,
 the
 largest
 seller
 of
 online
 video.
 
 Feeling
 
threatened
 by
 Amazon’s
 arrival,
 DVD
 Empire
 lowered
 prices
 to
 an
 unsustainable
 50
 
percent
 below
 retail.
 
 Amazon
 wouldn’t
 make
 any
 money
 at
 50
 percent
 off,
 either,
 but
 as
 
Wei
 puts
 it
 “Our
 leading
 opponent
 had
 challenged
 us
 to
 a
 game
 of
 who
 can
 hold
 your
 breath
 
longer”
 and
 Amazon
 had
 “bigger
 lungs”.
 
 The
 lesson
 is
 clear
 –
 a
 smaller
 firm
 looking
 to
 pick
 
a
 price-­‐fight
 with
 Amazon
 might
 not
 survive.
 

 
Amazon’s
 retail
 prices
 aren’t
 just
 cheaper
 than
 other
 e-­‐commerce
 firms,
 they’re
 usually
 
cheaper
 than
 larger
 rival
 Walmart,
 too.
 
 Wells
 Fargo
 compared
 a
 diverse
 basket
 of
 products
 
available
 at
 both
 firms
 and
 found
 Walmart
 prices
 were
 actually
 19
 percent
 more
 expensive
 
than
 Amazon.
 
 Target
 was
 28
 percent
 more
 expensive,
 while
 products
 purchased
 at
 
specialty
 retailers
 cost
 30
 percent
 more.
 Even
 more
 impressive,
 Amazon
 seems
 to
 be
 
monitoring
 the
 availability
 of
 products
 at
 competitor
 websites
 and
 using
 stock-­‐outs
 as
 an
 
opportunity
 to
 earn
 more.
 
 The
 Wall
 Street
 Journal
 reports
 that
 “where
 rivals
 sold
 out
 of
 
items,
 Amazon
 responded
 by
 raising
 its
 prices
 an
 average
 of
 10
 percent.”31
 
 Firms
 should
 be
 
careful
 –
 consumers
 have
 been
 known
 to
 react
 angrily
 to
 so-­‐called
 dynamic
 pricing
 if
 they
 
feel
 they
 are
 taken
 advantage
 of.32
 
 But
 the
 insight
 does
 show
 how
 data
 can
 drive
 a
 nimble
 
response
 to
 shifts
 in
 the
 competitive
 landscape.
 
 

 
Figure X: Key Retailer Avg. Price Difference Above Amazon.com33

 
While
 not
 well
 known
 for
 its
 own
 brands
 beyond
 Kindle,
 Amazon’s
 scale
 has
 allowed
 it
 to
 
create
 several
 product
 lines
 that
 it
 has
 branded
 itself.
 
 Amazon’s
 private-­‐label
 brands
 
include
 AmazonBasics
 (cables,
 battaries,
 and
 other
 consumer
 electronics
 accessories),
 

Gallaugher
 –
 Information
 Security
 –
 http://gallaugher.com/chapters
  p.
 10
 

Pizon
 (kitchen
 gadgets),
 Strathwood
 (outdoor
 furniture),
 Pike
 Street
 (bath
 and
 home
 
products),
 and
 Denali
 (tools).34
 
 

 
Putting
 its
 own
 brand
 on
 high-­‐volume
 products
 should
 allow
 Amazon
 to
 cut
 out
 some
 
pricing
 that
 would
 otherwise
 go
 to
 a
 branded
 supplier.
 The
 willingness
 to
 sell
 its
 own
 
brands
 can
 also
 give
 Amazon
 even
 more
 negotiating
 leverage
 with
 suppliers.
 
 Firms
 
unwilling
 to
 provide
 Amazon
 with
 the
 price
 breaks,
 payment
 terms,
 or
 complete
 product-­‐
line
 access
 it
 demands
 may
 see
 Amazon
 compete
 directly
 with
 them
 via
 a
 private-­‐label
 
product.
 And
 a
 scale-­‐reinforced
 brand
 that
 screams
 ‘best
 price’
 in
 a
 space
 crowded
 with
 
me-­‐too
 retailers
 selling
 the
 exact
 same
 thing
 is
 a
 powerful
 asset
 and
 enormous
 barrier
 for
 
competitors
 to
 try
 to
 overcome.
 Amazon
 can
 keep
 advertising
 spending
 down
 as
 customers
 
see
 the
 firm
 as
 the
 first
 and
 often
 only
 stop
 needed
 when
 moving
 from
 product
 research
 to
 
purchase.
 Consider
 that
 Target
 (with
 roughly
 the
 same
 revenues
 as
 Amazon)
 is
 a
 member
 
of
 that
 elite
 club
 of
 firms
 that
 spends
 over
 $1
 billion
 in
 advertising
 ($1.62
 billion
 in
 2011),
 
while
 Amazon
 didn’t
 even
 make
 the
 list.35
 

 
Amazon
 also
 sees
 growth
 beyond
 consumers.
 AmazonSupply
 is
 billed
 as
 “The
 Store
 for
 
Business
 &
 Industry”
 and
 carries
 a
 range
 of
 business,
 scientific,
 and
 industrial
 goods
 for
 
corporate
 customers.
 
 Getting
 most
 products
 in
 and
 out
 of
 a
 warehouse
 is
 the
 same,
 
regardless
 of
 category,
 so
 Amazon
 can
 effortlessly
 expand
 in
 any
 area
 where
 it
 thinks
 the
 
model
 will
 work.
 

 
 
Customer
 Obsession
 

 
For
 a
 firm
 that
 does
 so
 much,
 Amazon’s
 moves
 are
 largely
 motivated
 by
 one
 thing
 –
 
relentless
 customer
 focus.
 Sure,
 every
 firm
 says
 they
 care
 about
 their
 customers,
 but
 
consider
 this:
 in
 meetings,
 Bezos
 is
 known
 to
 insist
 that
 one
 seat
 be
 left
 open
 at
 the
 
conference
 table
 as
 a
 symbol
 representing
 ‘the
 most
 important
 person
 in
 the
 room’,
 the
 
Amazon
 customer.36
 To
 keep
 even
 the
 most
 senior
 executives
 empathetic
 to
 the
 customer
 
experience,
 every
 two
 years
 every
 employee
 from
 Bezos
 on
 down
 must
 spend
 two
 days
 on
 
the
 service
 desk
 answering
 customer
 calls.37
 

 
It’s
 an
 eye
 on
 improving
 the
 customer
 experience
 that
 has
 motivated
 so
 many
 of
 Amazon’s
 
pioneering
 efforts,
 among
 them:
 1-­‐click
 ordering
 (which
 the
 firm
 patented),
 customer
 
reviews,
 recommendations,
 bundles,
 look
 and
 search
 inside
 the
 book,
 where’s
 my
 stuff,
 free
 
supersaver
 shipping.
 
 While
 pioneered
 by
 Amazon,
 many
 of
 these
 efforts
 are
 now
 accepted
 
as
 must-­‐have
 features
 across
 e-­‐commerce
 categories.38
 

 
As
 we’ve
 mentioned
 earlier,
 strong
 brands
 are
 built
 largely
 through
 customer
 experience.
 
 
As
 evidence
 of
 the
 strength
 of
 customer
 experience,
 Amazon
 has
 repeatedly
 scored
 the
 
highest
 rating
 on
 the
 University
 of
 Michigan’s
 American
 Customer
 Service
 Index.
 It
 was
 a
 
rating
 that
 not
 only
 bested
 all
 other
 Internet
 retailers,
 it
 was
 the
 highest
 score
 of
 any
 firm
 in
 
any
 service
 industry.
 

Gallaugher
 –
 Information
 Security
 –
 http://gallaugher.com/chapters
  p.
 11
 

 
Figure X: Letter posted to Amazon’s home page following the firm’s second record-breaking ACSI Index
score (note to publisher: I screen-grabbed this from Amazon’s public website posting years back. I am

assuming it is within copyright to do so. Kindly verify).

 
Leveraging
 the
 Data
 Asset
 –
 A/B
 Testing,
 Personalization,
 and
 Even
 an
 Ad
 Business
 

 
Moving
 early
 and
 having
 scale
 allows
 Amazon
 to
 amass
 that
 profoundly
 valuable
 tech-­‐
derived
 competitive
 resource
 –
 data.
 
 The
 more
 customers
 a
 firm
 has,
 the
 more
 accurately
 
the
 firm
 can
 understand
 various
 patterns
 related
 to
 recommendations,
 preferences,
 
customer
 segments,
 price
 tolerance,
 and
 more.
 

 
At
 Amazon,
 data
 wins
 arguments,
 and
 the
 corporate
 culture
 gives
 employees
 the
 freedom
 
to
 challenge
 even
 most
 senior
 managers
 all
 the
 way
 up
 to
 Bezos
 himself..
 
 When
 Amazon
 
coder
 Greg
 Linden
 proposed
 that
 Amazon
 present
 ‘impulse
 buy’
 recommendations
 that
 
match
 patterns
 associated
 with
 the
 consumer’s
 shopping
 carts
 (e.g.
 customers
 who
 bought
 
that
 also
 bought
 this),
 he
 was
 originally
 shot
 down
 by
 a
 senior
 vice
 president.
 Linden
 was
 
undeterred,
 he
 ran
 an
 A/B
 test
 -­‐
 capturing
 customer
 response
 for
 those
 who
 saw
 option
 “A”
 
(recommendations)
 vs.
 option
 “B”
 (those
 who
 didn’t).
 
 The
 result
 overwhelmingly
 
demonstrated
 that
 recommendations
 would
 drive
 revenue.39
 

Gallaugher
 –
 Information
 Security
 –
 http://gallaugher.com/chapters
  p.
 12
 

SIDEBAR: Two-Pizza Teams: Keeping An Entrepreneurial Culture in a Big Firm

One challenge growing firms often face is they become slow and less innovative as they expand.40 In
order to keep Amazon nimble and innovative, Bezos has mandated a rule known as “two-pizza teams”,
stating that any individual project team should be small enough so that it can be fed by no more than
two pizzas.41 This helps ideas flourish, discourages the kind of ‘groupthink’ that diminishes the
consideration of alternative approaches, and even provides a mechanism where several efforts can
compete to identify the best solution.

 
While
 the
 ‘abandoned
 shopping
 cart’
 problem
 plagues
 many
 web
 retailers,
 Amazon
 is
 
considered
 one
 of
 the
 best
 ‘converting’
 e-­‐commerce
 sites,
 moving
 customers
 from
 product
 
evaluation
 through
 completing
 checkout.42
 
 A/B
 tests
 drive
 this
 –
 the
 firm
 has
 relentlessly
 
experimented
 with
 tests
 that
 modify
 and
 compare
 all
 sorts
 of
 variables
 including
 the
 
wording
 associated
 with
 images
 and
 buttons,
 screen
 placement,
 size,
 color,
 and
 more.
 
 
Relentlessly
 measuring
 customer
 activity
 also
 helps
 the
 firm
 direct
 its
 investment
 in
 
infrastructure.
 
 One
 test,
 for
 example,
 revealed
 that
 a
 tenth
 of
 a
 second’s
 delay
 in
 page
 
loading
 equaled
 a
 one
 percent
 drop
 in
 customer
 activity,
 pointing
 to
 a
 clear
 ROI
 for
 keeping
 
server
 capacity
 scalable.
 “43
 

 
While
 you’re
 shopping
 on
 Amazon,
 you’re
 likely
 part
 of
 some
 sort
 of
 experiment,
 perhaps
 
several.
 
 While
 Amazon
 doesn’t
 say
 how
 many
 A/B
 tests
 it
 runs,
 Google
 runs
 over
 7,000
 
annually.
 
 Amazon
 has
 gotten
 so
 good
 at
 A/B
 testing
 that
 it
 launched
 a
 service
 offering
 
scalable
 options
 for
 running
 simultaneous
 tests
 and
 gathering
 measured
 results
 for
 
developers
 that
 use
 the
 Amazon
 app
 store.
 A/B
 testing
 is
 yet
 another
 advantage
 e-­‐
commerce
 firms
 have
 over
 conventional
 retailers.
 
 Constant
 experimentation,
 refinement,
 
and
 re-­‐testing
 is
 far
 easier
 in
 the
 digital
 world
 when
 every
 user’s
 click,
 delay,
 and
 back-­‐
track
 can
 be
 measured
 and
 compared.
 

 
Amazon’s
 data
 trove
 on
 you
 individually,
 and
 users
 collectively,
 fuels
 the
 firm’s
 
personalization
 effort
 (efficiently
 referred
 to
 internally
 as
 p13n,
 since
 there
 are
 13
 letters
 
between
 the
 p
 and
 the
 n
 in
 the
 word
 ‘personalization’).
 When
 visiting
 the
 Amazon
 home
 
page
 it’s
 more
 accurate
 to
 say
 that
 you’re
 visiting
 your
 Amazon
 homepage
 at
 a
 given
 point
 
in
 time.
 
 Your
 page
 may
 vary
 not
 only
 based
 on
 any
 ongoing
 A/B
 tests,
 but
 also
 based
 on
 
Amazon’s
 best
 guess
 of
 what
 you’ll
 want
 to
 see
 as
 well
 as
 any
 myriad
 of
 other
 sales
 and
 
promotion
 goals.
 
 Behind
 the
 scenes,
 your
 web
 browser
 receives
 a
 unique
 tracking
 string
 
called
 a
 cookie
 and
 Amazon
 tracks
 your
 surfing
 behavior
 as
 well
 as
 your
 buying
 history.
 
 
Rate
 products?
 Even
 better!
 
 Amazon
 knows
 what
 you
 liked
 and
 what
 you
 didn’t.
 
 The
 
firm’s
 proprietary
 collaborative
 filtering
 software
 compares
 a
 user’s
 data
 with
 that
 of
 
others,
 mapping
 a
 best
 guess
 of
 what
 you’ll
 like
 to
 see
 each
 time
 you
 visit.
 
 A
 parent
 who
 
has
 searched
 for
 and
 bought
 items
 for
 young
 children
 will
 likely
 see
 recommendations
 for
 
other
 age-­‐appropriate
 kid
 products
 –
 maybe
 even
 guessing
 at
 your
 kids
 gender
 and
 likes.
 
 
Athletes,
 gamers,
 romance
 novel
 fans
 should
 also
 expect
 interest
 revealed
 by
 surfing
 and
 
purchasing
 to
 create
 a
 custom
 experience.
 
 Scale
 means
 the
 firm
 has
 more
 users
 doing
 
more
 things,
 allowing
 the
 firm
 to
 collect
 more
 observations
 that
 fuel
 greater
 accuracy
 in
 
tailoring
 the
 user
 experience.
 And
 this
 fuels
 that
 oh-­‐so-­‐important
 brand-­‐building
 positive
 
customer
 experience.
 

Gallaugher
 –
 Information
 Security
 –
 http://gallaugher.com/chapters
  p.
 13
 

All
 of
 this
 customer
 insight
 data
 also
 positions
 Amazon
 to
 grow
 a
 massive,
 Google-­‐
competing
 ad
 business.
 
 Amazon
 initially
 sold
 ads
 as
 a
 way
 to
 generate
 more
 sales
 through
 
its
 website,
 but
 Amazon
 now
 offers
 advertisers
 the
 ability
 to
 advertise
 on
 Kindles,
 on
 other
 
Amazon-­‐owned
 sites
 like
 IMDb,
 within
 mobile
 apps,
 and
 via
 Amazon-­‐targeted
 ads
 on
 third-­‐
party
 websites.
 Amazon
 ad
 offerings
 are
 feature-­‐rich,
 including
 things
 like
 the
 ability
 to
 
play
 a
 movie-­‐trailer
 in
 an
 ad,
 or
 embedding
 a
 discount
 coupon
 in
 a
 click-­‐to-­‐purchase
 
offering.
 
 Amazon
 reportedly
 charges
 up
 to
 $1
 million
 for
 ads
 placed
 on
 the
 welcome
 screen
 
of
 new
 Kindle
 Fires.44
 
 Don’t
 like
 ads?
 You
 can
 pay
 $20
 more
 for
 a
 Kindle
 without
 the
 
‘special
 offers’.
 

 
Selection
 &
 Network
 Effects
 

 
Amazon’s
 radical
 focus
 on
 customer
 experience
 also
 caused
 it
 to
 take
 what
 many
 would
 
consider
 a
 contrarian
 move
 –
 offering
 products
 provided
 by
 others
 alongside
 its
 own
 
listings.
 
 Third
 party
 products
 are
 referred
 to
 as
 being
 part
 of
 the
 ‘Amazon
 Marketplace’.
 
 
Amazon
 doesn’t
 own
 inventory
 of
 marketplace
 items.
 
 Sellers
 can
 warehouse
 and
 ship
 
products
 themselves,
 or
 they
 can
 opt
 to
 use
 Amazon’s
 warehouses
 as
 part
 of
 the
 ‘Fulfilled
 
by
 Amazon’
 program.
 The
 latter
 lets
 Amazon
 handle
 logistics,
 storage,
 packaging,
 shipping,
 
and
 customer
 service,
 while
 customers
 get
 Amazon
 shipping
 prices
 –
 including
 super-­‐saver
 
discounts
 and
 free
 shipping
 for
 customers
 enrolled
 in
 the
 Amazon
 Prime
 program.
 
Customers
 also
 benefit
 if
 they
 already
 have
 credit
 card
 and
 other
 information
 on
 file
 with
 
Amazon
 (a
 switching
 cost
 potentially
 deterring
 users
 from
 going
 to
 a
 new
 site).
 

 
As
 much
 as
 40
 percent
 of
 all
 units
 sold
 by
 Amazon
 are
 from
 the
 firm’s
 2
 million
 
participating
 Amazon
 Marketplace
 sellers
 worldwide.45
 Marketplace
 allows
 Amazon
 to
 
build
 a
 long
 tail
 of
 product
 offerings
 without
 the
 costly
 risk
 of
 having
 to
 take
 ownership
 of
 
unproven
 or
 slow-­‐moving
 inventory,
 while
 the
 firm
 gets
 fat
 and
 happy
 in
 the
 middle
 of
 a
 
two-­‐sided
 network
 effect
 (i.e.
 more
 buyers
 attract
 more
 sellers,
 and
 more
 sellers
 attract
 
more
 buyers).
 
 Some
 Marketplace
 products
 compete
 directly
 with
 Amazon’s
 own
 offerings,
 
but
 the
 firm
 doesn’t
 shy
 away
 from
 allowing
 competitive
 listings,
 new
 or
 used,
 even
 if
 
they’re
 cheaper.
 Competition
 among
 sellers
 reinforces
 low-­‐price,
 and
 lowers
 the
 chance
 
that
 customers
 will
 look
 first
 to
 sites
 like
 PriceGrabber,
 Shopping.com,
 Google
 or
 eBay.
 
Even
 if
 a
 rival
 wins
 a
 sale,
 all
 products
 sold
 through
 Amazon
 allow
 Bezos’
 firm
 to
 collect
 a
 
fee.
 And
 when
 Amazon
 sells
 third
 party
 goods
 through
 its
 site,
 it
 continues
 to
 ‘own’
 much
 of
 
the
 customer
 relationship
 for
 that
 sale,
 gathering
 data
 that
 would
 otherwise
 be
 lost
 if
 
customers
 went
 elsewhere.
 
 Amazon
 also
 won’t
 hesitate
 to
 kick
 out
 sellers
 with
 bad
 ratings
 
to
 ensure
 quality
 and
 protect
 the
 Amazon
 brand.
 

 
Not
 only
 does
 Amazon
 allow
 others
 to
 sell
 products
 through
 its
 site,
 it
 allows
 others
 to
 
market
 for
 the
 firm,
 too.
 
 The
 Amazon
 Associates
 program
 is
 the
 world’s
 largest
 affiliate
 
marketing
 program,
 offering
 a
 sort
 of
 ‘finders
 fee’
 for
 generating
 sales.
 
 Website
 operators
 
can
 recommend
 Amazon
 products
 on
 their
 site
 and
 Amazon
 gives
 the
 affiliate
 a
 percentage
 
of
 sales
 generated
 from
 these
 promotions.
 
 For
 Amazon,
 fees
 paid
 are
 pay-­‐for-­‐performance
 
–
 associates
 get
 a
 commissions
 only
 if
 their
 promotions
 generate
 sales.
 

 
Fostering
 an
 Addition
 to
 Amazon:
 Prime,
 Mobile,
 and
 More
 Markets
 

Gallaugher
 –
 Information
 Security
 –
 http://gallaugher.com/chapters
  p.
 14
 

 
Amazon
 is
 also
 creating
 habit-­‐changing
 behaviors
 that
 fuel
 sales
 growth.
 Subscribers
 to
 
Amazon
 Prime
 get
 free
 two-­‐day
 shipping
 for
 unlimited
 qualifying
 purchases.
 
 Prime
 
encourages
 impulse
 or
 on-­‐demand
 purchases
 –
 no
 need
 to
 wait
 to
 aggregate
 purchases
 for
 
a
 super-­‐saver
 rate.
 
 The
 rise
 of
 mobile
 commerce
 also
 changes
 buying
 patterns.
 
 The
 cash
 
register
 is
 now
 in
 your
 hand,
 and
 with
 you
 at
 all
 times.
 
 Why
 create
 a
 shopping
 list
 when
 
you
 can
 buy
 immediately
 when
 the
 need
 arises?
 
 
 

 
Amazon
 doesn’t
 break
 out
 mobile
 sales,
 but
 some
 analysts
 suspect
 the
 percentage
 may
 be
 
as
 high
 as
 10
 percent,
 and
 growing.46
 
 Other
 retailers
 are
 reporting
 even
 more
 impressive
 
figures.
 
 One
 Kings
 Lane,
 a
 firm
 bringing
 in
 over
 $200
 million
 a
 year
 selling
 home
 
furnishings,
 claims
 25
 percent
 of
 its
 sales
 are
 from
 mobile
 devices,
 and
 that
 mobile
 
shopping
 carts
 ring
 in
 an
 even
 higher
 average
 order
 size
 than
 orders
 from
 PCs.47
 
 And
 this
 
is
 from
 a
 firm
 that
 sells
 bulky
 items
 like
 couches
 and
 chairs!
 
 

 
Acquisition
 of
 other
 firms
 and
 the
 growth
 of
 new
 internal
 businesses
 has
 allowed
 Amazon
 
to
 accomplish
 several
 things
 including:
 broadening
 the
 firm’s
 product
 offerings
 to
 
underscore
 Amazon
 as
 the
 ‘first
 choice’
 shopping
 destination,
 absorbing
 potentially
 
threatening
 competitors
 before
 they
 get
 too
 big,
 experimenting
 with
 new
 product
 offerings
 
and
 services,
 and
 integrating
 value-­‐added
 businesses
 and
 technologies
 into
 the
 Amazon
 
empire.
 
 BusinessWeek
 once
 ran
 a
 cover
 story
 titled
 “What
 Amazon
 Fears
 Most”,
 featuring
 a
 
diaper-­‐clad
 toddler.
 
 The
 implication
 was
 NJ-­‐based
 Quidsi,
 operator
 of
 diapers.com,
 could
 
grow
 brand
 and
 scale
 in
 staple
 products,
 drawing
 customers
 away
 from
 Amazon.
 Amazon’s
 
response?
 They
 bought
 the
 firm
 for
 over
 half
 a
 billion
 dollars.
 
 Today
 the
 Quidsi
 subsidiary
 
has
 seven
 brands
 that
 can
 deliver
 a
 range
 of
 goods
 from
 cosmetics
 to
 green
 cleaning
 
products,
 in
 some
 cases
 within
 the
 same
 day.
 While
 Amazon
 hasn’t
 yet
 made
 the
 decision
 to
 
integrate
 Quidsi
 completely
 into
 the
 Amazon
 experience,
 they
 are
 now
 full
 owners
 of
 the
 
biggest
 threat
 to
 grabbing
 high-­‐growth
 markets
 that
 Amazon
 didn’t
 dominate.48
 
 Same
 
thing
 with
 Zappos,
 which
 Amazon
 paid
 nearly
 $1
 billion
 for,
 and
 which
 continues
 to
 
operate
 as
 a
 separate
 brand.49
 Other
 acquired
 firms
 include
 Alexa,
 a
 web
 analytics
 and
 tools
 
provider;
 Audible,
 the
 leading
 provider
 of
 digital
 audio
 books;
 GoodReads
 and
 Shelfari,
 
social
 networking
 sites
 for
 book
 readers;
 Woot,
 a
 flash-­‐sales
 site;
 and
 LoveFilm,
 often
 
described
 as
 the
 Netflix
 of
 Europe.
 

Gallaugher
 –
 Information
 Security
 –
 http://gallaugher.com/chapters
  p.
 15
 

 
Figure X: Just some of the brands & businesses owned by Amazon.com

 
Amazon
 is
 also
 growing
 its
 own
 brands
 in
 new
 categories.
 
 Examples
 include
 MyHabit,
 a
 
fashion
 flash-­‐sales
 site,
 competing
 with
 the
 likes
 of
 Gilt
 Groupe
 and
 Rue
 La
 La.
 Amazon
 
Instant
 Video
 offers
 streaming
 TV
 and
 movie
 titles
 for
 rental,
 purchase,
 and
 some
 included
 
free
 with
 an
 Amazon
 Prime
 subscription.
 
 And
 Amazon
 Fresh
 is
 a
 FreshDirect-­‐like
 
competitor,
 offering
 same
 day
 delivery
 of
 groceries
 and
 more.
 
 Amazon
 has
 also
 begun
 
building
 warehouses
 close
 to
 major
 metropolitan
 areas,
 a
 move
 which
 many
 think
 is
 
targeted
 at
 growing
 same-­‐day
 delivery
 (Walmart,
 eBay,
 and
 even
 Google
 also
 offer
 same-­‐
day
 delivery
 services
 in
 some
 areas).
 
 The
 move
 is
 a
 departure
 for
 Amazon,
 which
 for
 years
 
built
 warehouses
 in
 low-­‐population
 states
 to
 avoid
 tax
 laws
 that
 require
 sales
 tax
 collection
 
where
 the
 firm
 has
 a
 physical
 location.50
 
 As
 Amazon
 gives
 in
 on
 sales
 taxes,
 it’s
 poised
 to
 
launch
 an
 all-­‐out
 assault
 on
 markets
 handled
 by
 local
 retailers.
 

 
KEY
 TAKEAWAYS:
 
• Amazon’s
 sophisticated
 fulfillment
 operations
 speed
 products
 into
 and
 out
 of
 inventory,
 

reinforcing
 brand
 strength
 through
 speed,
 selection,
 and
 low
 prices.
 
• Rapid
 inventory
 turnover
 and
 long
 payment
 terms
 enable
 Amazon
 to
 consistently
 post
 

a
 negative
 cash
 conversion
 cycle.
 
 The
 firm
 sells
 products
 and
 collects
 money
 from
 
customers
 in
 most
 cases
 before
 it
 has
 paid
 suppliers
 for
 these
 products.
 

• The
 cost
 structure
 for
 online
 retailers
 can
 be
 far
 less
 than
 that
 of
 offline
 counterparts
 
that
 service
 similarly-­‐sized
 markets.
 
 Savings
 can
 come
 from
 employee
 costs,
 inventory,
 
energy
 usage,
 land,
 and
 other
 facilities
 expenses.
 

• Amazon’s
 scale
 is
 a
 significant
 asset.
 
 It
 allows
 the
 firm
 to
 offer
 cheaper
 prices
 in
 many
 
categories
 than
 nearly
 every
 other
 firm,
 online
 or
 off.
 Scale
 gives
 Amazon
 additional
 
bargaining
 leverage
 with
 suppliers.
 And
 the
 firm’s
 scale-­‐driven
 low-­‐prices
 reinforce
 
Amazon
 as
 the
 ‘first
 choice’
 shopping
 destination.
 

• Amazon’s
 ability
 to
 acquire
 and
 leverage
 data
 further
 allow
 the
 firm
 to
 enhance
 
customer
 experience
 and
 drive
 sales.
 
 Internet
 retailers
 have
 a
 greater
 ability
 to
 gather
 

Gallaugher
 –
 Information
 Security
 –
 http://gallaugher.com/chapters
  p.
 16
 

personal
 data
 on
 consumers
 than
 do
 offline
 counterparts.
 Data
 is
 used
 in
 
personalization
 and
 in
 innovation
 fueled
 by
 the
 result
 of
 A/B
 experiments.
 

• The
 rise
 of
 mobile
 is
 resulting
 in
 an
 increase
 in
 shopping
 among
 many
 retailers,
 and
 
fuels
 immediate
 purchases
 rather
 than
 the
 creation
 of
 shopping
 lists.
 

 
QUESTIONS
 &
 EXERCISES:
 
1. When
 you
 walk
 into
 a
 conventional
 retailer,
 similar
 items
 are
 stacked
 next
 to
 each
 

other.
 
 But
 Amazon
 tries
 not
 to
 do
 this
 in
 its
 warehouses.
 
 Why?
 
2. How
 does
 Amazon
 warehouse
 staff
 know
 where
 to
 find
 items?
 How
 does
 technology
 

help
 make
 the
 process
 most
 efficient?
 
3. Does
 Amazon
 buy
 most
 of
 its
 warehouse
 automation
 software
 from
 others
 or
 is
 most
 of
 

the
 software
 written
 in-­‐house?
 
 Why
 do
 you
 suppose
 this
 is
 the
 case?
 
4. In
 what
 other
 ways
 do
 Amazon’s
 information
 systems
 reduce
 errors?
 
 Why
 is
 error
 

reduction
 so
 critical
 to
 firm
 performance?
 
5. Which
 requires
 more
 code,
 the
 firm’s
 customer
 facing
 website
 or
 warehouse
 

automation?
 
6. Although
 Amazon
 is
 investing
 in
 robotics,
 human
 beings
 still
 do
 most
 of
 the
 product
 

picking
 and
 packaging.
 How
 does
 Amazon
 ensure
 customer
 privacy
 is
 protected,
 despite
 
heavy
 human
 involvement?
 
 Do
 you
 think
 it
 needs
 to
 go
 to
 such
 great
 lengths?
 Why
 or
 
why
 not?
 

7. What
 is
 the
 cash
 conversion
 cycle?
 What
 factors
 enable
 Amazon
 to
 have
 a
 cash
 
conversion
 cycle
 that
 is
 negative?
 Why
 are
 off-­‐line
 rivals
 unable
 to
 match
 these
 
efficiencies?
 
 What
 advantage
 does
 this
 give
 Amazon
 over
 rivals?
 

8. How
 do
 Amazon’s
 prices
 compare
 with
 rivals?
 
 What
 gives
 Amazon
 such
 advantages?
 
 
What
 other
 pricing
 advantages
 does
 Amazon
 have
 that
 a
 conventional
 retailer
 might
 not
 
be
 able
 to
 take
 advantage
 of?
 

9. What
 is
 dynamic
 pricing
 and
 why
 might
 this
 be
 risky?
 
10. What
 are
 private-­‐label
 products
 and
 what
 advantages
 do
 they
 offer
 Amazon?
 
11. Log
 into
 Amazon
 (or
 pull
 up
 a
 page
 if
 you
 ‘remain’
 logged
 in).
 
 Compare
 it
 to
 a
 

classmate’s
 page.
 
 What
 similarities
 do
 you
 notice?
 What
 differences?
 Why
 do
 you
 think
 
Amazon
 made
 the
 choice
 to
 show
 you
 the
 things
 that
 it
 did?
 Do
 you
 think
 it
 guessed
 
accurately
 regarding
 your
 interests?
 Why
 or
 why
 not?
 

12. Amazon’s
 unique
 customer
 data
 has
 allowed
 the
 firm
 to
 enter
 the
 advertising
 business.
 
 
Which
 firms
 does
 this
 bring
 Amazon
 into
 competition
 with?
 
 Research
 Amazon’s
 role
 in
 
matching
 advertisers
 to
 consumers.
 
 How
 big
 a
 player
 is
 Amazon?
 How
 do
 you
 feel
 
about
 a
 firm
 using
 your
 personal
 data
 on
 purchases,
 product
 browsing,
 and
 
recommendations
 for
 advertising?
 Under
 what
 circumstances
 (if
 any)
 are
 you
 
comfortable
 with
 such
 targeting,
 and
 under
 what
 circumstances
 are
 you
 concerned?
 

13. How
 does
 Amazon
 keep
 management
 focused
 on
 customer
 issues
 and
 ‘putting
 the
 
customer
 first’?
 
 

14. Describe
 how
 Amazon
 Marketplace
 offers
 two-­‐sided
 network
 effects.
 
15. Besides
 network
 effects,
 what
 additional
 benefits
 does
 Amazon
 gain
 by
 allowing
 other
 

retailers
 to
 sell
 potentially
 competing
 products
 on
 Amazon?
 
16. How
 does
 mobile
 change
 buying
 habits?
 Are
 retailers
 seeing
 decreasing
 usage
 due
 to
 

the
 rise
 of
 mobile
 or
 more
 shopping?
 Give
 an
 example
 from
 your
 reading
 or
 from
 
subsequent
 research.
 

Gallaugher
 –
 Information
 Security
 –
 http://gallaugher.com/chapters
  p.
 17
 

17. Amazon’s
 operations
 are
 a
 marvel
 of
 automation
 and
 procedural
 efficiency,
 but
 the
 firm
 
has
 also
 been
 subject
 to
 criticism
 regarding
 its
 warehouse
 work
 environment.
 
 
Investigate
 these
 criticisms
 on
 your
 own.
 
 Do
 you
 feel
 they
 are
 valid?
 Are
 any
 of
 the
 
critics
 also
 worthy
 of
 criticism?
 If
 so,
 how?
 Do
 you
 feel
 Amazon
 has
 responded
 
appropriately
 to
 this
 criticism?
 How
 would
 you
 have
 responded
 if
 you
 were
 CEO
 of
 the
 
firm?
 What
 take-­‐aways
 from
 your
 own
 investigation
 will
 inform
 your
 own
 actions
 as
 a
 
manager?
 

 
KINDLE
 AND
 THE
 RISE
 OF
 DIGITAL
 

 
LEARNING
 OBJECTIVES:
 
After
 studying
 this
 section
 you
 should
 be
 able
 to:
 
 
• Understand
 the
 motivation
 behind
 Amazon’s
 Kindle
 business.
 
• Recognize
 the
 various
 ways
 that
 Amazon
 earns
 money
 and
 strengthens
 its
 

competitiveness
 via
 the
 Kindle
 platform.
 
• Examine
 the
 changes
 Amazon’s
 digital
 media
 offerings
 have
 brought
 to
 traditional
 the
 

publishing
 industry
 value
 chain.
 
• Understand
 key
 concepts
 such
 as
 channel
 conflict,
 wholesale
 pricing,
 and
 agency
 

pricing.
 

 
While
 Amazon
 has
 built
 solid
 advantages
 by
 selling
 a
 broad
 array
 of
 products,
 media
 
(books,
 music,
 and
 video)
 represents
 over
 1/3
 of
 the
 firm’s
 revenue,51
 and
 nearly
 all
 of
 that
 
business
 is
 going
 to
 shift
 from
 atoms
 to
 bits,
 shipped
 not
 in
 physical
 packaging,
 but
 through
 
the
 Internet.
 
 Losing
 this
 market
 would
 be
 a
 blow
 any
 publicly
 traded
 company,
 especially
 
one
 with
 razor-­‐thin
 margins,
 would
 find
 difficult
 to
 sustain.
 
 This
 is
 what
 has
 prompted
 the
 
creation
 of
 the
 Kindle.
 
 While
 many
 refer
 to
 Kindle
 as
 an
 e-­‐Reader,
 Kindle
 isn’t
 as
 much
 
about
 reading
 digital
 books
 as
 it
 is
 about
 putting
 a
 store
 in
 the
 hands
 of
 the
 firm’s
 over
 150
 
million
 customers52,
 allowing
 them
 to
 not
 only
 lap
 up
 goods
 from
 an
 increasingly
 massive
 
digital
 trough,
 but
 also
 instantly
 linking
 those
 customers
 with
 the
 firm’s
 entire
 inventory
 of
 
physical
 products.
 

 
The
 Kindle
 arrives
 linked
 to
 your
 Amazon
 account.
 
 That
 means
 the
 device
 comes,
 out
 of
 the
 
box,
 as
 a
 pre-­‐configured
 cash
 register
 with
 a
 vacuum
 attached
 firmly
 to
 the
 credit
 card
 in
 
your
 wallet.
 
 The
 first
 Kindle
 was
 optimized
 for
 book
 reading
 and
 featured
 a
 black
 and
 
white
 display
 that
 used
 e-­‐Ink.
 That
 display
 can’t
 refresh
 fast
 enough
 for
 animation
 or
 video,
 
but
 it
 is
 legible
 in
 sunlight
 and
 only
 draws
 power
 when
 flipping
 a
 dot
 from
 black
 to
 white
 or
 
vise
 versa,
 offering
 exceptionally
 long
 battery
 life.
 
 Thanks
 to
 Moore’s
 Law,
 Kindles,
 
originally
 offered
 at
 $399,
 grew
 in
 power
 while
 plummeting
 in
 price,
 with
 a
 low-­‐end
 model
 
selling
 for
 just
 $69
 five
 years
 after
 introduction.
 
 When
 introduced,
 the
 high-­‐resolution
 
color
 Kindle
 Fire
 offered
 a
 touch-­‐screen
 tablet
 experience
 for
 half
 the
 price
 of
 the
 
competing
 iPad
 and
 quickly
 became
 the
 second
 best
 selling
 tablet
 on
 the
 market.
 The
 
Kindle
 is
 also
 a
 cloud
 machine.
 
 The
 first
 Fire
 came
 with
 half
 the
 RAM
 of
 the
 iPad,
 the
 
thought
 being
 that
 your
 media
 would
 be
 snugly
 stored
 on
 Amazon’s
 servers,
 downloaded
 
when
 you
 need
 it.
 While
 Amazon
 doesn’t
 promote
 this
 fact,
 the
 Fire
 is
 also
 built
 on
 a
 

Gallaugher
 –
 Information
 Security
 –
 http://gallaugher.com/chapters
  p.
 18
 

modified
 version
 of
 Google’s
 Android
 OS,
 allowing
 the
 tablet
 to
 run
 a
 subset
 of
 native
 
Android
 apps.53
 

 
The
 success
 of
 Kindle
 is
 staggering.
 
 By
 the
 holiday
 season
 of
 the
 product’s
 second
 year,
 the
 
Kindle
 was
 Amazon’s
 top
 selling
 product
 in
 both
 dollar
 volume
 and
 unit
 sales.54
 
 That
 
means
 Amazon
 was
 selling
 more
 Kindles
 than
 any
 single
 book,
 CD,
 movie
 title,
 toy,
 or
 any
 
other
 product
 among
 the
 millions
 that
 it
 offers.
 
 Even
 more
 noteworthy
 for
 competitors
 in
 
the
 eBook
 and
 tablet
 space,
 Amazon
 doesn’t
 look
 to
 make
 money
 directly
 from
 Kindle
 
hardware
 sales
 -­‐
 various
 Kindle
 versions
 are
 regularly
 sold
 at
 or
 below
 costs.55
 
 But
 once
 
that
 cash
 register
 is
 in
 the
 hands
 of
 consumers,
 the
 sales
 ring
 up.
 As
 an
 always-­‐on
 
bookstore,
 the
 Kindle
 works
 pretty
 well.
 
 Roughly
 a
 million
 titles
 are
 offered,
 with
 “search
 
inside
 the
 book”
 features
 and
 the
 first
 chapter
 downloadable
 for
 free.
 
 Estimates
 of
 the
 
firm’s
 Kindle-­‐generated
 revenue
 bump
 vary,
 but
 all
 point
 to
 positive
 Kindle-­‐fueled
 sales
 
gains.
 
 RBC
 Capital
 estimates
 that
 despite
 being
 sold
 at
 a
 loss,
 each
 Kindle
 Fire
 generates
 
over
 $136
 in
 operating
 income
 with
 operating
 margins
 above
 20
 percent
 over
 the
 lifetime
 
of
 the
 device.56
 
 Kindle
 owners
 buy
 three
 to
 four
 times
 more
 books
 than
 they
 did
 prior
 to
 
owning
 the
 device.57
 
 And
 Amazon
 today
 sells
 more
 electronic
 books
 overall
 than
 their
 
print
 counterparts.58
 In
 terms
 of
 fueling
 overall
 sales,
 SmartMoney
 reported
 that
 Amazon
 
customers
 who
 don’t
 own
 a
 Kindle
 spend
 an
 average
 of
 $87
 each
 month,
 while
 those
 with
 a
 
Kindle
 spend
 $136,
 and
 Kindle
 Fire
 owners
 spend
 over
 $150.59