Amazon Blue Ocean PDF

IN1397
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Successes and Failures of
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Amazon’s Growth Strategies:
Causes and Consequences
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09/2017-6340
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This case was written by Oh Young Koo, Institute Executive Fellow of the INSEAD Blue Ocean Strategy Institute,
under the supervision of W. Chan Kim and Renée Mauborgne, Professors of Strategy at INSEAD. It is intended to be
used as a basis for class discussion rather than to illustrate either effective or ineffective handling of an administrative
situation.
Additional material about INSEAD case studies (e.g., videos, spreadsheets, links) can be accessed at
cases.insead.edu.
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This document is authorized for educator review use only by NOSHEEN SARWAT, Bahauddin Zakariya University until Aug 2019. Copying or posting is an infringement of copyright.
Permissions@hbsp.harvard.edu or 617.783.7860
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Amazon started as an internet bookstore in the garage of its founder Jeff Bezos, in 1995. Back
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then, internet shopping was in its infancy – Netscape and Internet Explorer had just been
introduced and there were just a handful of e-commerce start-ups. Aiming to become “the
Earth’s biggest bookstore”, Amazon challenged established brick-and-mortar bookstores like
Barnes & Noble and Borders, touting the convenience of online shopping, a wide selection,
discount prices and unprecedented customer service. Customers could order books at anytime
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from anywhere; even rare books that were not available in bookstores could be ordered and
delivered in a few clicks. The majority of its books were 10%-30% cheaper than the retail
price, and customers did not pay sales tax on goods purchased online.
The website made it fast and easy to search books by author, title, subject and keyword (see
Exhibit 1). With editorial content such as “Book of the Day” or “Featured Books”, Amazon
made its website informative and entertaining, so that net surfers could ‘browse’ as they
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would in their local bookstore in their free time. Customers were provided with rich
information including Amazon and customer reviews, interviews with authors, and a selection
of related book titles. They received emails from Amazon about particular authors or
recommended books. People who had experienced the convenient, secure and fun online
shopping experience offered by Amazon generated powerful word-of-mouth referrals,
spurring exponential growth. In December 1995, 2,200 people visited Amazon’s homepage;
by the spring of 1997 that figure had surged to 80,000.
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Barnes & Noble jumped into the online book retail market using its entrenched resources:
high brand awareness, the largest customer base, and huge bargaining power over publishers.
But the Goliath of book retailing couldn't keep up with a new set of rules that Amazon had
established for online retailing in the race and failed to champion the leadership for the
America’s largest book seller.
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This document is authorized © INSEAD
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review use only by NOSHEEN SARWAT, Bahauddin Zakariya University until Aug 2019. Copying or posting is an infringement of copyright.
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Exhibit 1
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Amazon.com First Homepage in 1995 1
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Over decades, Amazon grew aggressively, expanding beyond books at first, and then beyond
online retailing, transforming industries as diverse as publishing, media and IT services and
their business models. In its quest to grow big and fast, Amazon made several critical strategic
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moves that resulted in both sustainable growth and severe setbacks.
Successful Strategic Moves

1) Amazon Marketplace (2000)
After the remarkable success of its online bookstore, Amazon grew aggressively to become an
“everything store”, expanding its line of retail products and acquiring various types of
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companies. The company took an unconventional approach to growth – sharing

Amazon.com’s e-commerce platform with its direct competitors, who could now sell their
1 News18.com (2015). 20 years of Amazon.com: 20 amazing Amazon facts. [online] Available at:
http://www.news18.com/news/tech/20-years-of-amazon-com-20-amazing-amazon-facts-1021365.html
Accessed 29 May 2017
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products through its high-traffic website offering a superior customer experience, including
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better search and functionality and easy checkout.
This move created a certain amount of resistance within the company. Some executives
worried it could cannibalize Amazon retail products and intensify the price-war in an already
thin-margin market. Others believed Amazon could create and capture unprecedented value
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by creating a seller platform.
In November 2000, Amazon Marketplace was launched for third-party vendors to sell their
products on Amazon.com. For a monthly subscription fee of $9.99, 2 vendors could access
Amazon’s broad customer base to market their products and use its superior shopping
infrastructure such as one-click shopping. Amazon provided both individual sellers and
small/large professional vendors with automated tools to list their products, manage them, and
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collect payments. The company collected a sales commission of up to 5% of the sale.
Unlike eBay, then the largest shopping portal, Amazon created a uniform product description
page where customers could see available products from different vendors on one page (see
Exhibit 2). Customers could conveniently compare prices, shipping options, vendor
information, and use an Amazon account to process payment, check order status, and
communicate with the vendors. Prices dropped naturally as they became visually easy to
compare; the range of goods expanded to rare items as more vendors began to accommodate
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various customer needs.
Exhibit 2
Product Detail Webpage Including Third-Party Vendors (2008) 3
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By successfully establishing an online bazaar, Amazon created an ecosystem in which third-

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party vendors and customers reinforced greater value and lowered costs at the same time,
allowing Amazon to strengthen its position in e-commerce, generate more revenue for itself,
and collect a greater volume of customer search and transaction history, enabling it to provide
2 As of May 2017, Amazon charges monthly subscription fee of $39.99 to professional sellers.
3 Steiner, I. (2008). Amazon.com Tests New Layout on Detail Pages. [online] Ecommercebytes.com.
Available at: http://www.ecommercebytes.com/cab/abn/y08/m07/i18/s01 Accessed 9 Jun. 2017
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more accurate personalized recommendations. Revenues from third-party merchants
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accounted for 6% of Amazon’s total revenue in 2000, jumped to 17% in 2003 and 28% in
2005.
In 2006, Amazon launched a complementary program for third-party vendors – Fulfilment by

Amazon (FBA), whereby vendors could send their inventory to Amazon’s fulfilment centres
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for warehousing and order fulfilment, using Amazon’s efficient logistics system and customer
service program. Vendors’ products were treated the same as Amazon’s, including free two-
day shipping for ‘Prime’ members. Amazon charged a fulfilment fee based on a tiered system
which grouped products by weight and volume.
Not only did Amazon share its fulfilment and customer service capabilities, it also shared
information collected through its website. Amazon analysed data and provided each vendor
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with curated, proactive recommendations, such as inventory quantities and new selections to
add. This free service helped vendors grow their business – hence the two could grow
together. Sales of third-party merchants jumped from 26% in 2007 to over 40% in 2013, while
active Amazon sellers worldwide doubled from one million to over two million.
In 2015, Amazon expanded the marketplace platform to a different level with Amazon
Business, a marketplace dedicated to business customers. Like Amazon.com, third-party
vendors could sell products that catered to the requirements of business customers such as
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dynamic pricing for bulk orders or a tax exemption program.
With Home Services, Amazon’s on-demand home service marketplace, service providers
could register for free, Amazon ran background checks, and then connected them to
customers in need in the vicinity. It charged commission on the service price for completed
jobs, depending on the arrangement (pre-packaged, customer service, recurring services).
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2) Amazon Prime (2005)
For both online retailers and shoppers, shipping is an unavoidable cost. Free shipping is
sometimes offered to lure customers via a promo code or purchased over certain amount
required. Amazon made a series of efforts to expedite shipping and lower its cost by building
more fulfilment centres, developing warehousing software and streamlining logistics.
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However, standard shipping still took four to six days. The company offered varied shipping
options. For example, Super Saver Shipping, for customers purchasing over $99, provided
free delivery but did not guarantee the date of delivery. ForG time-sensitive customers,
Amazon offered overnight, two-day and three-day shipping – at a cost.
Customers thus had to compare shipping options. Not only did this make them unhappy about
additional shipping costs but they had the hassle of the trade-off between speed and cost of
delivery. Ironically, the more loyal customers were, the more shipping costs they incurred.
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Rather than rewarded for consuming more, they simply had the hassle of shipping costs every
time they ordered.
Concerning that these shipping arrangements would cognitively discourage online shopping
and push customers to traditional retailers like Wal-Mart or Target (even though Amazon
offered a wider selection and lower prices), Amazon felt it was imperative to remove the
hassle of timely and costly shipping in order to create a leap in the customer experience,
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thereby nurturing loyalty. It therefore designed a customer loyalty program around free, fast
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shipping.
Traditionally, loyalty programs were based on a free-membership point-earning system –

airline mileage and credit card points, for example, incentivized customers who used their
service instead of competitors’. Points were accumulated and redeemed in exchange for
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discounts or services. Amazon redefined the basic premise of loyalty program when it created
Amazon Prime in 2005.
Prime was expensive – members paid a $79 annual fee – and there were no points. Instead,
benefits were directly linked to every purchase they made – free, unlimited two-day shipping
(and discounted rate for overnight shipping) of orders fulfilled by Amazon. Prime members
were not hassled by different shipping options and associated costs; they had instant
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gratification every time they ordered from Amazon.
From 2011, Amazon added more services to Prime membership – Instant Video that
customers could access Netflix-like video streaming services, Kindle Lending Library, Prime
Music, Prime Drive and Prime Photo. In 2013, the annual fee was increased to $99, with
students offered a 50% discount following a free six-month trial period. The following year,
Amazon launched a Prime Now service, allowing customers in some metropolitan areas to
receive delivery within two hours for free, or one hour for $7.99.
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Amazon created a related courier service, Amazon Flex, whereby independent drivers could
sign up and handle delivery for Prime Now orders. Drivers earned $18-$25 per hour using an
Uber-like app to pick up packages from small warehouses near metropolitan areas and deliver
them to the customer’s doorstep.
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Prime Day was created in 2015 to celebrate Amazon’s 20th anniversary – a one-day-only
global event to provide Prime members with hugely discounted offerings. Amazon saw 86.3
million visits on Prime Day in 2015, compared to 87.1 million visits on Black Friday, and
95.3 million visits on Cyber Monday in the same year.
For the first few years, Prime was considered a loss maker due to unlimited free two-day
shipping; revenues from membership fees and profit margins were not enough to cover the
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cost of shipping. But Amazon saw Prime as a long-term investment to nurture customer
loyalty. It took four years to reach 2 million Prime members, and then the number of
subscribers soared. Prime changed the behaviour of customers and encouraged them to
purchase more and often from Amazon to make the membership fee worthwhile. Shopping at
Amazon rather than in stores became a habit thanks to a superior customer experience: low
prices, high convenience, wide selection, and above all instant gratification. Together with
perks like unlimited photo storage, music and video streaming services, customers were
locked in to Amazon.
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It became extremely difficult for competitors to poach Amazon’s customers. In 2012, Prime
members were reported to be 7.6 million, 4% of the total Amazon customer base. Four years
later they outnumbered non-members, with an estimated 63 million members. By June 2017
the number had reached over 80 million, and 64% of American household had at least one
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Amazon Prime account. 4 Prime members spent 40% to 68% more than non-members.
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According to Consumer Intelligence Research Partners (CIRP), in 2015 Prime member spent
on average $1,100 per year compared to $600 per year for non-members; 5 70% of 30-day free
trial Prime users switched to paid membership, and 95% of current Prime members planned to
renew their subscription. 6 Renewed members spent more than the previous year.
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Prime became Amazon’s core service, building stronger customer relationships and a
sustainable business model. It generated membership fees and extra revenues as Prime
members spent more. The larger sales volume enabled a lower cost structure. As Prime
became a powerful service, more third-party vendors joined the Fulfilment by Amazon (FBA)
program in order to be eligible for Prime offerings. In turn, Amazon could offer a wider
selection of Prime-eligible items and make more commission from the FBA program.
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In 2016, Amazon launched Prime Air – Amazon-operated cargo jets – bypassing traditional
carriers like FedEx and UPS. Leasing 40 aircrafts and establishing a cargo hub in Kentucky,
Amazon could deliver lightweight parcels within the US faster, thus lessening its dependency
on cargo airlines. Additionally, Prime Air started testing package deliveries using drones.
While regulatory issues remain to be resolved in each country, Amazon aimed to use drones
for small packages up to 2.5kgs, for delivery within 30 minutes (see Exhibit 3).
Exhibit 3
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Amazon Prime Air (Left: Cargo Fleet, Right: Drone)
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4 Hyken, S. (2017). Sixty-Four Percent Of U.S. Households Have Amazon Prime. Forbes. [online] Available
at: https://www.forbes.com/sites/shephyken/2017/06/17/sixty-four-percent-of-u-s-households-have-
amazon-prime/#71f321304586 Accessed 8 Aug. 2017
5 Isidore, C. (2016). Amazon Prime now reaches nearly half of U.S. households. CNN. [online] Available at:
http://money.cnn.com/2016/01/26/technology/amazon-prime-memberships/ Accessed 23 May 2017
6 Duryee, T. (2015). The number of U.S. Prime members eligible for Amazon’s huge sale tomorrow: 44
million – GeekWire. [online] GeekWire. Available at: https://www.geekwire.com/2015/the-number-of-u-s-
prime-members-eligible-for-amazons-huge-sale-tomorrow-44-million/ Accessed 23 May 2017
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3) Amazon Web Service (2006) 7
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To our shareholders:
In many ways, Amazon.com is not a normal store. We have deep selection that is
unconstrained by shelf space. We turn our inventory 19 times in a year. We personalize the
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store for each and every customer. We trade real estate for technology (which gets cheaper
and more capable every year). We display customer reviews critical of our products. You can
make a purchase with a few seconds and one click. We put used products next to new ones so
you can choose. We share our prime real estate—our product detail pages—with third
parties, and, if they can offer better value, we let them.
Letter to Shareholders, 2002
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Amazon focused on delivering an outstanding customer experience and cost savings by
staying lean and efficient. Yet despite its hyper growth, it experienced huge inefficiencies and
seethed with frustration in building applications for better customer service and operational
efficiency. Each project involving IT application deployment required a lengthy development
process to build the database, computing and storage component. Developers had to go
through the same process from scratch every time, as existing IT solutions couldn’t be reused
or scaled up/down. Not only was project development inefficient, it was also hard for project
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managers to accurately predict the launch date. This was not only an internal problem as
Amazon was providing IT solutions and web infrastructure to affiliates and third-party
merchants.
Amazon took on the unorganized, entangled development platforms and built decentralized,
reliable infrastructure, where developers could create IT solutions more efficiently using well-
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documented suites of application programming interfaces (API). This led to the realization
that all developers and engineers were struggling with the same problem, just as all companies
were burdened with the high cost of creating and maintaining IT solutions. G
In mid-2000, Infrastructure as a Service (IaaS) was only available to big corporations.

Mainstream infrastructure service providers such as IBM, HP, and EMC were offering on-
premise IaaS. Most companies had to build a huge storage and computing system in case of a
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traffic surge – but for the most part capacities were underutilized, yet costing money and
people to maintain. With cloud computing on the rise since Salesforce.com had pioneered the
concept of delivering enterprise applications over the internet, some companies began to offer
a storage system under a pay-as-you-use business model.
Amazon brought the advantages of cloud computing into IaaS and built a reliable, scalable
and cost-effective IT infrastructure (such as servers, storage and networks) to offer developers
and engineers in the form of web-based services. Most importantly, Amazon saw IT
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infrastructure as a utility, like electricity, and borrowed the on-demand utility pricing model.
Instead of building or buying huge storage or computing power to make provision for
uncertain traffic surge, companies simply paid for what they used in Amazon Web Services
(AWS). Instead of upfront costs to build physical servers and storage systems, customers
7 Amazon Web Service (AWS) was created in 2002. However, this case focuses on its first blue ocean
strategic move of launching Elastic Compute Cloud (EC2) and Simple Storage Service (3S) in 2006.
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could use and pay for what they needed. No longer did they have to estimate future usage or
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and waste excessive capacity.
In 2006, Amazon introduced two remarkable products – Simple Storage Service (3S) and
Elastic Compute Cloud (EC2). Simple Storage Service (3S) enabled companies to store and
access unlimited amounts of data, paying $0.15 per gigabyte per month, which was 20% -
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30% of offerings from existing on-premise suppliers like IBM and HP. Small companies and
start-ups in particular found 3S more reliable, secure and cost-effective in the long run as they
had no need to install, manage or maintain hardware. For example, SmugMug, the photo-
hosting service, which used 3S since 2006, claimed that they had saved almost $1 million in
storage costs for the first 12 months. 8 Notable users also included Netflix, Dropbox, Tumblr
and Pinterest. Elastic Compute Cloud (EC2) was a virtual computing service which allowed
companies to rent virtual computers to run their own computer applications.
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AWS was an instant success – freelance developers, start-ups and small companies who could
not afford on-premise IaaS flocked to use the service. For large companies and public
agencies it was cost-effective, reliable and secure. Most of all, developers were able to build
innovative IT applications quickly using AWS’s various services as building blocks.
By 2015, AWS served over 1 million active customers in 190 countries, including
government agencies, education institutes, start-ups and non-profit organizations. AWS grew
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massively and gained market dominance – its revenue was larger than those of its major
competitors’ combined. 9 As of 2016, AWS offered over 70 IT services including computing,
networking, storage, database, analytics and deployment, and it became one of the most
profitable Amazon divisions (see Exhibit 4).
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8 MacAskill, D. (2006). Amazon S3: Show me the money. [Blog] Smugmug. Available at:
https://don.blogs.smugmug.com/2006/11/10/amazon-s3-show-me-the-money/ Accessed 2 Jun. 2017
9 NV, R. (2015). AWS Still Bigger than its Four Main Competitors Combined Despite Surging Growth.
[online] Srgresearch.com. Available at: https://www.srgresearch.com/articles/aws-still-bigger-its-four-
main-competitors-combined-despite-surging-growth Accessed 9 Jun. 2017
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Exhibit 4
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Operating Profit of Amazon Web Services and Amazon
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4) Kindle (2007)
In 2004, Amazon launched project “Fiona” to build its own e-book reader. It was a significant
move for an online retailer to develop and manufacture a hardware device, yet Amazon was
not the first to create an e-book reader.
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In 1997, Barnes & Noble together with Bertelsmann had invested in a Silicon Valley
company NuvoMedia, and created the Rocket eBook in 1998. Equipped with a LCD screen,
Rocket eBook could store up to 10 e-books which could be purchased online at Barnes &
Noble and Powell’s Bookstore. Users had to connect the device to a computer and transfer e-
books. While the novelty device attracted attention from book lovers, the company sold only
20,000 readers in 1999. 10 Not only was the price too high ($499), there was a lack of available
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book titles in the online bookstores.
In 2006, Sony introduced a second generation e-reader, the PRS-500. 11 As a leading

consumer electronics maker, Sony greatly improved the reading experience with state-of-art
technology. Priced at $350, the PRS-500 was lighter, boasted a longer battery life, and stored
more e-books than previous e-readers. Using E-ink technology that eliminated backlight,
users could experience more natural reading on an electronic device. There were a wider
selection of titles (over 45,000) in the Sony Reader Library.
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10 Baer, D. (2014). The Making Of Tesla: Invention, Betrayal, And The Birth Of The Roadster. [online]
Business Insider. Available at: http://uk.businessinsider.com/tesla-the-origin-story-2014-10?r=US&IR=T
Accessed 8 Aug. 2017
11 In 2004, Sony launched Librie, the first e-book reader using E-ink technology available only in Japan. Two
years later, Sony introduced the PRS-500 to the US market.
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A year later, Amazon unveiled Kindle. Priced at $399, Kindle had similar technical specs to
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Sony’s PRS-500 (see Exhibit 5), but its impact was significantly different.
Exhibit 5
Comparison between Sony PRS-500 and Amazon Kindle
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Sony PRS-500 Kindle
Launch September 2006 November 2007
Price at launch $350 $399
Weight 250g 290g
Display E-ink technology E-ink technology
6-inch screen 6-inch screen
Storage 64MB 250 MB
Battery 7,500 page turns per charge 1-week of reading (turn off Wi-Fi)
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E-book download Through USB port from computer Direct download through Wi-Fi or 3G
Bookstore Sony Reader Library Amazon Kindle Store
Kindle was equipped with a built-in wireless connection (3G and Wi-Fi) called Whispernet. It
enabled users to browse, purchase, download and read the book instantly without having to
connect to a computer. Using an Amazon account, users could access the Amazon e-book
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store and instantly purchase a book or download a sample. If the user subscribed to a
newspaper or magazine, it could be delivered straight to their Kindle when available.
Moreover, users had a vast e-book catalogue to choose from – over 88,000 titles at launch,
priced at $9.99 or less.
Amazon saw the economics of Kindle differently from other e-book makers. As Jeff Bezos
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said, “This isn’t a device, it’s a service,” 12 Kindle aimed to offer an unprecedented reading
experience so that readers would purchase e-books repeatedly. Hence, Amazon set the price
of Kindle as low as possible to attract a mass of buyers, and made recurring profit from
selling e-books rather than a one-time profit from selling the device. Amazon later reported
that Kindle owners purchased 2.7 times more than they had purchased printed books prior to
owning a Kindle. 13 In order to address publishers’ concern about piracy, Amazon developed a
proprietary format called AZW. All e-books sold in the Kindle Store were in AZW format
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and were limited to Kindle devices registered to the user account of the purchaser.
Kindle’s success exceeded all expectations. Amazon sold over 250,000 Kindle devices in the
first 12 months, and it was reported to have sold 3 million as of December 2009. 14 In 2010 it
was estimated that Amazon made $2.5 billion revenue from e-book sales, which accounted for
over 7% of its total revenues. In 2011, sales of e-books surpassed those of printed books on
Amazon.com.
Its sweeping success was not limited to the company – Amazon revived a nearly dormant e-
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book market space and made publishers create more e-books; e-book sales increased by
12 Levy, S. (2007). Amazon Reinventing the Book. Newsweek. [online] Available at:
http://www.newsweek.com/amazon-reinventing-book-96909 Accessed 10 Apr. 2017
13 Amity Research Centers, (2009). Kindle vs Nook. Bangalore: Amity Research Centers, p.9.
14 Arrington, M. (2010). 3 Million Amazon Kindles Sold, Apparently. Tech Crunch. [online] Available at:
https://techcrunch.com/2010/01/29/3-million-amazon-kindles-sold-apparently/ Accessed 11 Apr. 2017
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82.9% from August 2007 to August 2008. However, it was still taking 1%-3% of total book
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sales. In 2012, e-book sales reached $3.35 billion and accounted for 23% of US trade
publishers’ net revenues (see Exhibit 6).
Exhibit 6
Percentage of e-Book sales of US Publisher Sales in 201215
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Barnes & Noble, the largest book retailer in the US, re-entered the e-book reader market in
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2009 with Nook. Priced at $259, the device was equipped with double screens – a 3.5-inch
colour touchscreen and a 6-inch E-ink display. It was technologically on a par with the
Kindle. Offering more e-book titles (one million including 500,000 free e-books) than the
Kindle store, Barnes & Noble competed to overtake Amazon in the fast growing e-book
market. In 2010, Amazon was the market leader with 54% market share, followed by Nook
store (25%) and Sony Reader store (10-12%). 16 Five years later, Amazon’s dominance was
further consolidated, Sony had withdrawn from the market, and Barnes & Noble had lost
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significant market share (see Exhibit 7).

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15 Richter, F. (2013). Infographic: eBooks Account for 23% of U.S. Publisher Sales in 2012. [online] Statista
Infographics. Available at: https://www.statista.com/chart/1091/ebook-sales-in-the-us/
Accessed 14 Apr. 2017
16 Kozlowski, M. (2015). What market share do Amazon, Apple, B&N, Kobo and Google have selling
eBooks?. [Blog] Good E Reader. Available at: http://goodereader.com/blog/e-book-news/what-market-
share-do-amazon-apple-bn-kobo-and-google-have-selling-ebooks Accessed 13 Apr. 2017
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Exhibit 7
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Market Share of E-Books in the US, 2015 (unit sales including self-publishing
books) 17
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Failed Strategic Moves
1) Amazon Auctions (1999 - before November 2004)
From selling books online at its launch in 1995, Amazon gradually expanded its range of
products (see Appendix 1), selling music and videos as of 1998, and consumer electronics,
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video games and toys as of 1999. With its wide selection, easy 1-click shopping, and
customer-centric programs, Amazon had major growth ambitions. Beyond e-commerce
retailing, it began eyeing the online auction market.
The person-to-person (P2P) auction market was expected to grow to $3.7 billion by 2000. 18
Amazon wanted to tap into the market where eBay dominated with over 75% market share.
The largest and most popular P2P trading community, eBay was founded in 1995, the same
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year as Amazon. With its efficient and entertaining auction format to buy and sell personal
items, it benefitted from the network effect – the large number of buyers attracted more
sellers, which in turn grew the number of buyers, and so on. By February 1999, there were
over 186 million bids on over 50 million items. Although eBay was the indisputable market
leader, Amazon had a greater market presence than eBay with more than twice its customer
base (see Exhibit 8).
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17 Ibid.
18 Bradley, P. S. 2001, “eBay, Inc.” Harvard Business School Publishing, 21 Jun, p.1.
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Exhibit 8
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Comparison between Amazon and eBay in 1998
In 1998 Amazon eBay

Revenue $ 609,819,000 $ 86,129,000
Market capitalization $ 19,573,000 $ 17,854,000
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Brand ranking in e-commerce 19 No.1 No.3
Customer base 8.4 million 3.8 million
In March 1999, Amazon announced the launch of Amazon Auctions

(www.amazon.com/auctions). It was integrated as a tab on the Amazon.com website, and
boasted faster and better search results with new useful features than eBay (see Exhibit 9)
Amazon’s 8 million users were preregistered to sell, bid and buy. They were also given a $10
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gift certificate if they read the letter from Jeff Bezos introducing the new auction category.
Amazon charged lower seller fees than eBay and introduced a free insurance program up to
$250 for both buyers and sellers.
The following month, Amazon acquired LiveBid.com, the online auction software company,
to broadcast (offline) auctions in brick-and-mortar auction houses simultaneously over the
internet, so that online bidders could participate. In June 1999, Amazon entered into an
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alliance with Sotheby’s auction house, seeking to expand its range of collectibles. For
Sotheby’s, Amazon’s online expertise and infrastructure could be used to expand low-priced
collectibles based on Amazon’s large customer base. Chairman of Artnet, Hans Neuendorf,
said, “We see the Sotheby’s-Amazon deal not as art world news but as an attempt by Amazon
to compete with eBay.” 20 Using LiveBid’s live auction system, users could participate in
offline auctions wherever they were.
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With an aggressive investment of $25 million, Amazon Auctions seemed to grow fast in the
first few months. Yet it was not enough to reach a critical mass of buyers and sellers to enjoy
a network effect like eBay. Existing sellers and buyers did not find enough compelling utility
to jump ship (from eBay). Potential customers were not interested in auctions – especially
when Amazon’s customers were not accustomed to a bidding system. They could skip the
hassle of auctions and purchase the same product instantly (one-click shopping) at a fixed
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price on the same website. Moreover, the majority did not notice the “Auctions” tab on the
website as it was often out-of-sight. Amazon did not officially announce the termination of
Amazon Auctions, but by November 2004 it was defunct.
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19 A study by Brand Institute, sourced from https://www.bloomberg.com/news/articles/1999-05-30/e-bay-vs-

dot-amazon-dot-com
20 Vogel, C. (1999). Sotheby's and Amazon.com Strike a Deal to Sell on Line. The New York Times. [online]
Available at: http://www.nytimes.com/1999/06/17/business/sotheby-s-and-amazoncom-strike-a-deal-to-
sell-on-line.html Accessed 1 Mar. 2017
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Exhibit 9
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Amazon Auctions
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2) A9.com Search Portal (2004 – 2006)
In 2003, Amazon founded A9, an independent company, in Palo Alto, California, with a
mission to develop technology for search and advertising. Headed by Udi Manber, former
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Chief Scientist at Yahoo, A stood for Amazon, and the 9 letters in the word “algorithm”. The
search engine war for Amazon was about to begin.
In early 2004, the search engine industry was lucrative yet crowded. It was led by the big
three – Google (39.4%), Yahoo (30.4%), and MSN (29.6%) – followed by AOL (15.5%) and
Ask Jeeves (8.5%). 21 There were 151 million active internet users in the US, 76% of whom
spent nearly 40 minutes a month on search.
Product search for shopping was a critical domain for Amazon – a search engine was an
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intermediary to draw traffic to Amazon.com and the company spent heavily on advertising for
popular search keywords like flat screen TV and Apple iPod. 22 Amazon wanted its own search
21 Users could visit more than one search engine; therefore the combined totals exceed 100 percent. Sourced
from http://www.tridig.com/sem_docs/Search%20Engine%20Ratings.pdf
22 Stone, B. (2013). The everything store. 1st ed. USA: Little, Brown and Company, p.194.
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engine to gouge out Google’s market share, and ensure it would be less vulnerable to other
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search engines.
In April 2004, a search portal was launched. The A9 search engine had a simple interface like
Google’s and used Google’s search technology, sharing advertising revenue through
AdWords. But search results were displayed differently: laid out in expandable columns
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grouped by sources to reveal pages, images and reference materials (see Exhibit 10) It also
provided product search results from Amazon.com, encyclopaedia from Wikipedia, movie
information from IMDb, and website information from Alexa. Additional panes, which could
be hidden, included book search results and the search history of the user. The A9 search
engine aimed to go beyond Google by becoming the first personalized search engine. The
“Search engine with memory,” as it was dubbed by Udi Manber, enabled users to organize
and retrieve past searches, which could be deleted. To sum up, the A9 search engine let users
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edit their search results in expandable columns as preferred, and manage their search and web
history.
Exhibit 10
Amazon A9 Search Engine
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Over time, the A9 search engine introduced Clickriver (Google’s AdWord’s equivalent
advertising program) and Blockview (like Google’s Streetview map-viewing program, which
was introduced two years later) to differentiate it from existing search engines. However,
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performance was suboptimal and it failed to gain public interest. People did not feel
personalized search had more utility; rather they were concerned about their activities being
monitored on the web. The user interface was confusing – even though columns were
customizable, there was little benefit to search results grouped by categories on one screen.
After two years of poor performance and flat traffic growth, Udi Manber decided to leave A9.
In August 2006, the A9 search engine was ranked 32 among US search engines, representing
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0.1% of all searches. 23 In October, Amazon announced that it would terminate the search
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engine function of A9.
As of 2017, A9 remains Amazon’s leading technology arm focused on product searches and
ads within Amazon.com. Despite serving 1.2 billion ads per day, the quest to become a
general-purpose search engine ended in failure.
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3) Endless.com (2006 – 2012)
From an online bookstore in 1995, the ten-year old Amazon was the leading online retailer
with $4.9 billion in revenue from a wide range of categories (see Appendix 1) – the apparel
and accessories categories were added in 2002 and the shoe section in 2004, yet did not
generate sizeable revenues. Meanwhile, online fashion retailing was growing fast, especially
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online shoe retailing which reached $2.9 billion in revenues and was forecast to double in five
years. 24
The problem for Amazon was that it was difficult to navigate and search fashion items such as
shoes on Amazon.com was optimized for product searches like books and electronic
appliances. Online shoe shoppers normally filtered by multiple variables such as price, size,
colour and material, but Amazon could not provide the same shopping experience. In addition,
shoe brands like Nike were reluctant to supply their merchandise to Amazon as it could
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tarnish the brand reputation by selling products at heavily discounted prices.
Amazon clearly needed a breakthrough to poach a greater share of growing demand for online
fashion retailing. First, it went on the hunt for existing established retailers – rival companies
in the apparel and shoes market. In February 2006, Amazon acquired Shopbop.com, an online
retailer for designer brands such as Juicy Couture and Diane Von Furstenberg.
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The company also eyed Zappos.com, the Las Vegas-based online retailer offering a wide
selection of shoes and superb customer service. Started in 1999, Zappos was the leading
online shoe retailer, earning $370 million in revenue. In the summer of 2005, Jeff Bezos met
with the Zappos’ leadership team, aiming to discuss a potential acquisition. While Zappos was
interested in a potential partnership, it did not intend to be a part of Amazon, so the meeting
was quickly concluded. There was no outcome. 25
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Amazon therefore decided to create from scratch its own online store dedicated to shoes and
accessories. It spent $30 million designing the new website and launched Endless.com in
December 2006. Albeit an independent website, it used Amazon’s warehouse and distribution
system and customers could log in with their Amazon account.
Endless.com offered over 15,000 styles of women’s apparel, shoes and accessories from 250
brands. The enhanced search function enabled search by price, style, brand, size, colour and
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23 Linn, A. (2006). Amazon's A9 Search Engine Getting Less Personal. Seattle Pi. [online] Available at:
http://www.seattlepi.com/business/article/Amazon-s-A9-search-engine-getting-less-personal-1216172.php
Accessed 28 Feb. 2017
24 The Mercury News, (2007). Amazon launches new handbag and shoe site. [online] Available at:
http://www.mercurynews.com/2007/01/03/amazon-launches-new-handbag-and-shoe-site/ Accessed 27
Feb. 2017
25 Stone, B. (2013). The everything store. 1st ed. USA: Little, Brown and Company, p.270.
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even heel height. It provided several professional photos and product videos. Endless.com
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competed on price and promised to pay 110% of the difference if customers found a lower
price at another website or if their purchased item was offered at “sale price” within 14 days
of shipment. Copying Zappos’ best customer service practice, Endless.com offered 24-hr
customer service and free shipping, as well as free return within 365 days. It even offered free
overnight shipping (compared to the free standard shipping service that Zappos was offering).
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Given the low profit margins (owing to its lowest-price policy and free overnight shipping),
every sale actually made a loss for Amazon. But the company had resolved to fight a war of
attrition, willing to bleed in order to make Zappos bleed more. Zappos had to compete by
upgrading its free shipping service from standard to overnight in order to match Endless.com.
Since its sales were a lot larger, this engendered substantially larger costs. Amazon spent
more than $150 million in the first two years to beat Zappos.com, yet Endless.com was never
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able to attract mass traffic and failed to gain significant market share. On the contrary, Zappos
did not stop growing – reaching $840 million in revenue in 2007 and $1 billion in 2008. 26
In 2009, Amazon approached Zappos looking to make a potential acquisition – but the Zappos
leadership team agreed that the company would remain independent, along with the
management team, and preserve its unique culture. Amazon ultimately bought Zappos for
$1.2 billion in 2010. 27 Endless.com was closed in 2012 by merging the site into
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Amazon.com/Fashion.
4) Fire Phone (2014 – 2015)
In 2010, Amazon launched “Tyto” – its first smartphone project – to compete in the fast-
growing smartphone market established by the iPhone in 2007. The number of worldwide
smartphone users reached 1.6 billion and sales of smartphones as a percentage of total mobile
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devices jumped from 19% in 2009 to 72.1% in 2010. 28 Consequently, mobile business
became more important than ever as smartphones became indispensable – and able to
purchase and pay.
Afraid of missing the latent opportunity, Amazon wanted its own hardware. Like Kindle, that
had created an ecosystem and dominated the e-book market, Jeff Bezos wanted a mobile
phone that would lead users to its online store more directly and frequently. Amazon aimed to
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wow customers with something big and distinctive so that they would buy an Amazon device
instead of an iPhone. 29
26 Learn more about the Zappos’ success from the cases “Zappos.com (A): Bring the Shoe Store to your
Home” and “Zappos.com (B): Strategy Powered by Culture” written by the same authors.
27 Wauters, R. (2009). Amazon Closes Zappos Deal, Ends Up Paying $1.2 Billion. [online] TechCrunch.
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Available at: https://techcrunch.com/2009/11/02/amazon-closes-zappos-deal-ends-up-paying-1-2-billion/

Accessed 30 Jun. 2017
28 Gartner, (2011). Gartner Says Worldwide Mobile Device Sales to End Users Reached 1.6 Billion Units in
2010; Smartphone Sales Grew 72 Percent in 2010. [online] Available at:
http://www.gartner.com/newsroom/id/1543014 Accessed 26 Feb. 2017
29 Carr, A. (2015). The Real Story Behind Jeff Bezo's Fire Phone Debacle And What It Means For Amazon's
Future. Fast Company. [online] Available at: https://www.fastcompany.com/3039887/under-fire Accessed
26 Feb. 2017
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Four years from its inception, Amazon unveiled the Fire Phone in July 2014. The hardware
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looked like other smartphones of that time – a 4.7-inch touchscreen display with a high-
definition Gorilla glass screen, 13 Megapixel cameras and a micro-USB connector port. The
cost of a Fire Phone by teardown analysis was assumed to be $205, which was higher than the
cost of the iPhone 5S and lower than the Samsung Galaxy 5S. 30 The phone came with two
storage options, 32GB and 64GB, priced at $199 (32GB) and $299 (64GB), and a two-year
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exclusive contract with AT&T. The unlocked phone for 32GB was priced at $650. Amazon
offered a free 1-year Amazon Prime Membership ($99), unlimited photo storage in the
Amazon Cloud Drive, and 24/7 customer support branded Mayday.
The phone was equipped with cool technology including Dynamic Perspective and Firefly.
Dynamic Perspective displayed 3D images and graphics. Using four front cameras, the phone
captured the image in depth and created a more immersive photo and video. The gyroscope
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inside the phone allowed users to navigate menus and access shortcuts with actions such as tilt,
swivel and peek. Firefly used the camera and microphone to capture the image and sound,
identify it, and then link to useful information, particular to its marketplace. For instance,
once a user captured the book cover of Blue Ocean Strategy, it would lead the user to the
related webpage on Amazon.com.
The Fire Phone flopped miserably. People thought Dynamic Perspective and Firefly were
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gimmicky, adding no meaningful value to the smartphone experience. One of the engineers
who developed the Dynamic Perspective said, “We poured surreal amounts of money into it,
yet we all thought it had no value for the customer, which was the biggest irony.” 31 Firefly
also disappointed users with its inaccuracy, as it often failed to recognize the image or sound
correctly and showed incorrect results. The Fire Phone not only focused on worthless features,
but was poorly supported by its own app store. It ran on the Fire Operating System (OS), an
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altered version of Android OS, in which third-party developers should have participated in
building large pool of available apps like Apple’s App Store and Google’s Play. Lacking in
available apps, users found the phone far less smart than other smartphones, while its price
was equivalent to the iPhone 5S ($149 in September 2014).
Amazon's debut phone isn't bad per se, but there's little incentive for anyone to
switch carriers or platforms to buy it. Its unique features don't provide enough
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utility, and come at the expense of both battery life and performance.
Brad Molson, Engadget 32
With mediocre hardware run on a poorly supported operating system, useless features and a
premium price, it was predictably unable to attract buyers or make a dent in the smartphone
market. Amazon dropped the price from $199 to $0.99 just six weeks after the launch, yet no
one wanted to buy. Amazon discontinued sales in August 2015.
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30 Hesseldahl, A. (2014). Amazon Fire Phone Costs $205 To Build, Teardown Shows. [online] Recode.
Available at: http://www.recode.net/2014/7/28/11629224/amazon-fire-phone-costs-205-to-build-teardown-
shows Accessed 26 Feb. 2017
31 Ibid.
32 Molsen, B. (2014). Amazon Fire phone review: a unique device, but you're better off waiting for the sequel.
[online] Engadget. Available at: https://www.engadget.com/2014/07/22/amazon-fire-phone-review/
Accessed 26 Feb. 2017
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The debacle entailed a significant loss. In October 2014, when Amazon released its third
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quarter financial results, it reported a $170 million write-down, mainly owing to its spending
on the Fire Phone, and a $437 million net loss, its biggest in 14 years. Unsold Fire Phones
were valued at $83 million.
Amazon in 2016
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Amazon was ranked the ninth most valuable company in the world with a market cap value of
$280 billion on 31 March 2016, 33 a 62% increase on its market cap of the previous year.
Surprisingly, Amazon’s net income in FY 2015 was only 0.56% of total revenue, far below
those of its competitors (see Exhibit 11). In fact, Amazon’s stock price has oddly increased
over the years, despite constantly reporting negative or scant net income (see Exhibit 12).
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People joked that Amazon is a charitable organization run by the investment community for
the benefit of consumers. 34 Amazon’s profitless past is due to its massive investment in
expansion. It has built fulfilment centres all around the world (109 by March 2015), expanded
global operation, acquired a wide array of companies, and poured investment into R&D. In
2015, Amazon’s R&D expenditure was $12.6 billion, larger than Apple ($8.1 billion),
Alphabet ($12.3 billion), and Microsoft ($12 billion).
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Exhibit 11
Market Cap and Net Income Margin of Leading Technology and Consumer Services
Companies
Market Cap
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Ranking Company Market Cap ($billion) Net Income Margin (%)

(2016)
1 Apple Inc. $602 22.80%
2 Alphabet Inc. $518 21.80%
3 Microsoft Corp. $437 13.03%
6 Facebook Inc. $325 20.57%
9 Amazon.com $280 0.56%
18 Wal-Mart Store Inc. $215 3.40%
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33 PricewaterhouseCoopers LLP., (2016). Global Top 100 Companies by Market Capitalization. [online]
PricewaterhouseCoopers LLP., p.62. Available at: https://www.pwc.com/gx/en/audit-
services/publications/assets/global-top-100-companies-2016.pdf Accessed 5 Apr. 2017
34 Greenfield, J. (2014). Amazon: Still A Charity For Consumers Funded By Investors?. Forbes. [online]
Available at: https://www.forbes.com/sites/jeremygreenfield/2014/01/30/amazon-a-charity-for-consumers-
funded-by-investors/#157a8f84607b Accessed 19 Jun. 2017
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Exhibit 12
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Amazon’s Historical Share Price and Net Income (Dec.31 of each year)
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Discussion Questions
1. What are the key commonalities of Amazon’s successful strategic moves (Marketplace,
Prime, AWS, Kindle)?
2. What are the key commonalities of Amazon’s failed strategic moves (Auctions, A9 Search
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Engine, Endless.com, Fire Phone)?
3. What divides successful strategic moves from failures?
4. Jeff Bezos wrote in his Letter to Shareholders (2016): “I believe we are the best place in
the world to fail (we have plenty of practice!), and failure and innovation are inseparable
twins.” Were Amazon’s failed strategic moves truly innovative?
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5. Why do investors trade Amazon’s present for the future? What should be Amazon’s
strategic focus for future growth?
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Appendix 1. Product Expansion of Amazon in the First 10 Years
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Copyright © INSEAD
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Appendix 2. Timeline of Amazon’s Distinguished and Forgotten Strategic Moves
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Appendix 3. Amazon Marketplace: Positive Loop for Growth
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Appendix 4. Amazon’s Products & Services Portfolio in 2016
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Category
1 Online Retail Amazon.com & 13 other country domains: 120 million different items, 44% of items are sold by third-party vendors
Independent websites (17): 6pm, Abebooks, Beauty Bar, Books Depository, Casa, Diapers, East Dane, Fabric, Junglee, Amazon Fresh,
Shopbop, Soap, Wag, Warehouse Deals, Woot!, Yoyo, Zappos
2 Online Services Brilliance Audio: Independent audio book publishing
Comixology: Cloud-based digital distribution platform for comics
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Inspire: Free digital educational resources
Kindle Direct Publishing: Self-publishing e-book and paperback
Restaurants: Food delivery from local restaurants
ACX: Audio book publishing platform
TenMarks: Math activities for kids & schools
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Create Space: Self-publishing and free distribution of books, CD, DVD
Rapids: Mobile app for children’s short, fun stories
Home Services: On-demand household-work related service
Drive: Unlimited cloud storage
3 Digital Contents Kindle Store: E-books, magazines
Audible: Audio books
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App Store: Android apps for android phones, tablets, and Kindle Fire
Music: Digital music download and streaming service
Video: Streaming or download of movies and TV shoes
Studio: Content production by Amazon
Video Direct: Easy and low-cost distribution of video for content creators
Whispercast: Discover and distribute digital content
4 Devices Kindle: E-book reader
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Kindle Fire Tablet: Tablet PC
Fire TV: Streaming media player
Dash: Wi-Fi connected device to re-order products
Echo: Hands-free speaker supported by Alexa voice assistant
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Copyright © INSEAD 25
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5 Services Prime: Paid membership for free two-day shipping and other exclusive services (Pantry, Fresh, Now, Reading, Photo, Video, Music, etc.)
Subscription Services: Subscribe & Save, Kindle Unlimited, FreeTime Unlimited, Video Included with Prime, Prime Music, Music
Unlimited
Sell on Amazon (Marketplace): Third-party vendor program. Recently opened a new marketplace for service (e.g. Home services)
Fulfilment by Amazon: Provide storage, delivery, customer service for orders made to third-party vendors
Advertising: Provide advertising solutions such as Sponsored Products
Amazon Pay: Online payments processing
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Amazon Business: Everything for your business
Credit & Payment programs: Credit cards, Partnership, Prepaid, Allowance, etc.
6 Amazon Web Service Scalable cloud computing services offering over 70 services
(AWS)
7 Websites, Withoutabox: Submit to film festivals
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Communities Box office Mojo: Find movie box office data
Alexa: actionable analytics for the web
Goodreads: Book reviews & recommendation
DPReview: digital photography
IMDb: movies, TV, celebrities
8 Brick-and-mortar Amazon Books: Physical book store as an extension of Amazon.com. People can try Amazon devices. Five stores are open as of March
retail 2017 and seven are waiting (US).
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Copyright © INSEAD 26
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IN1397

Causes and Consequences

moves that resulted in both sustainable growth and severe setbacks.

Successful Strategic Moves

companies. The company took an unconventional approach to growth – sharing

By successfully establishing an online bazaar, Amazon created an ecosystem in which third-

In 2006, Amazon launched a complementary program for third-party vendors – Fulfilment by

2) Amazon Prime (2005)

Traditionally, loyalty programs were based on a free-membership point-earning system –

Letter to Shareholders, 2002

In mid-2000, Infrastructure as a Service (IaaS) was only available to big corporations.

book titles in the online bookstores.

In 2006, Sony introduced a second generation e-reader, the PRS-500. 11 As a leading

significant market share (see Exhibit 7).

In 1998 Amazon eBay

In March 1999, Amazon announced the launch of Amazon Auctions

19 A study by Brand Institute, sourced from https://www.bloomberg.com/news/articles/1999-05-30/e-bay-vs-

2) A9.com Search Portal (2004 – 2006)

4) Fire Phone (2014 – 2015)

Available at: https://techcrunch.com/2009/11/02/amazon-closes-zappos-deal-ends-up-paying-1-2-billion/

Brad Molson, Engadget 32

Ranking Company Market Cap ($billion) Net Income Margin (%)

Engine, Endless.com, Fire Phone)?

3. What divides successful strategic moves from failures?

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