Why Did Jeff Bezos Choose Books as the Initial Category for Launching His New Company?

1. Why did Jeff Bezos choose books as the initial category for launching his new company?

It’s likely that Jeff Bezos choose books due to three factors. First and foremost, the book category was large and growing. Specifically domestic wholesale grew by  27% between 1996 ($26B) and 2001($33B) while worldwide wholesale grew by 10 % from 1996 ($82B) to 2000 ($90B). Next the bookselling industry is highly fragmented. The largest publishers and retailers, companies like Random House and Barnes and Noble, could only maintain a 10% market share leaving opportunity for an outsider to come in and establish themselves as the global brand. Finally, Amazon was able to find a niche in the electronic retailing industry, specifically for books. The total value of goods sold online in the United States estimated sales of $318 million in 1995, $5.4 billion in 1996, all the way to $95 billion by 2000.

• Large and growing

• Domestic Wholesale

• $26 Billion in 1996
• $33 Billion in 2001

• Worldwide Wholesale

• $82 billion in 1996
• $90 billion by 2000

• Highly fragmented

• Book publishing industry

• Leading consumer publisher, Random House, controlled less than 10% of the market

• Book seller industry

• Largest retailers, Barnes & Noble and Borders controlled 11% and 10% respectively
• No leading global brand

• Niche in the electronic retailing market for books

• Electronic retailing

• $318 million in 1995, $5.4 billion in 1996, $95 billion by 2000

1. What is the business model for Amazon.com?  How does their business model differ from that of Barnes & Noble or Borders?  How would you value Amazon.com?.

Amazon is an online based retail company. Their primary business model focuses around finding retailer inefficiencies and consumer inconveniences and remedying them. Their business model is different as Amazon is solely focused on being an electronic platform for book while Barnes and Noble and other similar retailers are more focused on brick and mortar stores. Although Amazon’s gross margins were lower than traditional brick and mortar stores, their business model allows for cheaper/faster growth and access to customers 24/7. The advantages in Amazon’s strategy are shown by their rapid cash conversion cycle of 1 day of receivables, 7 days of inventory, and 41 days of payables. The cash conversion cycle gives Amazon pricing power as they do not require the same margins as their brick and mortar competitors. Finally, a DCF is not possible due to negative earnings but the company can roughly be valued with the use of comparables.