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1997
[AMAZON.COM LOGO]
ANNUAL REPORT
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[AMAZON.COM LOGO]
To our shareholders:
Amazon.com passed many milestones in 1997: by year-end, we had served more
than 1.5 million customers, yielding 838% revenue growth to $147.8 million, and
extended our market leadership despite aggressive competitive entry.
But this is Day 1 for the Internet and, if we execute well, for Amazon.com.
Today, online commerce saves customers money and precious time. Tomorrow,
through personalization, online commerce will accelerate the very process of
discovery. Amazon.com uses the Internet to create real value for its customers
and, by doing so, hopes to create an enduring franchise, even in established and
large markets.
We have a window of opportunity as larger players marshal the resources to
pursue the online opportunity and as customers, new to purchasing online, are
receptive to forming new relationships. The competitive landscape has continued
to evolve at a fast pace. Many large players have moved online with credible
offerings and have devoted substantial energy and resources to building
awareness, traffic, and sales. Our goal is to move quickly to solidify and
extend our current position while we begin to pursue the online commerce
opportunities in other areas. We see substantial opportunity in the large
markets we are targeting. This strategy is not without risk: it requires serious
investment and crisp execution against established franchise leaders.
It's All About the Long Term
We believe that a fundamental measure of our success will be the
shareholder value we create over the long term. This value will be a direct
result of our ability to extend and solidify our current market leadership
position. The stronger our market leadership, the more powerful our economic
model. Market leadership can translate directly to higher revenue, higher
profitability, greater capital velocity, and correspondingly stronger returns on
invested capital.
Our decisions have consistently reflected this focus. We first measure
ourselves in terms of the metrics most indicative of our market leadership:
customer and revenue growth, the degree to which our customers continue to
purchase from us on a repeat basis, and the strength of our brand. We have
invested and will continue to invest aggressively to expand and leverage our
customer base, brand, and infrastructure as we move to establish an enduring
franchise.
Because of our emphasis on the long term, we may make decisions and weigh
tradeoffs differently than some companies. Accordingly, we want to share with
you our fundamental management and decision-making approach so that you, our
shareholders, may confirm that it is consistent with your investment philosophy:
- We will continue to focus relentlessly on our customers.
- We will continue to make investment decisions in light of long-term
market leadership considerations rather than short-term profitability
considerations or short-term Wall Street reactions.
- We will continue to measure our programs and the effectiveness of our
investments analytically, to jettison those that do not provide
acceptable returns, and to step up our investment in those that work
best. We will continue to learn from both our successes and our
failures.
- We will make bold rather than timid investment decisions where we see a
sufficient probability of gaining market leadership advantages. Some of
these investments will pay off, others will not, and we will have
learned another valuable lesson in either case.
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- When forced to choose between optimizing the appearance of our GAAP
accounting and maximizing the present value of future cash flows, we'll
take the cash flows.
- We will share our strategic thought processes with you when we make bold
choices (to the extent competitive pressures allow), so that you may
evaluate for yourselves whether we are making rational long-term
leadership investments.
- We will work hard to spend wisely and maintain our lean culture. We
understand the importance of continually reinforcing a cost-conscious
culture, particularly in a business incurring net losses.
- We will balance our focus on growth with emphasis on long-term
profitability and capital management. At this stage, we choose to
prioritize growth because we believe that scale is central to achieving
the potential of our business model.
- We will continue to focus on hiring and retaining versatile and talented
employees, and continue to weight their compensation to stock options
rather than cash. We know our success will be largely affected by our
ability to attract and retain a motivated employee base, each of whom
must think like, and therefore must actually be, an owner.
We aren't so bold as to claim that the above is the "right" investment
philosophy, but it's ours, and we would be remiss if we weren't clear in the
approach we have taken and will continue to take.
With this foundation, we would like to turn to a review of our business
focus, our progress in 1997, and our outlook for the future.
Obsess Over Customers
From the beginning, our focus has been on offering our customers compelling
value. We realized that the Web was, and still is, the World Wide Wait.
Therefore, we set out to offer customers something they simply could not get any
other way, and began serving them with books. We brought them much more
selection than was possible in a physical store (our store would now occupy 6
football fields), and presented it in a useful, easy-to-search, and
easy-to-browse format in a store open 365 days a year, 24 hours a day. We
maintained a dogged focus on improving the shopping experience, and in 1997
substantially enhanced our store. We now offer customers gift certificates,
1-Click(SM) shopping, and vastly more reviews, content, browsing options, and
recommendation features. We dramatically lowered prices, further increasing
customer value. Word of mouth remains the most powerful customer acquisition
tool we have, and we are grateful for the trust our customers have placed in us.
Repeat purchases and word of mouth have combined to make Amazon.com the market
leader in online bookselling.
By many measures, Amazon.com came a long way in 1997:
- Sales grew from $15.7 million in 1996 to $147.8 million -- an 838%
increase.
- Cumulative customer accounts grew from 180,000 to 1,510,000 -- a 738%
increase.
- The percentage of orders from repeat customers grew from over 46% in the
fourth quarter of 1996 to over 58% in the same period in 1997.
- In terms of audience reach, per Media Metrix, our Web site went from a
rank of 90th to within the top 20.
- We established long-term relationships with many important strategic
partners, including America Online, Yahoo!, Excite, Netscape, GeoCities,
AltaVista, @Home, and Prodigy.
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Infrastructure
During 1997, we worked hard to expand our business infrastructure to
support these greatly increased traffic, sales, and service levels:
- Amazon.com's employee base grew from 158 to 614, and we significantly
strengthened our management team.
- Distribution center capacity grew from 50,000 to 285,000 square feet,
including a 70% expansion of our Seattle facilities and the launch of our
second distribution center in Delaware in November.
- Inventories rose to over 200,000 titles at year-end, enabling us to
improve availability for our customers.
- Our cash and investment balances at year-end were $125 million, thanks to
our initial public offering in May 1997 and our $75 million loan,
affording us substantial strategic flexibility.
Our Employees
The past year's success is the product of a talented, smart, hard-working
group, and I take great pride in being a part of this team. Setting the bar high
in our approach to hiring has been, and will continue to be, the single most
important element of Amazon.com's success.
It's not easy to work here (when I interview people I tell them, "You can
work long, hard, or smart, but at Amazon.com you can't choose two out of
three"), but we are working to build something important, something that matters
to our customers, something that we can all tell our grandchildren about. Such
things aren't meant to be easy. We are incredibly fortunate to have this group
of dedicated employees whose sacrifices and passion build Amazon.com.
Goals for 1998
We are still in the early stages of learning how to bring new value to our
customers through Internet commerce and merchandising. Our goal remains to
continue to solidify and extend our brand and customer base. This requires
sustained investment in systems and infrastructure to support outstanding
customer convenience, selection, and service while we grow. We are planning to
add music to our product offering, and over time we believe that other products
may be prudent investments. We also believe there are significant opportunities
to better serve our customers overseas, such as reducing delivery times and
better tailoring the customer experience. To be certain, a big part of the
challenge for us will lie not in finding new ways to expand our business, but in
prioritizing our investments.
We now know vastly more about online commerce than when Amazon.com was
founded, but we still have so much to learn. Though we are optimistic, we must
remain vigilant and maintain a sense of urgency. The challenges and hurdles we
will face to make our long-term vision for Amazon.com a reality are several:
aggressive, capable, well-funded competition; considerable growth challenges and
execution risk; the risks of product and geographic expansion; and the need for
large continuing investments to meet an expanding market opportunity. However,
as we've long said, online bookselling, and online commerce in general, should
prove to be a very large market, and it's likely that a number of companies will
see significant benefit. We feel good about what we've done, and even more
excited about what we want to do.
1997 was indeed an incredible year. We at Amazon.com are grateful to our
customers for their business and trust, to each other for our hard work, and to
our shareholders for their support and encouragement.
/s/ JEFFREY P. BEZOS
Jeffrey P. Bezos
Founder and Chief Executive Officer
Amazon.com, Inc.
