Page 77 - Electronic Commerce

Chapter 1

Bezos encouraged early customers to submit reviews and ratings of books, which he
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posted with the publisher’s information about the book and with reviews written by Amazon.com
employees. This customer participation served as a substitute for the corner bookshop staff’s
friendly advice and recommendations. Bezos saw the power of the Internet in reaching small,
highly focused market segments, but he realized that his comprehensive bookstore could not be
all things to all people. Therefore, he created a sales associate program in which Web sites
devoted to a particular topic, such as model railroading, could provide links to Amazon.com
books that related to that topic. In return, Amazon.com remits a percentage of the referred sales
to the owner of the referring site.
Although Bezos’ original vision was to create an online bookstore with the world’s best
selection, Amazon has moved into other product lines where opportunities for network economic
effects and transaction cost reductions looked promising. In 1998, Amazon.com began selling
music CDs and videos, first on VHS tape, and then later on DVD. More recently, Amazon added
MP3 music downloads. Today, Amazon offers thousands of products in dozens of categories.
By paying attention to every process involved in buying, promoting, selling, and shipping
consumer goods, and by working to improve each process continually, Bezos and Amazon.com
became one of the first highly visible success stories in electronic commerce. In fact,
Amazon.com now generates significant revenue by supplying other sellers of consumer goods
with the technology to sell those goods online. One of its first partnerships was with Toys“R”Us,
a company that had experienced difficulties in selling online and making deliveries on time in
the 1999 holiday shopping season. Toys“R”Us signed an agreement with Amazon.com in 2000
that placed Toys“R”Us products on the Amazon.com Web site. Amazon.com would accept the
orders on its Web site and would ship products to customers for Toys“R”Us in exchange for a
percentage of each sale. Amazon.com also agreed not to sell toys itself or on behalf of other
partners for whom it might provide online sales services in the future. For example, when Ama-
zon agreed to sell Target products online, it could not sell Target’s toy lines on its Web site.
(Target is the third-largest toy retailer in the world, behind Walmart and Toys“R”Us.)
In addition to the online sales services Amazon.com provides to Toys“R”Us, Target,
CDNow, and other large companies, it provides similar services to many smaller companies with
its Amazon Marketplace offering. In Amazon Marketplace, small retailers become members of
an online shopping mall on Amazon’s site.
Toys“R”Us sales exceeded $300 million by 2004 on the Amazon.com site. Both Toys“R”Us
and Amazon.com benefited from the network economics effect they obtained by having toys
available for sale on Amazon.com’s well-known electronic commerce site. Many small toy retail-
ers in the Amazon Marketplace program also benefited because shoppers visited the
Amazon.com site looking for toys. When a site visitor searched for a toy, the Amazon Market-
place retailers’ offerings were presented on the search results page along with results from
Toys“R”Us and Amazon.com.

Required:
1. Toys“R”Us sales exceeded $300 million by 2004 on the Amazon.com site. In about
200 words, explain how Amazon, Toys“R”Us, and other toy sellers who participated in
Amazon’s Marketplace retailer program benefitted from the network effect as a result of
the relationship between Amazon and Toys“R”Us.

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