How Amazon Survived the Dotcom Bust - An Intro to Business Model-Market Fit
Gennaro is the founder of FourWeekMBA, a leading source on business model innovation.
As you can notice above, Amazon managed to survive the dot-com bubble. While its revenues grew from 1997 to 2001 as a result of the aggressive expansion, the company's losses mounted.
During that time, Amazon's employee base grew from 158 to 614. That was a time when management, leadership, and culture started to play a critical role in Amazon's success.
Indeed, if we were to break down or have a theory around what makes a company able to scale, there is the core which is represented by a must-have product or a service
which obsesses over customer experience.
To gain further traction, the company needs a strong business model
. And as it scales, culture might become extremely important. Thus, it might look something like that:
That is why, as Amazon scaled up and as it started to expand its products aggressively it has also to find business model-market fit.
By 2001, Amazon had that!
The company, had not only expanded its selection away from books and into many other categories.
But it had also opened up its platform to third-party sellers which helped further grow Amazon customer base, by following the Amazon flywheel model
At the time, Amazon also strategically opened to third-party sellers to enhance its brand. In other words, where today Amazon might host third-party sellers which might be primarily small businesses.
Understanding Amazon business model-market fit
Back in the 2000s, Amazon opened up to brands like Toysrus.com, Inc., Target Corporation, Circuit City Stores, Inc., the Borders Group, Waterstones, Expedia, Inc., Hotwire, National Leisure Group, Inc., Virgin Wines, and others which further amplified Amazon's brand.
If you could buy something from Target on Amazon
, you would trust its brand more easily.
The third-party seller strategy started to work. And it showed how Amazon was leveraging on a platform business model
to enhance its brand and business.
The third-party seller services strategy revolved around three core ones:
- Merchant@amazon.com Program: here third party seller could offer their products on Amazon, either in its online stores or in a co-branded store on the Amazon site, or both. And they could also fulfill those thorough products Amazon by paying the company a fixed fee. Companies like Target and Toysrus were part of it.
- Merchant Program: with which the third-party seller had its own URL and Amazon provide the option of providing fulfillment-related services on behalf of the third-party.
- Syndicated Stores Program: which represented third-party seller’s e-commerce websites were offering products available on Amazon, which product were fulfilled by Amazon and the company paid commission to syndicated store.
In that period, as Amazon started to scale its employees base, it significantly strengthened the management team.
In the annual letter of 2001, Jeff Bezos highlighted:
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.
And he continued:
Why focus on cash flows? Because a share of stock is a share of a company’s future cash flows, and, as a result, cash flows more than any other single variable seem to do the best job of explaining a company’s stock price over the long term.
Therefore, even though Amazon did survive the dot-com bubble, the business model which would enable the company to make it through the first phase of scale-up was drafted around the beginning of the year 2000, right at the bottom of the dot-com bubble.
In short, even though Amazon emphasized so much on cash flows, during the dot-com, the company was burning a substantial amount of cash. And Amazon itself still saw the web as a distribution platform, rather than a business model
Therefore, Amazon's survival through that period was nonetheless due to a bit of lack. However, Jeff Bezos led Amazon through that period with vision and extreme passion, and he kept pushing the company to a new business model.
Amazon.bomb evolving into a platform
To have an idea of how gloomy was the scenario. As the Guardian highlighted in June 2000, in an article entitled "Amazon.bomb:
Analyst Ravi Suria highlighted Amazon's "weak balance sheet, poor working capital management, and massive negative operating cashflow - the financial characteristics that have driven innumerable retailers to disaster through history." It was a day during which Amazon's shares lost 20% of their value, and 51m of them changed hands. A company worth about $40bn (£25bn) just before Christmas had ended the day worth $12bn (£7.5bn), and things did not improve during trading yesterday.
At those comments, Jeff Bezos replied at the time:
Three years ago our stock was $1.50 a share, today it's $30-something. There have been many, many days when our stock has gone up 20% in a day" - that laugh again - "and if stocks can go up 20% in a day, they can go down 20% in a day. All internet stocks are volatile, including Amazon.com... we are nowhere near running out of cash, and we are not at all worried about it.
And he was right. Even though the company had burned a few hundred million in cash in 2001.
It had managed to get a long-term loan of over six hundred million back in 2000, right before the explosion of the dot-com bubble. Thus, guaranteeing enough cash to go through that bad period.
Indeed, as of 2001, Amazon still had over five hundred millions of cash sitting in its bank account.
To understand how bad Amazon reputation might have been at the time (of course not all agreed with that), an article dated
April 26, 2001, by Doug Casey, author of "Crisis Investing," highlighted:
I've said several times that Amazon is a cinch for bankruptcy, certainly Chapter 11 (a reorganization) and maybe even Chapter 7 (a liquidation), although I consider the latter a bit of a long shot.
The lessons Amazon learned during the dot-com bubble to find business model-market fit
What can we learn from this story?
- Quite a bit of luck when hard times hit is critical.
- Amazon managed to secure enough cash to survive long enough to its business model to be fully viable and scalable.
- The company kept pushing on growth, and it changed its business model as it went through the crisis. In short, Amazon in 2000 finally expanded its e-commerce and made it more as a platform business, which would be the basis for Amazon success in the decades to come.
- Jeff Bezos kept a strong focus on the operations even through a period which was highly distracting.When new technologies are becoming mass adopted, companies need to think about it as a new playground where the rules of the business game can be rewritten.
- Throughout the dot-com era, Amazon changed the playbook. It went from a cash-burning machine, and it transitioned into a lean organization. Although we give the lean startup principles as given today, they were not so back then.
Not by chance, I mentioned luck as the first factor, but learning fast, changing playbook accordingly, were also crucial to Amazon survival!
Disclaimer: I’m the Founder of FourWeekMBA.
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