The Web's Best-seller

Amazon.com drew consumers to the Web in droves and forever changed inventory control.

It seems comical now, but less than seven years ago, the staff at online retail giant Amazon.com Inc. processed credit cards by taking a customer's order on one computer, putting the information on a floppy disk and walking it over to a separate computer. They called it the "sneaker net," and it was done to make wary first-time customers feel comfortable that hackers wouldn't steal their credit card information.

Those days are long gone. But the Seattle-based e-commerce giant, which reported sales of $3 billion in 2001, hasn't changed its relentless pursuit of customer satisfaction or its focus on using technology to improve the customer experience. Back in 1995, there were no off-the-shelf packages for online shopping carts, or Secure Sockets Layer for credit card transactions. Amazon created most of its early applications either from scratch or by creatively weaving together existing software, paving the way for the e-commerce era.

Shel Kaphan, Amazon's first programmer in 1994, says the start-up years were an exciting time. "A lot of things were tried. Many of them didn't work out," he recalls, "and the ones that persist are generally the ones that people have found most useful."

A History of Firsts

Today, Amazon's e-business prowess and technology innovations are the industry standard not only for business-to-consumer transactions, but in the business-to-business world as well, says Laurie Orlov, an analyst at Forrester Research Inc. in Cambridge, Mass. The company remains one of the few successful online "pure-play" retailers.

"Amazon.com was in many respects the birth of sustainable consumer-based commerce transacted across virtual electronic networks," says Mario Morino, founder and chairman of the Reston, Va.-based Morino Institute, a nonprofit organization created in 1994 to explore the New Economy and the impact of the Internet on society. "Many forget that electronic business interaction has been a reality since the mid-'70s, perhaps earlier, when close partners passed proprietary trading information to aid in business process management. However, [consumer electronic business interaction] had no such legacy to build upon prior to Amazon."

Amazon.com was also the first commercial Web site to use "collaborative filtering" technologies to analyze customer purchases and suggest other books that people with similar purchase histories have bought. Its one-click ordering technology also set new e-commerce standards for online purchases.

"There was always a vision to make the service as useful as possible to each user and to take advantage of the ability of the computer to help analyze a lot of data to show people things they were most likely to be interested in," Kaphan says.

Because Amazon was breaking new cyberground, it had to develop most of its own technology to take orders online, coordinate distribution and handle huge volumes of e-mail. Paul Barton-Davis, another early Amazon programmer, says the company's most significant conceptual idea was its "almost-in-time" inventory control applications, as opposed to just-in-time inventories, where companies strive to always have just the right amount of stock on hand.

"We used to joke that our motto could be, 'We don't have it in stock, but we can get it really quickly if you'd like,' " Barton-Davis says. At the time, no inventory control software existed that could handle that business model. Although Amazon now keeps thousands of items in stock at all times, "almost-in-time inventory control is still a significant departure," he says.

Today, Amazon continues to evolve its IT strategy by expanding its technology alliances and partnering with other retailers that are thirsty for Amazon's ordering, distribution and customer service capabilities.

"When the history of e-commerce is written, people will credit Amazon as being the most important driving force in the acceptance of e-commerce," says Robert Spector, author of Amazon: Get Big Fast (HarperCollins, 2002).

The Prologue

When Jeff Bezos founded Amazon in 1994, the company's technology empire existed on little more than a few workstations from Sun Microsystems Inc. Programmers Kaphan and Barton-Davis set to work writing code to deliver Web pages, compiling a database of 1 million book titles with the help of databases from the Library of Congress and Books in Print. In July 1995, Amazon opened its Web site for business.

"Amazon was dependent on commercial and free database systems, as well as HTTP server software from commercial and free sources. Many of the programming tools were free software," Kaphan says.

By 1997, the massive million-record database was running on Digital Alpha servers. Applications were still being custom-developed. But by early 2000, Amazon's data management needs grew to encompass 100 separate database "instances" running on Compaq/Digital, Hewlett-Packard Co. and Sun servers and supporting terabytes of data. The company's IT team realized that it was time to raise its IT infrastructure to a corporate-class level.

Over the next nine months, Amazon would go on an IT shopping spree and spend $200 million, or 11% of its net sales, on new applications from E.piphany Inc., HP, Manugistics Group Inc. and Oracle Corp. It also struck deals with Excelon Corp. for business-to-business integration software and with SAS Institute Inc. for data mining and analysis applications.

But Amazon's most important applications - its personalization and customer contact software - were largely written by the company's own programmers in the late 1990s. The personalization capability recognizes when a visitor returns to the company's site and, based on that person's previous purchases, recommends products. With this technology, Amazon has one of the world's largest business intelligence applications.

As part of Amazon's IT transformation, in May 2000 the company signed a deal to have HP supply it with servers, storage and IT services, all of which helped with scalability and the support of its distribution and supply chain management processes. RISC servers from Sun and Compaq were replaced with HP machines running Linux. "They were one of the early adopters of Oracle9i. They started bringing new Linux in the very early stages. In that respect, they were definitely innovative in trying out new products and exploiting the latest technologies," says Albert Pang, an analyst at IDC in Framingham, Mass.

By October 2001, with most of the new IT infrastructure in place, Amazon had spent just $54 million on IT systems, development and consulting for the quarter, 24% less than in the same quarter a year earlier. The company said in a Securities and Exchange Commission filing that it was able to save money by shifting its software to run on a Linux platform. Coincidentally, in the following quarter of 2001, it posted its first profit since going public in May 1997.

Explosive Growth Begins

From 1997 to 2000, Amazon continued to gain in popularity and sales, but profits remained elusive. With the e-commerce bubble about to burst at the end of 2000 and profits still in the red, Amazon struck partnerships with brick-and-mortar stores to leverage its technology expertise. That year, Amazon formed a platform service group and became an outsourcer of technology and customer service. Retailers such as Toys R Us Inc. began using Amazon's technology and distribution platform for their online sales. Later, Amazon announced similar deals with Borders Group Inc., Circuit City Stores Inc. and others.

"Amazon gives companies like ours options, in terms of how we rationalize our IT investment," says Bob Edington, director of retail convergence services at Borders, an Ann Arbor, Mich.-based bookseller. Borders had reservations about surrendering its Web site to an outsourcer, since it would be just the second client for Amazon, and it was worried about customer service. But, Edington says, "Amazon has gotten where it is because they do it so well."

Just as Borders realized that it should focus on selling books instead of building e-commerce, Amazon may have more leverage in the software and fulfillment business than in peddling books, videos and DVDs. Some observers say Amazon's technology may hold the key to its future.

Today, a handful of new technologies offer personalization and simplified online purchasing, but none matches the total package Amazon has built combining technology and an enormous volume of data. "Other companies would be able to match the technology, but the competitive advantage is the sheer amount of customer data in their warehouse. You can't do that overnight," says Pang.

Collett is a freelance writer in Sterling, Va. Contact her at stcollett@aol.com.

Copyright © 2002 IDG Communications, Inc.

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