20100323 amazon v9

MW-CH4107-20061025-106

Competitive overview

March 30, 2010

Connected World/Global Web

2

Amazon executive summary

SOURCE: Analyst reports, BBY Competitive Strategies Group, Team analysis

Best Buy continues to gain share in the overall CE market despite Amazon’s impressive

business and financial performance

11

Amazon is well positioned to deliver against customers’ needs for low prices and wide

assortment, but ill-suited to provide the physical immersive experience they prefer

22

Amazon has made enhancements to their existing businesses and continues to create new

business models and profit pools, including marketplace, Kindle, and Amazon Web Services

33

Despite their impressive performance, Amazon has limitations and risks, including

impending changes to state sales tax laws and new competitive pressures

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3

Amazon outpaces Best Buy in online CE share growth…

SOURCE: Comscore

11

0

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

03

2002

07

08

09

06

05

04

Amazon

Best Buy

Online market share, CEPercent of market

• Amazon.com consistently outsells Bestbuy.com in every major product category except laptops, where Dell dominates, Best Buy is second, and Amazon trails in third

• Amazon.com has over 60% share in movie sales and over 70% in music; entertainment overall is Amazon’s strongest category as they have 50% market share compared to Best Buy’s 5%

• Best Buy has made strides in A/V equipment, which includes TVs, gaining four points of share year over year and actually beating Amazon in 4Q09

4

…but despite Amazon’s rapid online growth, Best Buy continues to outpace Amazon’s overall share growth in the CE market

22.2 21.9 23.0 23.024.6

28.2

11.9 11.0 10.1 11.3 12.7 13.9

05

06

65.5

1.4

66.3

0.8

65.2

2004

2.3

08

4.43.4

09

Other retailers 63.4 59.3

07

53.5

0.7

US Market share% of total CE market (offline and online) CAGR

5%

-4%

3%

44%

Net share gain(2004-2009)

6.0%

-11.7%

2.0%

3.7%

SOURCE: Stevenson Traqline

11

5

Amazon’s consistent revenue growth and healthy operating cash flow have earned it an industry-leading earnings multiple

Total revenue$ Billions

Operating cash flow $ Billions

+11% p.a.

+32% p.a.

09

49.7

24.5

08

45.0

19.2

07

40.0

14.8

2006

35.9

10.7

Best Buy

Amazon

3.3

1.71.40.7

1.92.01.81.7

09

+3% p.a.

+67% p.a.

08

07

2006

40

120

80

0

BBY

Amazon

Mar10

JanNov

Sep

JulMay

Mar09

Avg. stock price$ per share

• Amazon’s ability to drive revenue growth with creative business models and produce incredible amounts of cash make them an attractive play to Wall St.

• When combined with their flexible and compressed SG&A structure, Amazon becomes an investment that commands a high multiple

• AMZN currently trades at 65x earnings, far ahead of any competitor, including BBY at 14x, Apple at 23x, and Walmart at 15x

11

SOURCE: Company financials

6

* Figures are for year ending Dec. 31, 2009 for Amazon and Q3 projected fiscal year 2009 for BBY** Stores includes store labor, rent and taxes, but does not include D & A

Source: Amazon 10-K, BBY internal data

SG&A costs% of sales

Total SG&A

Technology andcontent

Other generaland administrative

1.2%

1.7%Marketing

7.2%

Fulfillment

9.3%

19.4%

Stores**

0% 8.4%

17.6%

2.8%

0%

5.1%

1.3%

Amazon’s performance is driven by their ability to keep SG&A costs low, a result of their flexible SG&A structure

Amazon SG&A costs% of sales

Best Buy SG&A costs% of sales

11

-1% p.a.

07

19.1%

08

19.3%

06

20.2%

2005

19.8%

2009

18.8%

2005

19.7%

+1% p.a.

21.3%

07

19.8%20.3%

06

2009

20.8%

08

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22

8

Amazon continues to win on price…and product assortment

135

Tied

Amazon lower

Best Buy lower

82

Price comparison by SKUs1

Percentage; 2010

SOURCE: Best Buy Competitive Strategies Group

22

Price per SKU of DSLR cameras, 10-11MPUSD; 2009

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

5,000

1 Based on a price comparison of 128 overlapping SKUs

9

But fails to meet many other customer needs…22

Physical inventory to handle and experience

Experienced and knowledgeable staff to answer questions

Physical store for returns

In-house service offering

% of online shoppers who consider it important

Why Amazon is ill-equipped to address it

XX%

YY%

ZZ%

VV%

• Without physical stores, Amazon has no way of getting it’s inventory in the hands of customers pre-purchase

• Amazon cannot offer the “connected” experience of showing how products interact; you can buy a router and a home theater system on Amazon, but you can’t see it at work • Amazon has no Blue Shirt equivalent and has no face-to-face interaction with their customers

• Even if Amazon were to implement an online customer-facing sales force, they would be unable to demonstrate products in the same way an in-store staff can

• To return an Amazon product, a customer is forced to ship the product back to Amazon’s warehouse

• This becomes especially problematic around the holidays as purchases have a higher likelihood of being returned

• While Best Buy can offer service and installation packages with devices sold in-store, Amazon is unable to offer in-house servicing

• As more consumers look to buy “connected world” solutions, having a trusted in-house installation and service offering is an increasingly important factor

10

Although consumers spend more time per visit on Bestbuy.com, they visit Amazon more often, resulting in 4x as much time spent on Amazon.com per month

3.3

4.5

Amazon.com

Bestbuy.com

+37%

Time on site per visitMinutes

Source: iConsumer clickstream analysis

=

38.3

9.9

Amazon.com

Bestbuy.com

-74%

Time spent on site per monthMinutes

11.5

2.1

Amazon.com

Bestbuy.com

-81%

Number of visits per monthNumber

22

X

11

Amazon’s conversion rate among online shoppers is higher than Bestbuy.com, and we are losing significant value to Amazon

Source: iConsumer clickstream analysis, Comscore

22

Also visitAmazon

29

100

71VisitBestbuy.comonly

Total BBY.com visitors

25 Bestbuy.com

75

100

Visitors that do make purchase

Amazon.com

Total BBY.com visitorsPercent; 2009

Where BBY.com visitors make their purchasePercent; 2009

213

Amazon.com

Dollar Share

2,000

Dell.com

680

Walmart.com

All others

537

570

Lost value from bestbuy.com visitor non-buyers$ Millions

29% of Bestbuy.com visitors also visit Amazon…

…and of those that make a purchase at BBY or AMZN, 75% go to AMZN…

…moreover, estimates suggest we lost $570M in value to Amazon last year

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11

Amazon has made enhancements to their existing businesses and continue to create new


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44



22

13

Originally a pure-play retailer, Amazon has built a diversified set of businesses through internal development and M&A

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Marketplace

EC2 Cloud

CloudFront

Data storage (S2)

E-commerce

Computing services

Information/ Social ntwk.

Downloadable media

Brands/products/acquisitionsStrategy

• Amazon continues to fulfill Bezos’ original mission to sell to any consumer any product at any time by expanding their product assortment (Amazon Fresh), acquiring new retail outlets (Zappos), and creating new business models to leverage third party vendors and affiliates (marketplace and Amazon Associates)• Amazon Web Services’ computing solutions not only provide a high-margin auxiliary revenue stream, but also lay the groundwork for potential consumer solutions based on the cloud experience

• Amazon’s SVP of Web Services proclaimed that “Amazon at it’s heart, is a technology company”• From early on, Amazon has incorporated large amounts of information into the e-commerce experience in the form of product reviews and collaborative filtering

• Aware that customers value this radical transparency that information provides, Amazon has invested heavily in information sites, like IMDb and Alexa, as well as social networking sites like Shelfari• With the Kindle, Amazon revolutionized the e-book, connecting to consumers to content and realizing steady revenue streams in the process

• Additionally, Amazon has made an effort to expand their other downloadable media offerings, inlcuding Amazon MP3, which current offers over 8 million songs, and Amazon Video on Demand, which offers streaming movies and TV

aa

bb

cc

dd

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Amazon drives revenue from a variety of sources, although traditional retail still provides over 50%

Traditional retail

• Revenue from Amazon selling their own inventory to customers

• Includes sales of physical goods, all downloadable media, Kindle device and content sales, etc.

• Drives ~54-56% of overall profitability

Web Services & Others

• Revenue from Amazon Web Services, which provides storage, cloud computing, database, payments, and other products

• Drives ~1-2% of profitabilityAffiliates

• Revenue from third parties that use APIs to sell Amazon’s inventory

• Drives 10-12% of profitability (post-commission)

Marketplace

• Revenue from selling third-party merchants’ inventory on Amazon.com

• Drives ~33-34% of profitability

SOURCE: Best Buy Competitive Strategies Group

Amazon revenue breakdown$ Billion

33

Traditional retail

Marketplace

$24B

12.5

7.7

0.5

3.6Affiliates

Web Services & Other

2009

15

Amazon continues to fulfill its mission to sell anything to anyone, while also building profitable business models around the engine

SOURCE: Amazon.com, BBY.com

3a3a

Books

Physical media

Digital downloads

Kindle

Consumer Electronics

Home & Garden

Grocery & Beauty

Toys & Kids

Apparel

Sporting Goods

Tools & Industrial

Amazon Associates

Amazon Marketplace

Amazon.com

• Amazon associates uses open APIs to allow third party merchants to advertise Amazon products on their site

• Merchants receive a commission for each sale they generate

• When customers click on the advertisement, they are directed to Amazon.com

• Increases customer traffic to Amazon.com

• Estimated to generate ~15% of overall revenue and ~10-12% of profitability after commissions

• Amazon’s marketplace allows third party sellers to upload their inventory to Amazon.com and sell their products alongside Amazon’s own inventory

• Amazon charges a 6-15% commission depending on the product sold as well as closing fees

• Increases customer choice and provides a new revenue stream

• Estimated to generate ~32% of overall revenue and ~33-35% of profitability

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Amazon’s marketplace allows third party merchants to sell alongside Amazon and provides ~30% of overall profitability

SOURCE: Team Analysis, Amazon.com, Amazon Financials,

19.2523.00 2%

3.19

Profit

14%

Price

Proc.Fee

0.56

84%

Seller rev

30.00 25.02

3.266%

83%

Price

COGS

1.73

Shipping

11%

Profit

How it makes money…

Marketplace Amazon as seller

3a3a

Target uploads inventory to Amazon.com marketplace

Amazon posts Target’s listing for the same product alongside their inventory and other third party merchants

Customer can view “more buying choices” and find Target’s listing for the same product

Customer decides to purchase the Target product, and pays via Amazon.com

Payment is routed to Amazon first, who collects 6-15% commission and various fees, then sends remainder to Target

Order is sent to Target for fulfillment (Amazon offers fulfillment services)

How it works

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4455

66

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Amazon Web Services has already attracted prominent clients and is estimated to generate ~$400M in revenue per year…

AWS products What it does?

Elastic Compute Cloud (EC2)

• Provides resizable compute capacity in the cloud

• Designed to make web-scale computing easier for developers

CloudFront • Web service for high-speed content delivery

• Integrates with other AWS productsVirtual Private Cloud

• Provides a bridge between a company’s existing IT systems and the Amazon cloud via a virtual private network (VPN)

Simple Storage Service (S3)

• Data storage infrastructure• Web-based interface to store and

retrieve objects

Database services

• Highly scalable database storage with less internal administrative oversight required

Flexible payments services (FPS)

• Built on top of Amazon’s own payments structure, it gives e-commerce engine a payment tool they can integrate into their stie

Simple Queue Service (SQS)

• Scalable structure for storing messages as they travel between computers

• Amazon Web Services’ revenue is estimated at $400M per year and growing

• AWS already boasts an impressive list of clients, including ESPN, eHarmony.com, and Eli Lilly

• S3 storage is estimated to hold 82 billion objects and can receive 100,000 requests per second

• Hundreds of thousands of developers currently using S3 storage functionality

• In a 2010 FastCompany comparison between Amazon, Apple, and Google, Amazon was selected as having the superior web service offering

• Margins for AWS are estimated at ~45%

SOURCE: Amazon.com, Analyst reports, FastCompany.com

3b3b

18

Amazon has acquired and integrated a host of informational and social networking sites into their existing business

SOURCE: Amazon.com, Company sites

3c3c

How Amazon uses itWhat is it?

• Internet database with a wealth of information regarding movies and TV shows, including episode summaries and community forums for contributors to voice their opinions

• Acquired boxofficemojo.com, which provides in-depth information and statistics on movies

• Company that collects and publishes statistics on browsing behavior, including web traffic broken down by various demographics

• Human search engine for users to post and answer questions

• Users get “experience points” depending on how often they contribute; has developed into a social network of sorts

• Users upload a virtual bookshelf with all their favorite titles

• Users can rate, review, discuss, and suggest books to other users

• Free web hosting site for wikis1

• Users can browse different categories and follow wikis they find interesting

• Amazon has used IMDb as a advertising mechanism; for example, if someone searches for information on Avatar, they will be presented with a one-click reroute to Amazon where they can buy the DVD

• Still operates as an independently-branded site

• Under Amazon Web Services, Alexa remains relatively unconnected to Amazon’s e-commerce business models

• Co-branded with Amazon (Askville by Amazon)

• Amazon-related questions are amongst the most popular on the site

• When looking at any given title, Shelfari has a link to Amazon to buy the physical book or a digital Kindle edition

• Amazon also has a stake in Shelfari’s main competitor, LibraryThing

• Monetized through advertising revenue

• Limited connection to Amazon currently1 Amazon does not own Wikia, but has invested $10M

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Amazon has expanded their digital media offering with Kindle, Amazon Video on Demand, and Amazon MP3

SOURCE: Amazon.com, Analyst reports, FastCompany.com

3d3d

What is it? How is it monetized? Performance

• Amazon’s e-reader that allows customers to read digital books, magazines, blogs, and newspapers; competes with other e-readers and traditional book sales

• Kindle device sales• Digital book revenues• Commissions off

newspaper and magazine subscription sales

• No revenue numbers released; unit sales estimated in the “millions”

• Kindle is widely considered the market leading e-reader; Credit Suisse estimates that Amazon currently has 90% of the digital book market

• Amazon’s streaming and downloadable video site; allows customers to watch on computers and TVs; competes with Netflix and free services like Hulu

• Digital movie rentals• Downloadable and

streaming TV/movie revenues

• Widely believed to be well behind Netflix in market share

• Amazon VOD recently became accessible on Roku digital video players

• Amazon’s streaming and downloadable music site; competes with iTunes, Napster, and other download sites

• Downloadable and streaming music revenues

• Estimated at having 8% market share, well behind iTunes near 70% share

• Has over 11 millions songs in its current catalog

• First store to sell without digital rights management (DRM)

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Despite their impressive performance, Amazon is not without challenges and difficulties, including…

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Changing state tax laws

Apple’s iPad

Lack of physical stores

Amazon’s current advantage

Risks/limitations

• Amazon currently enjoys “remote seller” status in states where it lacks a physical presence, allowing them to avoid charging sales taxes to customers in most states

• The Kindle is widely considered the leading device among e-readers; no sales numbers have been released, but estimated to be in the “millions”

• Credit Suisse estimates that Amazon has ~90% of the digital book market

• Amazon’s lack of physical stores have allowed them to keep their SG&A costs low and flexible and their prices down

• Four states have recently passed laws designed to collect sales tax from e-commerce engines that enjoy “remote seller” status

• Six additional states, including California, are considering similar regulations; Amazon’s tax advantage is slowly eroding • Apple’s iPad debuts on April 3 and has already sold out its initial order supply

• The iPad, although slightly more expensive than the Kindle, will have much greater functionality than the Kindle, including access to a wider array of media

• Amazon has developed a Kindle application for the iPad in anticipation of the iPad taking significant share from Kindle devices

• Customers’ number one complaint with online shopping is the lack of a physical store to try the product and get your questions answered; with no plans to open physical stores, Amazon will be unable to address this concern

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Amazon is a formidable competitor, but a closer look reveals strategic advantages for Best Buy

Amazon is/has… But…

• Continuing to beat us in online CE sales • Best Buy gained 3 points of share in the overall CE market last year while Amazon gained 1 point• Beating us on price for 82% of SKUs • Customers say not being able to interact with a knowledgeable employee is their biggest frustration with online shopping and our Blue Shirts fit that need

• A great collaborative filtering engine that produces recommendations and product bundles

• We actually have better and more comprehensive information to leverage with nearly a billion total visits (in-store, online, RewardZone, services, etc.)• A marketplace that provides 30% of their

item sales and profitability• We can develop our own marketplace worth

$XM• We have Remix, which gives 3rd party

merchants access to our product library• A digital content offering, including Amazon Video on Demand and Amazon mp3

• They only have 8% market share in digital music

• We have Napster and Cinema Now • A tax advantage in most states as no sales

tax is levied on e-commerce• Four states have already enacted laws

designed to capture this tax and six more, including California, are considering following suit• A Web Services business that provides cloud

computing, storage, and payments products• Their products are largely B2B with limited

application for consumers


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BACKUP/APPENDIX

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Amazon.com effectively uses customer information to provide recommendations and typically-bundled products…

SOURCE: Amazon.com, BBY.com

3c3c

• Amazon’s recommendations and customized content based on purchase history and in-cart items create an immediate connection with the consumer upon log-in

• Bestbuy.com’s splash page provides standard content despite an extensive purchase history and 2 items in the cart

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Amazon has developed the Kindle, connecting consumers to books and other media electronically

$2.99/month

Magazines Blogs

$1.99/month

$9.40

Books Newspapers

$13.99/month

SOURCE: Amazon.com

Non-revenue “connected” features

Kindle

$259

3d3d

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Additionally, Amazon is slowly losing grip of their sales tax-exempt status, with additional legislation pending

How we got here Recent/upcoming changes Consumer reaction

• Under federal law, remote sellers are required to collect and pay sales taxes in any state in which they have a physical presence; Amazon, with almost no physical presence has been successful in establishing “remote seller” status in most states

• As of July 1, 2008, New York state required sales taxes to be collected from e-retailers that use local marketing affiliates

• North Carolina and Rhode Island passed similar measures in 2009

• In 1999, Amazon tries to sue the state of New York on ground the new statute is unconstitutional; case is thrown out

• Marketplace sellers must pay sales tax and often include it in the price listed

• In February, Colorado passed a law requiring e-commerce sites to either collect sales taxes or provide the state with sales information so it can collect taxes from consumers directly; Amazon has severed ties with all Colorado marketing affiliates as of March 15

• Six other states are considering similar provisions, including California, Connecticut, Illinois, Maryland, Virginia, and Vermont

• Due to increasing budget constraints, more states are likely to look at remote seller sales taxes as a potential revenue source

• 23 states have come together to try to create a national sales tax that treats online retailers the same as brick-and-mortar retailers

• Estimates of lost sales tax revenue are as high as $12 Billion by 2012

• In the first half of 2009, after New York passed the new regulations, the conversion rate for online retailers in the state fell by 11.4%, a much bigger drop than the 7.4% seen across the country

• Potential PR problems for Amazon as they respond to new regulations, including cancelling Colorado affiliate relationships despite no provision including those entities as a physical presence

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Despite the Kindle’s success, analysts believe that the debut of the iPad could have disastrous effects on Kindle sales…

SOURCE: Amazon.com, Apple.com, Analyst reports

Amazon Kindle

Apple iPad

• $259-$489• Sold exclusively by

Amazon• Wi-Fi and 3G capabilities

depending on model• Access to 450,000 digital

books, many newspapers, magazines, and blogs

• Can store up to 350,000 books

• No internet or application functionality

• $499-$829• Will be sold at Apple stores

as well as third party retailers

• Has Wi-Fi and 3G capabilities, depending on model and data package

• Access to 150,000 apps from AppStore

• Will feature an Amazon-created Kindle application

Analyst / expert opinions

• Among consumers looking for an e-reader device, the iPad was seriously considered by 15%, while the Kindle stayed close at 14%– Comscore

• Amazon has braced itself for reduced Kindle device sales by developing a Kindle application for the iPad, allowing Amazon to receive revenues from iPad users

• iPad sales will surpass all-time Kindle sales within three months of its debut– FBR Capital report

• 37% of potential iPad customers were planning to use it as an e-reader– Comscore March 23, 2010

• Amazon’s share of the e-book market will fall from 90% to 35% over the next five years– Credit Suisse analyst report

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20100323 amazon v9

Education

amazon product

importantwhy amazon

amazon trails

amazon web services3despite

best buy sga costs

amazons overall share

us market share

amazons performance