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20 years after IPO: How Amazon came to dominate books, electronics and the cloud 20 years after IPO: How Amazon came to dominate books, electronics and the cloud
Getty Images Amazon’s play for the consumer-electronics space has included launching its own products, like the Fire stick. The surest sign Amazon is... 20 years after IPO: How Amazon came to dominate books, electronics and the cloud


Getty Images


Amazon’s play for the consumer-electronics space has included launching its own products, like the Fire stick.

The surest sign Amazon is on the verge of dominating its next retail category emerges when online sales start to account for more than 20% of that business, according to an analysis by L2.

Must read: Amazon investors should pay attention to this two-digit number

Here is how Amazon managed to pass that mark in three key areas over the course of its history.

Books

Way back before companies were feverishly devising ways to thwart Amazon, they were ignoring the e-commerce site all together.

The book publishing and book selling world had no idea what was coming when Amazon












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first set its sights on that sector, and did little to prepare for the onslaught.

In August 2005, Barnes & Noble Inc.












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was enjoying bumps in traffic and sales from “Harry Potter and the Half-Blood Prince.” So was Amazon. It was the online company’s biggest new product release, the company said at the time.

Don’t miss: Meet Amazon.com’s first-ever customer — there’s a building named after him at headquarters

Book publishers were grappling with how to maintain online control over the titles they were publishing. In November 2005, Amazon was hatching a plan to launch Amazon Upgrade, allowing online access to physical books customers had bought on the site. And there were questions about whether Google












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had the right to scan books to make them searchable and provide excerpts, and whether publishers would go along with a book-rental plan.

At the same time, lower-priced used books were becoming more popular on Amazon and other sites, cutting publishers out of the revenue stream.

Somewhere between 2007 and 2008, the books category hit that 20% e-commerce mark, according to U.S. Department of Commerce data provided to MarketWatch by L2’s Cooper Smith, director of Amazon intelligence for the research firm. That 20% threshold is a critical figure, signifying a change in consumer behavior toward online shopping that works in Amazon’s favor.

Amazon launched the Kindle in late 2007 and not only changed the way many people read books but how they bought them: directly from a device with the content delivered wirelessly. The Kindle also transformed the industry’s pricing model, bringing the cost of e-books down to $9.99 as print books were priced as high as $25 or more.

Barnes & Noble didn’t launch its first Nook until October 2009, giving Amazon a two-year advantage.

“[W]e believe that this is the first inning and that it will be a multibillion-dollar opportunity for Barnes & Noble,” said then–Chief Executive Stephen Riggio at the time.

It was a huge money-making opportunity — for Amazon, not Barnes & Noble. Fast-forward, and Amazon’s share of e-commerce for books in 2016 was a stunning 93%, according to data provided by Slice Intelligence. E-book sales rose 3.7% annually between 2011 and 2016, reaching $3.9 billion in 2016, according to Codex Group data provided by IBISWorld. Annual growth between 2016 and 2021 is expected to be 1.3%.

In the most recent quarter, total sales for Barnes & Noble fell 8% on a year-over-year basis to $1.3 billion, and Nook sales fell 25.7% to $38.4 million. But at least Barnes & Noble still exists, unlike Borders, B. Dalton and many other booksellers both large and small.

“Books make sense. There’s no real touch and feel, whereas on the other end of the spectrum, bananas have high touch and feel,” said Matt Sargent, senior vice president of retail at consulting firm Frank N. Magid Associates, explaining why Amazon would dive into the book business. “Amazon is picky about categories; [It] took the lowest-hanging fruit first, and moved upward.”

See also: Thanks, Amazon! Now indie bookstores are booming

Plus: The depressingly huge impact the end of adult-color-book fad and Adele had on Barnes & Noble revenue

Into electronics

Books have barely changed over the centuries. Consumer electronics, however, can be obsolete in a matter of a few years.

On the one hand, that makes the consumer-electronics category complicated, especially for not-so-savvy customers. And there are certain things, like the finish of an appliance, that a shopper might want to see in a store before making a purchase.

On the other hand, said Eric Voyer, vice president of market research firm TraQline, “there are some categories in consumer electronics [where] they know exactly what they’re going to get.”

In those cases, a couple of clicks to purchase may be all a customer needs.

Read: Amazon makes bigger push into furniture, among the fastest-growing online categories

Consumer electronics surpassed the 20% e-commerce threshold between 2010 and 2011, according to L2 data.

“This year it looks like they’re going to surpass Best Buy,” said L2’s Smith. Amazon is closing in, he said, on items like TVs and computer accessories.

In the “online only” electronics category, Amazon had 32.5% of dollar share in 2016, while Best Buy












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had 12.5% share. Wal-Mart












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had 6.2%, according to TraQline.

Read: WPP buys consulting firm specializing in Amazon

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A December blog post by Nicholas Johnson, head of platform for the marketplace advisory company Applico, which aims to help clients compete with Amazon and Google












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 , charts the decline of Circuit City, which went bankrupt in 2008. Amazon, which racked up its first book sales in 1995, launched consumer-electronics sales in 1999 and the Amazon Marketplace in 2000. In 2001, that marketplace stocked inventory from Circuit City and by 2004 was selling more than $1 billion in electronics.

Amazon, according to Johnson, sold “enough of the smaller items that consumers typically bought at Circuit City — MP3 players, computer accessories, headphones, computer parts and the like — [that it] eroded Circuit City’s margins so much that many of its locations would become unprofitable.”

Circuit City filed for Chapter 11 bankruptcy protection in November 2008. By March 2009, a group of four liquidators had sold off $1.7 billion of inventory in going-out-of-business sales and the 60-year-old company closed its doors for good.

Now Amazon has moved into a wider variety of items, many of them Amazon-branded. In the fourth quarter, according to Amazon, it sold “millions” of Fire tablets and Fire TV devices, and Alexa-enabled devices “were the top-selling products across all categories on Amazon.com” during the holidays, with Amazon Echo sales up more than nine times on a year-over-year basis. In his most recent shareholder letter, Amazon Chief Executive Jeff Bezos said it’s been a “struggle to keep Echo in stock.”

Echo devices aren’t just for gathering information and listening to music. They’re increasingly being used to purchase products, with Prime Now ordering added in recent weeks, much the way Kindle is used to purchase books. The latest Echo Look device builds on the company’s fashion business, offering style advice, purchase recommendations and another path into the category.

And barely two weeks after introducing the Echo Look, Amazon unveiled the Echo Show, demonstrating just how fast it can bring out a major product add-on in the already-fast-moving world of consumer electronics.

Ahead in the cloud

Amazon’s adventures in the cloud have arguably been its most successful to date.

The company was quickly out in front of the cloud-services business with Amazon Web Services, or AWS, which has turned into a consistently positive section of the company’s earnings report.



Amazon has more market share than top tech companies like Microsoft and Google.

AWS rolled out quietly in 2006, roughly six years ahead of its closest competition. That gave Amazon a head start in shaping the public cloud industry and allowed it to invest in the infrastructure that is now underpinning much of the internet.

“AWS was essentially the first to launch,” said John Dinsdale, chief analyst at Synergy Research Group. It “made the market its own” before other big players launched similar services. By the time others did appear on the scene, they were playing catch-up “from a long way behind,” he said.

See: The college that supplies the most graduates to Silicon Valley

While Microsoft












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Google, and IBM












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have all since introduced rival services, Amazon’s AWS maintains its dominant position in public cloud services, with a more than 40% share, according to Synergy data. The other three have grown an aggregate five percentage points over the past year and account for 23% of the market, but they’re growing at the expense of smaller providers, not Amazon. “That is unlikely to change any time soon,” Dinsdale said.

Amazon has been able to maintain such a large lead because of the aggressive investments it has made in expanding its network and price cuts that have kept its service competitive. AWS has cut prices more than 50 times since its launch in 2006, and SunTrust Robinson Humphrey analyst Kunal Madhukar said he wouldn’t be surprised if further price reductions were coming in the near future, following recent cost cuts for Microsoft’s Azure.

Amazon also continues to add new infrastructure to support AWS around the world. It recently announced plans to open an infrastructure region in Sweden in 2018, joining the 16 regional operations it currently maintains around the world, with another two slated to come online later this year.

In February, Amazon reported fiscal 2016 AWS revenue of $12.2 billion, a 54% year-over-year increase. Operating income more than doubled to $3.1 billion from $1.5 billion in 2016. But AWS revenue has decelerated in recent quarters, and Amazon has had to cut prices to remain competitive. AWS’s year-over-year revenue growth was 43% in the first quarter of 2017, compared with 47% in the fourth quarter of 2016, 55% in the third quarter and 58% in the quarter before that.

Amazon shares have gained nearly 29% in 2017 while the S&P 500 index












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  has gained about 7%.

Jennifer Booton contributed to this report.



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