The lawsuit “Amazon is not a bookstore at all”

At the beginning of the 1990s, while Barnes & Noble and other chains were expanding their networks of superstores, first steps were set into another radically different approach to book retailing: online, over the Internet. Several hundred book "cyber-stores" were estimated to be in operation on the WW in mid-1997.

Their quality varied; from simple websites to full operative e-commerce portals which actually helped process transactions with the general public. Book Stacks Unlimited (www. books.com) had been one of the pioneers: It began selling books online through a bulletin board service (BBS) in 1992 and in October 1994 launched a website that offered a selection of more than 500. 000 titles. In the mid-90s, Book Stacks was still a significant player in online book retailing but had clearly been overtaken by Amazon. com. Latter was expected to post sales between $100 and $150 Million in 1997, up from $16 Million in 1996. As far as Amazon's market-share for online book-retailing is concerned, estimates ranged as high as 90% back then. Amazon.

com's founder, Jeff Bezos, who had a summa cum laude degree in electrical engineering and computer science from Princeton, was working as a "quant" at a hedge fund on Wall Street in spring 1994 when, in the course of surfing the WWW, he came across a site claiming an annual growth-rate of more than 2000%. This explosion in demand inspired him to think about opportunities in online retailing. After analyzing over 20 products on the basis of a number of criteria – including the size of the market, distribution patterns and competitors he decided to focus on books.

He also thought that preformed marketing designs and distributional systems could prove to be a good basis for similar products, such as CDs, that also fit well with the Internet. Bezo's new company, named Amazon. com ("Earth's biggest river"; "Earth's biggest bookstore"), shipped its first book in July 1995. While Amazon. com had offered customers more than 1 million titles from the outset, it still carried only 2000 of them in its own warehouse in Seattle.

Packages of books were shipped from the publisher or wholesaler's warehouse to Amazon's, where they usually had to be "broken down" and repacked before being shipped out to customers. Amazon's dependence on others to stock most of the books that it sold prompted it to place more emphasis on going through wholesalers rather than dealing with publishers. Orders from publishers could take weeks to arrive. Wholesalers, in contrast, could ship a book within on to five days if they had it in stock.

Amazon obtained 59% of the books frome just one wholesaler, Ingram, which had a warehouse in Oregon. The most obvious benefit of this "just-in-time" logistics system was that it multiplied inventory turns and reduced working capital requirements. Amazon turned its inventory over 70 times in 1996, although this figure had declined by the second quarter of 1997 to 56. Amazon's "physical" headquarters was located in Seattle, Washington. Bezos had selected this location for a number of specific reasons.

First, it was close to the largest book distribution warehouse in the world (it was owned by Ingram). Second, the region had a large pool of high-tech talent. Third, the fact that Washington state's population was relatively limited had a positive impact on the tax situation. In fact, under the existing legislation, Amazon would not have to make customers in other states pay sales tax on their online purchases. Amazon's physical operations in Seattle were decidedly Spartan: The corporate Headquaters were located in a low-rent downtown district and office space was very limited.

Bezos liked to say that Amazon kept everything short, except people and computers. In March 1997, Amazon employed about 250 people; half of them were involved in packing, shipping, and customer service, and the other half in computer programming, the editorial function, marketing, accounting and management. The top-managers' backgrounds were generally computer-related rather than book related. Amazon's Web page, which limited graphic content so that it could be downloaded quickly, had been named on of the 10 "Best Websites of 1997" by Time Magazine.

However, 80% percent of the resources spent for software development were used for back-office operations, due to the lack of existing software. Amazon needed a customer service centre for handling e-mails rather than phone calls and inventory management software that could automatically send e-mail messages when orders were placed and shipped. Customers were able to shop at Amazon any time of the day, any day of the week. They could search through its catalogue, which originally consisted of 1. 1 million titles, by author, title or subject.

First-time shoppers had to fill out a simple order form with their names, addresses. Password protections meant that this information would not have to be re-entered in the future unless an order was to be shipped to a different address. Customers were instantly informed of the prices and inventory status of the items they had ordered. Customers were able to shop at Amazon any time of the day, any day of the week. They could search through its catalogue, which originally consisted of 1. 1 million titles, by author, title or subject.

First-time shoppers had to fill out a simple order form with their names, addresses. Password protections meant that this information would not have to be re-entered in the future unless an order was to be shipped to a different address. Customers were instantly informed of the prices and inventory status of the items they had ordered. The main point is that Amazon did far more than just sell books. It also provided a range of services, including information about books: interviews with authors, book reviews and recommendations from other customers.

Barnes & Noble had begun monitoring developments in online book retailing shortly after Book Stacks started up its Web site in late 1994. The company tracked all the early online efforts but did not benchmark itself against any particular one because it saw a unique mission for itself: bringing the Barnes & Noble brand name into the new formed online community. In 1996 the company decided to launch its own transaction oriented Website and it formed a "New Media" division that consisted of seven people.

In 1997, Barnes & Noble officially announced its plans to become the exclusive bookseller on America Online's (AOL's) "Marketplace". On March 18 that year, the company went online at AOL with deep discounts: 30% for hardcovers and 20% for paperbacks. Barnes & Noble also launched its own Web site, with a similar deeply discounted price structure later in May. In the same month, the company also sued Amazon. com because of their claim to be the "largest bookshop on Earth". According to the lawsuit, "Amazon is not a bookstore at all". Rather it is a book broker making use of the Internet to generate sales to the public.