Amazon.com’s IT Leader Leaving Huge Customer Service Infrastructure as Legacy

As senior vice president and CIO of Amazon.com, Rick Dalzell is the visionary behind the company’s legendary e-commerce platform and personalization engine.

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Dalzell has overseen $2 billion worth of technology investment during his decade-long tenure with the Seattle-based e-commerce and technology company. On his watch, the company’s IT infrastructure has scaled to support $10.7 billion in sales, more than 69 million active customer accounts, 42 product lines from apparel to video games, more than 1.1 million third-party sellers, and a growing contingent of software engineers who are tapping into the computing prowess and Web services the company has developed over the years. Then there are all the technological innovations the company’s legion of software engineers have brought to market, many under Dalzell’s leadership, to make shopping online a piece of cake for consumers: 1-Click ordering, the A9 search engine, product recommendations, wish lists and order updates, among others.

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Amazon’s Approach to Systems Integration

The IT platform Dalzell has overseen is viewed as Amazon.com’s core competency, a competitive differentiator and a monumental achievement. CIO.com visitors voted it a wonder of the IT world. Jeffrey Lindsay, a senior analyst with the research arm of investment bank Sanford C. Bernstein, says it’s the world’s leading online retail platform and calls out its ability to tailor the e-commerce site to each individual customer who logs in. “It delivers a unique user experience in real time to everyone who uses it. It extends to lots of product categories and seamlessly integrates third-party sellers,” says Lindsay. “What they’re doing [with IT] is extremely difficult and very complicated.”

In an interview with CIO in 2001, Dalzell noted that personalization was a way for Amazon.com to achieve its vision of being a customer-centric company. “Very early on, we recognized that we were really in business to help the customer find anything they wanted to buy,” he said. “The key was that we were going to need to build a unique store, one that changed all the time, for each individual customer.”

Dalzell, a 50-year-old West Point graduate, is now preparing to end a chapter in his career. After 10 whirlwind years, the CIO has decided it’s time to pass the baton to someone else, though the company has not yet publicly named a successor. On Aug. 31, 2007, the company quietly announced to its investor community that Dalzell—who joined the fledgling online bookseller in 1997, the year of its initial public offering, from Wal-Mart Stores, where he spent seven years in its information systems division—would be retiring by the end of the year. Dalzell, who maintains a low profile, declined to be interviewed for this story. His retirement presents an opportunity to examine how Amazon.com has changed over the past 10 years, how it executed on its vision, and how it beat investors’ skepticism and changed retailing.

The Only Constant Is Change

What we’ve been able to do, and what I expect we’ll do in the future, is we’ll continue to build and innovate like crazy.

— Rick Dalzell, from 2001 CIO interview

Since day one, Amazon.com has been expanding and innovating, with a view toward bringing more products to customers and making the site easier, more convenient and more fun for them to shop through features such as user-generated reviews, product recommendations and the ability to read book excerpts. The company has evolved from a startup bookstore to an established general merchandise retailer on the Web. It began diversifying its product offerings in 1998 with the introduction of its music store in April and movie store seven months later. The website now boasts 42 product categories including auto parts, mechanical components and pet supplies. Last year, it ventured where previous Internet companies met their demise—into groceries.

Amazon.com is also aggressively moving into the sale of digital goods as more consumers trade in physical media like CDs for MP3s. In a bid to compete with iTunes, Amazon.com launched downloadable music and video services. The company won a high-profile contract with NBC to distribute the network’s TV shows in September, after NBC decided to pull its programming from iTunes due to a pricing disagreement. To further cement its position as the place for consumers to find all forms of media on the Web, Amazon.com is betting on e-books. It also owns a self-publishing service so that writers, musicians and movie makers can publish their work and distribute it through Amazon.com.

Besides expanding its offerings of hard goods, soft goods and digital media, Amazon.com has morphed by finding ways to monetize its vast IT infrastructure. In 2000, the company embarked on a new strategy that built upon its traditional e-commerce business. It sought partnerships with traditional brick-and-mortar retailers, starting with Toys “R” Us, that were struggling to establish e-commerce presences. Amazon.com offered its e-commerce, customer service and fulfillment infrastructure to retailers such as Borders and Target that didn’t want to spend millions of dollars reinventing the e-commerce wheel. This business is now known as Amazon Enterprise Solutions.

The alliances with brick-and-mortar retailers, though they’ve contributed a negligible amount to Amazon.com’s net sales, allowed the company to put its stake in the ground as a technology services provider.

“At its core, Amazon is a technology company,” says Carrie Johnson, a vice president and research director with Forrester. “Amazon continues to invest in technology and acquire companies that complete its technology platform.”

Online Giant

Amazon.com, Then and Now

Amazon.com CIO Rick Dalzell is leaving the company after a decade of leading its IT operations. Here’s a look back at what was going on at Amazon.com in 1997, compared to today.

How Google Influenced Amazon.com’s Strategy

Amazon.com as a technology services provider took a turn in 2002 when the company began offering its own features and content to a new set of customers, website developers, so that they could incorporate those features onto their sites. This new service called Web Services was intended to tie developers to the Amazon.com brand and drive traffic to the site. Today, Amazon.com offers a variety of Web services to more than 240,000 developers, entrepreneurs and established companies. These Web services include the Elastic Compute Cloud, which gives users access to Amazon.com’s computing capacity in a virtual computing environment on a pay-per-usage basis, and the Simple Storage Service, which lets users store data in Amazon’s data centers and pay only for the amount of storage they need. The company essentially provides “on-demand” computing to customers through these Web services interfaces.

Scott Devitt, a managing director with Stifel Nicolaus who has covered Amazon.com for six years, says Amazon.com’s willingness to open up its technology to external users was a strategic move and partially driven by Google’s capacity to “unbundle and fragment the Internet.” Even though Amazon.com is charging customers for computing and storage capacity, the short-term financial gain is questionable, says Devitt. “It’s a long-term investment,” he says. “To succeed in technology or on the Internet long term, companies need to focus on running their businesses with open platforms.” The companies that work with open platforms today are succeeding, he adds, while the ones that have remained closed, like Yahoo and eBay, are struggling.

Devitt’s nonchalant attitude toward the questionable short-term return on Amazon.com’s Web services business represents Wall Street’s confidence in the company. Revenue has grown year over year, and even though net income declined from 2004 to 2006 due to increases in income tax expenses, the stock averages an outperform rating, which means analysts expect shares of Amazon.com to outperform the broader market averages. Indeed, the average target price for the stock, which was trading around $91 when this story was reported, is $100 a share—just $13 under the all-time high the stock hit at the height of the Internet boom in 1999. Investors’ confidence in Amazon.com today is founded on the company’s ability to execute its strategy and understanding of what works on the Internet, and not some irrational exuberance over a New Economy business plan, as was once the case.

“The company has executed on its strategy as planned when it was just a books, music and DVD website,” says Devitt.

“Investors are very excited about this company because it has rebuilt its growth and improved its margins,” says Sanford C. Bernstein’s Lindsay.

Cash + Willingness to Experiment + Stable Leadership = Success

Lindsay says Amazon.com has been able to execute on so many different ideas because it generates a lot of cash and because the founder, Jeff Bezos, remains at the helm as CEO. “He’s a visionary and very single minded. If he wants to do something, he can get it done,” says Lindsay.

When Bezos has an idea he wants to act on, no matter how controversial, whether it’s a free shipping service or welcoming third-party sellers whose prices are cheaper than Amazon’s, his customer service instincts often prove to be right. Amazon Prime, the free shipping service Amazon.com offers to customers who pay an annual $79 fee, is a case in point. Skeptics thought offering such a deep discount on shipping to so many customers would hurt the company’s bottom line. In fact, it bolstered it. Amazon Prime has tied customers to the company in a way that few other loyalty programs have, says customer service author and expert Patricia Seybold. Whenever an Amazon Prime subscriber needs to purchase something on the Web, he looks to Amazon.com first because he doesn’t have to pay shipping. Amazon Prime has successfully changed consumers’ shopping behavior, says Seybold. And now that Amazon.com offers so many more products, customers have even more reason to subscribe to Prime and shop with Amazon.

Of course, not every idea has stuck to the bull’s-eye. Devitt and Forrester’s Johnson say that Amazon Enterprise Solutions, Amazon.com’s e-commerce services business for retailers, has not been very successful. “Large retailers decided that Amazon was a competitor and moved away. Others looking for solutions went with GSI Commerce,” says Devitt, referring to an e-commerce outsourcing vendor. In fact, one of Amazon.com’s earliest customers, Borders, announced last April that it would be launching its own proprietary e-commerce site and thus parting ways with Amazon.com. Johnson says Amazon.com is no longer aggressively pursuing large deals in this space, though last July it debuted a new website for apparel designer Lacoste.

The venture funding the company received in its early days has also enabled Amazon to be a first-mover and take risks that other companies wouldn’t dare consider, according to Devitt.

“This company would not be as successful as it is today if it had not been appropriately funded at a time when capital was so cheap,” says Devitt. “The funding gave them the capacity to scale. Since that point in time it’s been a very deep understanding of what works on the Internet.”

Sanford C. Bernstein’s Lindsay notes Amazon.com’s ability to recognize and capitalize on product categories such as nonperishable groceries, beauty products and jewelry that are poised for growth online. “They’re getting into categories people find strange like auto parts, jewelry, apparel and watches. These are mature, slow-growing sectors in the offline world, but online they’re growing rapidly. It’s this online switching effect that Amazon has identified and that is driving a lot of growth for the company.”

Amazon.com’s Innovations at a Glance

1995

User-generated product reviews: Registered customers play tastemaker.

1997

1-Click shopping: Registered users click on one button when they find an item they want to purchase and bam! Their order is placed and processed. The customer doesn’t have to fill out page upon page of shipping and credit card information to buy a book.

Personalized recommendations: Amazon.com suggests books that registered users might enjoy, based on their past purchases, customer ratings and other authors they like. User-generated reviews of books. 1999

Wish List: Customers can make lists of all the products they’d like to buy or have other people buy for them.

Amazon.com Anywhere: Customers can now shop on Amazon.com using their wireless devices.

Purchase Circles: These are lists of the most popular items being purchased by customers in a given zip code.

2001

Look Inside the Book: Shopper can browse pages of books.

Instant Order Update: Amazon.com warns customers when they’re about to purchase a book they previously bought on Amazon.com so that they don’t inadvertently buy a book they don’t need. 2002

Web Services: This platform lets website developers incorporate content and features from Amazon.com onto their websites.

2003

Search Inside the Book: Customers can search the text inside books for specific keywords.

2004

A9 Search Engine: Stores registered users’ search history and offers search results from different sources including Google and the Internet Movie Database, which is owned by Amazon.com.

2005

Mechanical Turk: Named for the chess-playing robot designed by Wolfgang von Kempelen, the service provides businesses and software engineers with a marketplace of temporary workers to work on projects such as identifying objects in a photo or transcribing audio records. Mechanical Turk application programming interfaces then integrate that work into the customer’s business processes and systems.

2006

Elastic Compute Cloud: This Web service gives users access to Amazon.com’s computing capacity.

Simple Storage Service: This Web services interface can be used to store any amount of data, at any time, from anywhere on the Web, on Amazon.com’s data storage infrastructure.

Amazon.com’s Online Prowess a Blessing (and a Curse) for Retailers

Amazon.com is a boon to Internet shoppers around the world. It’s brought them convenience, choice, discounted prices and quality service. In so doing, Amazon.com made selling more complicated and competitive for retailers. Every retailer now has to have an e-commerce site, and it has to measure up to the high standards Seybold says Amazon.com has established for usability, personalization, and the rapid fulfillment and delivery of orders. And that’s not easy for competitors to match, says Lindsay.

Forrester Research’s Johnson notes that Amazon.com changed consumers’ expectations of how much product information retailers should give them. The product ratings and reviews, which Amazon.com had on its site first, made consumers more informed, discerning and price sensitive, and that pushed retailers back on their heels. “Many retailers say consumers walked into their stores with a huge amount of knowledge and guessed it came from Amazon,” says Johnson. “Their win-all strategy has put every merchant selling online on the defensive.”

In reaction, says Seybold, some brick-and-mortar retailers have shot back by integrating their sales channels and letting consumers check local store inventories online, and pick up and return items they purchased online in stores. The seamless cross-channel retail experience that some merchants offer brings convenience to another level with which Amazon.com, with only one channel, can’t compete. “The cross-channel experience is the industry’s one competitive advantage,” says Seybold.

What’s Ahead

If the past is any indication of Amazon.com’s future, the company will continue to expand and innovate. But how will its seemingly boundless capacity for technological innovation be affected by CIO Dalzell’s departure? How will Dalzell’s absence impact the company moving forward?

Wall Street analysts Devitt and Lindsay aren’t quite sure, but they don’t seem too worried, either. Lindsay notes that Dalzell has been “a major part of the value contribution” at Amazon.com, but that his company hasn’t examined how the CIO’s departure might affect the technology giant.

“Anytime you lose a talent like that, it’s meaningful in one regard or another, but I really don’t have a strong opinion on its impact on the business,” says Devitt. “I assume they have a very deep bench.”

That bench strength makes Forrester’s Johnson believe that Amazon.com will carry on just fine without Dalzell. “Not to downplay his contribution, but such smart individual contributors are working there, especially on technology innovation, that I would be surprised if there was any impact,” she says. “If you watch Amazon’s history of executives coming and going, no move has impacted the company materially. Amazon is not heavily influenced by any single person save Jeff Bezos.”

And it looks like Bezos is going to stick around for a while, according to Lindsay. “It’s becoming clear that his vision is being realized,” he says. “It’s taken 10 years, but he’s rebuilt top-line growth back up to 38 percent. Investors and stakeholders are very pleased with his performance.”