A reader looking for a particular book went to a bookstore and found what fit on its shelves. The largest chain's superstores stocked more than 170,000 titles, while about 3 million were in print at any time AMX-1 AMX-6. Anything else had to be special-ordered from a wholesaler or publisher and collected later AMX-1. No mail-order catalog listed every book, because a catalog that size would be too big to mail AMX-3. A reader who did not yet know which book to buy had the store's shelves and its staff to go on. The store's advantage was that the reader left with the book the same day.
Amazon
Amazon listed every book in print with reader reviews and spent the margin it did not need for stores on lower prices, then opened its catalog to outside sellers and ran their goods through its own warehouses behind Prime, while Barnes & Noble remained a bookstore chain with a website.
How Amazon won
- 1 · 1995–98Innovation: every book in print, searchable, with reader reviewsAbout 3 million titles in print against a superstore's 170,000; reviews and recommendations to help pick one; 58% of fourth-quarter 1997 orders from repeat customers.User-Generated Content
- 2 · 1997–99No stores to protect: margin spent on lower pricesDiscounts up to 40% (1998), then 50% off bestsellers (1999); 75% of online book orders and 8.4 million customers to barnesandnoble.com's 15% and 1.7 million.Counter-positioning
- 3 · 1999–2018Open the catalog to outside sellersAfter Auctions and zShops failed, Marketplace took third-party sellers from 3% of physical sales (1999) to 58% (2018), with more than two million sellers.Aggregator Strategy
- 4 · 2005–14Prime and FBA: one fast-shipping promise for every seller's goods$79 a year for unlimited free two-day shipping (2005); FBA made sellers' stock Prime-eligible (2006) and carried 40%+ of paid third-party units by 2014.Membership Pricing
- 5 · 2014–18Scale and scope economies in the shared fulfillment network13 fulfillment centers in 2005, 109 in 2015, serving Amazon's and sellers' goods; third-party sales reached $160B, growing 52% a year since 1999.Scale economies
Versus Barnes & Noble (barnesandnoble.com): Barnes & Noble answered each move online: it listed the same titles, matched the discounts and offered free shipping. But it kept its stores' prices and its own stock at the center, and barnesandnoble.com stayed a bookseller's website, while Amazon turned its catalog into a marketplace that outside sellers stocked and its own warehouses delivered.
Arena: Market Conditions Before Amazon
How each step happened
Step 1 of 5 · 1995–98
Innovation: every book in print, searchable, with reader reviews
Amazon's innovation was a bookstore without shelves. A web page could list every book in print, about 3 million titles, where a Barnes & Noble superstore held 170,000; Bezos called it infinite shelf space AMX-6 AMX-1. Amazon did not need to own that stock: in early 1997 its warehouse held only hundreds of titles and ordered the rest from wholesalers and publishers AMX-1.
A list that long raised a new problem, which Bezos called the hardest part of buying a book: choosing one AMX-6. Amazon answered with customer reviews and recommendations drawn from each buyer's purchases, beside a searchable database of titles AMX-6 AMX-3. Readers wrote the reviews, so each one made the page more useful to the next buyer; the 1997 letter lists vastly more reviews among the year's additions A2.
Readers came back: more than 58% of fourth-quarter 1997 orders came from repeat customers, up from 46% a year earlier A2. As Ben Thompson later put it, the internet let a retailer offer more selection and lower prices together, "because you didn't need to maintain a limited-in-size-yet-expensive-due-to-location retail space" A17. The next step spent that saving.
Rivals Barnes & Noble, the largest bookseller since 1992 with more than 1,000 outlets, sued in May 1997 to stop Amazon calling itself Earth's biggest bookstore, arguing that it was a book broker, and launched barnesandnoble.com the same week with the same list of 2.5 million in-print and out-of-print titles AMX-1.
Step 2 of 5 · 1997–99
No stores to protect: margin spent on lower prices
With no stores to staff and rent, Amazon put the difference into price. By early 1998 it discounted books by as much as 40%, cheaper than a store even after postage AMX-6; in 1999 it cut all bestsellers to 50% off, which Fortune described as selling at cost AMX-2. Bezos had explained the choice in his 1997 letter: growth came before profit, because scale was central to the business model A2.
Barnes & Noble could not follow the price into its stores, which gave it 15% of all U.S. book sales in 1999 to Amazon's 2% and carried the rent and staff Amazon did not AMX-2. It matched the 50% discount online only AMX-2. Years later its website still warned that store and online prices might differ; a cashier explained that the store had to charge more to cover its overhead, and a book reserved online for $66 cost $108 at the counter AMX-10.
The prices won the online market. By mid-1999 Amazon took 75% of all books ordered online to Barnes & Noble's 15%, and had 8.4 million registered customers to 1.7 million AMX-2. Outside sellers would later come to reach those customers.
Rivals barnesandnoble.com, owned equally by Barnes & Noble and Bertelsmann with 18% sold to the public, matched the online discounts on $62 million of 1998 sales; Wired described it as close to disaster AMX-2. The stores kept separate, higher prices AMX-10.
Step 3 of 5 · 1999–2018
Open the catalog to outside sellers
Amazon opened its store to other sellers in 1999 and kept widening it for two decades, through the Prime and FBA years of the next step. After Amazon Auctions and zShops, a fixed-price version, drew almost no one, Amazon turned zShops into Marketplace, where outside sellers offered goods to Amazon's own shoppers AMX-4.
This reversed the usual order of building a store. Amazon already had the buyers from step 2; Marketplace brought suppliers to them, so selection grew without Amazon buying every item. Each new seller gave shoppers more to find, and more shoppers gave sellers more reason to list. Third-party sellers accounted for 3% of Amazon's physical gross merchandise sales in 1999, 17% in 2002 and 58% in 2018 A8; by 2014 more than two million of them sold more than 40% of Amazon's units AMX-4. What sellers lacked was a way to deliver quickly and cheaply, which the next step supplied.
Rivals barnesandnoble.com stayed a books-and-media retailer that added used and out-of-print titles; in 2003 it had $424.8 million of sales and a net loss, and had never turned a profit AMX-9 AMX-8. Amazon's revenue in the third quarter of 2003 alone was $1.1 billion, and that November Barnes & Noble offered $115 million for the part of the website it did not own AMX-8.
Step 4 of 5 · 2005–14
Prime and FBA: one fast-shipping promise for every seller's goods
Prime, launched in February 2005, changed the price of the next order. For $79 a year, members got unlimited two-day shipping free, with no minimum purchase; Bezos said "two-day shipping becomes an everyday experience rather than an occasional indulgence" A16. In its first year Amazon gave up many millions of dollars in shipping revenue AMX-4. Once the fee was paid, a small order cost nothing extra to ship: Thompson's household placed 173 orders in 2012, because ordering toothpaste was easier than a trip to Target A17.
Fulfillment by Amazon (FBA), launched in September 2006, extended that promise to sellers' goods. A seller sent stock to an Amazon fulfillment center; Amazon stored, packed and shipped each order and handled returns, and the goods qualified for Prime A4. The president of Dervish Toys named the problem it solved: "The overhead costs of pick-and-pack for one-off orders drains time and resources" A4.
The two programs fed each other: Prime members wanted goods that shipped free in two days, and FBA was how a seller's goods qualified. In a 2014 survey, 71% of U.S. FBA sellers reported more than a 20% increase in unit sales after joining, and that holiday season FBA carried more than 40% of paid third-party units AMX-4. Every new seller added volume to Amazon's warehouses.
Rivals Barnes & Noble had offered free shipping online since July 2001 and sold a Barnes & Noble Membership giving 10% off in stores and 5% online AMX-9. Its website shipped its own stock of about a million titles from facilities in Dayton, New Jersey, and Memphis, Tennessee, and did not fulfill for other sellers AMX-9.
Step 5 of 5 · 2014–18
Scale and scope economies in the shared fulfillment network
Prime demand and FBA stock filled one network, which grew from 13 fulfillment centers when Prime launched in 2005 to 109 in 2015 AMX-4. The same centers handled Amazon's own goods and the stock of more than two million sellers AMX-4. That is a scope economy: each seller added products and volume without Amazon building a separate operation or buying the inventory. It is also a scale economy: more orders through the same centers spread their fixed cost, the scale Bezos had called central in step 2.
Growth moved to the sellers. From 1999 to 2018 first-party sales rose from $1.6 billion to $117 billion, 25% a year, while third-party sales rose from $0.1 billion to $160 billion, 52% a year; Bezos credited FBA and Prime A8. A rival would have to build a network of that size, and find the sellers to fill it, before it could make the same two-day promise across the same selection. (Amazon's other large business, AWS, has a separate story; it earned $45.6 billion of operating income in 2025 A20.)
By 2018 Amazon held about half of U.S. print book sales and 84% of e-book sales AMX-11. The catalog with no shelf limit of step 1 had become a store that other sellers stocked and Amazon delivered.
Rivals Barnes & Noble held about a fifth of print book sales and 2% of e-books in 2018; it had closed 90 of its 720 stores over seven years and put itself up for sale, valued at about $475 million AMX-11.
Key dates
- 1997-05Barnes & Noble sues and launches barnesandnoble.com AMX-1
- 1997-05Initial public offering AMX-1
- 1997-12$147.8M net sales Full year, +838%; 1.5 million customers A2
- 1997-1258% of fourth-quarter orders from repeat customers A2
- 1998Discounts of up to 40% AMX-6
- 1998Holiday season: 1 million new customers to bn.com's 320,000 AMX-2
- 199950% off bestsellers; Barnes & Noble matches online only AMX-2
- 199975% of online book orders Barnes & Noble 15%; 8.4 million customers to 1.7 million AMX-2
- 1999Marketplace sellers: 3% of physical sales A8
- 2003-11Barnes & Noble offers $115M for the rest of its website AMX-8
- 2004$6.92B net sales Full year, +31% year over year A16
- 2005-02Prime: unlimited two-day shipping for $79 a year A16
- 2006-09Fulfillment by Amazon opens to sellers A4
- 2013-08Thompson: 173 household orders in 2012 A17
- 2014FBA carries 40%+ of paid third-party units AMX-4
- 2015109 fulfillment centers, up from 13 in 2005 AMX-4
- 2018$160B third-party sales 58% of physical sales; +52% a year since 1999 A8
- 2018-10Barnes & Noble up for sale; Amazon holds half of print book sales AMX-11
Sources
Oldest first.
- AMX-1 Amazon.Com Sued For 'Earth's Biggest' Claim. Contemporaneous trade press
- AMX-6 Young Entrepreneur: Jeff Bezos '86. Contemporaneous profile with founder quotes
- A2 1997 Letter to Shareholders. Founder letter; conservative year-end disclosure convention
- AMX-2 Title Fight: Just a year ago, book king Lenny Riggio had the category killed. Then Amazon.com knocked his Barnes & Noble flat.. Contemporaneous business press with founder quotes
- AMX-3 Jeffrey P. Bezos (profile and interview). Founder interview with profile
- AMX-8 Amazon Beats BN.com. Outside analysis
- AMX-9 barnesandnoble.com inc. Form 10-K for fiscal 2003. Filing
- A16 Amazon Prime launch. Contemporaneous earnings release and product announcement
- A19 Amazon S3 = The Holy Grail. Customer-authored account
- A4 Fulfillment by Amazon launch. Launch announcement with seller account; beta availability
- AMX-10 Is Barnes & Noble Hurting Its Stores By Not Price-Matching Its Own Website?. Consumer press with employee accounts
- A17 Amazon’s Dominant Strategy. Strategy analysis
- AMX-4 2014 Letter to Shareholders. Founder letter
- AMX-11 How Barnes & Noble, the last big bookstore, fell to Amazon. Outside analysis
- A8 2018 Letter to Shareholders. Founder letter; conservative month-end convention
- R10 Acquired — Special: Amazon Unbound (with Brad Stone). Podcast transcript
- R11 Acquired — Amazon.com. Podcast transcript
- R12 Acquired — Amazon Web Services. Podcast transcript
- A10 2023 Letter to Shareholders. CEO operating account
- C1 Cloud services: summary of final decision. Final market investigation findings, UK scope
- R13 Order.co Takes the Pain Out of Procurement with up to 7x Faster Analytics. Challenger-hosted named customer selection and migration account
- A20 Amazon 2025 Form 10-K. Primary source