When Jeff Bezos founded Amazon.com in 1994, could he have imagined how the company’s gravitational pull would make it the center of the e-commerce universe? The company conquered the online sales of goods from CDs to groceries, is partnering with social media giant, Facebook, essentially created the e-book market and most recently has its sights on the video rental space — the next chapter in its quest to be the center of the online retail space.
Amazon envisions the future of the e-commerce world to be in the cloud based on product launches in the past five years. In 2001, Amazon enabled its users to buy and sell used and new products and four years later began selling private label goods (under the name, Pinzon). Amazon has focused less on physical goods and more on the cloud in the second half of the decade.
In 2006, Amazon began selling data storage, called Amazon Simple Storage Service, and a year later launched its digital music service. In that same year, Amazon launched its ground-breaking e-reader the Kindle. And in July 2010, e-book sales overshadowed Amazon’s hardcover books. In fact, Amazon claims it sold 143 e-books for every 100 hardcover books. The success of the Kindle (which can only be rumored to be successful as Amazon has never released sales figures of the device) has arguably led to the current war of the tablets — with competitors like Apple, Google, Dell, HP and others.
With its e-book sales increasing (a resource with tips for eBook authors), Amazon is poised to tackle the emerging online video rental market. Online video is certainly a rising trend amongst internet users. In the month of December 2009, 178 million people watched 33.2 billion videos, with the average viewer watching 187 videos per month in the U.S, according to comScore. To capture this growing audience, Amazon recently announced it would soon begin $.99 online video rentals and launched video streaming, similar to Netflix. But Amazon isn’t the only company picking up on the trend.
Steve Jobs recently released the new iTV video rental device, Google has beta tested its YouTube rentals and the rapid growth of Netflix over the last couple of years is going to be challenging for Amazon to compete against. Netflix had 15 million subscribers as of June 30, an increase from 10.5 million a year ago, with 61 percent of them having watched a movie or television show via the internet on computers and web-connected TVs. And Netflix’s CEO admitted over the next decade he anticipates the company to focus primarily on internet streaming, reports the LA Times.
“Amazon.com has used aggressive price discounts to carve out a dominant position in print and electronic books,” writes the Wall Street Journal. But the company is faced with formidable competitors in the online video space. Beyond the industry leader, Netflix, Amazon is challenged by Apple — which aims to replicate its $.99 music downloads in the video rental market with its new iTV. Amazon’s goal is to match the $.99 rentals, but if Apple’s iTV takes off, Amazon could lose grasp of the market.
Will Amazon tackle the online video rental market as it did with e-books? If Amazon can parallel its e-book success in the online video space, the online retailer will be that much closer to achieving its goal of becoming the center of the e-commerce universe.
Image by Gabriella Fabbri from Stock.Xchng
Developing financial projections can seem like a monumental challenge, especially for emerging businesses that have little track record. After all, if you are operating at a loss with $0 revenue, how can you project a future state in which you have millions in revenue and are operating profitably? While financial modeling can be an inexact science, it can be incredibly helpful in pushing you to think about the future state of your business. Entrepreneur typically build a financial model in conjunction with their business plan. We suggest revisiting and updating your financial model as you reach milestones and plan for future growth. Assumptions are the key to any financial projections model. Before developing an overly complicated Excel model, give some thought to the key levers for your business.
Identify your revenue streams first (i.e. advertising, product sales, subscriptions) and the key elements for each. This can be as straightforward as price times quantity sold equals revenue. In a subscription business think about price points of your products and your target number of customers. If you have an advertising based business, consider metrics such as number of advertisers, impressions, and CPM. To help inform your assumptions so that they are more than just guesses, you should look at the overall market and comparable businesses. How long did it take your competitor to reach $1 million in sales? What price are they charging? Even better yet, do a beta test of your product to see sales response on a limited basis. If you have little confidence in your assumptions, create assumptions for multiple scenarios by developing your best guess, an optimistic case and a pessimistic case.
Expense assumptions are often much more straightforward than revenue assumptions. Start with cost-of-goods sold, then consider sales, marketing & distribution expense. It’s important to think about how your expenses relate to your revenue. For example, if you are going to ramp up your sales, do you need a significant marketing budget? Then factor in your technology, people, office, and other expenses. Expenses tend to go up over time, so factor in annual raises and adjustments for inflation of 3 to 5% annually. Be sure to be comprehensive and include expenses such as payroll taxes, healthcare expenses, and a small miscellaneous cushion.
The Actual Model
Setting up the model is the complicated part, unless you are an Excel whiz. The key output of your financial modeling is income statement projections for the next 3 to 5 years. Try to link up as much as possible through formulas that reference your assumptions (ideally assumptions can be on a separate worksheet in the same Excel file). Generally, you can use simple formulas such as multiplying price and quantity. Occassionally, you’ll need to use more advanced functions such as the IF function and others. I color code my entries such that all hard-entered inputs are in blue, and all formulas are in black. Then I know never to update any numbers in black because they are just calculations that adjust in real-time. Beyond an assumptions worksheet and income statement worksheet, you might also consider separate worksheets for listing out your headcount, cash flow, balance sheet, and a depreciation schedule.
Making Sense of the Output
The fun part is to see revenue growth, operating income, and required investment based on the final model. Be sure to troubleshoot and make sure that your results make sense. Assuming that your formulas are all linking up properly, consider how your business looks to an investor. How much do they need to invest and what is the expected return? Are you able to surpass revenue milestones of $1 million and/or $10 million? Do you show a healthy revenue growth of 15+ %? Do your operating margins make sense in years 3 – 5 (i.e. are they reaching the 20 to 30% range)? Are you able to reach profitability by the 2nd or 3rd year of projections? How much investment is required to fund your business for the next 18 months? Be sure that your expectations are reasonable. I’ve seen some projections that are unrealistically optimistic and show margins twice those of Google. You might need to find additional market data to inform your assumptions and make adjustments so that your financial projections model is both reasonable and compelling to prospective investors.
View A Financial Model Presentation for Startups