Kellogg Sample

8/19/2019 Kellogg Sample

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©2015 by the Kellogg School of Management at Northwestern University. This case was prepared by Professor Russell Walker and

Rafique Jiwani ’14. Cases are developed solely as the basis for class discussion. Cases are not intended to serve as endorsements,sources of primary data, or illustrations of effective or ineffective management. To order copies or request permission to reproduce

materials, call 847.491.5400 or e-mail [email protected]. No part of this publication may be reproduced, stored in a

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or otherwise—without the permission of Kellogg Case Publishing.

RUSSELL WALKER AND RAFIQUE JIWANI ’14 5-315-501

Reinventing E-Commerce:Amazon’s Bet on Unmanned Vehicle Delivery

I would define Amazon by our big ideas, which are customer centricity, putting the

customer at the center of everything we do, [and] invention. We like to pioneer; we like to

explore; we like to go down dark alleys and see what’s on the other side . . . I know

[drone technology] look[s] like science fiction—it’s not. It will work and it will happen.

It’s going to be a lot of fun.1

—Jeff Bezos, CEO and founder, Amazon.com

In a December 1, 2013, interview on American television program 60 Minutes, Amazon CEOJeff Bezos announced that Amazon would soon change the future of online shopping by enablingcustomers to receive items within thirty minutes of ordering. This delivery service, Bezos said,would be powered by unmanned autonomous drones and could be offered as soon as 2015. Themarket reaction was instantaneous and positive.

Still, Amazon needed some answers before it could launch autonomous delivery services:Were customers ready to embrace and pay for this type of delivery service? Would regulatorsallow it? Should Amazon make or buy its drones? Would it be too risky for Amazon to wait tolaunch this service? If it decided to go ahead, how should it launch, and to whom?

The U.S. E-Commerce Industry

The Early Days

An English inventor named Michael Aldrich began developing the precursor to onlineshopping in 1979. Aldrich, frustrated with how long it took to shop for groceries (driving to thestore, looking for items, waiting in line, and driving back home), tested a device that usedvideotex* to connect a television set to a transaction-processing computer with a telephone line.He decided to commercialize his concept in 1980, just when VCRs were beginning to gain mass-market traction in the United States. Aldrich envisioned that his product, coined the Teleputer,would enable a new form of information exchange between businesses and consumers;

* Videotex, developed in the mid- to late 1970s, was a technology that incorporated a television with a computer interface, allowing

users to send messages and content to each other.


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AMAZON’S UNMANNED VEHICLE DELIVERY 5-315-501

2 K ELLOGG SCHOOL OF MANAGEMENT

additionally, he felt that firms could gain competitive advantages by externalizing labor costs andserving customers more efficiently.2

While finding short-lived success with B2B-focused customers (e.g., General Motors testedthe system to sell spare truck parts), Aldrich was unable to make headway in the minds of

consumers. They had just woken up to the idea of the VCR in their homes and the costs wereextremely high, and there was no real online marketplace in use or laws regulating how firmscould conduct business online.* Further, consumers were wary that these systems had no way oftransacting orders securely. Aldrich later commented on his release of the Teleputer:

It is also clear that moving a company [or consumer], for strategic reasons, from a low

technology profile to a higher technology profile is not an overnight activity. Before

using information technology strategically the goals, capabilities, positioning, and

constraints on the enterprise must be established . . . If the first step in our guide was the

management of change, the second step must be the business implications of change.3

Aldrich’s insight, though ahead of its time, gave way to evolving technologies such as the

ATM, electronic payment through credit cards, and telephone banking during the 1980s.However, it was nearly fifteen years before his work would be remodeled for a consumer willingto accept the risk of shopping online.

1994 Resurgence

As the 1980s continued, little notable advancement occurred in the online shopping industry,though there were signs of potential. The first mass-market online services, Prodigy and AOL, began advertising flowers on their welcome pages in the late 1980s, but the attempt was more ofan advertisement than a platform to complete a transaction. Security was still seen as the majorimpediment to consumer adoption. It wasn’t until 1994, four years after the invention of theWorld Wide Web, that security protocols (SSL) and high-speed connections (DSL) were

established, allowing users to confidently purchase goods online securely and quickly. Thewithdrawal of entry barriers enabled the emergence of hundreds of online retailers by 1995,including Amazon, eBay, and Dell. Offering goods at prices 10 to 20 percent below those at brick-and-mortar retail locations allowed online retailers to grow substantially through the latter part of the decade. By 1999, the U.S. online retail market reached over $15 billion in annualsales.4

Along with the exponential rise of Internet retail companies came a substantial amount ofventure capital (VC) funding. VCs believed that the success of an online retailer would comeafter realizing net losses in order to gain market share, and were willing to back startup dot-coms based simply on an idea. Within a year, the NASDAQ fell 78 percent from its high in March2000, and 52 percent of dot-com companies established between 1995 and 2000 disappeared.This left only a few pure-play online retailers, including Amazon, eBay, and Priceline.

* By 1984, California was the only U.S. state that had passed an electronics commerce act that defined corporate and consumer rightsonline.


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5-315-501 AMAZON’S UNMANNED VEHICLE DELIVERY

K ELLOGG SCHOOL OF MANAGEMENT 3

2001–2013 Boom

Continuous revitalization of goals, identification of “white space,”* and diversification of risk became a major theme for dot-com companies that survived the bubble and the subsequentdecade. Amazon explored interests in B2B, reseller, and hardware operations; Priceline shifted its product focus from air travel to hotel and rental car travel; and eBay drastically expanded its product lines. By 2013, Amazon was the clear and dominant leader in online retail. With over $74 billion in revenue, it outpaced eBay, Priceline, and all other online retailers many times over.5

Amazon.com

History

The story of Amazon is widely known. Founded in Jeff Bezos’s garage in 1995 as a reseller

of books, the company took advantage of the rapidly growing e-commerce space that followedthe increased security measures enacted by Netscape founders. Attempting to carry “every product from A to Z,” Bezos enacted an unusual business plan (though not uncommon to Internetstartups at the time) that focused on customer and revenue growth rather than profit. He alsoemphasized the need for Amazon to pursue areas within and outside online shopping from the beginning of its existence as a public company. In a 1997 letter to shareholders, Bezos contended:

Our goal is to move quickly to solidify and extend our current position while we begin to

pursue opportunities in other areas. We see substantial opportunity in the markets we are

targeting. This strategy is not without risk: it requires serious investment and crisp

execution.6

By 1997, the company—now public—had greatly expanded its reach. Employee headcount

grew from 185 to 614; distribution center capacity grew from 50,000 to 285,000 square feet; and book inventories surpassed 200,000 titles. Amazon soon found itself competing less on price withincumbent retailers and more on convenience and time to delivery.7 Throughout the next fifteenyears, Amazon’s focus on winning with time and price in every aspect of its business was crucial.Retail competitors had a difficult time transitioning from brick-and-mortar operations to e-commerce platforms. Even the ones who experienced some online success still had troublecompeting with Amazon because of its sheer range of product offerings and logisticalcapabilities. By the end of 2013, Amazon had $74 billion in sales and had turned a profit for fiveconsecutive years. (See Exhibits 1A, 1B, and 1C for Amazon financials.) It occupied nearly 50million square feet of distribution centers around the country and employed more workers thanGoogle and Microsoft (Exhibit 2).

* White space is a management term coined in 1991 by Geary Rummier and Alan Brache to identify areas of an organization where noone is in charge. Mark Johnson redefined the term in 2010 as an area in which businesses can create new business models.


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Growth Strategies and Amazon Prime

Though making every effort to grow Amazon organically, Bezos acquired a diverse group ofcompanies beginning in 1998. (See Exhibit 3 for a complete list of Amazon acquisitions through2009.) Economist Mark W. Johnson elaborated:

Amazon at its roots is built to transform. When it finds opportunities to serve new

customers, or existing customers in new ways, it conceives and builds new business

models to exploit them. Amazon has the unique ability to launch and run entirely new

types of businesses while simultaneously extracting value from existing businesses.

Amazon’s journey forward will likely be marked by a series of transformations, as it

continues to pursue its vision unafraid of white space, business model innovation, or

renewal.8

As Amazon grew over the next decade, it leveraged the Amazon brand as it introduced cloudcomputing services (Amazon Web Services) and its first hardware product, the Amazon Kindle.In an article in the Harvard Business Review, Accenture partners Larry Downes and Paul Nunes

described the Amazon Kindle:

Amazon’s real innovation was waiting just until the right combination of technologies

was ready for mainstream use and then leveraging its powerful brand and customer

network to launch Kindle with easy access to a huge catalog of books on day one . . .

along the way, they scrambled every link in the supply chain.9

While the Kindle grew, Amazon invested heavily again in serving customers as quickly as possible with Amazon Prime, a service guaranteeing two-day shipping for certain products.Initially, 1 million products were targeted for Prime at its launch in 2004. By 2014, 120 million products in Amazon’s catalog qualified for Prime. The $79-per-year subscription service becamea huge profit machine for Amazon, and the company soon began adding digital services for Primemembers, including Prime Instant Video. Many Prime members claimed they would pay over

$100 for annual services, and they spent nearly double at Amazon than regular customers ($1,200 per year versus $600 per year). Instant access became a major competitive advantage forAmazon. Customers saved time on everything from watching movies to downloading books toordering groceries, and viewed Amazon as their premier online shopping destination. Reportsindicated that the number of Amazon Prime members could reach 25 million by 2017.10

Fulfillment and Distribution

Amazon’s efficiencies in fulfillment and distribution were critical to its success, particularlyits ability to serve online customers more quickly than its competitors. Its heavy investment inmore than sixty distribution centers (compared to two or three for the average retailer) across theUnited States paid off annually as more and more products that consumers traditionally boughtin-store were being purchased online.11 (See Exhibit 4 for a map of Amazon’s fulfillmentcenters.) Customers expected to receive products as soon as possible; the closer a supplier was tothe customer, the quicker it could ship the product. (See Exhibit 5 for a diagram of Amazon’sshipping and receiving process.)

Amazon’s reliance on shipping companies increased in tandem with its expansion infulfillment centers and need to rapidly service its customers. The costs associated with its


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arrangements with these companies were beginning to become a major concern for Bezos andAmazon. In a 2013 statement to shareholders, Bezos discussed the necessity to reduce fulfillmentand delivery service costs in order to maintain the health of Amazon’s business:

We rely on a limited number of shipping companies to deliver inventory to us and

completed orders to our customers. If we are not able to negotiate acceptable terms with

these companies or they experience performance problems or other difficulties, it could

negatively impact our operating results and customer experience.12

Amazon heavily relied on delivery services such as UPS and FedEx. Both UPS and FedExannounced in 2014 average price increases of 4.9 percent and 3.9 percent, respectively, ondelivery costs due to increased fuel prices. It was estimated that fuel for the long-haul fleets thatUPS and FedEx employed accounted for nearly 40 percent of their operating expenses. 13 (SeeExhibit 6 for financial highlights for UPS and FedEx.)

Lobbying

Amazon began heavily lobbying the U.S. government in 2010 on issues such as taxes ononline sales, transportation safety, data protection, and intellectual property. In addition, thecompany fought hard at the state level to ensure that it could retain multiple competitiveadvantages, such as tax breaks on large distribution centers and of course the ability to sellwithout charging customers sales tax. (Amazon threatened to leave the state of Texas when itasked to collect taxes from the company’s shipments.14) Amazon spent $3.4 million on lobbyingin 2013, its highest spending year since its inception, and over $200,000 on political donations. It partnered with the CIA in a $600 million cloud-computing contract in 2012. In his 60 Minutes interview, Bezos claimed that Amazon conducted a significant amount of lobbying in 2013 forthe legalization of unmanned autonomous drones. (See Exhibit 7 for Amazon lobbyingspending.)

Customer Data

Amazon considered the data it captured from its customers one of its most important assets.The data allowed the company to foster a relationship with customers that it claimed is superior tothat of a traditional retailer. Aside from promising its customers that their data was kept secret,however, Amazon rarely discussed how much it did or did not use it, though customers highlyvalued the product recommendations that Amazon provided based on the customer data. Aspecial report in Time magazine investigated the data that Amazon collected:

While brick-and-mortar stores are black boxes—customer behavior inside the store is

effectively invisible to managers—Amazon is able to collect endlessly useful information

about shoppers and use it to sell more stuff by targeting customers through e-mail and

the website itself. Whenever a customer buys something from Amazon or logs in without

buying something, Amazon is collecting all kinds of information about that person.

There’s a lot of data that can be mined about how they peruse the website, what they put

in the cart, what they abandon, and how the customer actually goes about searching for a

product.15


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By 2014, Amazon enjoyed tremendous customer trust in the management and use ofcustomer data, providing it a clear advantage over other leading digital firms.16 Shoppers trustedAmazon more than Google, Facebook, Twitter, and Apple when it came to consumer privacy. Infact, only 7 percent of American consumers viewed Amazon as a threat.17

Autonomous Vehicles

Background

By 2014, the development of autonomous vehicles (AVs) had been underway for quite sometime. In his 60 Minutes interview, Bezos suggested that Amazon would deliver goods by drones,or flying AVs. At the same time, however, advances in autonomous cars and trucks were beingmade, allowing for the possibility that retailers could use a fleet of both drones and autonomouscars and trucks. By that time, the National Highway Traffic Safety Administration (NHTSA) had

classified “autonomy” into five different levels when associated with a land- or air-based vehicle:

Level 0: No features of autonomy; full control by driver.

Level 1: Individual features of autonomy, such as automatic braking.

Level 2: Different controls of a vehicle working together autonomously.

Level 3: Near autonomy; a driver is present only for critical control of the vehicle.

Level 4: Full autonomy; a driver is not needed to be present for control of the vehicleand it runs solely on data it collects from surrounding vehicles. (Amazonfocused on using this level of autonomy.)

(See Exhibit 8 for a detailed description of the NHTSA classification schedule.)

At the highest level of autonomy, there were clear benefits for corporations that deliveredgoods within an industry’s value chain,* particularly for those involving freight activity. (See Exhibit 9 for a breakdown of the value of commercial freight activity and predicted savings.)Trucks could complete overnight deliveries (those that took longer than twelve hours) withouthaving to take rest breaks due to driver fatigue. Drivers might not even be needed on a largescale, as robotic functions in the vehicle could theoretically perform automotive tasks in a safer,more consistent manner than a human could, thereby virtually eliminating a portion of labor costsand insurance claims associated with on-the-job accidents.† With advanced convergencetechnologies, vehicles could travel at higher speeds by communicating with each other,mimicking a human’s processing of information when driving their vehicles. Velocity, location,

direction, and status would be communicated between vehicles so that each could operate more

* In 2014, Peloton Technology, an autonomous trucking company, estimated that AVs could save $6 billion per year for the truckingindustry.† The cost for a vehicle crash on the job can cost an employer up to $74,000. See OSHA, “Guidelines for Employers to Reduce MotorVehicle Crashes,” https://www.osha.gov/Publications/motor_vehicle_guide.pdf (accessed September 14, 2015).


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efficiently and without the error introduced by drivers. Without drivers, AVs could use less fueland become more efficient in operation and ownership.

But there were concerns with investing in AV technology as well. First, a major impedimentfor the mainstream introduction of AVs would eventually be consumer adoption for the emerging

technology. Without adoption, there is no convergence, and without convergence the limitationsfor scale are real.18 Scale was important, particularly because of the reliance of AVs on big data.In fact, it was the large amounts of consumer data that vehicles could collect and use that wouldmake them truly valuable. Once customers could hail a driverless car to go where they needed,the data collected about the trip would not only provide operational efficiencies, such as whichroute to take, but would also provide a view on what individuals elected to do and where theywent. Wide-scale use of AVs in society would provide data that could be used to determine notonly how customers travel and where they shop, but also when and where they work and otherelements of their lives. For critical adoption, consumers would need assurance that data would besecure in the hands of whichever company controlled it.

Second, although consumers were excited about the prospect of autonomous features in their

vehicles, only 12 percent claimed they would actually feel safe purchasing an AV or being on theroad with one (though this number was highly skewed toward urban dwellers). Predictions aboutwhen consumers would embrace the new technology widely varied. (See Exhibit 10 for predictions of full Level 4 AV adoption.) Political support for Level 4 autonomy would also becrucial for consumer adoption. Following on the heels of advancement in AV technology was arise in legislation associated with it. (See Exhibit 11 for a timeline of recent U.S. state legislationinvolving AVs.)

Competitive Landscape

The 2010s saw many different parties investing meaningful capital in the production of AVs.(See Exhibit 12 for renderings of AVs for some of these firms.)

GOOGLE’S SELF-DRIVING PROJECT

Google seemed to be the most aggressive proponent of commercializing AVs. Promoted asits “self-driving project,” Google’s autonomous cars had logged over 700,000 miles in testing byMay 2014 and were designed to take humans completely out of the transportation equation,though humans would still be expected to ride in the initial test models using a stop/go emergency button, if necessary. Partnering with automobile manufacturer Lexus, Google focused more onthe technology behind the vehicles than the vehicle itself. Chris Urmson, director of the GoogleSelf-Driving Project, elaborated on the progress of the project:

As it turns out, what looks chaotic and random on a city street to the human eye is

actually fairly predictable to a computer. As we’ve encountered thousands of situations,

we’ve built software models of what to expect, from the likely (car stopping at a redlight), to the unlikely (blowing through it). We still have lots of problems to solve and we

are still waiting for some follow up regulation in California . . . but thousands of

situations on city streets that would have stumped us two years ago can now be navigated

autonomously.19

Google did not plan to sell the car but the technology behind it; its commercialization planinvolved partnering with retailers, who could use the autonomous technology to serve customers


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quickly, and car service companies, such as UberRush, in densely populated areas. Additionally,the vehicles could be given routes via mobile devices, which would allow for greater fuelefficiencies.

CATERPILLAR AND THE ROBOTICS INSTITUTEIn 2010 Carnegie Mellon University’s Robotics Institute conducted a study with Caterpillar

to develop an autonomous truck to be tested in a barren terrain of Central Australia. By 2013, theself-driving truck had been developed and tested, demonstrating the ability to carry 240 tons ofiron ore in a single trip. By 2014, Caterpillar had six fully functional mining trucks. Each truckhad 2,650 horsepower from combustible engines and was “driven” by over 25 million lines ofsoftware code. These trucks operated without drivers and could work day and night. Theautomation replaced four drivers per truck per 24-hour period.20 Ted Scott, director ofengineering and safety policy for the American Trucking Association, which sponsored the study,said:

Ubiquitous, autonomous trucks are close to inevitable. Eventually we are going to have

wireless, self-driving trucks because there will be money in it. Safety features like

automatic braking will be commercially available over the next decade, but they will be

quickly superseded by autonomous trucks after that.21

Caterpillar’s trucks were considered connected vehicles (at Level 3 autonomy), as they stillneeded technicians to monitor and sometimes guide several trucks at once, similar toadvancements developed by Peloton Technology.* Most experts believed that even at its near-term technological peak, full Level 4 autonomy might not be a realistic goal.

UPS AND FEDEX

UPS and FedEx had kept fairly quiet about their potential use of AVs until Bezos’sappearance on 60 Minutes, though both had expressed a desire to significantly decrease laborcosts. After the interview aired, a UPS spokesman mentioned that the company might have manyuses for drones. Particularly, UPS trucks could bring packages quickly from an airport to a majordistribution center in more remote locations, speeding up the delivery process from business tocustomer. The spokesman said, “UPS invests more in technology than any other company in thedelivery business, and we’re always planning for the future.”22

FedEx founder Fred Smith spoke more about his eager desire to get into the “unmanned aerialvehicle game” than UPS. FedEx’s goal was to have an aircraft that had no one on board and thatcould carry a significant amount of cargo. Smith continued:

A modern 777 is already capable of being an unmanned vehicle. They let the pilots touch

the controls for about 20 seconds, to advance throttles, and then the plane takes over.

Today, pilots drive the planes on the ground, but there’s no reason a computer can’t do

that. It’s just a matter of getting the laws into place so companies can begin building tothose specifications and doing some real field testing.23

* Peloton Technology was at the forefront of Level 3 autonomous innovation. Its driver-assisted truck platooning (DATP) model wasworking with the Federal Aviation Administration for a 2015 launch. Exhibit 13 shows an illustration of the technology.


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AMAZON PRIME AIR

Focusing on its major competitive advantage of speedy delivery to customers, Amazondecided to pursue an aerial approach to autonomy. By the end of 2013, the Amazon Prime Airteam was in its sixth generation of drone testing. The team planned to start aerial-drone delivery

service to areas in the immediate vicinity of Amazon’s many U.S. fulfillment centers. Prime Air promised to deliver packages of up to five pounds—which comprised 86 percent of Amazonshipments—to any address within ten miles of its fulfillment centers.

Bezos told 60 Minutes he hoped that Prime Air would be ready for launch by 2015, but inaddition to perfecting the technology, he also needed to consider how to use the data collectedfrom customers to better serve them through autonomous delivery. He also needed to wait forofficial approval from the Federal Aviation Administration (FAA) to begin the service. SenatorEd Markey (D-Mass) commented on the FAA approval with regard to Amazon’s press event on60 Minutes:

Before drones start delivering packages, we need the FAA to provide privacy protections

for the American public. Convenience should never trump constitutional protections. My

Drone Aircraft Privacy Act requires transparency on the domestic use of drones andadds privacy protections that ensure that this technology cannot and will not be used to

spy on Americans.24

Although Amazon did not release figures for the portion of R&D spent on Prime Air, in 2013total R&D expenses reached $1.73 billion, an all-time high. Estimates put the cost of owning andoperating air drones at $20,000–$30,000.

Conclusion

Though Prime Air would not be ready for deployment for at least another year, Bezos had

many questions before it could launch. He knew that Amazon needed to continuously innovate to provide the level of service its customers were accustomed to having. But what risks would beassociated with venturing into autonomous delivery before consumers fully adopted thetechnology? Moreover, what risks would Amazon take on if it waited for another competitor toenter the market first? How would the retail landscape change and could Amazon change with it?The problem was, the information he needed to answer these questions would not be available formonths—or even years.


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Exhibit 1A: Amazon.com Consolidated Statement of Operations

Source: Amazon 2013 Annual Report.


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Exhibit 1B: Amazon.com Consolidated Balance Sheet



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Exhibit 1C: Amazon.com Consolidated Statement of Cash Flows



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Exhibit 2: Amazon, Microsoft, and Google Labor Comparisons

Source: Blair Hanley Frank, “Amazon Soars to Nearly 110,000 Employees, Surpasses Microsoft for First Time,” GeekWire, October 24,2013.


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Exhibit 3: Visual Breakout of Acquisitions by Amazon, 1998–2009

Source: Nicholas Carlson, “Visualizing Amazon’s Acquisition History,” Business Insider , July 27, 2009.


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Exhibit 4: Map of Amazon’s Fulfillment Centers

Source: “Amazon Fulfillment and Distribution Center Locations Map,” E-Commerce and Auction Site News, January 26, 2014,http://auctionsitenews.com/amazon-fulfillment-center-locations.


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Exhibit 5: Amazon’s Fulfillment Process

Source: Company documents.


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Exhibit 6: Financial Highlights for UPS and FedEx

UPS ($ IN MILLIONS):

2013 2012

Revenues 55,438 54,127

Operating expenses 48,404 52,784

Net income 4,372 807

FEDEX ($ IN MILLIONS):

2013 2012

Revenues 44,287 42,680

Operating expenses 41,736 39,494

Net income 1,561 2,032

Source: UPS and FedEx company documents.

Exhibit 7: Amazon’s Annual Spend on Lobbying

Source: Center for Responsive Politics, http://www.opensecrets.org/lobby/clientsum.php?id=D000023883 (accessed May 1, 2014).


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Exhibit 8: Detailed AV Definitions from the National Highway Traffic Safety Administration

NHTSA defines vehicle automation as having five levels:

No Automation (Level 0): The driver is in complete and sole control of the primaryvehicle controls—brake, steering, throttle, and motive power—at all times.

Function-Specific Automation (Level 1): Automation at this level involves one or morespecific control functions. Examples include electronic stability control or pre-charged brakes, where the vehicle automatically assists with braking to enable the driver to regaincontrol of the vehicle or stop faster than possible by acting alone.

Combined Function Automation (Level 2): This level involves automation of at least two primary control functions designed to work in unison to relieve the driver of control ofthose functions. An example of combined functions enabling a Level 2 system is adaptivecruise control in combination with lane centering.

Limited Self-Driving Automation (Level 3): Vehicles at this level of automation enablethe driver to cede full control of all safety-critical functions under certain traffic orenvironmental conditions and in those conditions to rely heavily on the vehicle tomonitor for changes in those conditions requiring transition back to driver control. Thedriver is expected to be available for occasional control, but with sufficiently comfortabletransition time. The Google car is an example of limited self-driving automation.

Full Self-Driving Automation (Level 4): The vehicle is designed to perform all safety-critical driving functions and monitor roadway conditions for an entire trip. Such a designanticipates that the driver will provide destination or navigation input, but is not expectedto be available for control at any time during the trip. This includes both occupied andunoccupied vehicles.

Source: “U.S. Department of Transportation Releases Policy on Automated Vehicle Development,” NHTSA 14-13, press release, May 30,2013.


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Exhibit 9: Estimate of Average Trucking Operating Costs and AV Savings

ComponentPer Mile

($)Percentage of

Total (%) Annual Total ($) AV Savings

(%)

Fuel 0.540 39 70,200 20

Truck cab and trailer depreciation

(based on 5-year straight line)

0.240 17 30,600 25

Driver’s salary 0.360 26 46,800 90

Repairs and maintenance 0.120 10 15,000 —

Insurance 0.050 4 6,500 80

Tires 0.030 3 4,000 —

Permit, licenses 0.020 2 3,600 —

Coffee 0.004 — 600 —

Total 1.380 180,000 39

Source: “The Real Cost of Trucking—Per Mile Operating Cost of a Commercial Truck,” KPMG Trucker’s Report,http://www.thetruckersreport.com/infographics/cost-of-trucking (accessed May 1, 2014).

Exhibit 10: Predictions of Introduction of AVs to the Mass ConsumerSource Year Summary

Google 2016–2018 Plans to release Google-car technology

Nissan 2020 Available in showrooms

GM 2020 Fully autonomous cars available

BMW 2025 Fully autonomous cars available

Ford 2025 AVs will be “a common sight” on roads in the United States

McKinsey 2025 10–20% of 1.2 billion private cars on the road will be autonomous

IDC 2040 Too many regulatory/trust barriers to be mainstream before 2040

IEEE 2040 75% of cars on the road will be autonomous by 2040

Source: Company documents for all above.


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Exhibit 11: Milestones in U.S. State AV Regulation

June 2011: The Nevada legislature passes a law authorizing the use of AVs.

May 2012: The Nevada Department of Motor Vehicles issues the first license to a self-driven car to a Toyota Prius using Google’s technology.

July 2012: Florida becomes the second state to authorize AVs.

September 2012: California signs a law allowing the legalization of driverless cars in thestate. A mandate for the California Department of Motor Vehicles to draftfull regulations by 2015 is issued.

January 2014: Michigan allows the testing of AVs with a human being inside the vehicle.

Source: Bryant Walker Smith, “Automated Vehicles Are Probably Legal in the United States,” Texas A&M Law Review 1, no. 411 (2014).


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Exhibit 12: Images of Autonomous Vehicles

GOOGLE

CATERPILLAR

AMAZON



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Exhibit 13: Peloton Technology Level 3 Autonomous DATP Model



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Endnotes

1 Jeff Bezos, in interview with 60 Minutes, December 1, 2013.2 Michael Aldrich, “Management Guide to IT,” white paper, January 1982.3 Ibid.4 U.S. Department of Commerce, “E-Stats Report on E-Commerce for 1999,” March 7, 2001.5 Revenue data from Amazon 2013 Annual Report, eBay 2013 Annual Report, and Priceline Group 2013 Annual Report.6 Amazon 2013 Annual Report.7 Brian Fung, “Everything You Need to Know about Amazon’s Delivery Drones,” Washington Post , December 2, 2013.8 Mark W. Johnson, “Amazon’s Smart Innovation Strategy,” Bloomberg BusinessWeek , April 12, 2010.9 Larry Downes and Paul F. Nunes, “Big Bang Disruption,” Harvard Business Review, March 2013. 10 Brad Tuttle, “Amazon Prime: Bigger, More Powerful, More Profitable Than Anyone Imagined,” Time, March 18, 2013.11 Nitin Chaturverdi et al., “The Future of Retail Supply Chains,” McKinsey Quarterly, Spring 2012.12 Amazon 2012 Annual Report.13 David J. Donatelli, “Evolution of US Air Cargo Productivity ” (master’s thesis, Massachusetts Institute of Technology, September2012).14

Brad Plumer, “Here’s What Amazon Lobbies for in D.C.,” Washington Post , August 6, 2013.15 Christopher Matthews, “Will Amazon Take Over the World?” Time, July 16, 2012.16 Timothy Morey, Theodore “Theo” Forbath, and Allison Schoop, “Customer Data: Designing for Transparency and Trust,” Harvard

Business Review, May 2015.17 Nadia Tuma and Laura Simpson, “Why Amazon’s Data Store Doesn’t Scare People—But Facebook’s Does,” Advertising Age,January 23, 2014.18 KPMG and Center for Automotive Research, “Self-Driving Cars: The Next Revolution,” 2012.19 Chris Urmson, “The Latest Chapter for the Self-Driving Car: Mastering City Street Driving,” Google blog, April 28, 2014,http://googleblog.blogspot.com/2014/04/the-latest-chapter-for-self-driving-car.html.20 Dennis K. Berman, “Daddy, What Was a Truck Driver?” Wall Street Journal , July 12, 2013.21 Ibid.22 Christina Chaey, “UPS Is Researching Drone Deliveries, Too,” Fast Company, December 3, 2013.23 Chris Anderson, “Fred Smith: FedEx Wants UAV’s,” DIY Drones, February 12, 2009.24 “Americans Debate Amazon’s Intent to Deliver Packages by Drones,” Business Standard , December 3, 2013.

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