Why Amazon.com Is Saying Its Brand Isn't Really All That

It's the largest online retailer in the United States. It's so closely associated with its trade--selling books and DVDs delivered to your door--you probably use it without giving a moment's thought to looking for another outlet. Forbes Magazine says it's the 24th most powerful brand on the planet--ahead of American Express and Pepsi--and, according to some studies, the most trusted.

So who would argue that Amazon.com Inc.'s brand isn't immensely valuable?

Well, Amazon.com would.

At least, that's the somewhat awkward position that the Seattle-based online giant finds itself in this week, during a billion-dollar trial in the U.S. Tax Court.

Why would Amazon.com want to downplay the value of its brand? Because in 2005, it transferred some of the intellectual property associated with its branding, as well as several other intangible assets, to its Luxembourg subsidiary for use across Europe.

In keeping with transfer pricing principles, the Luxembourg subsidiary paid the parent company what Amazon.com claimed was a fair, arm's-length price for the IP. (You can read more about the arm's-length standard here.) But the Internal Revenue Service claims that the company undervalued these assets--by a factor of more than 15--in this transaction, greatly reducing taxable income in the United States while increasing it in Luxembourg, which has a much lower tax rate. If Amazon.com loses the case, it could pay as much as $1.5 billion in back taxes.

A brand, according to the American Marketing Association, is "a customer experience represented by a collection of images and ideas; often, it refers to a symbol such as a name, slogan, and design scheme."

As a marketing concept, it's been around for at least a century. But it's gained heightened attention in the online world, where the success or failure of websites often feels arbitrary. (What exactly did Facebook have on MySpace, anyway?) In this world, something as silly as a name or logo design might actually make the difference between reaping gobs or money, or having to start over again.

As reported in a Nov. 19 story in Bloomberg BNA's Transfer Pricing Report, however, Harvard Business School Professor Robert Dolan claimed Amazon.com's brand contributes a fairly negligible amount to its value. Dolan was testifying in Seattle as a witness for the company during the trial, which began on Nov. 3 but has been largely closed to the press.

"The contribution of the Amazon brand name to a customer's decision to utilize the Amazon service was very small compared to the actions of Amazon to deliver on the three pillars: selection, price and convenience," Dolan, who was hired by Amazon.com to review its brand, testified.

Dolan argued that brands imply an emotional connection--say, Coca-Cola fans' intense loyalty to the product--but Amazon.com users, on the other hand, are coolly and rationally recognizing its superior service.

"It's a service; it's price; it's convenience. It's very functional. There's not really an emotional aspect of this," Dolan testified.

Lawyers for both sides are also debating the "useful life" of the brand, which is a major factor in determining its cost. Does the right to use Amazon.com's logo and design reap profits for an infinite amount of time, or does it slowly depreciate? Amazon.com's witnesses claimed that the site continues to be profitable due to innovations, not due to the enduring power of its name.

"It is very easy for a consumer to switch from one website to another website. All they have to do is click their mouse. All these factors increase the need for innovation," said Haim Mendelson, from the Stanford Graduate School of Business, also a witness for Amazon.com.

"The Amazon brand is really a reflection of the customer experience that has been provided by Amazon, that has been generated by Amazon innovations." As an example, Mendelson pointed to the e-reader Kindle, one of Amazon's most successful products in recent years. Were people only buying it because it had Amazon.com's logo on it? Or because it was a unique and useful product when it was introduced in 2007?

In case you're curious about Amazon.com's brand, founder Jeff Bezos picked the name because it begins with "A," and it implies something that is exotic and new, and also vast. Plus--I never noticed this until recently--the smiling arrow beneath the company's name is pointing from the "A" to the "z," indicating the breadth of the company's inventory.

Of course, there's plenty of debate over the value of branding, and plenty of skepticism about its hallowed status in the tech world. (Search for the hashtag "#brands" on Twitter and you'll find many technology reporters using the term sarcastically, having deemed it a pernicious cliche.)

Can you really separate the "brand value" of a product from its practical use, as some separate experience for the user? Or is it a chicken and egg exercise--users associate Amazon.com with shipping simply because it's the best shipping website out there? What if Amazon.com's brand isn't an emotional connection, but a belief among consumers that it's something like a public utility for buying books, which they use instinctively without feeling one way or the other about it?

Brand value is inherently difficult--maybe impossible--to define and quantify. Which, in a way, makes it perfect grist for an international corporate tax dispute, which often revolves around trying to peg the value of complex and nebulous intangibles. It's hard enough to price software patents or copyrights--how do you price something as ambiguous, yet potentially valuable, as a consumer's attachment to a product?

But whether or not brands are important, companies spend millions of dollars determining just the right colors, just the right font, just the right image that they want to create. (You can read here how much effort companies use just to pick the names of their products.)

In fact, a young entrepreneur once made a convincing defense of the value of brand names. That entrepreneur would be Jeff Bezos.

"There's nothing about our model that can't be copied over time," Bezos told Inc. magazine in 1997, when his company was only three years old. "But you know, McDonald's got copied. And it still built a huge, multibillion-dollar company. A lot of it comes down to the brand name. Brand names are more important online than they are in the physical world.

To see Transfer Pricing Report's coverage of the Amazon.com trial, sign up for a free trial of the publication here.