Amazon to operate Borders.com

DSN Retailing Today, May 1, 2001 by Molly Prior

Deal returns e-tailer to roots, keeps Borders alive on line

NATIONWIDE DSN REPORT -- With few exceptions, 2000 was not kind to Internet retailers. Even market leader Amazon took its share of lumps. But as the dust settles from last year's e-tailing shakeout, hindsight brings into focus the one recurring flaw that helped drive down the industry: overzealous product expansion. For its part, Amazon is taking steps to learn from its product expansion mistakes, and today is showing signs of returning its focus to its core categories--the most recent example being its announcement last month of an agreement to take over the operations of rival book e-tailer Borders.com.

At a press conference in New York April 11, Amazon ceo Jeff Bezos and Borders Group ceo Greg Josefowicz announced Borders.com, the No. 3 on-line bookstore, will turn over the management of its struggling Internet operation to Amazon in an arrangement reminiscent to that of Amazon and Toys "R" Us.

Why Borders? "[It's] a best of breed in the physical world and a company that serves our passion for serving book, music and movie lovers everywhere," said Bezos. Borders sought a partner for its faltering Internet operation after company profits dove 48% in the fourth quarter. "This alliance allows Borders to offer our customers the convenience of an on-line shopping option with the added benefits that will emerge through our new association with Amazon.com, the world's recognized e-commerce leader," said Josefowicz.

This August, Amazon will re-launch Borders.com as a co-branded site dubbed "Borders.com teamed with Amazon.com," mirroring the look and feel of the co-branded Toys "R" Us site.

"It will be clear that you'll be interacting with both companies," said an Amazon spokeswoman. Across the top, it will feature tabs such as books, music, video, DVD and other Amazon stores. The setup provides Amazon with an opportunity for cross-vending traffic, said Daniel Good of Merrill Lynch.

Exact terms of the Borders.com deal have not been disclosed. However, an Amazon spokeswoman said Borders will pay Amazon a onetime fee for site development. And while Amazon will recognize the gross revenue, the two companies will engage in a share of net revenue.

Neither Borders nor Amazon has changed its financial guidance following the deal. However, Josefowicz said the deal will help Borders Group deliver the previously announced 20% earnings growth over 2001. Borders said it will cut 70 jobs at Borders.com from a staff more than 100 as a result of the agreement to join forces with Amazon.

Following the success of the Toys "R" Us deal. The alliance is similar to Amazon's highly lauded deal with Toys "R" Us last September, which not only appeased investors but had industry analysts singing the pure-player's praises.

At the time, Amazon said it was open to similar deals. Since then, the e-tailer has reportedly been in talks with Best Buy and Wal-Mart about a possible partnership. The deal with Borders comes after Amazon warned book sales had stalled in the first quarter. Unlike its deal with Toys "R" Us, Amazon will manage the inventory.

Amazon will also continue to run its own bookstore independent of the co-branded Borders site. "We have a thriving bookstore and we wanted to leave that alone," said Bezos. Josefowicz of Borders added, "We still have a very high level of interest in our site, so separateness still serves a lot of value."

The new site will be fully loaded with Amazon technology, such as 1-Click ordering, editorial reviews and personalization features, as well as a calendar of Borders' in-store events and store locators.

A win for Borders. By turning over its Internet operation to Amazon, Borders can essentially wash its hand of the faltering division, while still collecting revenue from the site. Borders will concentrate it efforts on its in-store technology, such as Title Sleuth. While still in the early phases, customers conduct one million searches on Title Sleuth kiosks each week, said Josefowicz.

As a latecomer to e-commerce making its on-line entry in May 1998, Borders never managed to gain ground on the second largest on-line book retailer Barnesandnoble.com, said Jupiter analyst Heather Dougherty Borders.com site traffic peaked in December, barely breaking one million. Barnesandnoble.com's traffic was more than five times Borders, totaling 5.9 million for the same period.

"Amazon is the leader in the space, with Barnesandnoble.com nipping at their heels," said Dougherty.

The alliance of the two competitors will help ward off increased competition from on-line book clubs and Barnesandnoble.com, which expects to report its first quarter sales rose 23% from the period a year earlier. Amazon reported its first quarter books, music and video sales were only slightly higher than the same period a year earlier.

A win for Amazon. Amazon is looking to restore credibility. That two major retailers have partnered with Amazon offers the pure-player validation, said Good of Merrill Lynch. Also, Amazon will become the seller of record, providing inventory, Web content and customer service. In the future, these deals may allow Amazon to leverage a bricks-and-mortar presence. "There are certain things you can do in a physical store that you can't do in an on-line store," allowed Bezos, citing book signings as an example.