Amazon Finds Partners Toys 'R' Us,
Expedia, Hotwire Growing Restless
By NICK WINGFIELD
Staff Reporter of THE WALL STREET JOURNAL
Some of Amazon.com Inc.'s online partners are getting restless.
Toys "R" Us Inc. has sought to renegotiate its partnership with Amazon on more favorable terms, according to people familiar with the matter. At the same time, two other Amazon partners, Internet travel sites Expedia Inc. and Hotwire, say they are dissatisfied with the results of their alliance with Amazon and are seeking to resolve the problems with the Internet retailer.
The discussions between Amazon and its partners raise concerns about one of Amazon's most important and profitable businesses -- its so-called services business, through which it manages Internet stores for or delivers customers to other retailers.
The Toys "R" Us deal, under which Amazon sells toys on behalf of Toysrus.com, is especially important to Amazon since some analysts believe it may have accounted for roughly half of the $225 million in revenue the Seattle Internet company reported from its services business last year.
A person familiar with the situation said Amazon Chief Executive Jeff Bezos and Toys "R" Us CEO John Eyler met in Aspen, Colo., in January to discuss amending the terms of their original 10-year agreement, signed in late 2000. It isn't clear whether the negotiations resulted in a new deal for the companies. News of the talks between Amazon and Toys "R" Us, reported Thursday by TheStreet.com, caused Amazon shares to fall $1.26, or 8%, to $14.48 as of 4 p.m. on the Nasdaq Stock Market.
Amazon and Toys "R" Us wouldn't confirm nor deny that they are renegotiating their partnership. "We work with them to continue to improve the profitability of their business," said an Amazon spokeswoman. "Toys 'R' Us continues to work with Amazon and is happy with our alliance with Amazon," a Toys "R" Us spokeswoman said.
Analysts said it is unlikely the agreement between the companies will fall apart. The original pact called for Toys "R" Us to pay Amazon a fixed yearly fee, a transaction fee for every unit Amazon sells on behalf of its partner and a single-digit percentage of revenue from Toysrus.com sales.
The alliance was a convenient way for Amazon to drop its own toy business, leaving the trickier aspects of toy retailing, like forecasting hot holiday-season products, to Toys "R" Us. Meanwhile, Toys "R" Us, which had struggled in its own online business, got help from the best-known Internet retailer.
Toys 'R' Us Profit Falls 37% on Drop in Sales, Charges
While Amazon finally reported a small profit last quarter, earnings have proved elusive for Toys "R" Us on the Internet. The Paramus, N.J., company's online unit had a loss of $76 million last year on revenue of $277 million. "Toys is having some problems of their own right now," says Kristine Koerber, an analyst at WR Hambrecht & Co. Amazon and Toys "R" Us will "do what's in the best interest of both parties. Maybe it's paring back on the cash Toys pays to Amazon over the near term."
Although revenue from Amazon's services business was a small fraction of the company's $3.12 billion in sales last year, the business generates a bigger gross profit margin than Amazon's core retailing operations. Amazon's services business last year had a gross margin, the percentage of sales that the gross profit represents, of 56%, compared with 27% for the company's books, music and video retailing unit. Amazon has deals with Target Corp., Borders Group Inc. and Circuit City Stores Inc., and company executives have heavily promoted future partnership opportunities.
However, two Amazon partners, Expedia and Hotwire, say the company hasn't done enough to promote an Amazon travel site for which the two agreed last year to provide travel booking services. Both companies declined to disclose the terms of their agreements with Amazon, except to say that they weren't receiving as many transactions as expected from their alliances with the company. The deal "hasn't been performing as we had hoped but we are trying to resolve that with them," said Suzi LeVine, an Expedia spokeswoman.
"The fact is the deal right now isn't a winner," said John Hommeyer, chief marketing officer for Hotwire, a closely held concern whose investors include six airlines. "We're honestly surprised Amazon is not more aggressively promoting the leading e-commerce space, which is travel." An Amazon spokeswoman had no comment.
Analysts believe Amazon's revenues from the Expedia and Hotwire deals are far smaller than those from the Toys "R" Us deal.
Amazon has had to renegotiate its deals with partners in the past. In late 2000, the company lowered the payments it required from a number of Internet partners it was promoting on its site, including Drugstore.com Inc. and Greenlight.com, now owned by CarsDirect.com Inc. Amazon agreed to new terms after the bursting of the Internet bubble made it tougher for the partners to meet their original commitments. |
