Now, as the company continues to struggle with a vastly expanded retail strategy that includes such mass-market stalwarts as Wal-Mart, the e-commerce pioneer from Seattle is losing ground in the business that the company was created for: selling books.
According to estimates for the last quarter, the online retailer has lost significant market share to archenemy Barnes&Noble.com, whose parent company was at one time emblematic of the brick-and-mortar world's sluggish reaction to online competitors. Mark Rowen, the Prudential Securities bond analyst who reviewed the combined U.S. sales for both companies last week, said he had seen indications of problems with Amazon's book business more than a year ago.
"Amazon's books, music and video segment has exhibited deteriorating sales patterns for the past seven quarters," Rowen said. "We estimate Barnes&Noble.com's share this quarter is higher than ever."
The increased competition in books could not come at a worse time for Amazon, which promised Wall Street that it would become profitable in this quarter. To reach that goal, the company has aggressively reduced expenses, no longer able to afford the kinds of advertising blitzes that helped turn it into one of the most recognizable names on the Web.
Amazon attributes its revenue slowdown to recent price cuts designed to boost sales. On books that cost $20 or more, Amazon offers a 30 percent discount.
"The important thing is that while the top line has suffered, the bottom line is much improved," Amazon spokesman Bill Curry said. "In absolute dollar terms, our pro forma operating profit was up 6 percent (for the books category) year over year. And we have said all year that our focus is getting to profitability."
But others outside the company see a different, more troubling reason for the decline: Amazon's controversial expansion into general merchandise may have diverted its attention from books or, worse, spread the company too thin to compete effectively in any single area. Traditional retailers such as Wal-Mart and Kmart, as well as Barnes & Noble, present an increasingly difficult challenge as they become more adept at doing business online.
"While these companies were slow to move online, each has shown signs of starting to understand the Web better," Kristine Koerber, an analyst with investment firm WR Hambrecht. "In a market that's still expanding with new customers and Amazon can't get decent growth, it leads me to believe that there are other worrisome issues going on."
As the cornerstone of Amazon's business appears to be suffering--the books, music and video category--competitors are taking advantage of the company's vulnerability. Amazon's total revenue growth, once in the triple digits, is now crawling at 1 percent. The company predicts that sales for the fourth quarter will be equal to 10 percent more than those in the like period a year ago.
Still, the 6-year-old Amazon remains the Web's kingpin in book and related sales. The company has reported profits in its books, music and video segment for six consecutive quarters, and no other online company has more than Amazon's 29 million customers.
But Rowen asserted that Barnes&Noble.com took "considerable market share" from Amazon in the third quarter, "an estimated 22 percent of the total." That's up from 18 percent in the second quarter.
Barnes&Noble.com got a boost in new revenue from its late 2000 purchase of Fatbrain.com, which publishes books and training materials for corporations. The Fatbrain acquisition "accelerated growth at Barnes&Noble.com," Rowen said.
In its third-quarter earnings report, Amazon said sales in books, music and video skidded 12.1 percent from the same quarter a year ago and 9.8 percent from the second quarter. Barnes&Noble.com, meanwhile, said in an earnings report last week that revenue rose 6.5 percent from the year-ago period and climbed 15.7 percent from the second quarter.
Curry said Amazon wasn't worried about Barnes&Noble.com.
"We're not concerned with other people's businesses," he said. "We're concerned with our customers."
Amazon has taken steps to reverse the downward sales trend by reducing costs and passing along savings to its customers to prod sales. By cutting prices, the company hopes to save on marketing expenses while attracting new bargain-hunting consumers.
"We could afford to (cut prices) by reaching double-digit gross margins in this segment," Amazon Chief Executive Jeff Bezos told analysts and reporters after releasing the company's earnings.
Amazon is relying on price promotions to entice shoppers to buy, said Safa Rashtchy, an Internet analyst with investment bank U.S. Bancorp Piper Jaffray. "Amazon had a choice between profits and growth, and it chose profits," Rashtchy said. "They cut marketing to help save money and cut prices to help bring customers to the site...They needed to do that for long-term growth."
Amazon has also taken steps to improve the shopping experience for book buyers. Last month the company launched a "Look Inside the Book" feature that includes images of covers, flaps and some pages for roughly 25,000 titles.
The question is whether such moves will be enough to help the company regain ground from its rivals permanently--or whether Amazon has simply underestimated the competition in all fields.
What it might boil down to, said WR Hambrecht's Koerber, is that e-commerce in general may just not be "as big as Amazon or everyone thought it was going to be."