Amazon may spark new shipping war

On the same day Amazon.com reported its first-ever net profit, the company announced that it would extend permanently its holiday season offer of free shipping for orders of $99 or more.

Although Amazon acts like the 800-pound gorilla when it comes to setting e-commerce trends, it is unclear how many of its competitors will actually follow suit this time around.

Though the Amazon program is certainly attractive to consumers, it could end up costing a lot in the long run, analysts said.

"It's absolutely a bet, but it's absolutely a very calculated bet," Amazon Chief Executive Jeff Bezos said.

Free shipping is second only to coupons in terms of what lures shoppers, said Tim Storm, who operates Fatwallet.com, a community site dedicated to online bargain hunters.

"Shipping costs are always an issue among online shoppers," Storm said. "This offer will definitely remove the hesitation of clicking the 'buy it now' button."

Storm also said that in the past, when Amazon or one of the top e-tailers launched a special price promotion, competitors scrambled to come up with their own.

Last year, Amazon began shipping books, music and videos for free. Two days later, rival bookseller Barnes&Noble.com started a free-shipping offer on orders of two items or more.

Barnes&Noble.com is still offering that promotion and has not decided when it will end, a spokeswoman said Tuesday.

"We've had extremely favorable reaction to it, and that's why we extended it. It's a service that we know our customers like," spokeswoman Carolyn Brown said. She would not discuss the financial impact of the program, saying the company was in a quiet period before reporting its quarterly results.

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Amazon has slashed prices before and has learned how to trim prices without cutting too deeply into profit margins. The retailer has often marked down items in the past, attracting droves of shoppers while it posted a long string of profitless quarters.

But Amazon has banked on its stores' selection, including the widest assortment of goods on the Web and groundbreaking transaction and shopping technology--hoping this would keep customers coming back.

"We're even doubling down on that whole (free shipping) approach with the latest announcement," Bezos said. "Its a big deal, very expensive for the company, a major investment on our part in the short term. But we think it'll be an important driver of new business."

On a typical $100 order, Amazon earns a 25 percent gross margin, said Ken Cassar, an analyst with Jupiter Media Metrix.

"If they have to eat $7 to $8 in shipping, that only leaves them with $17 to $18 profit. That puts a lot of pressure on them to drive operating costs low," he said.

Amazon was able to trim costs significantly in the fourth quarter; that is one reason the company turned a profit. But other companies simply don't have the same capacity to do that, Cassar said.

Free shipping is a good way to bring in new customers, said Jonathan Morris, executive vice president of Bluefly.com, which sells discounted designer clothing online. But a company can't afford to offer it all the time, he said.

"In the last three years a lot has changed. Businesses that are going to survive in this industry need to be profitable," Morris said. He also said that Bluefly has set a goal of breaking even with regards to shipping costs and that the company is willing not to make a profit from them, but not to lose money on them either.

What some retailers have done to reach profitability, Morris said, has been to use free shipping as a marketing tool, but then raise prices at the same time.

Amazon said it would not raise prices to pay for the program, even though Bezos said "it will be expensive" in the short term. The long-term goal is to increase the average order size, and Bezos said that the company's research leads it to believe that demand is elastic enough to support the program.

David Hallman, an Amazon shopper who said he spends up to $300 a year at the Web store, mostly on books and DVDs, said the offer of free shipping could sway him to buy on the unlikely chance that he wanted to purchase $100 worth of goods at one time.

"But I don't usually buy like that," he said. "As far as higher-priced items like electronics, I usually like to have my hands on it before I buy. I'll drive to a (brick-and-mortar) store for that stuff."

Some of those goods will not be available through Amazon's offer, anyway; the promotion excludes toys, video games and purchases made through Amazon's Target and Circuit City partnerships.