Buy.com threatens wider price war

After scoring early successes on its new strategy, put in place Tuesday, of pricing its books 10 percent below those of e-tail leader Amazon, the company said it is considering making the discount permanent and expanding it to other products besides books.

Citing competitive pressures, Brent Rusick, Buy.com's chief operating officer, declined to say which categories the company may extend its discount to. But he said the company plans to release them soon.

"We're going to do some analysis on how (the discounts) work," Rusick said. But he added that the early returns have been "fantastic."

Buy.com says the discounts have lifted its revenue and drawn in new customers.

The discounts came one week after Buy.com bested a free shipping offer from Amazon. Buy.com now offers free shipping on most of its products with no minimum purchase, whereas Amazon's free-shipping deal requires a $49 minimum purchase.

The promise of lower prices and special offers helped draw millions of consumers to try online shopping during the dot-com boom. But the cut-rate deals proved unsustainable, as many companies closed shop and others either dropped their discounts or raised prices.

The weeding out of the dot-coms has proved especially beneficial for Amazon. As one of the few survivors, the company has seen its revenue continue to grow, attracting business from customers of failed competitors. With fewer dot-coms to compete against, Amazon has been able to decrease its ad spending and ramp down its aggressive expansion plans. The result has been a vastly improved bottom line, including a first-ever quarterly profit in the fourth quarter of last year.

A sustained price war with Buy.com or with other rivals could undo much of the gains Amazon has made over the last year. But some analysts played down Buy.com's chances.

"We believe concerns over Buy.com's undercutting Amazon prices are overblown and are unlikely to have any impact on Amazon," US Bancorp Piper Jaffray analyst Safa Rashtchy wrote in a research note. "Amazon's brand name, positioning and overwhelming scale makes the threat almost a nonissue, in our opinion."

Buy.com has been raising its profile in recent months after struggling for much of the last two years. Once one of the top online retailers, the company saw its sales dwindle and its losses mount following the market downturn. The company was close to closing shop when founder Scott Blum bought it back from shareholders last fall.

Since Blum reacquired the Buy.com, he has returned the company to its roots, a period when it was known for some of the best bargains on the Net.

Revenue, customers up
On Tuesday, as the company put in place its new pricing policy, Buy.com saw its revenue from book sales jump 800 percent over its daily average. Meanwhile, the number of new customers shopping on the site tripled, the company said.

The company doesn't know exactly where its new customers are coming from, but assumes that many of them are Amazon shoppers because Buy.com has targeted Amazon directly with its prices and advertising, Rusick said.

"I would assume a lot of business came from them," he said.

Amazon.com representatives did not return calls seeking comment.

Despite Buy.com's apparent initial success, Rashtchy said the company will win a war with Buy.com in the long run. Buy.com's discounts are a "reminder of what went wrong in 1999," Rashtchy wrote in his research note.

"We believe sacrificing margin (and for that matter profitability) for revenues is not a viable long-term strategy, and we do not expect this war to continue," Rashtchy said in his note. "Additionally, we believe Amazon is well insulated from a price war. Brand name is important, and we believe people will spend slightly more for the comfort of buying at a store they are familiar with."

But Buy.com says it will continue the price war for the long haul and can afford to do so because of its inventory-free model. Unlike Amazon, Buy.com doesn't have any warehouses and instead has all of its products directly shipped to customers from its distributor partners such as Ingram Books.

Additionally, the company has cut its overhead, reducing staff from about 650 employees at its height to about 100 currently, Rusick said.

"We've developed efficiencies that give us a better cost structure than Amazon has," Rusick said. "We can pass those saving through to consumers while still being profitable."

Amazon shares traded up 19 cents to $15.53 in midday trading on the Nasdaq.