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Amazon unlikely to lose ground

The firm's competitors are making plans that could threaten its bread-and-butter online book business, but analysts doubt it is in trouble.

Dawn Kawamoto Former Staff writer, CNET News
Dawn Kawamoto covered enterprise security and financial news relating to technology for CNET News.
Dawn Kawamoto
3 min read
In the last two days, competitors have announced deals that seem to be aimed squarely at the company's core online book business, as well as its more recently launched music venture.

But according to industry analysts, Amazon isn't likely to be toppled from its perch anytime soon.

Earlier today, CDnow and N2K confirmed that they are in talks about a possible merger of their online music businesses. Amazon stock chart Yesterday, publishing powerhouse Bertelsmann said it would pay $200 million to Barnes & Noble for a 50 percent stake in the retailer's online book business via a joint venture.

Industry experts, however, don't see any immediate threat to Amazon.com. Volpe Brown Whelan analyst Derek Brown said that it will take quite a while for Bertelsmann and Barnesandnoble.com to ramp up their joint venture and that the same would be true of any CDnow and N2K merger deal that might emerge.

Dalton Chandler, an analyst with Needham & Company, agreed. "Barnesandnoble.com already has spent a lot of money to promote the site and has not gained ground against Amazon. In fact, it has lost ground in the last quarter," Chandler said. "If anything, it muddies the waters."

He pointed out that questions already have arisen regarding how German publishing giant Bertelsmann will react when Barnesandnoble.com wants to selling the products of its publishing-house competitors on the joint-venture site.

In addition, he said, any discounts Bertelsmann may give Barnesandnoble.com for selling its products would represent only a few dollars at most to the book-buying customer--hardly enough to get customers to switch from Amazon to Barnesandnoble.com. "There are shopping sites out there that are cheaper than Amazon, but customers still continue to use [Amazon]," Chandler said.

Analysts noted that the question of whether Amazon will be able to jump past CDnow and N2K is less of an issue than Amazon's current ability to leverage its customer base. The online book giant so far has been successful in adding new sources of revenue--music, for example--to the fixed costs of running its site.

Amazon previously Why Wall Street loves Amazon.com has acknowledged that gross margins from its music business are expected to be less than those of its book business. Analysts have said that the company's music sales likely will remain only a small portion of its overall revenue pie.

The company posted gross margins of 22.6 percent for the second quarter, with the vast majority of that figure coming from its book business. Its music business had been operational for only three weeks when the quarter ended. By comparison, N2K's gross margin was 21.5 percent and CDnow's was 17.3 percent during the same period.

In fact, the total combined quarterly revenues for both N2K and CDnow--roughly $22 million in the second quarter--represent a small portion of the $116 million Amazon posted in second-quarter revenues.

"Amazon, however, clearly wants to do well in the music category because the game plan is to move into selling videos and then into rolling out new product categories," Chandler said. "If they don't succeed in music, it would cast some doubts in the investment community if they'll be able to execute on this business plan."

Brown said that, while Amazon does not face a competitive risk in the short term, its long-term financial standing remains uncertain.

"The competitive landscape in both the book and music business is changing, and it raises the risk for Amazon's story in the long term but not the short term," Brown said. He added that Amazon's risk in the long term may come from losing new customers rather than from having its existing customer base reduced by competition.