THE DAY AHEAD: Digital delivery a slippery slope for Amazon

Larry Dignan
2 min read

As if Amazon.com Inc. (Nasdaq: AMZN) shareholders didn't have enough to worry about, the company started on the slippery slope of digital music delivery while announcing yet another bricks-and-mortar distribution center.

The two moves don't go together.

Now digital delivery of music may, or may not, prompt buyers to spend their cash on CDs, but one question remains. If music and books are ever delivered digitally, what does that mean for all of Amazon's distribution capacity? Nearly everything Amazon sells or plans to sell -- books, video, music, software -- could be delivered digitally. But Amazon has a lot of real-world warehouses that ship mostly books and CDs.

Digital delivery: A threat to Amazon?

It's no wonder investors aren't sure what to make of Amazon shares these days (chart).

Amazon said it would launch of a free digital-download area in its music store via Liquid Audio Inc., with number of songs available in MP3.

Just a few minutes later, Amazon heralded yet another distribution center.

"Building up distribution is a smart move," said Dalton Chandler, an analyst with Needham & Co. "But Amazon is primarily selling books and music. The concern is what happens if those items become delivered digitally."

Indeed, Amazon has to fulfill its orders. But there is also a conflict between digital delivery and the capacity Amazon is building up. Does Amazon have the leeway to "err on the side of overcapacity?"

The Georgia-based facility is the fifth new Amazon distribution center announced this year. By the 1999 holiday season, Amazon will have more than 3.5 million square feet of space at seven distribution centers in the U.S. That's more than 10 times the distribution capacity Amazon had in 1998.

Distribution isn't a bad thing given there's a busy holiday season coming up. But Amazon could find itself holding a lot of inventory and capacity a few years down the line once broadband allows music and books to be delivered digitally. There is a reason Barnesandnoble.com and Bertelsmann both own stakes in NuvoMedia, which distributes books digitally.

We're not going to get into a "Amazon.bomb" debate because no one -- Barron's, analysts or even company management -- knows for sure what Amazon will be when it grows up. The company is a leap of faith that's growing larger by the quarter.

But you should be thinking about what goods these distribution centers are going to move. Toys? Pet gear? Drugs? It's a question worth asking, especially since Amazon is looking more like a real-world retailer than an online store without inventory risk.