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Amazon battles on a new front

The Net retail juggernaut may be speeding forward in the online retail markets it has tackled so far, but the company could hit some potholes with its latest push to sell consumer electronics online, analysts say.

Amazon.com may be speeding forward in the online retail markets it has tackled so far, but the company could hit some potholes with its latest push to sell consumer electronics online, analysts say.

As reported by News.com, Amazon today opened an electronics store, as well as a toy store, pushing its selection beyond books, videos, music, and auctions.

Analysts expected the move into the toy market. But the plan to sell televisions, VCRs, and stereo equipment in a crowded market with high customer-service demands, eager land-based competitors, and notoriously low margins raised a few eyebrows.

"There's not a lot of margin on selling TV sets and receivers and CD players," said International Data Corporation analyst Barry Parr. For offline consumer electronics businesses, most profits come from customer service contracts, Parr said, as well as by selling higher-end digital equipment.

Amazon's obvious advantage is its whopping 10 million customer base and its highly recognized, trusted online brand, analysts said. And the company said it hopes that features found in its other stores--customer reviews, fast shipping times, and highly regarded customer service--will set it apart.

Nonetheless, Amazon is entering a new market that differs vastly from books and music, said Geoffrey Bock, an e-commerce analyst at Patricia Seybold Group. For one, consumers tend to require more hand-holding when buying a stereo or VCR, and offline competitors fulfill this need with their armies of salespeople. Amazon also will need to ship all of its products, which could be a headache for customers who need to return a TV or stereo, or require service, analysts said.

Nonetheless, Amazon sees dollars in the nascent online market.

Forrester Research estimates that the market for consumer electronics sold online will grow to $6.1 billion in 2003 from $411 million this year. That's just a slice of the $56 billion offline consumer electronics market.

While the online consumer electronics market is wide open, competition is looming from offline giants inlcuding Circuit City, the Good Guys, and Best Buy, which are itching to expand online. Last month, $9.3 billion Circuit City announced an aggressive new plan to start selling 700 products online by July 1, with an expansion on tap for the Christmas season.

Amazon also faces heat from Net pure-plays including 800.com, Value America, and Netmarket, which have begun to gain some ground in the area. And there's talk that PC giant Dell may even join the consumer electronics fray through its news online shopping site, Gigabuys.com.

Complicating matters, Amazon's move comes at a time when consumer electronics companies including Sony, Panasonic, and Philips are becoming much more cautious about which companies sell their products online, said Doug Gordon, analyst with Banc of America Securities.

"Their brands have been foot-balled around the Internet--and that's scared them," he said.

Sony, for one, has said that no one is an authorized dealer of its products online, and the company is expected to limit that privilege to its own Web initiative, Gordon said. While Best Buy and Circuit City get their offline products from authorized dealers, Amazon must forge deals with distributors, which means more middlemen and a higher cost of goods, Gordon said.

"The whole point of the Internet is to cut out layers of distribution and have a direct touch point to the consumer," he said. "The way Amazon does it is they buy closeout goods or go through a distributor, who goes though a retailer, who got it from a manufacturer."

To keep things simple, Amazon likely will try to focus on more popular, less complicated items, and try to make up the difference in volume, analysts said.

"Could [Amazon] generate a lot of volume at the lower end? Sure," said George Sutton of financial market research company Dain Rauscher Wessels. "They'll do well with Palm Pilots and products like that."

However, entering the market won't be easy, he said.

"The key issue will be getting product vendors to ship," he said, noting that electronics manufacturers have to consider loyalties to existing national chains. "Vendors are going to be a little sensitive to not being friends to a Best Buy and a Circuit City--and there's just not enough volume online right now [to make them take the risk]."

Despite the challenges, some analysts expect Amazon to thrive.

"I think the success of Amazon doesn't come from bookselling," said Gartner Group analyst Adam Sarner. "It comes from offering a great customer experience."