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Amazon, Drugstore renew marketing vows

The two online retailers will be partners for a little while longer, signing a short extension of an earlier pact. A friendly gesture, or a sign of sour times?

Amazon.com and Drugstore.com will be partners for a little while longer, signing an extension of their marketing agreement.

Under the new deal, announced on Monday, Drugstore.com will continue to be the "health and beauty" store on Amazon at least until the first quarter of next year. The companies declined to say how much Drugstore.com would pay for the privilege, saying only that Drugstore.com's payments would be in cash.

But the deal is significantly shorter than the companies' original agreement, a three-year deal signed in January 2000. The two companies later renegotiated that contract twice, shortening its length to two and a half years and cutting the amount Drugstore.com would pay.

"I wouldn't read anything into the length of contract. We consider this to be an extension of the existing contract," Amazon spokeswoman Patty Smith said. "We're thrilled to have them continue and to be a presence on our site."

The new agreement is a better deal for both companies than previous agreements, said Kal Raman, chief executive officer of Drugstore.com. Drugstore.com gets about 10 percent to 15 percent of its new customers through its store on Amazon, but the company is trying to balance that benefit with its effort to become cash-flow positive by next year, he said.

"We want to make sure that any deal we sign is good for us, good for Amazon and good for our customers," he said.

An early investor in the online pharmacy, Amazon is the leading shareholder in Drugstore.com, with a 22.1 percent stake. Drugstore.com was the first company that Amazon decided to buy a stake in rather than purchase outright. The investment was the start of Amazon's strategy of trying to jumpstart e-commerce by funding a series of e-tail start-ups.

That strategy quickly disintegrated, however, as a number of Amazon-backed start-ups such as Pets.com, Living.com and Wineshopper.com either closed or were sold.

Meanwhile, Amazon's relationship with Drugstore.com has been anything but smooth. As the stock market plummeted and investors increasingly focused on company profits, the retailers renegotiated their original deal in July 2000, just six months after it was signed.

The deal originally called for Drugstore.com to pay Amazon $105 million, $30 million of it in stock. The revamped agreement reduced Drugstore.com's cash obligations to Amazon from $75 million to $30 million and gave Amazon a warrant to purchase an additional 2.5 million shares of Drugstore.com stock. The companies renegotiated again in June of last year, changing the end date of the contract from April 2003 to June 2002 and further reducing Drugstore.com's cash payments to $9 million.

The decline in Amazon's investments in Drugstore.com and other online retail start-ups led to a $36 million write-off in the first quarter of last year.

Although the companies have decided to renew their marketing deal, they have no plans to integrate their shopping carts. Amazon shoppers who enter its health and beauty store are essentially taken to Drugstore.com's site. Customers have to purchase items they order from the health and beauty store separately from other items they purchase on Amazon.

When the companies unveiled their joint store in April 2000, they said customers would eventually be able to use the same shopping cart at both stores. But creating an integrated shopping cart requires a "big effort," Raman said.

"It is a big effort from both companies' sides, and it's a bigger effort for Amazon," he said. "They are not ready. Once they are ready, we will evaluate it."