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Amazon said to be eyeing software sales

The retail giant will likely enter the online software market in the near future, industry analysts say, though probably not by means of a takeover.

Amazon.com will likely enter the online software market in the near future, industry analysts say, though probably not by means of a takeover.

The Net retail giant has lately been rumored to be acquiring both PC peripherals vendor Onsale and online software retailer Beyond.com. But while software sales fit the company's ever-expanding retail focus, Amazon seems better served by building its own software business, according to some Wall Street observers.

A company spokesman dismissed reports, saying Amazon doesn't comment on speculation.

Any move would be still another departure for Amazon, which rose to prominence selling books and has since expanded in any number of areas, including online auctions. In its most recent earnings, the company reported widening losses and growing expenses, the cost of getting into auctions and electronic greeting cards, as well as boosted marketing efforts and an expanded distribution network.

Predictions that Amazon would dive into software began as early as May, when Volpe Brown Whelan analyst Derek Brown singled out software as one of the next categories Amazon enters.

Brown stands by the notion. Software matches the characteristics of other new Amazon categories, he said, pointing out it's a commodity product, a packaged good, and an item that ultimately can be digitally downloaded.

Also, Brown pointed out, while Amazon customers can use the company's "Shop the Web" service to search for clothing, electronics, and computer hardware, they can't use it to search for current Amazon categories like books and music--or for software.

But Amazon is unlikely to buy Beyond.com, whose market capitalization is about $1 billion, Brown said, as Amazon has typically bought private companies for their technology.

"It would go against the company's historical pattern," he said. "I think Amazon could build a software store at significantly less cost that $1 billion."

Melissa Bane of the Yankee Group estimates that Amazon's desire to be the premier online shopping site and to retain its customers could lead it into both the software and the hardware business. Noting that neither category had an "Amazon-level player," Bane observed that ambitious Amazon is likely to enter a new category before the coming holiday season.

"If they want to offer everything to every consumer, it makes sense for them to move into hardware and software," Bane said.

Jupiter Communications analyst Mike May contends the PC hardware business, with its thin margins and high competition, seems "off strategy" for Amazon. Instead, Amazon will have to target a more profitable category, if only to satisfy investors eager for the company to move toward profitability.

"They've made an investment in acquiring each of their 10 million customers," May said. "That investment will take a lot longer to pay off if margins are thin."

May expects Amazon to look at the software category because it has higher margins than books and the company should easily be able to sell software to its customers. But supporting that software could prove difficult for Amazon. "Software retailers necessarily become help desks, which are costly and difficult to scale," he said.

Playing the contrarian, Forrester Research analyst David Cooperstein cast doubt on Amazon's entering the software market. The mainstream offline consumer will quickly be coming online in the next several years, he said, and Amazon's next move will be to target that consumer. Mainstream consumers don't purchase a lot of software, he said.

With software increasingly being distributed over the Internet via digital downloads, Cooperstein said that Amazon would need to invest in new servers that could handle scores of downloads. And while software is more profitable than hardware, it might not make up for the costs.

"They would need to make a huge technological investment to get into a low-margin business," he said.

Still, Lauren Cooks Levitan, a financial analyst at BancBoston Robertson Stephens, noted that Amazon has already entered the computer category, albeit in a small way, selling some software titles and PC peripherals like the Palm V. Levitan said Amazon is likely to continue and expand its presence in those areas.

"They clearly have a very computer savvy customer base," she said.