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Amazon wins Sony electronics deal

The electronics giant has authorized Amazon.com to sell a range of its electronics products after snubbing the Web retailer for two years.

Sony Electronics has authorized Amazon.com to sell a range of its electronics products after snubbing the Web retailer for two years.

Sony will provide Amazon with handhelds, personal computers, and digital audio and video players after the online retailer agreed to stop selling Sony products that it obtained from "unauthorized" sources, representatives from both companies said.

This practice was a major reason why Sony refused to ship goods to Amazon, according to Sony spokesman Greg Dvorken. "You can't authorize somebody when they are selling unauthorized products," Dvorken said, explaining the thinking at the time.

The partnership marks a breakthrough for Amazon, which has wooed Sony, the No. 1 consumer-products maker, since opening its struggling electronics area in 1999. Analysts expect that obtaining access to Sony goods directly from the company will bolster Amazon's profit margins because now it can avoid paying middlemen. Although Amazon has never detailed how it obtained Sony products, analysts say that the company likely got them from distributors who obtain goods from authorized Sony dealers.

These backdoor channels are more expensive because distributors usually charge fees on top of the wholesale price.

"Buying goods from a supplier is always better than getting them from alternative methods," said Frank Sadowski, Amazon's vice president of consumer electronics.

In the past, analysts and industry observers expressed doubts about whether Amazon's electronics department could flourish without a direct relationship with Sony. The electronics business is noted for being one of the tougher retail businesses. Products become obsolete almost overnight and competitors frequently undercut each other on price. For these reasons, profit margins are often slim.

Amazon posted a first-quarter $20 million operating loss on $126 million in sales in its electronics, tools and kitchen unit. Electronics make up the majority of sales in that unit, experts say.

"Amazon has been pairing losses but they still have pretty significant losses in this area," said David Kathman, an analyst with financial services company Morningstar. "(Amazon Chief Executive Jeff) Bezos says that the electronics business is the most exciting part of Amazon's business, but I'm wildly skeptical of that.

"Selling electronics online has proven a tough thing to do, and a lot of people have failed at it. Even if Amazon doesn't fail, I doubt it can be this huge cash cow that Amazon says it will."

Why Sony took so long to sell through Amazon, the largest Internet retailer, goes back to the e-commerce heyday. When online stores began cropping up, Dvorken said Sony decided to sell through one merchant: Net electronics store 800.com, which recently closed its doors.

Sony's decision prompted other e-tailers, including Amazon, to buy Sony products from other sources. After 800.com began to falter and Sony chose to sell via other online retailers, the electronics maker excluded Amazon.

And although Amazon has agreed to buy Sony products only through Sony, the Web superstore will not be granted access to all Sony products. For instance, Amazon will not be able to buy Sony televisions or DVD players from the company.

Amazon customers will still be able to find many of these products on Amazon, however. Electronics chain Circuit City, which does have access to those products, offers goods online via Amazon.

With Sony's blessing, Amazon may be more attractive to other manufacturers that have been wary of the Internet.

"There's no doubt that Sony is the most important supplier," Sadowski said. "And we are authorized with a majority of suppliers, but this deal may help sway others."