March 29, 1999 12:25 PM PST

Amazon auctions could bring new risks

Amazon.com's decision to take on eBay in the online auction market is a risky one, say analysts, but it's a move the company must make in its quest to become an Internet superstore.

Amazon has been steadily expanding the selection of goods it sells, and raised $1.25 billion in a debt offering last month to finance its transformation from a bookseller into a retail powerhouse. It began by simply adding new products, such as music and video, to its store, but has moved into other markets through strategic investments.

In 1995, Amazon was among the first to offer online book sales, pulling the rug out from under its brick-and-mortar competitors, notably chain stores Barnes & Noble and Borders. Those competitors have struggled to catch up to Amazon in the online market, so far without much success.

But Amazon's decision to begin person-to-person and small-merchant auctions tomorrow, which ended weeks of speculation, may signal a new strategy: following others who have created successful online businesses. Auctions represent the first time that Amazon has gone head-to-head with another strong Internet brand, eBay.

"It's different from taking on Barnes & Noble, because when Amazon began, Barnes & Noble wasn't online and when it did move online, it was a reactive venture as opposed to a proactive venture," said Derek Brown, an analyst with Volpe Brown Whelan. "To this day, [barnesandnoble.com] remains a secondary business."

To take some of the wind out of eBay's lead in the online auction market, Amazon will attempt to mitigate some of the risks of person-to-person transactions. All buyers and sellers in Amazon auctions will be required to provide their credit card numbers and Amazon will offer a $250 money-back guarantee on transactions that go awry.

Brown worries over Amazon's ability to control the shopping experience. "Amazon is relinquishing a lot of control over the customer experience through this service," he said.

Others say that although the risks exist, the payoff is likely to be a big one for Amazon. Genni Combes of Hambrecht & Quist thinks Amazon will change the auction marketplace altogether.

"So far, it's been centered around collectors," Combes said. "You can expand beyond collectors and Amazon has the opportunity to do that."

Other than auctions, which Amazon has developed in-house, the company has taken an "invest and link" approach to new markets. Last month, the company revealed that it owned a 46 percent stake in Drugstore.com, an online pharmacy, and added a link to Drugstore.com's site. Today, Amazon said it has bought 50 percent of Pets.com, an online pet supply store, and will link to that site as well.

Amazon's reputation for providing superior customer service will enable it to enter new markets without having to run those businesses itself, said Lise Buyer, analyst with Credit Suisse First Boston. "Other businesses require more focus, so Amazon will put its "Good Housekeeping" seal of approval--or "Good Amazon"--on related sites where the expertise required is not Amazon's strong point," Buyer said.

Tim Clark contributed to this report.

 

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