April 17, 2000 5:10 PM PDT

Analysts see Amazon deal as shift in strategy

Amazon.com is taking a step out of the online retail jungle and into the land of portals.

Amazon agreed today to put a permanent link to Drugstore.com on its home page in what may be the first of several similar moves as the e-tailer tries to reach profitability, analysts say.

"What everyone realizes now is that just like in the physical world, e-tailers need to make money at the end of the day," said Tom Wyman, a financial analyst at JP Morgan Securities.

"This is a way for Amazon to make money," he said.

The deal isn't risk free. Putting third-party vendors on the site could confuse customers and spell trouble for Amazon if the vendor doesn't deliver.

Amazon has already experienced some problems with outside companies on its site. In October, CNET News.com found numerous illegal weapons for sale through its auctions and zShops areas.

The company has previously made shifts from its original online retail model. Last year, the company launched Amazon Auctions and zShops. Later this year it will add a new store tab pointing to home furnishings store Living.com.

Amazon's stock has dropped more than 55 percent since setting a 52-week high of $113 in December. It closed up 19 cents today at $47.06, near its 52-week low of $40.81.

Part of the drag on the stock has been the company's mounting losses and declining gross margins. It lost 55 cents per share in the fourth quarter of 1999, the last period for which it has reported. During the same quarter, Amazon saw its gross profit margins drop to 13 percent from 21.1 percent for the same period in 1998.

Gross profit margins are the difference between what a company charges its customers for its goods or services and what it pays to acquire or deliver those goods or services.

The Drugstore.com deal allows Amazon to move toward the model pioneered by companies such as Yahoo and eBay. Instead of getting paid to deliver products, Amazon sells access to its customer base to other vendors.

The deal gives the company a chance to shore up its profit margins since it won't have to carry any inventory for Drugstore.com, which is paying Amazon $105 million over three years for the store tab and access to the e-tailer's customers.

"For Amazon, it's almost a portal play," Keenan Vision financial analyst Vernon Keenan said. "This is certainly a source of high-margin revenue."

eBay had gross profit margins of 75 percent and earned 8 cents per share last year. Yahoo's profit margins were 85 percent in the first quarter of this year, and it earned 10 cents a share.

 

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