Why the Street loves Amazon.com

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As is often the case, however, Amazon is in no position to rest on its laurels. Further price cuts in the bookselling industry--Amazon.com already discounts some books as much as 40 percent to match the mark-downs of its rivals--could take a toll on the company.

Analyst Bartlett, however, thinks prices won't dip much lower. "The structure of the business is still going to be dictated at retail for a long time. Retailers cannot afford too wide a gap [between online and real-world prices]," he said, noting that Barnes & Noble's online prices already undercut its retail stores.

In explaining Amazon's current dominance, analysts point to one key internal measurement, the percentage of the company's business that comes from repeat customers. According to the latest figures supplied by each company, Amazon boasts 58 percent returns, compared with 40 percent reported by BarnesandNoble.com.

Bezos said he wouldn't be happy with 40 percent. In fact, he's not content with 58 percent, saying that he intends to exploit Amazon's current advantage further by expanding into music and video.

But that move is not a surefire formula for success, said e-commerce analyst Nicole Vanderbilt of Jupiter Communications. "Going into music will have a unique set of challenges," she noted. "It's a slightly different demographic, and a different business."

And while retaining customers is important, Wall Street seems to think drawing new ones is even more critical. "In the game of customer acquisition, they are light-years ahead [of other Internet merchants]," Bartlett said.

He pointed out that Amazon's 1.5 million customers dwarf the next-best online retailers--music sites CDnow (CDNW) and Music Boulevard, which is owned by N2K (NTKI)--by a factor of four.

"They are extremely skilled direct marketers," Montgomery's Boren agreed.

Bartlett believes that Amazon could turn profitable immediately by cutting back on marketing, but he doesn't think it should go that route just yet.

"They're growing so fast that they're producing tremendous losses based on the cost of acquiring customers. Spending money now to acquire a customer appears to be a very profitable expenditure," Bartlett said, echoing Bezos's contention that marketing is an important area of focus now, when the company is in a "critical category-formation time."

While Amazon's plethora of e-commerce partnerships with high-traffic sites such as Yahoo, Netscape Communications, America Online, Prodigy, AltaVista, @Home, and GeoCities certainly have helped it gain a foothold on the Web, analyst Kate Delhagen of Forrester Research suggests that the company may need to ally itself with an established brand offline, someone like Blockbuster or Tower.

"Amazon should be talking to such candidates," Delhagen said. "They lack the real-world promotional machine, and they could get it with a real-world partner."

Under other circumstances, Amazon might be viewed as a juicy acquisition for some real-world retailer awakening late to the Net. But with its $2 billion-plus market value, Amazon.com, like the river it was named after, may be too big to swallow.