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Circuit City has retained Goldman Sachs to help it explore "strategic alternatives to enhance shareholder value," the electronics retailer said Friday.

The struggling company recently became the target of a roughly $1 billion takeover bid from movie rental giant Blockbuster. Circuit City said Friday it has received a letter from Blockbuster responding to Circuit City's request for information concerning Blockbuster's ability to successfully finance its proposal and to secure shareholder approval.

Blockbuster's letter included a note from Carl Icahn, a Blockbuster director and its largest shareholder. The note stated that, assuming his satisfaction with the due diligence review, he and his affiliates "stand ready" to purchase Circuit City if Blockbuster can't secure financing or shareholder approval. Circuit City officials said they will grant that due diligence.

"While the Circuit City board has confidence in the company's ability to successfully implement its turnaround plan and generate shareholder value, we believe that we can best serve the interests of our shareholders by exploring all possible alternatives to enhance shareholder value," Circuit City CEO Philip Schoonover said in a statement. "Let me be clear that our decision to allow Blockbuster and Carl Icahn to conduct due diligence should not be taken as an indication that the board has completed its review of the Blockbuster proposal, that the board has taken a position on the company's value, or that it has settled upon a particular strategic course of action."

Amazon.com posted Wednesday stronger than expected first quarter results, in part driven by strong sales in its electronics and general merchandise categories.

The online retailing giant also issued a forecast for the current quarter and year that shows greater strength than Wall Street's current estimates.

Shares of Amazon, however, were down roughly 4 percent in after-hours trading to $77.77 a share.

During the first quarter, Amazon generated net income of 34 cents a share to $143 million, up 30 percent compared with the previous year. Revenues jumped 37 percent to $4.13 billion in the quarter, verses the same period a year ago.

Wall Street was expecting the company to report earnings of 32 cents a share on revenues of $4.08 billion, according to Thomson Reuters.

The online retailer got a large leg up from its worldwide electronics and general merchandise sales, which soared 56 percent to $1.48 billion in the quarter, compared with year ago figures.

Amazon's global media sales rose a sharp 28 percent to $2.54 billion in the quarter, compared with last year.

"Our sales growth this quarter was driven by low prices and millions of in-stock items available for immediate shipment," Jeff Bezos, Amazon's chief executive, said in a statement. "We're grateful to our customers."

And in forecasting its second quarter and year-end, Amazon expects to generate greater revenues or stronger earnings than a consensus of analysts, according to Thomson Reuters, which tracks analysts projections.

Although Wall Street expects Amazon to post revenues of $3.84 billion in the second quarter, Amazon gave guidance it expects to exceed that level - with expectations of generating between approximately $3.88 billion to $4.1 billion.

And while analysts expect Amazon to post operating income of $125.3 million in the quarter, the company said it expects to do between $120 million to $160 million.

The online retailing giant expects its year-end operating income will outstrip current year-end estimates, saying it expects to raise between $740 million to $940 million in operating income. Wall Street had been expecting Amazon to do $662.3 million for the year.

And on the revenue front, Amazon expects to generate $19.1 billion to $20 billion, compared with Wall Street's projections of $19.3 billion.

Sometime in the next few weeks, online shoe seller Zappos.com will launch a new user interface that could soon let consumers buy lipstick and MP3 players along with Birkenstocks and Nikes.

The company is preparing to do a soft launch of the new, cleaner look to around 1,000 customers before deciding on a formal rollout plan, CEO Tony Hsieh said.

"Frankly I'm kind of surprised that what we put on sells, how our customers find it," Hsieh said. "The new site is built for easier navigation and searching, with multiple categories in mind."

Zappos.com's new user interface

(Credit: Zappos.com)

The rollout of the user interface, and the expansion into categories including small electronics and cookware, highlight the core of the company's mind-set: find out what the customer wants, and find the best way to deliver it.

"Customers will say, 'I wish you would start an airline.' Well, we're not going to do that. But if they say, 'I wish you would sell this because I just had a horrible experience somewhere else,' we'll look into it," Hsieh said. "We're experimenting with a lot of other categories. That's how we got into sunglasses. We're taking the same approach--not going out and buying 10 warehouses full of pots and pans, just trying it out."

Zappos prides itself on attention to customer service--an 800 number is plastered on every page, along with notes promoting the company's 24/7 customer service line and 365-day return policy. So far, this approach has been working: Zappos, which launched in 1999, had gross sales of $840 million in 2007, up from $1.6 million in 2000. As of the beginning of April, the company had a customer base of 7.7 million people.

The privately held company reported an operating profit in 2007, and "we exceeded (our goal) a little bit," Hsieh said. In fact, things are going so well that the company recently told its 1,600 employees they would each receive a bonus equal to 10 percent of their 2007 salary.

The company's two warehouses in Kentucky hold around 4 million items, but at just under a million square feet, Hsieh says Zappos has plenty of room to grow. And that's just what he's planning on; by the end of 2008 the company hopes to be selling footwear, apparel, sunglasses, watches, bags, bedding/linens, cosmetics, luggage, and electronics, according to his blog.

Zappos' current look

(Credit: Zappos.com)

So, is Zappos ready to take on big players like Amazon.com? Hsieh says that's not the company's goal, but it'll certainly be going up against some strong competitors.

One challenge will be convincing customers who are happy to buy shoes from Zappos that they should also turn to the company for other items.

"Getting a customer to buy from different categories from you is difficult," said Patty Freeman Evans, an analyst at Jupiter Research. "We've talked to a lot of retailers about that. What we've also seen...is that over time consumers have not increased number of categories across online shopping."

According to Jupiter's data, consumers on average purchased items from 4.1 categories online in 2001, out of a possible 32. By 2007, that number had grown to just 4.7.

"When you redefine who you are it's critical that you make the connection with the customer," said Ted Vaughan, a partner in the retail and consumer product practice at consulting service DO Seidman. "What's going to distinguish them from other companies where (they're not as well-known), especially as they move into other areas?"

Meanwhile, Zappos is facing challenges on its home turf. Big names like Gap and Amazon have jumped into the online shoe sale business with their Piperlime and Endless stores, respectively.

And as Zappos tries to distinguish itself through its customer-service mantra, it's had to cut back a bit on bargains. The main Zappos store recently changed its policy regarding price guarantees and free overnight shipping. To that end, the company recently acquired 6PM.com from eBags.com, and has designated the 6PM brand as its home for bargains.

"Long term, our plan is to not have any sale items on Zappos," Hsieh said. "We want it to be more of a premium brand for customers who value service over anything else."

That message appears to have sunk in with customers. Zappos came in second in a recent National Retail Federation survey regarding customer service, beating out online and offline brands including Amazon, Land's End, and customer service legend Nordstrom.

"For some things the technical and customer service supporting a sale is very important to the customer. Whereas maybe a GPS device is less dependent upon that and is more dependent upon pricing," Vaughan said. "Two clicks away at another Web site they may have the devices, but do they have the convenience? And in the end if you have problems and have returns customer service is critical. Price is always an issue and always going to be an issue but it's not the only issue."

Zappos is hoping the service that keeps customers coming back will have them looking at new categories. On any given day, 75 percent of orders are repeat customers, Hsieh said. The free shipping and customer service department stand in for advertising as well; Zappos does relatively little traditional advertising, spending about 85 percent of its marketing budget on online buys. Besides print ads in magazines, Zappos' offline buys include ads in airport security trays where passengers place their shoes.

"The closest analogy to a brand we might use as a model is Virgin. They're involved in CDs and airlines and whatever, but the Virgin brand is about being cool and hip," Hsieh said. "For us it's about the very best customer service. Hopefully, 10 years from now people won't even realize we started out selling shoes online."

Like some of the luckiest people in high tech, John Buckman made a mint on his first company and now dabbles in passion projects.

But one of his latest companies may prove he's more than just lucky, at least if you buy the Silicon Valley adage: Strike it rich once, you're lucky. Twice, you're smart.

BookMooch founder John Buckman

(Credit: BookMooch)

BookMooch, Buckman's 20-month-old service that lets people trade their used books for the cost of postage, is making a small impression on a giant online retailer, Amazon.com. Even though BookMooch is free to members, the site generates an estimated half-million dollars in annual book sales for Amazon because of a browser plug-in called the Moochbar, which matches members' book wish lists to Amazon's retail inventory. For every 25 books swapped on BookMooch, at least one person buys a new book on Amazon through the Moochbar. BookMooch collects 8.34 percent on each of those Amazon sales.

"We're making money by accident," said Buckman, who spoke recently at a technology luncheon near his home in Berkeley, Calif.

Apart from still-negligible sales, what should be more of a wake-up call to the book industry is how the site is tapping into the so-called long tail of book retail with a social, free service. The long tail, as the theory goes, accounts for as much as 60 percent of the goods sold in an industry, or all those unpopular works that find a home with only a few. It's said that the lion's share of Amazon's book sales come from works that have a low sales ranking.

What's more, within the next nine months, Buckman expects to have the inventory of books--distributed among its members--that would rival that of the largest book wholesaler in the United States. BookMooch now has an inventory of about 480,000 books among its 70,000 trading members, but at its growth rate it should rival Ingram Book Company's 1 million books by early 2009, Buckman said. BookMooch's decentralized warehouse of books serves the long tail the same way that centralized warehouses like those of Ingram's serves the top of the tail.

"This is meant to be a noncommercial business, with no ads and no fees. We're just trying to do something fun and huge--like be the biggest bookstore on the planet," said Buckman, who sits on the board of the Electronic Frontier Foundation and European equivalent, the Open Rights Group. "It seems to me we should be able to trade more books than Amazon sells."

BookMooch isn't alone in appealing to people's desire to trade books or consume in a more earth-friendly way. Novel Action, Bookswap.com, and Swaptree.com are just a few of the sites that let members trade books. And while none of them is rivaling the traffic that Amazon and Google Books garner per month, they are collectively proving there's demand in the long tail. Eco-online book retailer Better World Books, which resells used books and donates some of the proceeds to global literacy projects, recently raised $4.5 million in its first round of financing to grow its business.

Buckman is a true Internet veteran. In 1994, he founded the e-mail software company Lyris with his wife, Jan. During a recent talk, he said Lyris was originally designed for groups of like-minded people to easily exchange e-mail. But, he said, it eventually became known as a spam company when it started selling to larger marketing clients that would use the software to send mass e-mails to customers. For him, the company was "desperately difficult and boring to run."

Four years later, he sold Lyris to J.L. Halsey Corp., but continued to head it for seven more years. During the luncheon, Buckman said his goal was to earn at least $3 million from the deal so that he could live comfortably on the $90,000 in annual interest. But he ended up with $32 million after 11 years with Lyris, more than enough to fund Magnatune and BookMooch.

Influenced by Buckminster Fuller
Long inspired by the inventor Buckminster Fuller, Buckman wanted to change the world by creating a company for which people would want to work for free, if they could. That's when he turned his sights to the music industry.

In 2004, Buckman started Magnatune, an Internet-era record label that would take on the major labels. Designed in the Linux model, in which developers can help improve the back-end of the music site, Magnatune is a music label that signs largely unknown artists and lets Web surfers decide how much they want to pay for their music, starting at about $5 for a record. Magnatune splits the sales with the artist 50-50.

Despite the promise for artists, Buckman said that Magnatune hasn't taken off. After five years in operation, it now breaks even with four employees. One reason for the uphill battle, he said, is that much of the $12 billion in annual sales from the U.S. music industry comes from music licensing. And because those licensing deals largely get done between two friends at a bar in Los Angeles, Magnatune artists are left out of the big music label conversations.

"Big companies don't want to do business with small fish," he said.

However, he learned a larger lesson with Magnatune. He created the service with the same construct as old-media: push something out to people and they will consume it, he said. He failed at creating a participatory environment in which people buy into the service, or have a personal stake in it.

BookMooch accomplishes that by asking people to put up 10 books of their own to receive one point, which will allow them to get their first book for free. In that deal, the new member must be willing to send off three of their own books to other BookMooch members. Unlike Lala.com and Peerflix.com--sites which have fallen down on paying postage for members--BookMooch requires that members pay to send the book. People who have more points than they can use on BookMooch, known as power moochers, can donate their points to charity groups on the site.

So far, BookMooch members have swapped as many as 700,000 books. The average member swaps 3.5 books per month, up from one book per month a year ago. The most-traded books on the site, whose membership consists largely of older moms, include Memory Keeper's Daughter by Kim Edwards (traded 780 times) and The Kite Runner (traded 585 times).

It's a sizable accomplishment considering that the Berkeley-based company has only two employees, and the project is funded solely by Buckman.

"If you want to change the world, find a better way to do something and have everyone follow it," Buckman said. "I'm not looking to generate revenue because I already made my $32 million."

When asked if he would entertain a buyout offer of his company for another $32 million, he said he would definitely have a conversation.

Even if he doesn't strike it rich with BookMooch, he may do something more valuable...like prove there's another way to tap into the book business.

Still reeling from the recently concluded format war?

Lucky for some early adopters, the number of retailers lining up to ease your pain is growing: first Best Buy, then Wal-Mart, and now Amazon. The online retail giant is currently offering a $50 credit for every HD DVD player purchased on its site. The offer is good until April 9, 2009, for HD DVD players bought before February 23, when Toshiba said it would stop making the devices.

Amazon gives $50 credit to early HD DVD adopters.

(Credit: Toshiba)

Gizmodo has posted the e-mail sent to some Amazon customers on Tuesday. I've excerpted the best parts:

"New technologies don't always work out as planned. We at Amazon.com value our customer relationships more than anything and would like to support customers who purchased these players by offering a credit good for $50 off any products sold by Amazon.com...In addition, we'd like to share some of our top offers on Blu-ray discs, HDTVs and other high-def technology..."

This is surely a smart way to build goodwill with your existing customers when a technology becomes obsolete. And what better way to lessen the sting of money lost than by offering the cool salve of the opportunity to spend more money?

Best Buy launched a similar program last month, rewarding $50 to customers who purchased the doomed devices. Wal-Mart said Tuesday it is extending its return policy from 90 days to 6 months on HD DVD players.

All of them, it should be noted, still sell HD DVD players and/or movie titles.

Sony might be gaining share in the LCD TV market, but the overall television segment of Sony Electronics is still losing money.

(Credit: Target)

On Tuesday, Sony announced a change to top management intended to reverse its sagging TV profits. The head of Sony's audio business, Hiroshi Yoshioka, has been tapped to replace Takashi Fukuda, who has run the TV business, the Wall Street Journal reported. The change takes affect Tuesday.

Though Sony has aggressively stepped up its TV shipments recently--it shipped the most LCD TVs worldwide for the last quarter of 2007--profits are a different story. The company said earlier this year it did not expect to post a profit for the fiscal year that ended Monday.

Sony's TV unit has struggled over the last year, but its electronic business has improved overall. The head of its U.S. electronics business, Stan Glasgow, said last month that the holiday sales period in late 2007 was the company's best ever.

Many of the top-tier TV manufacturers were caught off-guard by upstart LCD TV brands like Vizio and Westinghouse, which quickly drove down the costs of LCD sets in 2007 by selling through club stores like Costco and Sam's Club.

In response, Sony, which has traditionally branded itself as a high-end electronics seller, began cautiously testing out LCD models made specifically for discount retailers Wal-Mart Stores and Target last summer. The lower-priced and more basic-featured models were a smashing success, according to Glasgow, and Sony has increased the number of models it offers through both retail outlets.

It turns out malware somehow found its way onto a Maine-based supermarket chain's servers, which led to the security breach announced earlier this month compromising up to 4.2 million credit cards.

Citing a letter the Hannaford grocer sent to Massachusetts regulators, The Boston Globe on Friday reported that the malicious software intercepted data from customers as they paid with plastic at checkout counters and sent data overseas.

The malware was installed on computer servers at each of the 300-some stores operated by Hannaford and its partners, the Globe reported.

The company is continuing its investigation into how the malware may have been placed on the servers. The Secret Service, meanwhile is conducting its own investigation.

The breach appears to be one of the first in which credit card numbers were stolen while the information was in transit, or at the point of sale. One of a growing number of sophisticated attacks, it illustrates vulnerabilities in the communication between cash registers and branch servers, as Neal Krawetz of Hacker Factor Solutions has warned in research (PDF).

That mode contrasts to attacks on databases, the method used to compromise 45.7 million accounts over a two-year period in a data breach of customer records at TJX Companies, the operator of T.J. Maxx and Marshalls retail chains.

Andrew Conry of InformationWeek adds that Hannaford, in addition to the breach, has two related class action lawsuits on its hands alleging negligence in maintaining customer security. And he suggests that there might be some truth to the claims, noting that Hannaford should have noticed that "internal servers were transmitting outside the network to a strange IP. This should've raised flags somewhere--server logs, IDS logs, firewall logs."

I'll second Conry's conclusion: "In any case, the whole mess should be very instructional to retailers everywhere," particularly in light of Friday's news of attacks on top Web sites like USAToday.com, Target.com, ABCNews.com, Walmart.com, and of a data breach at Antioch University in Ohio.

Dell notebooks will be available in retail stores in India for the first time, the company said Tuesday.

The company hinted that it would make this move last week, saying it planned to increase its presence in China and India, two of the world's biggest emerging markets for computers. Dell already has a relationship with one of China's largest retail chains, Gome.

Some Inspiron notebooks will be sold through Indian retailer Croma.

(Credit: Dell)

In the announcement, Dell said it plans to offer Inspiron desktops and notebooks, and XPS notebooks through Indian electronics outlet Croma. Dell has a presence in India, but prior to this announcement, only via direct sales channels where customers could call or order a PC online.

The move to make its PC available in retail stores follows a strategy the company began laying out almost a year ago when it first announced it would offer some PCs through Wal-Mart and Sam's Club. Since then the Texas PC maker has added U.K. electronics retailer Carphone Warehouse, Bic Camera in Japan, Gome in China, Staples, and Best Buy.

Much has been made of Dell's retail makeover, but it's actually part of a larger trend toward experimentalism.

The company that has largely avoided unproven product categories is jumping all over them suddenly. Case in point: several years ago, when Microsoft was pushing tablet computing, Dell was fairly adamant that, no thanks, tablet PCs weren't something the company was interested in making.

"I think it is really unknown at this point how big the market is," CEO Michael Dell said in a 2002 interview about tablet PCs. "Dell, of course, likes to participate in high-volume markets, and until we can determine the size of the market we are not ready to decide at what level we will participate."

The Latitude XT is Dell's first foray into tablet computing.

(Credit: Erica Ogg/CNET News.com)

Fast-forward to late 2007, when Dell introduced its first tablet PC, the Latitude XT. Tick forward some more to this week when the second version, the Latitude XT2, was leaked onto the Web. Tablet computing, to Microsoft's chagrin, still has never really taken off--tablets comprised 3.25 percent of the worldwide notebook market in 2007, according to market research firm IDC. Yet, Dell's staking out its claim in that category.

So what's changed? Well, almost everything.

"The old Dell was about how everything had to improve with scale. In other words, any fixed cost investment had to get more profitable with volume," said Roger Kay, analyst and president of Endpoint Technologies. But after the leadership change a year ago, "Michael (Dell) said there were no sacred cows when he took back over."

Now Dell can't seem to stay out of niche markets. Besides the Latitude XT, in the last year Dell has launched a ruggedized laptop, a consumer-friendly all-in-one desktop, and began offering Linux pre-installed on some PCs. Plus, there's constant chatter about the company re-entering the handheld market.

The PC industry is moving toward increased mobility, so tablets and rugged notebooks are part of a larger trend. But they also represent opportunities that Dell can't afford to miss anymore.

In Dell's heyday, its mammoth commercial computing clients would choose a variety of machines they wanted Dell to supply; if one of them was too much of a niche product, Dell would simply partner with a manufacturer that did make it.

"But now they're saying, we don't want to keep giving away those opportunities because that's decent margin (being left) on the table," said Richard Shim, PC analyst for IDC. Now, "they go out and create their own versions of these products."

Within the overall trend toward mobility, commercial clients, and even consumers, are demanding more and more specific usage models, and Dell, it seems, is trying to adapt.

"The market is evolving beyond generic solutions. There are new opportunities in more specialized products," said Shim.

Evolution seems to be the name of the game down in Round Rock, Texas, these days. The company has undergone a major transformation of its business plan since Michael Dell stepped back into the executive suite as CEO.

Along with that has come this marked shift toward experimentalism at the 20-year-old company. Though Dell's hallmark for its first two decades in business was its sharp, efficient supply chain and direct-to-customers sales model, now you can find a Dell almost anywhere you look: Best Buy, Staples, Wal-Mart Stores, and more.

Its product choices are different, too. "In the past, Dell would adopt new technologies faster than most, but new products more slowly," noted Kay. While it was happy to move from one processor generation to the next fairly rapidly, Dell was far more circumspect about getting into a niche market like PDAs or music players. Of course, Dell's expertise has always been in the enterprise market, which isn't particularly fast-moving. But targeting consumers is a different animal--they expect more product innovation and faster product cycle times.

Dell's ruggedized laptop, a first for the PC maker.

(Credit: Dell)

In trying to garner more consumer attention, Dell also has been more adventurous, with firsts for it like colored laptops last summer, the stylish design of the XPS laptop line, and the XPS One, an iMac-esque all-in-one PC. Dell even went as far as co-branding the XPS gaming line with World of Warcraft.

"It's more like they're dropping a lot of bait in the water to see what works," Kay noted.

Sure, Dell is trying a lot of new things, but it's got to do something different. No longer the largest seller of PCs overall, it's also recently fallen behind the Acer-Gateway-Packard Bell behemoth in notebook sales.

"They have to be risky to reverse their misfortunes here," Shim said. "That takes time when you're trying to change your personality. I'm sure they'll make missteps along the way because everyone does. But the positive is that they are making these changes. The writing is not just on the wall, it's in neon."