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Filter - Cynthia L. Webb
Toying With Amazon's Profits

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_____About Filter_____
Filter looks at the day's top technology news through snapshots and analysis of what the world's media outlets are covering. Washingtonpost.com's new Mon.-Fri. feature is penned by technology reporter Cynthia L. Webb. If a technology story breaks, a company falters or triumphs, or there's a new trend in technology, Filter wants you to know about it.

_____Filter Archive_____
Microsoft Masters the Art of the Cutback (washingtonpost.com, May 26, 2004)
Go East, Nokia (washingtonpost.com, May 24, 2004)
Gmail Supply and Demand (washingtonpost.com, May 21, 2004)
Spamming for Dollars (washingtonpost.com, May 20, 2004)
HP's No Gloating Zone (washingtonpost.com, May 19, 2004)
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By Cynthia L. Webb
washingtonpost.com Staff Writer
Tuesday, May 25, 2004; 9:37 AM

A new survey shows that the online retailing sector made its first profit last year, fulfilling a key vision of the 1990s Internet boom -- that lots and lots of computer users would actually go online to buy stuff.

But forget the survey for a moment. You know there's money to be made selling products via cyberspace when someone calls the lawyers.

And that's exactly what Toysrus.com did when it filed a suit last Friday against Amazon.com alleging that the online retailing giant violated an exclusive 10-year deal under which Toyrus.com was to be the exclusive retailer of toy, game and baby products on Amazon's site. Toysrus.com, a unit of No. 2 U.S. toy retailer Toys "R" Us, alleged that more than 4,000 products in these same categories are being sold by competing retailers on Amazon.com.

"We would be happy to compete with other vendors in these categories, but we are not willing to pay for exclusivity that we are not receiving," said David J. Schwartz, general counsel for Toys "R" Us, in a statement. Just how much has Toysrus.com ponied up so far for the high-profile exclusive deal? A cool $200 million, according to The Wall Street Journal. The New York Times explained that "Toys 'R' Us agreed to pay $50 million a year for 10 years for the exclusivity provision, which had a few exceptions, as well as a percentage of Toys 'R' Us sales on the Amazon site."
The Wall Street Journal: Toys 'R' Us Suit Includes Details Of Amazon Service (Subscription required)
The New York Times: Toys 'R' Us Sues Amazon.com Over Exclusive Sales Agreement (Registration required)

"Toys R Us was the first major retailer to enter an alliance with Amazon.com, which has broadened its merchandise selection since starting in 1995 as a Web bookstore," Bloomberg reported. "In the fall of 1999, the toy market was among the most competitive areas of online commerce with Amazon, Toys 'R' Us, eToys and several smaller online businesses trying to win the hearts of shoppers. In August 2000, Amazon and Toys 'R' Us stopped fighting and formed a joint venture in which Toys 'R' Us would become the exclusive seller of most toys, games and baby products on Amazon's site. By early 2001, eToys, a prominent Internet store, had closed," The New York Times explained.
Bloomberg via The Los Angeles Times: Toys R Us Sues Amazon Over Deal (Registration required)

Last of the Red Hot Dot-Com Deals

The Times noted that the deal -- extremely lucrative for Amazon -- "is a remnant" of the high-flying dot-com boom. "It is also unusually long for Internet arrangements. Many other companies that struck expensive deals for placement with companies like America Online and Yahoo have been able to renegotiate those contracts at better terms." And Toys "R" Us has so far failed to reap a big windfall. Last year, the company "lost $18 million on $376 million in sales on the Amazon site, the company said." The New York Post noted: "Last week, Toys 'R' Us reported that its first-quarter losses had widened to $28 million from $26 million in the same period a year ago. Sales at stores open at least a year fell 5.6 percent in the quarter."
New York Post: Amazon Doesn't Play Nice -- Suit

The New York Times article noted that since the deal was reached in 2000, "Amazon has shifted its business model away from such exclusive arrangements in favor of having multiple merchants offering the same products, often at different prices. In books and electronics, for example, Amazon often displays a dozen merchants competing with Amazon's own offerings in those categories. Amazon is increasingly trying to replicate the success of eBay." The Wall Street Journal reported that the "Toysrus.com complaint also takes aim at a forthcoming Amazon service known as GUI which allows merchants, on a self-service basis, to create listings to sell products. Before the GUI system, which is being tested, Amazon personnel typically added product listing pages to let merchants sell all but used and refurbished items."

Toysrus.com said it filed the suit after mediation attempts failed. "The lawsuit comes days after representatives from both companies met in Oakland, Calif., with prominent mediator Randall Wulff, principal of Wulff, Quinby & Sochynsky, Toysrus.com general manager Greg Ahearn said. Wulff mediated the $1.1 billion antitrust settlement between Microsoft and the state of California, according to a biography on the law firm's Web site. Last month, he was selected to lead the panel that would decide the property-damage claims for the World Trade Center that arose from the Sept. 11 attacks," The Seattle Times reported.
The Seattle Times: Toysrus.com Sues Amazon Over Online Partnership

Amazon spokeswoman Patty Smith told The Wall Street Journal that the "the suit was without merit. Under Amazon's interpretation of the contract, the company believes it can have multiple sellers in toys, games and baby products 'to increase selection and offer products that Toys 'R' Us does not have,' she said. Ms. Smith said the exclusive categories of toys, games and baby products are excluded from the GUI program."

Meanwhile, expect the lawsuit to be broached at Amazon's annual shareholders meeting today in Seattle.

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