News

Ruling Sheds Light on Amazon.com's Secrecy

• By The Associated Press
• March 21, 2006

Analysts say the decision could hurt Amazon.com's relationships with other partners. They also say the judge's harsh words -- including accusations that company executives exhibited selective memories -- illuminate behavior some on Wall Street have long complained is too secretive.

Yet the familiar Amazon.com Web site remains hot property, and the Seattle company has signed on several new partners in recent months. Some critics even concede that shareholders will still give the company some time to prove that its secret schemes will bear fruit.

"If Amazon produces the numbers, nobody will care," said Safa Rashtchy, analyst with Piper Jaffray. "If the growth isn't there, then I think it will become more of an issue. Why isn't there the disclosure level that we would expect?"

In her March 1 ruling, Superior Court Judge Margaret Mary McVeigh found that Amazon.com breached a deal that was supposed to give Toys R Us exclusive rights to supply some toy products on Amazon.com. The ruling allows the companies to sever their online partnership.

McVeigh accused Amazon.com founder Jeff Bezos and other executives of tweaking the meaning of words -- such as "exclusivity" -- to suit the company's own needs, regardless of how Toys R Us originally understood it.

"Mr. Bezos' understanding of the exclusivity granted to (Toys R Us) would not be any different than what Jeff Bezos wished exclusivity to be," she wrote.

She was especially critical of Bezos' recollection of events. Although Bezos said he had little information about details of the agreement, she wrote, "this court has no doubt his knowledge and understanding went much deeper than revealed."

At one point in her ruling, she snipped at Bezos, writing that he, "in a rather childlike fashion," tried to suggest he wasn't aware of one part of the dispute until Toys R Us slapped it with a restraining order.

David Garrity, director of research with Hapoalim Securities U.S.A., said he's already begun hearing concerns from some retailers who partner with Amazon.com to sell goods online.

"It should raise question marks," Garrity said. "The whole issue here is, 'Fool me once, shame you. Fool me twice, shame on me.' Who wants to be in that position?"

Garrity believes Amazon.com will need to take some steps to retain the confidence of its business partners and reassure them that it can act in good faith.

Still, Rashtchy said he expects the company will be able to pull through it, "but it's obviously a negative for them."

Garrity said criticisms such as McVeigh's hurt Amazon.com because the company is so closely associated with Bezos, who likes to present the image of a gregarious, passionate innovator.

"Jeff's gotta be a standup guy in the eyes of not only potential business partners, but investors," Garrity said.

Garrity is one of several analysts who have argued that Amazon.com has a duty to be more forthcoming with shareholders. Recent hefty technology investments are a special concern, Garrity said, because there is fear that Amazon.com may be lagging competitors on technical innovation.

In a research note released Friday, Edward Weller of ThinkEquity Partners said the company needs to improve various technologies, including its basic search functions, and make it easier for third parties to sell on the site.

Amazon.com won't say how much money it pulls in from third-party sales, but acknowledges they're a growing part of the business. Third-party sales accounted for 28 percent of Amazon.com's unit sales in fiscal 2005 -- up from 17 percent two years earlier.

Fidelity Investments, the nation's largest mutual fund brokerage, is one of six companies that have become "featured partners" with Amazon.com in the last year. Others include Weight Watchers, the digital photography company Shutterfly and the travel search engine SideStep.

Sean Belka, senior vice president of personal investment at Fidelity, said the deal it signed with Amazon.com last month is part of the company's push to broaden its reach.

"Amazon is a well-known leader in the online space," Belka said. "We believe many of their customers would be interested in our products and services."

Amazon.com spokeswoman Patty Smith said the company does not discuss dealings with individual merchants, but that in general, it has great relationships with its partners.

Toys R Us declined to comment.

Amazon.com is considering an appeal. Though it countersued, saying it also wants out of the agreement, it stands to lose tens of millions a year in exclusivity fees and other payments from the toy retailer if the 10-year deal signed in 2000 ends early.