Amazon.com heads for the Borders

In its second alliance with an offline chain, Amazon.com Inc. said Wednesday that it would run the online operations for rival Borders Group Inc.

Financial details of the deal were not disclosed, but its impact on Amazon's bottom line is expected to be minimal. Amazon said it is not changing its revenue or earnings guidance as a result of the alliance. Nor is either company taking an equity stake in the other, the companies said.

"Borders is clearly the best of breed in the physical world," said Amazon CEO Jeff Bezos during a press conference in New York. In addition to powering Borders' Web site, Amazon will also manage the company's online inventory.

Borders, which has about 350 offline stores and some 30 million customers, is a distant third in online book sales behind Amazon and Barnesandnoble.com Inc. Its Internet operations have struggled since they were launched in 1998 and continue to bleed red ink.

The joint Amazon-Borders site, which will remain separate from Amazon's main site, is expected to launch in August.

After striking a deal with Toys "R" Us Inc. in September, Amazon has sought to model similar partnerships with other brick-and-mortar retailers. In that alliance, Amazon agreed to run the Web site, fulfillment and customer service operations for Toys "R" Us in exchange for certain fees. Meanwhile, Amazon handed over to Toys "R" Us the operations it had struggled with, such as buying, merchandising and managing inventory.

The deal was hailed as a way for Amazon to get out of unprofitable and difficult businesses with which it had little experience, such as buying toys, while capitalizing on its Web and fulfillment savvy.

Over the past few months Amazon held talks with a number of retailers, including Wal-Mart Stores Inc., and reportedly including Best Buy Co. The talks with Wal-Mart ended without an agreement, according to sources familiar with the discussions.

The deal with Borders is structured differently from the Toys "R" Us partnership, in that Amazon will own the inventory sold from the joint Amazon-Borders site. Unlike with toys, where Amazon suffered massive inventory write-downs, the company can return books and CDs to publishers and distributors, so the latter products present less risk for retailers, Bezos said.

The alliance could help prop up growth in Amazon's key books, music and video business, which accounts for nearly two-thirds of Amazon's sales. Growth for that segment, the only profitable portion of Amazon's business, slowed dramatically to 11 percent in the fourth quarter. On Monday Amazon said its losses for the first quarter would be smaller than expected, but added that growth in its books, music and video segment would be "very slight."

Yet sales of books and CDs on the joint site are not likely to be as profitable for Amazon as sales on its site, insofar as the online retailer is certainly paying a fee to Borders.

"I am not saying the economics are identical in both cases," Bezos said. "I am saying that we are happy in both cases."

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