Amazon Goes Kozmic

The Internet-based delivery service Kozmo.com has landed an estimated $120 million in strategic financing from a blue-ribbon panel of investors led by Amazon.com Inc., sources familiar with the deal say.

Amazon is expected to invest about half of the total. The rest will come from investors like Japanese investment firm Softbank, with about $28 million, private equity firm The Carlyle Group and entertainment products distributor Ingram Entertainment. (Ingram Entertainment is unrelated to Ingram Books Group, the company Barnes and Noble tried and failed to buy last year.) Sources say the deal, which includes other investors, will be announced at the end of this month. Combined, the latest round of investment would give the backers about one-third of the company.

Company officials declined to comment on the investment.

In a separate deal, Kozmo is also expected to announce today an exclusive, long-term, multimillion-dollar distribution deal with USA Networks-owned Ticketmaster Online-CitySearch. That deal gives Kozmo prime space on CitySearch's front page. The two would also create cobranded sites in regions currently served by Kozmo. As part of the deal, Ticketmaster will also become the exclusive provider of local arts and entertainment content on Kozmo.

For Amazon, the investment deal will help the world's largest online retailer stay up to speed against competitors, at a time when Barnesandnoble.com has been testing the waters for a 24-hour delivery service to Manhattan customers since late last year. While Amazon has relied primarily on shipping via UPS or the U.S. Postal Service for its deliveries, the online retailer has begun to explore alternative ways to serve its customers more quickly. To that end, it purchased a minority stake last year in HomeGrocer.com, which offers next-day delivery for groceries.

Barnesandnoble is expected to roll out the service to other cities in coming months, pending research from the test period. Industry watchers say Barnesandnoble's more than 500 existing brick-and-mortar retail locations gives the bookseller a leg up in offering such services.

The expected deal with Kozmo would give Amazon instant leverage over its competitor with a proven system, but a comparatively paltry 10 warehouses in five markets: New York; San Francisco; Seattle; Bellevue, Wash.; and Washington D.C. Kozmo will launch in Los Angeles and Chicago in several weeks. Kozmo is expected to launch in more than 20 markets by the end of 2000. Despite that brisk growth, however, questions remain as to how the system would handle the crush of Amazon's 13 million customers.

Barnesandnoble charges customers nothing beyond the standard $3.95 delivery charge. Kozmo deliveries, on the other hand, are free. The cost of offering a similar service to Amazon customers is not clear.

The deal catapults Kozmo's stature over upstart competitor Urban Fetch, which launched a nearly identical service in New York last year. A lawsuit filed by Kozmo charged its competitor with posing as a potential investor before starting a copycat company. The suit was settled out of court in December for an undisclosed amount.

The investment will help the company, which was founded by 28-year-old CEO Joseph Park, cover the nation with outposts that will become delivery intermediaries for companies like Amazon. According to these same sources, the deal would give the company a market valuation of about $300 million; after the company's last round of financing, the valuation stood at less than $100 million. In October, an investment round led by Flatiron Partners, Oak Investment Partners and Chase Capital Partners generated $28 million.

In interviews before the most recent holiday shopping season, Park said he expected Kozmo to generate $3 million in revenue in 1999, up significantly from the 1998 figure of $100,000. This year, the company predicts it will bring in $20 million in revenue, although profits are still not in the foreseeable future.

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