Amazon and AOL: Handshake Between Giants

For those wondering why chief executive officer Jeff Bezos of Amazon (Nasdaq: AMZN) still has a smile on his face, this week’s answer can be summed up three letters: AOL.

On Monday — the same day the company announced second-quarter results bordering on dismal — Amazon and America Online (NYSE: AOL) revealed a new agreement in which the giant Internet service provider will invest US$100 million in cash-strapped Amazon.

At the end of the day, investors and pundits were left scratching their heads. Was it a good day for Amazon or a bad day? Did the announcement of the new cash infusion overshadow the fact that Amazon posted a net loss of $168 million in Q2? Or did the shaky financial showing steal the thunder Amazon hoped to generate by announcing its new financial cushion?

Ask 10 people and you’re likely to get 10 answers. But no matter how you slice it, the deal between the two powerhouses raises significant questions.

Not About Money?

First, although Bezos infuses his public comments with frequent references to his visions of the future and longevity in the marketplace, some would argue that the deal with AOL is not only shortsighted, but also solid evidence of Amazon’s desperate need to survive in the present.

After all, the present isn’t looking so good.

Even though Amazon execs were quick to say the new AOL deal was not primarily about money, to many, the deal looks like it was all about money.

Bezos continues to prophesize profits in the very near future, even though the numbers and market trends do not support his prognostications. If saving face with consumers and investors is high on his priority list, any “big get” of $100 million will go a long way toward keeping the naysayers quiet.

At least for a little while longer.

Conflicts of Interest?

The level of Amazon’s desperation is not the only question that the alliance between these big-time players raises. There is also the question of loyalty: AOL’s online bookseller of choice is still Barnesandnoble.com (Nasdaq: BNBN).

Where does that leave Amazon, a company that still touts books as its bread-and-butter product? How does AOL reconcile agreements like the new Amazon deal with its existing partners, who are, as it turns out, Amazon’s direct competitors?

One wonders what the gang at Barnesandnoble.com thinks about Monday’s announcement that Amazon and AOL want to go steady.

Circle of Friends

Further, the last time we checked, eBay (Nasdaq: EBAY) and Amazon were not best friends. “Fierce competitors” more accurately describes their non-relationship.

AOL, on the other hand, clearly has eBay on its buddy list.

In the still evolving New Economy, AOL is free to construct agreements with anyone it chooses, but one element of Old Economy thinking still holds true — competitors usually like to keep their distance from one another.

Stay tuned, because the way these conflicts play out in the coming months could be juicy.

Strategy or Survival?

Before anyone is too quick to write off Amazon’s latest move as a desperate — albeit strategic eleventh-hour motion to save the company — a strong case could be made for Amazon’s contention that it is neither desperate nor staring midnight in the face.

First, while it’s true that profits still seem elusive, costs at Amazon appear to be coming down and under control. The company reports its distribution center construction is now completed. Further, like everybody else in the dot-com game, Amazon expects its internal technology costs to decrease.

As for the new deal itself, over time it allows AOL to acquire no more than 5 percent of Amazon stock, so control of the company is not at stake.

Additionally, those who see Amazon’s glass as half full rather than half empty point to the fact that the company’s gross profit increased 32 percent. Pro forma operating loss is down to 4 percent of sales. One year ago at this time, that figure was 15 percent.

So things are looking up and maybe Smiling Jeff has something to smile about after all.

Vote of Confidence

AOL’s substantial investment in Amazon could breathe some much-needed confidence among investors who have been known to doubt the giant e-tailer and its affable leader.

Bezos equals Amazon. His credibility as an Internet entrepreneur, manager, owner and major player is always on the line, and to have AOL show enough faith in Bezos/Amazon can only work to increase his standing in the marketplace.

What do you think? Let’s talk about it.