Visit Sony's home-entertainment products Web site and you'll find a list of authorized Internet dealers that includes the likes of BestBuy.com, Sears.com and Walmart.com. Conspicuously absent is Amazon.com. You won't find the No. 1 Internet retailer listed as an authorized dealer on the sites for Panasonic, Pioneer or Toshiba, either.
None of these top companies sells their home-entertainment products to Amazon. Instead, Amazon is forced to buy Sony stereos, Toshiba DVD players and the like from distributors - at higher prices. "That is a heavy penalty," admits Amazon CEO Jeff Bezos. But the company already is buying directly from 300 manufacturers, and Bezos hopes the holdouts would come around to Amazon. After all, that's what happened with its other big businesses: books, music and videos.
For now, the heavy penalty is hitting Amazon where it hurts. Consumer electronics has become the company's second-largest - and fastest-growing - product category. That may be a liability, not an asset, some analysts say. Buying through distributors not only cuts the category's already thin profit margins, but it also shuts Amazon out of manufacturers' rebates, warranties and customer support.
"It is going to be difficult for them to make that a profitable business," says Mark Rowen of Prudential Securities who calculates that the more consumer electronics Amazon sells, the more it loses. "I believe they will have to make a deal with someone."
Bezos insists that the economics of selling consumer electronics work nicely for Amazon. Yet he does not rule out a partnership with a traditional chain that is an authorized dealer for all the top brands.
While Amazon might need the buying clout of an industry veteran, an alliance would cut into future profits in an increasingly important category. Says Bezos: "Certainly the bar is very high for any of these deals."
Either way, Amazon faces the prospect of lost profits, and that certainly won't cheer investors.
