InformationWeek

rguably, the interest in partnerships between user companies and vendors this year was fueled in part by the overwhelming success of the Web alliance between Toys "R" Us Inc. and Amazon.com Inc. Inked late last year, the alliance helped the duo dominate not just the toy market but all online sales through the Christmas season. After botching its own distribution in 1999 by missing Christmas deliveries to thousands of kids, Toysrus.com let Amazon do its distribution magic for the co-branded site in 2000. The most-trafficked site of the season, it saw 123 million visitors, five times its nearest competitor, and racked up $180 million in sales.

Ray Arthur, Toysrus.com's senior VP and CFO, says that state sales taxes alone kept the deal with Amazon from being a true joint venture, because Toys "R" Us' brick-and-mortar stores might have made it necessary for Amazon.com to charge sales tax for online purchases if they owned an entity together. But despite the lack of common stock or ownership, Arthur considers their 10-year contract a partnership of spirit. Full-time alliance managers are charged with "overcommunicating with Amazon," he jokes, and spend half of each week at Amazon's Seattle headquarters. Amazon's CFO sits on the Toysrus.com board. As the holiday season approached, the two shared daily telephone calls to review how things were going. "I wouldn't call Amazon a supplier," he says. "This is a truly unique relationship."

In addition to growing into new global markets together, the two this month are bringing Imaginarium.com, the Toys "R" Us line of educational toys, and its baby products site, Babiesrus.com, to the Amazon.com platform. "The key is aligning your goals so that if one participant does well, the other does better also," Arthur says. "You have to create a financial win-win for both parties."

That's what Borders Group Inc. is hoping for in its new alliance with Amazon. After losing $18 million last year and writing off its investment in its own site, Borders in August will become Amazon's second co-branded site. "We didn't see our site becoming profitable in the foreseeable future, but we did have a large group of customers that wanted to shop online," says Ed Wilhelm, Borders CFO and senior VP.

While not a joint venture, the actual book sales on the Borders site will be run entirely by Amazon, with Borders getting a share of revenue for the use of its name and customer base. "Clearly, the idea rested with our CEO," Wilhelm says, driven by the clear understanding that the Internet "is definitely part of the future, and the choice is to build capabilities on your own or partner with someone who has already developed them."

Alan Alper, an analyst with the Internet market research firm Gomez, sees the Toysrus.com deal as an alliance of two players who combined their skills and together squeezed out online retailer E-Toys.com, which "did everything right except make money." The Borders deal, on the other hand, is less a partnership than "a decent exit strategy" that lets Borders refocus on its core brick-and-mortar business and virtually turn over its Internet distribution to Amazon. Under terms of the deal, Amazon.com handles warehousing, order fulfillment, and customer service for orders at the co-branded Web site, while the bookstore simply uploads its database of available titles and in-store events schedule.

Alliances such as those with Amazon.com are a good way to go for traditional retailers that are still jittery about investing in the infrastructure needed to support an online distribution operation. But understand that it's a way to reach new customers and better manage current ones, says Jay Scansaroli, global manager of the retail industry services at Andersen, the accounting and consulting firm formerly known as Arthur Andersen. Many try small-scale strategic alliances to bring, for example, Web-enabled kiosks into the store, and Scansaroli says he thinks the future will bring more of them as Web plays break down and brick-and-mortar companies look for a way to move online.

"The retail industry is too concerned about consumer spending to go whole-hog into technology projects, and the pressure is on for pure-play dot-coms to show a return," Scansaroli says. As a result, he predicts, "we're going to see more strategic alliances as the big players evaluate what's out there and begin to move into the new economy."