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5/28/2004
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Amazon.com And Toys 'R' Us Are On The Outs

Toys 'R' Us sues partner Amazon, claiming the online retailer isn't honoring its 10-year deal

When Amazon.com Inc. signed the Bombay Company Inc. last week as the latest customer for which it will build and run a Web store, it was easy to forget that it once was shocking for a brick-and-mortar retailer to work hand in hand with a dot-com. Not until Toys "R" Us Inc. tapped Amazon to run its online store in August 2000 did people start seriously thinking of Amazon as a company that might partner with traditional retailers rather than try to destroy them. Now, sales for other retailers account for almost a quarter of the units Amazon sells, and such services are the fastest-growing part of its business.

Toys "R" Us revived memories of that fierce competition when it filed a lawsuit May 21 alleging that Amazon isn't honoring an exclusive agreement to let Toys "R" Us sell in the toy, game, and baby-product categories, for which Toys "R" Us has so far paid $200 million. "We don't intend to pay for exclusivity we're not getting," says David Schwartz, senior VP and general counsel for Toys "R" Us, parent company of the Toysrus.com subsidiary that filed the suit. The lawsuit suggests Amazon's growth plans could increase such tensions, saying interface technology that Amazon is testing will make it even easier for new competitors to encroach on Toys "R" Us' turf.

Amazon says the suit is without merit. "We believe we can have multiple sellers in the toy category, increase selection, and offer products that [Toys "R" Us] doesn't have," the company said in statement. A spokeswoman declined further comment.

The dispute shows how far Amazon has come as a standards-setter and destination for the Internet retail sector. For one, it no longer needs to offer exclusivity to attract traditional retail clients to use its E-commerce site and services. "Amazon is clearly throwing its weight around as the Wal-Mart of the Internet," says Vernon Keenan, Internet analyst and founder of research firm Keenan Vision. "The fact that Amazon is the gravity well of retail on the Internet means that everybody wants to sell there."

Schwartz contends that as of May 17, Amazon had more than 4,000 products in the toy, game, and baby categories offered by competitors. The lawsuit cites the board game Monopoly as an example, claiming that consumers searching for the game on Amazon's home page are directed to third-party merchants hosted by Amazon and also, via sponsored links, to third-party Web sites. Toys "R" Us contends it has a monopoly on Monopoly, at least where Amazon is concerned.


Innovation is key to Amazon's customer experience, says  Amazon CEO Jeff Bezos. Photo by Jim Bryant/AP.
Innovation is key to Amazon's customer experience, says Amazon CEO Jeff Bezos.

Photo by Jim Bryant/AP.
Amazon CEO Jeff Bezos declined to discuss the suit last week at the company's annual shareholder meeting. Instead, he emphasized the company's growth strategy, which includes continuing to try to beat competitors on price. It's a strategy that hinges on keeping operating costs down, yet continuing to invest in its E-commerce and fulfillment infrastructure. "The main drivers of customer experience are selection, price, and convenience. And each of these things gets improved only through innovation," Bezos said.

The outcome of the suit could affect Amazon's ability to roll out innovations. In particular, Toysrus.com seeks an injunction on Amazon's "1 to 1 graphical user interface," a new technology the company is testing with its Pro Merchant sellers, a service catering to individuals who pay $39.99 a month to sell on Amazon's site. The test-site page is called "Create a Product Detail Page" and is billed as an easier way to add new product types to the site. "New products will appear alongside products offered by merchants and by Amazon.com itself," according to the Web site. "Pages become a permanent part of our catalog, and you--along with other sellers--can list copies of the product for sale through Amazon Marketplace."

Though the service is aimed at individuals, it's the larger players that concern Toysrus .com. The legal filing asserts that "the GUI will allow new and different merchants to offer additional products for sale on the Amazon site, including products exclusive to [Toysrus.com]." The filing claims competitors such as Wal-Mart Stores Inc. or Target Corp. would have the opportunity to list their toy products on Amazon, alongside those offered by Toysrus.com, without paying similar fees.

A number of large retailers--including Borders, Office Depot, and Target--have branded stores on Amazon. Bombay, which has 465 stores selling furniture and home accessories, opened a site on Amazon in October. Last week, it contracted with Amazon to run its Web site at www.bombay company.com, hoping the online retailer's knowledge will help boost online sales as well as cut costs. "I want somebody who's got experience to drive my conversion [rate] up and to drive my total business," says Matt Corey, operating VP of E-commerce, noting that Amazon provides stability and scalability, plus technology like "1-Click" buying and 600 software developers working on new E-commerce technology.

Bombay's approach shows how much E-commerce has changed since Toys "R" Us inked its landmark deal. Bombay doesn't get a promise of exclusivity, nor does it pay an up-front cost, instead paying Amazon based on unit sales. In fact, the retailer doesn't want exclusivity. Soon after Bombay Company created a storefront at Amazon, Corey called counterparts at Pier 1 Imports, Crate & Barrel, and Pottery Barn and urged them to set up storefronts, too. His reasoning was that not enough people shop for furniture at Amazon, so he needed his rivals there to create critical mass.

Corey says the Toys "R" Us lawsuit isn't a concern for Bombay, though he is watching the outcome. "I hope they figure it out," he says, "because I've got a few toys with Bombay Kids that I'd like to sell on Amazon."

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