Ruling Sheds Light on Amazon.com's Secrecy
When a New Jersey judge ruled that Amazon.com Inc. breached a groundbreaking
contract with Toys R Us Inc., she delivered with the legal blow a public scolding,
calling company executives obstinate, arrogant and even childish.
Analysts say the decision could hurt Amazon.com's relationships with other
partners. They also say the judge's harsh words -- including accusations that
company executives exhibited selective memories -- illuminate behavior some
on Wall Street have long complained is too secretive.
Yet the familiar Amazon.com Web site remains hot property, and the Seattle
company has signed on several new partners in recent months. Some critics even
concede that shareholders will still give the company some time to prove that
its secret schemes will bear fruit.
"If Amazon produces the numbers, nobody will care," said Safa Rashtchy,
analyst with Piper Jaffray. "If the growth isn't there, then I think it
will become more of an issue. Why isn't there the disclosure level that we would
In her March 1 ruling, Superior Court Judge Margaret Mary McVeigh found that
Amazon.com breached a deal that was supposed to give Toys R Us exclusive rights
to supply some toy products on Amazon.com. The ruling allows the companies to
sever their online partnership.
McVeigh accused Amazon.com founder Jeff Bezos and other executives of tweaking
the meaning of words -- such as "exclusivity" -- to suit the company's
own needs, regardless of how Toys R Us originally understood it.
"Mr. Bezos' understanding of the exclusivity granted to (Toys R Us) would
not be any different than what Jeff Bezos wished exclusivity to be," she
She was especially critical of Bezos' recollection of events. Although Bezos
said he had little information about details of the agreement, she wrote, "this
court has no doubt his knowledge and understanding went much deeper than revealed."
At one point in her ruling, she snipped at Bezos, writing that he, "in
a rather childlike fashion," tried to suggest he wasn't aware of one part
of the dispute until Toys R Us slapped it with a restraining order.
David Garrity, director of research with Hapoalim Securities U.S.A., said he's
already begun hearing concerns from some retailers who partner with Amazon.com
to sell goods online.
"It should raise question marks," Garrity said. "The whole issue
here is, 'Fool me once, shame you. Fool me twice, shame on me.' Who wants to
be in that position?"
Garrity believes Amazon.com will need to take some steps to retain the confidence
of its business partners and reassure them that it can act in good faith.
Still, Rashtchy said he expects the company will be able to pull through it,
"but it's obviously a negative for them."
Garrity said criticisms such as McVeigh's hurt Amazon.com because the company
is so closely associated with Bezos, who likes to present the image of a gregarious,
"Jeff's gotta be a standup guy in the eyes of not only potential business
partners, but investors," Garrity said.
Garrity is one of several analysts who have argued that Amazon.com has a duty
to be more forthcoming with shareholders. Recent hefty technology investments
are a special concern, Garrity said, because there is fear that Amazon.com may
be lagging competitors on technical innovation.
In a research note released Friday, Edward Weller of ThinkEquity Partners said
the company needs to improve various technologies, including its basic search
functions, and make it easier for third parties to sell on the site.
Amazon.com won't say how much money it pulls in from third-party sales, but
acknowledges they're a growing part of the business. Third-party sales accounted
for 28 percent of Amazon.com's unit sales in fiscal 2005 -- up from 17 percent
two years earlier.
Fidelity Investments, the nation's largest mutual fund brokerage, is one of
six companies that have become "featured partners" with Amazon.com
in the last year. Others include Weight Watchers, the digital photography company
Shutterfly and the travel search engine SideStep.
Sean Belka, senior vice president of personal investment at Fidelity, said
the deal it signed with Amazon.com last month is part of the company's push
to broaden its reach.
"Amazon is a well-known leader in the online space," Belka said.
"We believe many of their customers would be interested in our products
Amazon.com spokeswoman Patty Smith said the company does not discuss dealings
with individual merchants, but that in general, it has great relationships with
Toys R Us declined to comment.
Amazon.com is considering an appeal. Though it countersued, saying it also
wants out of the agreement, it stands to lose tens of millions a year in exclusivity
fees and other payments from the toy retailer if the 10-year deal signed in
2000 ends early.