'TIS A SAFE BET this holiday season that December 1998 will be the most lucrative month in the short history of online retailing. That's the

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Recent moves by Microsoft and Amazon.com may be signs of desperation.

'TIS A SAFE BET this holiday season that December 1998 will be the most lucrative month in the short history of online retailing. That's the good news and the bad news for Web giants like Amazon.com and the Microsoft Network, both of whom have yet to prove the viability of their popular yet wholly unprofitable online business models. As pressure mounts to justify the astronomical Wall Street valuations of online retailers, you'll probably hear a lot in the coming days about "e-commerce" and how online catalog sales are booming this holiday season. But if this is such a good business to be in—indeed, if this is the future of business as we know it—why are both Amazon and Microsoft moving away from their core online retail strategies?

Last week, both companies announced impressive-sounding alliances with the online divisions of successful traditional retailers. Amazon signed with the Gap, FAO Schwarz, Brooks Brothers, Frederick's of Hollywood, and others, while Microsoft partnered with Amazon rival Barnes & Noble, which will become the "premier" bookseller featured on the MSN portal site. This means that there will be a button on MSN.com—one of the most visited destinations on the Web—that links book buyers directly to BarnesandNoble.com. (Amazon has a similar arrangement with Microsoft, but its MSN button is listed as a CD store, linking customers directly to Amazon's music site rather than the bookseller's home page.) Barnes & Noble pays a fee to Microsoft for the placement.

Amazon's arrangements with the Gap et al. are slightly more sophisticated. Since last week, Amazon customers have been able to link from the company's home page to a new Amazon area called "Shop the Web." From there, users can choose from a list of general retail categories: clothing, toys, computer accessories, and travel. This looks at first very much like Microsoft's offering on MSN, and shopping "portals" run by Yahoo!, Excite, and Lycos. However, unlike its competitors, Amazon's "Shop the Web" doesn't immediately link customers to the partners' home page. Instead, users view the others' online offerings without actually leaving Amazon. Shoppers can compare, for example, the Gap's styles and prices against Eddie Bauer's (another Amazon "Shop the Web" partner) without jumping back and forth between gap.com and eddiebauer.com. Amazon accesses the databases of its partners and ports their product information into its own Amazon template using technology developed by Junglee, a company acquired by Amazon in August for nearly $200 million. (This can make for some odd screens, as when the Frederick's of Hollywood model pops up under the Amazon banner.) Only when Amazon shoppers click on the "Go to Merchant Page" button are they finally linked to the selected retailer's site to complete their purchase.

BOTH THE MICROSOFT AND AMAZON efforts represent significant departures from the original e-commerce vision pioneered by the two companies. The basic principle behind Amazon and MSN Shopping is that brick-and-mortar stores are expensive to operate, staff, and maintain, and that "virtual stores" can enjoy high profit margins by avoiding those costs. An online store can process orders automatically from the Web, collect credit card numbers without a clerk, and ship product from a single, relatively inexpensive warehouse. This is supposed to be Amazon's strength: a sophisticated automated infrastructure that can handle, process, and execute transactions over the Web. The e-commerce concept works even better with intangible goods, like airline tickets, where there's no need for a warehouse or shipping. (Thus one of the first e-commerce Web sites was Microsoft's Expedia online travel agent.)

By contrast, the recent alliances announced by Amazon and Microsoft are little more than advertising deals. Microsoft features Barnes & Noble on its popular Web site and charges a fee for the promotion. Amazon's "Shop the Web" promotes products sold by other retailers, ushering interested customers to their destinations. The actual transaction—the e-commerce—is handled not by Amazon, but by its partner.

If anything, the addition of this sort of transaction model signals that the original visions of Amazon.com and MSN.com are proving to deliver less cash—and far less profit—than originally envisioned. And advertising, no matter how technically sophisticated, simply cannot deliver the kind of profit margins that software companies and investors have come to expect. Amazon lost $11 million last quarter alone, and though Microsoft won't disclose figures for its online ventures, MSN shows signs of collapsing. Over the past six weeks, Peter Neupert, Microsoft's online strategist, has left the company, and Pete Higgins, MSN vice president, has taken an extended leave of absence—often a prelude to outright departure. Add it all up and you can't avoid concluding that today's e-commerce is still more buzzword than profit generator, and that company heads are running out of patience.

 
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