The drug deal is back -- but the hoopla's gone.
renewed their marketing partnership Monday, extending the deal through the first quarter of 2003. Under the arrangement, links to the drugstore site appear on Amazon's Web site.
Terms of the deal weren't disclosed, but a look at the history of the companies' dealings -- focusing on the steady slide in the amount of money changing hands in the partnership -- suggests that there's little to get excited about for investors in either stock.
And coming as it does at what are almost certain to be sharply reduced terms, the renewal highlights the growing strain on Amazon's closely watched services segment -- the host of partnerships with various online and bricks-and-mortars retailers. Even as Amazon has shown ample financial progress in recent periods, swinging into the black for the first time in the fourth quarter, the company continues to face new hurdles in its efforts to expand its business while earning solid profit margins.
Amazon shares, which have soared about 70% this year after the company finally turned a profit, were off lately $1.28, or 7%, at $17.30, a fall precipitated in part by an article in
that suggested the stock was overvalued. drugstore.com was up 8 cents at $2.49.
The companies' tight-lipped ways on the terms of the extended deal mark a 180-degree turn from a few years ago. When Amazon announced its original partnership with drugstore.com in 2000, the company said it would receive $105 million, an amount that many observers assumed would be in cash. Later, however,
Securities and Exchange Commission
filings revealed the deal called for drugstore to pay Amazon $75 million in cash, with the remainder in stock.
"We're not disclosing the terms for competitive reasons," says Kal Raman, the CEO of drugstore.com, in an interview. The original terms were disclosed, he says, because "at that time it was very much material information." He did say the new deal is all cash.
The original agreement was supposed to cover three years, but it has since been amended twice. In July 2000, Amazon agreed to reduce drugstore's cash payment to $30 million from $75 million, according to regulatory filings. Last June the companies moved up the expiration date, to June 2002 from April 2003, and cut the cash payment due Amazon to $9 million.
What is clear from SEC filings is that drugstore.com has not seen its bottom line benefit from its partnership with Amazon: Last year the deal brought drugstore.com about $7.3 million in revenue, while the company expensed about $19 million associated with the partnership, including amortization and payments to Amazon.
"The current deal is more in alignment with our financial objectives," Raman says.
Amazon's drugstore.com partnership is one of many that are the subject of a class-action lawsuit alleging that Amazon misled investors when it announced such deals. According to the suit, Amazon led investors to believe that the cash payout in such deals were larger than they turned out to be. Amazon has said the suit has no merit and that it will defend itself vigorously.
But clearly, much of Amazon's compensation from such deals turned out to be in Internet stocks that later tanked in value. For example, at the time of the original deal Amazon received drugstore.com stock that was worth $30 million, but today is valued at just $2.7 million. Meanwhile, many of the online partners Amazon initially aligned itself with -- living.com and audible.com come to mind -- have failed to blossom the way their founders envisioned as the dot-com bubble made funding scarce for cash-burning companies.
Earlier this year, Seattle-based Amazon
renegotiated its alliance with
Toys R Us
, its largest partner. Toys R Us is believed to have gotten better terms than it received in the original deal, which was inked in August of 2000. The toys deal is estimated to have accounted for roughly half of Amazon's total service revenue of $225 million last year. Amazon's total sales last year were $3.12 billion.