Amazon Goes to the Mall

The upside of zShops could be huge. But being a Web landlord of sorts also comes with its share of risks.
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With bricks-and-mortar retailers ranging from

Abercrombie & Fitch

(ANF) - Get Report

to

Best Buy

(BBY) - Get Report

now selling online, traditional e-commerce companies will have to shout to be heard this holiday season.

Some are screaming.

Amazon.com

(AMZN) - Get Report

did just that Wednesday, taking a big leap toward becoming a virtual mall with the announcement of its

zShops

, which will launch Thursday.

Amazon will let any merchant set up an online store on its Web site, giving retailers access to its 12 million customers. For $9.99 a month, each merchant can list as many as 3,000 items on zShops. In addition, Amazon collects a fee on each transaction that uses its one-click order system. The Seattle-based company can store credit information for customers and handle transactions for zShop merchants.

The move bolsters Amazon's position against the

Wal-Mart

(WMT) - Get Report

juggernaut. Although Wal-Mart has been on the Web since 1996, it hasn't generated much traffic or significant revenue from its online presence. Recently, there have been rumblings that Wal-Mart had plans that would trump all the online upstarts, but no significant developments have taken place so far.

But Amazon's move to become a Web landlord of sorts has its share of risks. Online malls don't enjoy a stellar track record. With perhaps the exception of

AOL

(AOL)

, online malls have largely been a flop. Most famously,

IBM's

(IBM) - Get Report

World Avenue

closed in 1997, as did

Nets

, founded by former

Lotus

hot shot Jim Manzi.

Most of the early online malls simply tried to replicate the real-world experience by grouping a number of disparate merchants without taking into account that shopping on the Net has its own reality.

Critics argue that the popularity of a shopping mall is that it's convenient to have all the stores close together. On the Web, when everything's a click away, there's no need for that convenience.

"People don't want to search, they want to find," counters Wendy Goldberg, a spokeswoman for AOL, whose 140 merchants generated $1.2 billion in sales through its shopping center last Christmas. This year, AOL's mall will house 300 merchants.

Meanwhile, the technology that allows customers to shop from various vendors simultaneously is only just becoming available. Consumers shopping in the first online malls had to punch in their credit card information each time they made a purchase from a different merchant. This was time consuming and raised concerns about the security of each transaction.

Today, companies like

Fingerhut

, part of

Federated Department Stores

(FD)

, allow customers to drag a shopping cart across various sites and pay once at the end of the excursion.

Why should Amazon succeed where others have failed?

"The other malls started backwards," says Lauren Cooks Levitan, an analyst with

BancBoston Robertson Stephens

, which hasn't participated in recent underwriting for Amazon. "They brought together merchants and asked consumers to trust them. Amazon already has the trust of consumers. Now they're bringing them the merchants."

But there is a danger that Amazon's reputation can be tarnished. Jeff Bezos, Amazon's chief executive, admitted as much during the press conference Wednesday, when he acknowledged that by listing other merchants on its site, Amazon would give up partial control over the relationship it so closely manages with more than 12 million customers, up from 10.7 million three months ago.

Yet that could just be the price of growth. Starting Thursday, Amazon shoppers, in addition to the books, CDs and videos they've come to expect, will be able to choose from some 500,000 different items. There will be preserves made by monks and something called a Turducken, which is chicken stuffed in a duck stuffed in a turkey (we're not kidding).

Perhaps more important is Amazon's ability to process and guarantee credit-card transactions with merchants in the zShop, many of which may not have had the capability to process credit cards online on their own. Amazon will guarantee any purchase up to $1,000 made using its one-click system, which requires customers to only enter their credit card information once. (Customers also have the option of paying zShop merchants directly through check or money order, and Amazon will guarantee those purchases up to $250.)

Even better: Amazon will make 60 cents plus 4.5% of the transaction price on every item bought from the zShop that uses the 1-click system. Since the incremental costs of providing this service are small, profits could add up quickly.

"This is a major positive," BancBoston Robertson Stephens' Levitan says. Although she isn't raising her earnings targets on Amazon, she adds: "This gives us confidence that the numbers are conservative in the near term and the move to profitability could be accelerated."

Investors loved the news. Amazon, which is expected to lose 29 cents a share for the quarter ending Sept. 30, saw its stock jump 14 7/8, or 23%, to 80 3/4 Wednesday.