HMV may be too hasty in turning its back on Amazon

Samad Masood, Analyst

UK high-street retailer HMV is pulling its Waterstones bookstore out of an online partnership with Amazon, which has provided a co-branded e-commerce site for the company since 2001.

In a statement released yesterday, HMV said that in Autumn 2006 Waterstones would 'launch its own online service which will reflect better the brand's specialist bookselling credentials'.

Like many 'bricks and mortar' retailers, HMV is fighting on two fronts - and losing. On the high street, the company's brilliant brand recognition can't stop the fact that footfall in retail outlets is under pressure from online competition. Meanwhile on the web, HMV's brand ranks far below that of specialists such as Amazon, eBay and iTunes. The net effect is that in the UK and Ireland, HMV and Waterstones' overall sales are falling.

Pulling out of the Amazon deal to build its own online capability is not the solution, and the risk is that the company will lose focus as it invests in integrating its diverse online estate, including HMV Canada - which, incidentally, is also currently run by Amazon. Indeed, the fact that HMV Canada has just increased its sales by 11% supports our view that the partnership with Amazon is not the problem.

In fact, there is evidence from web analytics firms that consumers are more attracted to online brands selling established traditional brands: for example, Amazon selling Sony equipment. With this in mind, HMV may well have been better off re-negotiating its relationship with Amazon so that it gets a bigger cut of sales and more brand recognition.

Of course, there is also a counter argument to this. As online portals improve their search and price comparison abilities, HMV may well find itself able to compete better against online leaders such as Amazon as a separate entity.

At the end of the day though, building its own complex e-commerce platform will not differentiate HMV. The company needs to focus on its core competencies: that of sourcing, marketing and distributing its growing portfolio of media: books, music, films, games and their associated merchandise. If the partnership with Amazon has not worked, HMV could also look to outsource its web infrastructure to IT services specialists. This may well still be an option for the company.

Samad Masood is an analyst in Ovum's UK software and IT services practice, and specialises in IT services, outsourcing and offshore services. Samad covers a range of outsourcing and services companies in the UK IT services market, as well as focusing on the leading Indian offshore providers. Samad is also responsible for maintaining Ovum's UK contract database service.