Throughout its 16-year history, Amazon.com under CEO Jeff Bezos has tended to snap up startups and small companies. But the company's purchase of Zappos.com in a deal valued at nearly a billion dollars marked a shift in Amazon’s strategy—toward big game.

After first trying, with limited success, to emulate Zappos with its own Endless.com shoe website, Amazon decided it would be better to gobble up Zappos. In doing so, Amazon instantly established itself as a major player in a product category—shoes—that it sees as a promising area for growth.

Given the breadth of Amazon’s ambitions and the rapidly shifting landscape of e-commerce and digital media, the company may need to make more big acquisitions to gain a foothold in key markets.

“They have the cash to do it. They have the stock to do it,” said Mark Mahaney, an analyst covering Amazon for Citigroup in New York. “And they have shown a willingness to do large deals.”

To be sure, Amazon also has shown a willingness to invest in big in-house initiatives, such as Kindle electronic books. But the retailer’s drive to be a player in sectors such as digital media may lead toward acquisitions as the surest path. At least that is the thinking behind widespread rumors that movie giant Netflix may be Amazon’s next target.

The growth of Amazon’s merger and acquisitions activity over the past three years is striking. The company spent $33 million on acquisitions in 2007. The following year the company spent $432 million on deals, including about $300 million for audiobook company Audible. Then, in 2009, Amazon spent more than $1.1 billion acquiring Zappos.

Amazon has shown it’s ready to use its stock for acquisitions; the Zappos deal was structured as a mostly stock transaction. (That structure worked in Zappos’ favor, as Amazon’s skyrocketing stock price pushed the deal’s value from the $850 million range to more than $1 billion at closing.)

Amazon also has ample cash reserves for acquisitions. As of December 31, the company reported $6.4 billion in cash, cash equivalents, and marketable securities.

Amazon has reportedly made one acquisition so far this year, a tiny New York startup called Touchco that develops touchscreen technology, which will likely be used for future Kindle readers.

The rumor of Amazon’s interest in Netflix springs from its streaming-video business. While Amazon has staked a strong claim to the digital book market with its Kindle, other digital efforts—video on demand and MP3 digital music—have lagged. Buying Netflix would give Amazon a big boost in Internet video.

“I could see them doing acquisitions to plug the media hole in their growth profile,” said Citigroup’s Mahaney. “That’s why this often-cited potential combination (with Netflix) strategically would make sense. I can see the logic behind it.”

Staying on top of the digital revolution is important to Amazon, which derives a big chunk of its revenue from printed books, CDs, and DVDs. Netflix has had notable success in building its “Watch Instantly” feature. The company said 48 percent of its subscribers watched 15 or more minutes of a TV show or movie via the Web in the fourth quarter of 2009, versus 28 percent a year earlier.

Others see Amazon eyeing the emerging “private sales” market—in which companies buy overstock goods from brand-name designers and hold limited-time, members-only sales. Late last year, technology blog TechCrunch reported that Amazon was in secret talks to acquire Vente-Privée, a French private sales club, for about $3 billion (three times as much as the Zappos deal). Amazon never commented on the report, and Vente-Privée dismissed it as a rumor.

“It would be a way for them to get into apparel without launching their own lines or doing special deals with designers,” said Patricia Edwards, a retail analyst for Bellevue-based Storehouse Partners, an investment adviser firm.

Vente-Privée is one of several companies targeting this private sales market; others include Gilt Groupe of the U.S. and Rue La La, acquired by GSI Commerce last year.

Edwards said Amazon’s growing interest in acquisitions reflects its status as a large, maturing company.

“The bigger you get, the bigger your new lines of business have to be out of the gate to have any effect on the bottom line,” she said.

---

Eric Engleman writes for TechFlash, the Puget Sound Business Journal's technology blog.