Evan Schuman's StorefrontBacktalk

As Borders executives discussed the various reasons they severed they multi-year partnership with Amazon.com on Thursday, the most critical was the least expected: taxes.

As a pure online play, Amazon.com was an ideal long-term partner for Borders as there was no physical store conflict. But as the years passed, that initial advantage quickly turned into the Amazon Albatross, as the online retailer couldn’t doing anything in-store, for fear of running up huge tax bills in various states.

As has happened with so many retailers who strive to be multi-channel, they instead end up being what Google Retail Head John McAteer has called “being multi-silo-ed.”

For Borders officials, having a good Web site that was distinct and apart from a lot of good brick-and-mortar stores made perfect sense in the late 1990s. But in 2007, it simply no longer worked.

“Being a world-class cross-channel retailer is integral to our future,” said Borders Chief Strategy Officer and Executive Vice President Rick Vanzura. “The only way we’re going to get there is to take control of our Web site.”

Vanzura happened to have been president of Borders.com in 2000 when the Amazon deal was signed and he said that it was the right deal to make at the time.

“At the time, I told existing management, ‘Look. This is just going to be way too expensive, way too hard, especially because we tried to do fulfillment ourselves. So the best thing we can do is to try and cut our losses here, work with the marketing elements to create a better marketing presence for the stores and find a partner who can really handle the E-Commerce.'”

Does Vanzura reget that decision? He says no. “The Amazon agreement, I think, made perfect sense at the time and was successful at what it was intended to do, which was to stop the bleeding in late 1999, early 2000, on a very expensive Web site that was very distracting for our core business,” he said. “It let us focus on our core business and find a way to actually make a little bit of money on the Web site.”

But he stressed that so much has happened since 2000 that everything needed to be rethought. “In Internet terms, we are eons away from the late 1990s. If we had to revisit that decision, I would 100 percent make the same decision we did back when we signed the original agreement. The world’s changed and customer expectations have changed.”

The state tax issue was an immovable obstacle to future expansion, Vanzura said. The Amazon physical-world restrictions “kept us from having a really great cross-channel experience and being able to control our brand in the way we want.”

But taxes were only one issue. The only crucial change is that it was a lot more expensive and complicated to create a major Web presence in 1999 than it is today. “Web technologies are a lot more advanced, a lot more mature, a lot more reliable, a lot more stable,” Vanzura said. “And it’s a lot easier to find people who are experienced in running Web operations so the hurdle to being able to put up a credible Web site that you can at least make some amount of money on is a lot different than it was in the late 90s.”

Analysts applauded the move, saying that it’s a trend of companies starting to take cross-channel issues seriously.

“Borders has recognized it?s time to go multi-channel for real,” said Paula Rosenblum, a longtime retail analyst who serves as VP/Research and Content for the Retail Systems Alert Group. “You can?t do cross-channel promotion, ordering, and fulfillment right–or profitably–when your eCommerce provider has its own company and its own agenda.”

Sucharita Mulpuru, the senior retail analyst at Forrester Research, agreed. “I think it points to something that retailers haven?t acknowledged for awhile, which is that online is indeed very important and that yes, it does cannibalize your store business a bit, so it?s important to keep it close,” she said.

But Mulpuru disagreed with Vanzura’s assessment that the 1999 decision?which he was intimately involved in?was the right one, even at the time. “In the long term, I think it?s important for them to own their eComm channel. Yes, it was a mistake to not have decided this 7 years ago, but hindsight is 20-20 and though they?re late to the game, eComm is still in its adolescence. There?s still opportunity.”

“I think the companies that did deals with Amazon at that time–such as Toys R Us–made decisions due to the frenzy surrounding the promise of the dot-com channel and the inability of their internal IT teams to dedicate appropriate efforts to build out an effective web presence,” Mulpuru said. “My perspective? Sure, it would have been bloody expensive, but I don?t think it?s smart to have taken your most promising channel, the one growing the fastest that is actually eroding store sales, and then to go give a chunk of that revenue to your biggest competitor in that channel. That doesn?t seem very logical to me.”

Another major change for Borders has been what customers expect and demand. The moves for video and audio away from brick-and-mortars to the virtual world make sense, but?Vanzura argues?books are different and they have a permanence that doesn’t lend itself to being entirely digital. That said, consumers are now insisting on integration with the Web in-store, with everything from cellphones, PDAs and social networking having an essential role.

“Customers’ expectations of technology being an integral part of what you need to deliver to be a headquarters for knowledge and entertainment?which is our mission?are a lot higher now,” Vanzura said. “Customers have an expectation that they will be able to consume knowledge and entertainment in the form they want it, where they want it. Social networking has emerged, crossing into the mainstream.”

Although he wouldn’t specify what kind of digital services the chain will deploy, he gave one example that a consumer interested in travel would be able to do “more than find a good travel guide.”

Book chains are feeling intense pressure from various Amazon.com capabilities, such as Search Inside, which tried and take in-store book browsing and replace it with a Web version that can search much more efficiently.

Indeed, Borders has found financial difficulties running its book chain. On Thursday, at the same time as it announced its new Web strategy, it also announced a $74 million quarterly loss.

The online changes are just one part of Border’s new strategy. The overall plan includes a pullback from its international superstore effort (it will be selling or franchising many overseas locations) and it will retreat from many of its Waldenbook stores and start to create more original content with direct-author deals.

But the cornerstone will be a major E-Commerce presence to be launched February 2008, with various pilots slated for the latter part of this year.

?Our company?s performance has fallen short in an industry that is increasingly competitive, technology driven and price sensitive. We recognize the urgent need to go on the offensive and drive significant change,” said Borders Group Chief Executive Officer George Jones, in a written statement.

The chain will also bring in new technology leadership. “The company?s long-term systems direction and overall technology strategy will be under the leadership of a new Chief Information Officer, expected to be named soon,” Jones said. That new CIO will report to Vanzura, who reports to Jones.