Feb. 1 (Bloomberg) -- Amazon.com Inc., the world's biggest online retailer, said fourth-quarter profit fell 51 percent as the company increased holiday promotions to boost sales and paid more taxes.

Net income fell 51 percent to $98 million, or 23 cents a share, from $199 million, or 47 cents, a year, Seattle-based Amazon said today in a statement. Sales increased 34 percent to $3.99 billion.

The company lowered shipping fees and cut prices to sell more digital cameras, video-game consoles and Mattel Inc.'s Barbie dolls, pushing profit margins to their lowest level since 1999. Chief Financial Officer Thomas Szkutak said they may decline further as Amazon introduces new sales categories and works with more third-party sellers.

``As electronics takes a higher share, that cuts margins,'' said Colin Sebastian, an analyst with Lazard Capital Markets LLC in San Francisco, who has a ``hold'' rating on the stock. ``That's not something that goes away. They're lowering prices and they face price competition from the likes of Wal-Mart.''

Shares of Amazon rose 17 cents to $38.87 at 7:45 p.m. in trading following the close of U.S. markets. Earlier, they rose $1.03, or 2.7 percent, to $38.70 at 4 p.m. in Nasdaq Stock Market composite trading. They fell 16 percent last year, the most since 2001.

Taxes, Margins

The company paid $91 million in taxes in the fourth quarter after a year-earlier tax benefit of $38 million. Gross margin, or the percentage of sales left after subtracting costs of goods sold, fell to 21.3 percent from 22.4 percent. For the year, the margin was 22.9.

Sales were helped by its Amazon Prime program, through which customers pay $79 a year and receive free two-day shipping, Amazon said.

Analysts surveyed by Bloomberg News were estimating profit of 21 cents on sales of $3.76 billion.

The company forecast first-quarter revenue between $2.85 billion and $3 billion, exceeding the $2.74 billion average estimate of analysts surveyed by Bloomberg. Full-year sales will be $13 billion to $13.7 billion, ahead of the $12.6 billion analysts were projecting.

Amazon exceeded its October forecast of as much as $3.95 billion in sales while its operating income of $197 million was near the midpoint of its forecast of $145 million to $235 million.

Investment Strategy

Net income has declined the past eight quarters as Chief Executive Officer Jeff Bezos increased spending to develop products such as the ``Unbox'' video download service.

The service competes with Blockbuster Inc., the largest U.S. video rental chain, and Netflix Inc., an online rental service.

``We entered a lot of new categories with new selection,'' said Szkutak on a conference call with analysts. ``Over time, we'll be able to get those margins to be very solid within our business.''

The retailer sells products in 36 different categories, including jewelry and electronics. The company last year began selling toys, baby supplies, auto parts and groceries and introduced a shoe and handbag site in January.

Media Sales

Media, including books and CDs, represented about 63 percent of fourth-quarter sales, down from 67 percent a year earlier, the company said.

``More is not a good substitute for better in retailing,' said Edward Weller, an analyst at San Francisco-based ThinkEquity Partners LLC, in a Jan. 19 note to investors. Weller has a ``source of funds'' rating on the stock, implying that shares may fall as much as 20 percent within the next year.

Of 24 analysts surveyed by Bloomberg in the past 12 months, four had ``buy'' ratings on Amazon shares, nine said to ``hold,'' and 11 said ``sell.''

Media sales, including books and CDs, rose 25 percent, while electronics and other general merchandise climbed 55 percent, Amazon said.

U.S. shoppers spent $24.6 billion on the Internet during the last two months of 2006, up 26 percent from a year earlier, Reston, Virginia-based ComScore Networks said in December.

Amazon was the top retail Web site based on dollars spent, excluding auction sites, ahead of Dell Computers Inc., Yahoo! Inc. and Wal-Mart Stores Inc., ComScore said with out providing sales numbers.

The company ranked sixth in terms of spending growth behind Best Buy Co. and Wal-Mart.

To contact the reporter on this story: Danny King in Los Angeles at dking19@bloomberg.net.

Last Updated: February 1, 2007 19:58 EST