Amazon may well be the name most people associate with internet retailing and it may, after six years in operation, at last have turned a profit.

But it still faces tough competition in the e-tailing world.

While possessing one of the strongest brands, having a cyberspace presence along has been seen as a disadvantage.

"The internet is working better for companies that are involved in both store and internet retailing, and can use the internet as a vehicle for sucking customers into their stores, and can look at it partly as a marketing expense," explained Paul Smiddy of Credit Lyonnais.

"For Amazon, it's their only shop - they have to get their bottom line out of the internet - and that's a long-term and difficult task."

Clicks-and-mortar rivals

Many traditional retailers, which built up their brands over decades of offline operations, now have significant web businesses of their own.

They are running them more cheaply, and they have the financial muscle to take on Amazon at its own game - price.

Shops such as Tesco are providing a big challenge to Amazon in its heartland markets of books and music.

Tesco promises to be 10% cheaper than Amazon in its top 50 range of books.

And Tesco can afford to be.

As the biggest supermarket in Britain, it has plenty of spare cash to fund an online business which is notoriously difficult to make any money from.

"The reason why we are confident about the profitability going forward is that the non-food volume which we got at Christmas was very good," said John Browett, Tesco.com.

"We sold over 1 million bottles of wine, and over 100,000 CDs, videos and DVDs, in the run-up to Christmas.

"And we can share our cost across the rest of the online business - as you know we are the largest online business in the UK because of our grocery operation - and therefore we can support these other businesses pretty well."

The real challenge for Amazon now is just how much further it can reduce costs to control its massive debts - and fund the price cuts it needs to make to stay competitive.