June 2, 1999 6:00 PM PDT

Amazon still a shelf above the competition

Although descended from a brick-and-mortar Goliath, barnesandnoble.com continues to look like a David next to Amazon.com.

Unlike its Biblical counterpart, it's an open question whether barnesandnoble.com can emerge from its recent initial public offering and catch up to or eclipse Amazon, the granddaddy of e-commerce.

The story of Barnes & Noble's online book-selling effort has become a real-life lesson for aspiring e-commerce entrepreneurs. The tale tells of how a dominant real-world retailer saw its business threatened by a startup when it hesitated to take advantage of an online opportunity.

To be sure, barnesandnoble.com is far from a flop. It raised some $450 million in a public offering last week and posted first quarter sales of $32 million--already more than half its annual revenue for all of 1988. The company's relationships with Barnes & Noble and Bertelsmann AG give it ties to powerful players in the offline retail and publishing industries, respectively.

But Melissa Bane, director of Internet Market Strategies at the Yankee Group, said barnesandnoble.com has the misfortune of playing runner-up to Amazon, which she calls "the poster child for e-commerce."

"Even if they're doing a good job, they're going to look like a loser," Bane said.

Barnesandnoble.com's share price seems to reflect that perception. Unlike other e-commerce players including Priceline, whose shares skyrocketed immediately after an IPO, barnesandnoble.com's stock has been in the doldrums since its launch--down 2.8125 today to close at 17.1875, under its IPO set price of $18.

Also, the company's market capitalization of $2.4 billion pales compared to Amazon's. Despite a recent decline in value of more than 50 percent, Amazon still is valued at more than $18 billion.

Barnesandnoble.com suffered another potential setback today when parent company Barnes & Noble called off its merger with Ingram Book Group after the deal ran into opposition at the Federal Trade Commission. Ingram, one of two major U.S. book distributors, supplies books to Amazon and other booksellers and could have given Barnes & Noble and barnesandnoble.com valuable information about their on- and offline rivals.

Many analysts remain bullish on barnsandnoble.com's prospects for improvement, however. Jupiter Communications analyst Ken Cassar said Barnes & Noble shouldn't be faulted for the failed Ingram deal.

And though Barnes & Noble is late to the online game, the company has done well since its launch, becoming one of the top 10 to 20 e-commerce Web sites, Cassar added.

Jupiter Communication estimates that the online book market will grow from $1.1 billion in 1999 to $3.7 billion in 2002. Cassar said that as the market grows and as Amazon expands into areas other than books, barnesandnoble.com will have an opportunity to curb Amazon's lead.

"My belief is that as Amazon gets broader and broader at product assortment, it will get worse and worse at selling books," Cassar said.

Barnesandnoble.com plans to keep focusing on selling books, said Ben Boyd, the company's vice president of communications. When consumers start to buy books on the Web, they will consider barnesandnoble.com a name they can trust, he added.

"The Barnes & Noble brand stands for books," Boyd said. "What we are doing is building the best online bookstore--not pets, not t-shirts, not lingerie."

But whether barnesandnoble.com can ramp up book sales enough to dominate Amazon.com is debatable. Amazon has shown that it will not simply concede the book market to barnesandnoble.com as it moves into new areas. It recently announced a 50-percent discount on all New York Times bestsellers, an aggressive move matched almost immediately by barnesandnoble.com and Borders.

The move threatened margins at all of the online booksellers, which are already bleeding red ink. Barnesandnoble.com lost $20 million during the first quarter of this year, while Amazon lost $62 million on $294 million in sales.

Forrester Research analyst Seema Williams called barnesandnoble.com's brand "limiting," noting it will be hard for them to draw the casual book buyer. Amazon will continue to have a larger customer base and will be able to offer "most of the stuff that most of us want to buy," she said.

Williams compared the Amazon versus barnesandnoble.com rivalry to Wal-Mart and Toys 'R Us.

Wal-Mart sold more toys than Toys 'R Us last holiday season, Williams said. Likewise, Amazon, as a general retailer, will continue to sell more books than a specialist such as barnesandnoble.com, she said.

"There's plenty of room for a barnesandnoble.com," Williams said. "But will they dominate the market? I think it's going to be really hard for them to catch up."

 

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