IQ News: IQanalysis: Book Battle

Three rivals are challenging front-runner Amazon for the multi-billion-dollar online books business. By Karen J. Bannan Despite numerous magazine and television reports lamenting the demise of the book, online booksellers continue to ride roughshod over the rest of their e-commerce competitors. And, according to analysts, the marriage of the printed word and e-commerce is growing stronger. The online bookselling market was worth $1.3 billion last year and that number is expected to climb to $4.9 billion by 2003, according to Jupiter Communications, a New York-based research firm. The reason, say analysts, is simple: Books are, and probably will always be, one of the easiest items to sell online. Low prices and an unusually low barrier to entry have made it possible for more than 800 retailers to set up bookshops on the Web. Anyone with a few thousand dollars and a Web server can get into the game--it's just a matter of contracting with a book wholesaler like Ingram Book Group of La Vergne, Tenn., which ships titles directly to consumers. To the consumer, books represent an easy gift or a cheap impulse buy, two things that booksellers count on as they cross-promote their products on small, niche Web sites and large commercial sites, says Malcolm Maclachlan, an e-commerce analyst with International Data Corp., based in Framingham, Mass. "Who knew people read so much?" Maclachlan asks. "Seriously, books ship well, you don't have to try them on and the Web makes it simple to offer consumers millions of titles instead of the thousands that you find in a retail store." Even as the ranks of online booksellers grow, today four online retailers are playing a virtual game of king of the hill. Barnes-andnoble.com, Borders.com and Fatbrain.com are trying to knock the reigning king of the bookselling hill, Amazon.com, off its throne. IQ has taken a closer look at the clicks-and-mortar players to find out why they've gotten into the game and what they hope to accomplish. Amazon.com Seattle-based Amazon.com burst onto the scene in July 1995, billing itself as the Earth's biggest bookstore--with a difference. Instead of marketing its titles with simple listings and reviews written by pretentious scholars, Amazon immediately latched on to what has become its biggest selling point: community. Amazon asked its customers to write their own book reviews, and in the beginning even gave away books as a reward for participation. The tradition lives on today with a number of features designed to build loyalty and create repeat customers: member pages, discussion boards, author chats and purchase circles (which enable people to track the book-buying habits of members of certain groups, for example, students at a particular college or U.S. Senators). The strategy seems to be working. Amazon had more than 15.8 million unique visitors to its site in December, a jump of 25.6 percent over the previous month, according to New York-based Web measurement firm Media Metrix. (The number of unique visitors to the book site alone is not available.) And according to Amazon's most recent quarterly earnings report, a whopping 73 percent of its fourth-quarter sales came from repeat buyers. If Amazon is the undisputed leader in both sales and traffic, why should it worry? Well, if the past holiday selling season indicates why Amazon.com is in the lead, it also demonstrates why that lead may be lost over the next few years. The company reported record sales of $676 million during the crucial fourth-quarter selling season, but only $317 million of that, less than half, came from book sales, according to its most recent quarterly financial results. Videos, CDs, toys and other products contributed the lion's share of business. As Amazon continues its quest to become the Wal-Mart of the Web, that number may shrink even more, say analysts. "I would've assumed a year ago, and I still believe, that as Amazon goes after more and more markets they are going to be less effective as booksellers," says Ken Kassar, an analyst at Jupiter Communications. And "more markets!" seems to be Amazon's battle cry. The company has been keeping busy with its own emerging business units--which include music, videos, DVDs, toys, electronics, tools and auctions--while also making acquisitions and creating partnerships that may make books less important over time, says Kassar. In January, Amazon announced it would expand its stake in Drugstore.com by $30 million and begin selling the online drugstore's products on the flagship Amazon site. The deal brings Amazon's total stake in the company to 28 percent. That same month, Amazon also took a 5 percent stake in Greenlight.com, an online car-buying company. On Feb. 1, Amazon formed a partnership with living.com to create a home/living store within the Amazon site. The company also opened a new fulfillment center in West Virginia last month. In December, the company struck a deal with upscale retailer Ashford.com that will give Amazon customers access to online deals on luxury items. Carl Gish, general manager of Amazon's books division, admits loss of focus is always a possibility when companies expand, but says Amazon will never lose its focus on its initial category. "Despite launching many new businesses, our book business continues to thrive and grow," says Gish. "We really look at the new categories as opportunities to help our existing categories grow." The numbers support this view: Amazon's book business experienced a 66-percent year-over-year revenue growth, according to its fourth-quarter earnings results. It is also hoped that the new categories will mean black ink for the company. Amazon, like its competitors, is eking out minuscule margins from its book sales. After five years in operation, the company's bookselling business only recently realized a profit. Barnesandnoble.com Bricks-and-mortar retailer Barnes & Noble launched its online store in March 1997. Two years later, the New York-based company spun off the business as a separate unit, Barnesandnoble.com, announcing an initial public offering last May that netted $421.6 million. The company's most recent coup may be its newly acquired domain name, Books.com. Now, anyone who types in the Books.com URL is instantly re-directed to a Barnesandnoble.com-branded site and offered a $10 coupon. Barnesandnoble.com is doing one thing that Amazon will never be able to do. The company is collaborating with Barnes & Noble, using its bricks-and-mortar stores in multiple ways to promote the online site, says Carl Rosendorf, senior vice president of Barnes-andnoble.com. This holiday season, while Amazon was cross-promoting its brand via the Web, Barnes & Noble was handing out coupons in 12 million holiday shopping bags at its bookstores, Rosendorf points out. "As we integrate marketing, we open up the greater probability that consumers are going to visit us using one of our channels," he explains. "We don't think of ourselves as a bricks-and-mortar retailer or Web retailer, we see ourselves as more of a multichannel retailer." The company has seen fast growth in terms of hits and revenues. Second only to Amazon.com in the online bookseller marketplace, Barnesandnoble.com boasted 5.9 million unique visitors in December alone, according to Media Metrix. Fourth-quarter sales were $82.1 million, an increase of 33 percent over last year's fourth-quarter sales of 25.9 million. But despite heavy traffic and significant sales figures, Barnes-andnoble.com does have its share of difficulties. Recently, chief executive officer Jonathan Buckeley left the company to pursue other interests. Although the CEO position has been temporarily filled by Leonard Riggio, the departure left a hole that worries some analysts. "This business is changing so quickly and needs to reinvent itself every six months," says Jupiter's Kassar. "If you have one person beating the drum it creates a sense of continuity, even among changes. Jon [Buckeley's] departure may hurt Barnesandnoble.com for this reason." Borders.com While Barnesandnoble.com took the traditional IPO route in spinning off a Web operation that functions quite independently of its bricks-and-mortar stores, Ann Arbor, Mich.-based Borders.com has instead kept its offline retail presence closely tied to its Web presence. And unlike Barnesandnoble.com, Borders.com is managed by the same team as the retail stores, making cross promotion and marketing easier to handle and implement. In effect, the company is using its online presence to push customers back into the stores, a move one analyst calls significant. "Having actual stores is a huge plus, but keeping the stores aligned with your Web site is even more important," says IDC's Maclachlan. "Too often, retailers are creating separate sites and forgetting to tie retail and the Web together. Sure, it might make more sense on paper to spin off an IPO. You basically get a huge market value and a license to bleed red ink, but you also lose marketing, branding and brainstorming power." Mary Jean Raab, senior vice president of retail direct and convergence for Borders Group, Borders.com's parent company, agrees. An Internet spin-off isn't the only way to make money on the Web, says Raab. "We're going after the disaffected Amazon customer, people who have been shopping at Amazon and don't want to mix their tools and books. By keeping the Web site tied to retail, we have the ability to serve one customer who likes to shop in a variety of fashions but clearly is looking for books." Borders.com's recent cross-promotional efforts include print-on-demand books, Internet broadcasts of in-store events, and an innovative kiosk program that will roll out in all of its 300 stores by the end of this year. The "Title Sleuth" kiosks will connect Borders' Web site with its retail stores, allowing customers to shop online at a bookstore kiosk if they don't find what they are looking for on the shelves. "You'll be able to have access to any title or find the inventory to any of our stores," explains Raab. "If you're flying from Los Angeles and you want to know if our Ann Arbor [Mich.] store has a book, you can check using the kiosk." The print-on-demand option, which lets Web site or retail consumers buy out-of-date books and have them instantly printed and bound as paperbacks, may be the next big thing for online book retailers, says IDC's Maclachlan. "It's very much like what's happening in the music arena," he observes. "It might be a reason that people would say, 'Hey, I can go to Borders for whatever I want.' It certainly might drive traffic." Borders.com still has a way to go, however, before it can even think about overtaking Amazon.com or Barnesandnoble.com. And a relatively new online bookseller--albeit one with a different focus--is coming up right behind it. Although Borders Group has a several-year head start and a more established brand name than industry start-up and competitor Fatbrain.com, Borders.com isn't that far ahead of the newcomer in terms of site traffic. Borders.com had 864,000 unique visitors in December, while Fatbrain.com, which focuses on business-oriented books and information, boasted 259,000 unique hits that same month, according to Media Metrix. In addition, Borders.com's online sales are less than stellar. Borders Group reported fourth-quarter sales of $982.6 million, but a mere $6.2 million of that was generated by the company's Web site. This will change once the Web site and the retail store expand their co-branding efforts, Raab asserts. "Amazon and eBay captured our imaginations and woke us up to the possibilities. Right now, we're just starting to create the infrastructure that will drive our convergence," she says. Fatbrain.com If Amazon, Barnesandnoble, and Borders are the Pepsis and Coca-Colas of the Web, then San Jose, Calif.-based Fatbrain, for now, is the Jolt Cola--unknown to many but gaining in popularity. Founded in 1995 in the garage of Chris MacAskill, now the company's CEO, Fatbrain is a relative newcomer to the scene. Originally, the company sold computer-related books and information materials and was called Computer Literacy. Less than a year ago, the consumer site changed its name and its focus, expanding to include other business-related books and educational products. Fatbrain's 30-person sales force made it the preferred bookseller for 250 Fortune 2000 companies, and it has become the fourth-largest online bookseller in the United States (behind Amazon.com, Barnesandnoble.com and Borders.com). Now Fatbrain is preparing to make another major change. It is expanding beyond its business-to-consumer roots into business-to-business sales. This, MacAskill says, will help distance Fatbrain from its competition. "We're doing $12 million a quarter and $50 million a year, but the way I see it we're just beginning," says MacAskill. "Amazon, Borders and Barnesandnoble.com are competing for the same consumer market. We're going after the business customer and that's why we're here to stay." The company also is trying to differentiate itself with customer service. Orders placed on the site before 7 p.m. Eastern time ship the same day and, in some cases, documents and papers can be downloaded to customers instantly. Using eMatter, the company's foray into electronic publishing, customers gain access to self-published titles and white papers that aren't available anywhere else. Some of the 7,000 eMatter titles are written by individuals, but many brochures and instructional manuals that are sold on the site come directly from hardware and software giants like Cisco Systems, Sun Microsystems and IBM. Better still, all of the industrial companies send their customers directly to the Fatbrain site via links on their product pages. This laser-like focus on business-related material may contribute to Fatbrain's success, say analysts. Unlike Amazon, Barnesandnoble and Borders, Fatbrain only sells books and educational properties and MacAskill intends to keep it that way. "We're never going to sell toys or tools," he says. "It's all going to be information." This may be the wave of the future for e-commerce, says IDC's Maclachlan. "No one site is going to be able to be everything to everyone. The site that figures that out first is going to be the one left holding all the toys." n

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