Barnes & Noble is betting that the printed word will be a best seller in cyberspace.
Barnes & Noble sued Amazon.com for its claim that it is the world's largest bookseller. Leonard and Steve Riggio, the "Books Brothers" who run Barnes & Noble, want to make it absolutely clear that they run the world's biggest-and most profitable-bookstores in both cyberspace and the real world. But, as chief operating officer Steve Riggio freely acknowledges, the Internet is swiftly changing the rules and opportunities for marketing, merchandising and promoting books worldwide. He knows that Barnes & Noble's successful business model is co-evolving with new media, even as the company commits to building more superstores nationwide. How does a traditional bricks-and-mortar merchant defend and extend its brand and its earnings into a radically different commercial environment? Steve Riggio doesn't claim that Barnes & Noble has all of the answers, but he does claim that his company is better positioned than any publisher, bookseller, distributor or entrepreneur to link its sales networks to its digital networks.
I checked on the market capitalization of Barnes & Noble and Amazon.com, the upstart online bookseller, today. There's a $1 billion gap. How do you explain that?
S.R.: That's a good question, but one I think should be directed to the analysts and investors who have enabled the market cap of Amazon.com [$692 million] to climb that high.
Are you declining to acknowledge that you have the same opportunity to capture the growth of Amazon.com?
S.R.: At the moment, both our market cap [$1.64 billion] and our price-to-earnings ratio  are very good, and our stock is at an all-time high [471/8 as of Aug. 11]. The marketplace is recognizing the tremendous earnings power and retail momentum that this company has. We have a real market capitalization that is based upon a historical trend of earnings. In the online business, however, there are different groups of investors and analysts who are putting multiples to companies with negative earnings.
So are you virtually prisoners of your bricks-and-mortar retail business?
S.R.: Well, it's pretty clear that, at the moment, the earnings of the so-called bricks-and-mortar format are significantly greater than anything that has been done online.
Then what's going to drive online expectations?
S.R.: Earnings. Anyone that's doing business online, whether it be an Internet search engine outfit, a commerce company or an information provider, must deliver earnings. Earnings are really the true test of the value of a company.
Do you think you're going to see a lot of your earnings come from the Web?
S.R.: We believe our Internet commerce business is going to be profitable. There's no question about it. The more we look at this business, the more it resembles a classic direct marketing business-something we are very familiar with.
First, you were talking about bricks-and-mortar retail. Now, you're talking about your expertise in direct marketing.
S.R.: Well, we have both. That's one of our advantages.
Is that something people don't understand about Barnes & Noble?
S.R.: I don't think people necessarily recognize that, of all the bookselling companies in America, we have the most experience in one-to-one marketing. We also have experience not just domestically but also internationally. We see the Internet as a natural extension. It's just another channel for selling books.
Is your online business retail or is it direct marketing?
S.R.: That's a good question. We have a separate subsidiary that runs this business, so we have a retail company, a direct marketing company and an online commerce company. The common thread is we've got great booksellers among all of them. It just so happens that in the direct mail and Internet business, you also have to have extremely good fulfillment and back-end customer service operations.
So your back office is sort of a core competency?
S.R.: Without question, one of the principal assets we bring to the table is the fact that we are extremely good at book distribution, whether it be to our stores or our customers, whether they be domestic or international and whether they buy by phone, mail or the Internet. By the fall, our 350,000-square- foot distribution center will have 90 percent of the books we believe people are going to be buying online.
So it's a core competency that we know how to do this. It's a core competency that we already have existing relationships with 20,000 publishers. It's a core competency that we have the infrastructure to know how to do business with all these folks and all the back-end apparatus of paying publishers, systems and the like. It's all there. The Internet company plugs into it. As a result, our online company has been able to hit the ground running without having to invest the extraordinary sums that startups would in such an operation.
Have you purchased a book from your Web site?
S.R.: Oh, me personally? Of course.
Have you tried purchasing a book from Amazon.com?
S.R.: Of course.
Who's easier to deal with?
S.R.: I think that we're shipping faster than anyone.
Is bookselling on the Net going to be price-driven or transaction-driven?
S.R.: My gut says that the leading Internet booksellers will probably be at parity on the price issue because one cannot be a large player without having competitive pricing. Our goal all along has not been to be the biggest, but to build a profitable business. The revenue model for virtual bookselling is very different from what we're doing.
You're not interested in buying market share for the sake of buying market share?
S.R.: There's no reason to. We built a great company here. We're going to be doing close to $3 billion in sales, and our goal is always to pull earnings. We front-loaded the retail business with massive investments in retail stores, and the earnings power of those stores is just starting to be unleashed. Over the next three or four years, the profitability of the company is going to explode.
Are your online services complementary or competitive with your store business?
S.R.: I think it's complementary in its incremental sales. We have an existing asset-our brand name and stores-that we leverage. We do $15 million worth of national advertising. If you pick up The New York Times, The Wall Street Journal, The New Yorker or Entertainment Weekly, the Web address rides free in these publications. We launched our America Online site in March and our Web site in May. The compounding effect of all that advertising over the next year, we believe, is going to be quite substantial as the Web site becomes ingrained in people's minds.
We will continue to open up 75-80 stores a year. We see 300-400 Barnes & Noble stores opening over the next several years. We see tremendous growth opportunity in retail, and we are going forward with that. We see opportunity online, and we are going forward with that as well. We believe our online business has an opportunity to add incremental sales to our company.
S.R.: Additional, not cannibal. It will not take away from our retail sales.
Incremental as in 10 percent or 15 percent?
S.R.: Let me explain. First, we do not have a Barnes & Noble store in every community in America, nor will we have a store in every community in America over the next five years. There are still too many places where people can't get to a bookstore with a big selection. Our Internet initiative is a way to bring our bookstore to the desktops of potential customers. And because Barnes & Noble has such a national brand recognition-it's a name that people know and trust-people will buy from us. We are already experiencing that. Second, there are many people today who do not have the time or the affinity to shop retail. The Internet is a way for them to reach us. Third, our international business, or sales of English-language books abroad, is untapped. It's an explosive area for growth. Finally, we believe the concept of having an online bookstore on your desktop will cause an explosion of interest in books.
How, then, can you say this is all incremental?
S.R.: As people discover books they're interested in on our Web site, they'll be printing out information about those titles and coming to our stores during lunch, on the weekend or whenever they have leisure time to make a purchase. The retail book business next year is going to be something like a $30 billion industry, and our take of that is about 14 percent. We still have quite enough room to grow.
Do you think you can capture 20 percent of the market?
S.R.: Well, we think our market share is going to continue to accelerate over the next few years. If you add up all the online book sales next year, you might get $300-400 million out of $30 billion. We believe that a lot of that $300-400 million, let's say $100 million, will come from abroad.
When do you think Internet book sales will reach $2 billion?
S.R.: When Web sales reach $2 billion, retail sales will probably be closer to $40 billion-maybe four to five years from now.
Not before the millennium?
S.R.: It's really too early to say. I'd say it's possible to be somewhere between $1-2 billion.
So, you're anticipating very healthy growth, but not the sort of growth that makes sense with Net company multiples that verge on triple-digits.
S.R.: We're not really focused necessarily on going after a big share of the business because it can be a Pyrrhic victory. We're not interested in that kind of approach. We are looking very closely at the relationship between promotion and advertising expenses on the Web and the profits that are generated. And, to be honest, we don't have a definitive answer.
I'm trying to figure out what business model makes sense.
We're experimenting with it. We just don't know.
When did the Internet first appear on your radar?
S.R.: In 1995, we launched an Internet site (loci.com) for College Bookstores, a private company owned by us. It gave us some early experience in how to set up a Web site and how to run it and host it. In early 1996, we decided to build our own Web site, which we launched in May 1997.
Do you think of barnesandnoble.com as a Web site or a place for transactions?
S.R.: We never envisioned it as a Web site. We envisioned the idea of an Internet commerce company. We knew from the get-go it would be transaction-oriented.
When did Amazon.com pop up on your radar screen?
S.R.: It's understandable that a lot of folks are questioning us and asking us, "Why now?" But there are 500 bookstores on the Web. The first one we looked at was Book Stacks, which was the first bookseller in cyberspace. I started to look at their site in '94. WordsWorth was up early, too. They all came up on the horizon, and we looked at them all.
Who did you benchmark your site against?
S.R.: I can't really say that we picked out any one site because we had a very strong sense that what we needed to do was translate the Barnes & Noble brand, which has substantial equity in the marketplace, online.
What does your brand stand for?
S.R.: The Barnes & Noble name is synonymous with excellence in bookselling. So, the logo type and just the look of the name sitting up there on the homepage is important in terms of how the site is treated.
Actually, you're more known today for your superstores.
S.R.: We feel that the stores are warm and cozy and comfortable gathering places where it's easy to buy a book. We wanted to do the same thing on the Web. We felt that in addition to easy checkout, fast shipping and great prices, we wanted to have a community aspect to our site. From very early on we had the idea of the live author auditoriums and the bulletin board system to be part of the site, and it's been very successful in generating dialogue.
Describe your online deal with The New York Times.
S.R.: Within The New York Times book review Web site, we're the exclusive book provider. We will ship all of their online orders. That's the deal we cut with them. We're pretty excited about that because of the demographic and the traffic that goes to their site.
Do you pay them or do they pay you?
S.R.: I won't reveal the nature of the arrangement, but view it as a partnership. I will say we're absolutely delighted and think it's going to make money.
Do you want to cut those sorts of deals with local newspapers or magazines?
S.R.: From the very beginning, our job was basically to establish an Internet commerce company. We weren't really interested in going out there guns blazing and making a lot of deals. We had to get the site up and running. We were very deliberate, very careful, and I think we pulled it off. Our site is good, it's fast, it's easy to search-we can ship books fast and it works.
How many daily hits are you getting on your Web site?
S.R.: We're not saying what the sales are, what the visits are, nothing.
S.R.: Because it's kind of strategic at the moment.
"Strategic" for me is a euphemism for not justifying cost.
S.R.: That's preposterous. We're in a fiercely competitive business, whether it be retail or on the Web, and we have no reason to release any kind of information without there being a purpose. We're not interested in artificially pumping up the stock or the value of the company. Frankly, the business is very young and there's really not much to report. There's no reason for us to start reporting numbers; there's just no way we're going to do it. One statistic I can share with you is that orders are going up and emails are going down.
What kind of impact do you think your Web site is having on your brand?
S.R.: It's a fabulous opportunity for us to extend the brand into the marketplace. We're not building a rocket ship here. It's a way for us to extend our expertise, our passion and our knowledge about books to the American and global marketplace. And that's good. There's no one in America that knows more about books than Barnes & Noble; the Web simply enables us to broadcast that message on a new channel.
Are you happy with the Web as a promotional medium?
S.R.: It's absolutely fabulous. I think it's great.
Will you do cross-promotions for the Web and your stores?
S.R.: Yes, there's a lot of opportunity there.
How about distributing coupons online for a cup of coffee to generate store traffic?
S.R.: That would certainly give people an incentive to come into the store. There's always a way to broadcast events in our stores on the Web which could be interesting.
Are there any publishers who are doing stuff on the Web that you admire?
S.R.: I think Simon & Schuster has done a quite good job.
Are you looking to cut deals with publishers if they drive traffic to you?
S.R.: To be fair to the booksellers, I believe publishers are going to work with online bookstores just as they do with retail bookstores.
I see the Web as a tremendous threat to traditional publishers
S.R.: I think you're going to see a lot of interesting approaches to distributing information, such as selling books through the Internet. They've been talking about the death of the book format for years. Some predicted, for example, that books on CD-ROM or cassette would kill book sales. Somebody once showed me a credit card-like gadget that had the complete works of Charles Dickens on it. All you had to do was stick the card in a machine and start scrolling through it. However, the fact remains that people want to own books, hold books, collect books, fill their homes with books. We do not feel that any other method of the sale of intellectual properties will be anything but a blip.
Is that one of the reasons why you completely de-emphasize the sales of software and CD-ROMs?
S.R.: Books on CD-ROM have been the most underwhelming product category in my lifetime. It's an awful way for consumers to interact with information.
You know what sells and who the best-selling authors are. Why don't you just disintermediate the publishers-eliminate the middle man?
S.R.: One of the strengths of our company is that we stay focused. We're retailers. We're direct marketers. We're booksellers. We're not publishers. We're not agents. It's just not something we're going to do.
S.R.: Because we want to focus on what we do best. What we do best is selling books to customers, not publishing or evaluating manuscripts or competing with publishers in the marketplace for intellectual properties.
You're telling me you're deliberately foregoing the content business, even though many people say content is king?
S.R.: Look, I have great respect for the editors at the publishing houses. I believe that it's very presumptuous of us to think that we can go out there and hire a bunch of editors and launch a publishing division and go and compete against publishers. It's not what we're about.
Which is the better brand: Simon & Schuster or Barnes & Noble?
S.R.: There's no question: It's Barnes & Noble. Undoubtedly.
People don't buy books because they're published by Simon & Schuster. They buy books sold at Barnes & Noble. How do you leverage the brand? Since you buy in volume, you're in a position to get better deals and even have certain preferred relationships, in the same way that Procter & Gamble cuts a deal with Wal-Mart for placements. You could do those same sorts of things, could you not?
Publishers have published discount schedules and we go by that. We don't do any more of that than medium-size or small bookstores.
Do you see cutting particular deals with authors as part of your alliances?
S.R.: We have been featuring live chat sessions with authors on our live auditorium. But we do it through the publishers. That's the appropriate way to deal with that.
Is the barrier of entry for a book in a university press or a midsized press lower now than five years ago?
S.R.: Yes, no question about it.
And the Internet will make it even easier?
S.R.: Absolutely. Everything's on sale on the Internet, everything's available. Not that it isn't in stores. You can order any book in print from any one of our stores. You have a few major blockbuster best-selling books, or supposedly best-selling books, that have been disappointments. Jay Leno, Dick Morris and Johnnie Cochran didn't work. You can't blame the bookstores. That's like the movie studios blaming the theater for the failure of the movies.
You've said that the Web is being used to drive traffic to retail outlets. Is the Web ever going to be a stand-alone medium?
S.R.: Yes. When I said driver to the store, I just meant that the sheer nature of having books on the site, or exposed on the site, puts something in people's minds. They'll say, "Wow, Cold Mountain. I'm either going to click the button and buy it now or when I'm at lunch today I'll go out and get it." We're dealing with what remains to be a very primitive way to interact with a customer.
Do you think we'll see better and more sophisticated forms of customer service develop on the Web?
S.R.: I'd say different. Obviously, we're excited about the opportunities on the Web. It's a way for one to interact with us online, and the more a consumer uses the Web, the more the bookstore will reconfigure in front of their own eyes. People will choose how to buy their books, and we'll have multiple ways for them to reach us. We'll have retail stores, 800 numbers, mail-order catalogs and the Web. There isn't anybody that's going to be excelling across the board in all four of those channels other than Barnes & Noble.
Are the Amazons of the world a genuine threat or merely mosquitoes as far as you're concerned?
S.R.: We've been in the book business for 30 years. We have competed with competitors of every size, shape and pedigree. It's what retailing is about. It's what capitalism is about. We think competition is good. It spurs creativity and innovation.
Do you think that Amazon's affiliates program is the kind of thing that you'll cherry pick, or implement as a vehicle to generate more cash for your online presence?
S.R.: I can't comment on Amazon's specific program or whether we'll do that or not. The point that I would like to emphasize is that most of the innovations in online bookselling haven't occurred yet-and, when they do, we're going to contribute to many of them. We don't intend to copy everything our competitors do, nor do we think they're going to copy everything that we're going to do. Over time you're going to see many of us develop the same type of marketing approaches.
Because of the way the medium is developing, we realized that we needed some strategic alliances to develop critical mass, and we did those with America Online and The New York Times. It's going to be a developing marketplace, and we intend to continue to do those strategic alliances where they make sense.