When Barnes & Noble announced record annual earnings of US$53 million for the fiscal year ending 31 January last week, it noted that it would have made even more if starting up its online store hadn't sucked $9 million out of the corporate coffers.
But such news surely comes as no surprise to the online book-selling category leader, Amazon.com, which also reported a net loss of $9 million for the fiscal year ending 31 December.
Amazon's loss came on net sales of $147.8 million in 1997 - compared to BarnesandNoble.com's $15 million in revenues for a partial year. (The site only became fully operational in May 1997.)
The losses, like those of many Net businesses, are due mainly to startup, marketing, and expansion costs. Ultimately, observers say, both companies are likely to build up brisk businesses as the Net's population grows. And there will be room, too, for rivals like Books.com and a new entry promised by Bertelsmann AG, the world's third-largest media company.
"Both Barnes & Noble and Amazon.com don't believe that growth has to come at the expense of Amazon," said John Burnham, a senior analyst at Minneapolis-based investment banking firm Piper Jaffray. "There's room for more than one or two online book suppliers."
The marketplace for books and music online has matured more quickly than most other e-commerce markets, with sales of $1.1 billion projected for 2001 by Forrester Research. That figure would represent more than 6 percent of the overall expected retail Internet trade that year.
While Amazon.com and BarnesandNoble.com currently dominate the electronic book-selling market, other players are nipping at their heels - most notably Books.com, which is owned by Cendant (formerly CUC International).
Originally known as Book Stacks, Books.com is one of the Net's oldest booksellers - its original modem-accessible version dates back to 1992 - and it focuses on a low-price strategy. Cendant Chairman and CEO Walter Forbes recently announced that Books.com will soon offer real-time price comparisons to show how it undercuts Amazon.com and BarnesandNoble.com, while guaranteeing the lowest prices on any book it carries.
"You can't underestimate that multibillion stealth e-commerce firm," said Vernon Keenan, a senior analyst at Zona Research, referring to Cendant's reputation as "the biggest company you've never heard of." Cendant operates a number of popular consumer buying clubs on the Internet, including AutoVantage and NetMarket.
While Cendant does not report separate financials for Books.com's revenues, Keenan said he believes the company is close behind BarnesandNoble.com.
Competition is also expected soon from Borders, the nation's second-largest bricks-and-mortar book retailer, which plans to unveil a full-blown online retailing site later this year.
And don't forget Bertelsmann AG, which plans to unveil a new online bookstore, tentatively named BooksOnline, later this year.
According to BooksOnline CEO and President Chip Austin, the site will compete directly with Amazon.com and BarnesandNoble.com for a share of the general books market, focusing particularly on the European market.
"We'll really compete by having a local infrastructure in the countries where we focus," said Austin. To that end, the company plans to premiere its service simultaneously in the United States, United Kingdom, Germany, France, Spain, and the Netherlands. Each country will have "local customer service, local language, and local warehouses," according to Austin.
While admitting that the service in the United States will "be just like what Amazon and Barnes & Noble are doing," Austin said that the overseas distribution and customer service centers will be a first in the online books market.
The new entrants, while having to play a game of catch-up in a market that is already fairly mature, are nonetheless expected to have an impact on the big players.
"Even if the new entrants are not successful in the long run, they'll be a factor because they'll spend a lot of money and create a lot of disturbances trying to be successful," said Piper Jaffray's Burnham, who believes that Borders in particular stands a strong chance of biting off a substantial portion of the market. "I think if somebody's competitive in the real world and makes a big effort to be competitive in the online world, I don't see how they're not going to be a factor."
In order to drive new customers to their respective sites, Amazon.com and BarnesandNoble.com have been shoveling money into the pockets of most of the Web's highest-profile sites. Last fall, Amazon signed a $19 million, three-year agreement to be the exclusive book retailer on America Online's Web site, mere months after Barnes & Noble ponied up $40 million for a four-year exclusive relationship with AOL's proprietary dial-up network.
Amazon claims exclusive marketing agreements with 4 of the 10 most-visited Web sites (according to statistics from Media Metrix), while Barnes & Noble only boasts one such top-ten agreement, with Lycos.com.
"Amazon definitely has the overall edge in marketing today," said Burnham.
Amazon has also put together a far more aggressive off-line marketing campaign, according to Zona's Keenan - a fact he finds surprising in the face of Barnes & Noble's experience in the bricks-and-mortar marketplace.
"Barnes & Noble's real-world branding (for its Web service) is virtually non-existent," said Keenan. "I see lots of real-world media for Amazon. ... Barnes & Noble seems to be suffering from a poor leveraging of their bricks-and-mortar brand."
But while fishing for new customers will continue to be important for all of the online booksellers, analysts emphasize that repeat customers is where it's at.
"Repeat buyers are more profitable than first time buyers: they order more, they order more frequently, they don't require as much customer service hand-holding, and they refer friends," said Maria LaTour Kadison, a senior analyst at Forrester Research. "So the sweet spot for all merchants online is to get repeat customers and lock them in with personalization and such."
BarnesandNoble.com boasts of a 40 percent repeat-customer rate; Amazon claims 58 percent of its sales go to repeat customers.
Despite its continued inability to catch up with Amazon, Barnes & Noble's strength in the bricks-and-mortar world virtually guarantees it will continue to make a mark in cyberspace. The company's online sales represent only half a percent of its overall total sales, most of which happen in the 483 Barnes & Noble stores and 528 B. Dalton stores around the United States.
"Barnes & Noble is a lot bigger company than Amazon.com, so they have greater buying power, more experience in the market, and a well-known reputation with the mass market," noted Burnham. "So as more mass-market consumers come online, it will [have the] advantage."
