Challenging an Amazon

The battle of the online bookstores is about to begin.
Any day now barnesandnoble.com will make an initial public offering of
stock intended to provide a $200 million war chest for its quest to
unseat Amazon.com as the king of Internet etailers.

It is a task even more daunting than it was last Sept. 21, when
bookseller giant Barnes & Noble first announced plans to take its online
unit public. Only 12 days later, the company postponed the IPO, opting
instead to sell 50% of its stake in barnesandnoble.com to German media
giant Bertelsmann.

Given the softness of the Internet stock market at the time, it was
probably a good move. The Bertelsmann deal gave barnesandnoble.com $200
million in additional cash, without the risks associated with a public
offering.

It also gave Barnes & Noble a valuable partner that could help its
online bookselling site penetrate a global book market estimated by
research firm Euromonitor to reach $90 billion by the year 2000.

Since then, however, Amazon.com has aggressively moved to expand its
product offerings well beyond books, music and videos. The company
launched a well-received Web auction site in March, directly challenging
online auctioneer eBay. In February, Amazon.com bought a 46% share of
Drugstore.com in a bid to get a piece of the estimated $102 billion
prescription drug market.

Further, Amazon.com’s market value has skyrocketed since last fall. The
company is valued at $33.7 billion, nearly six times its value when
barnesandnoble.com bailed on its IPO on Oct. 7. This has enabled
Amazon.com to go on a spending spree to build market share. Just Monday,
the company dropped $645 million on three Web firms.

Of course, a strong IPO would give barnesandnoble.com a sizable market
cap, and the company’s co-owners, Barnes & Noble and Bertelsmann, are a
formidable combination. But barnesandnoble.com has a long way to go
before it’s in Amazon.com’s league.

Look at revenue alone. Amazon.com’s 1998 sales were $610 million, nearly
10 times the $61.8 million reported by barnesandnoble.com. In terms of
revenue per employee, Amazon.com’s $290,474 easily beats
barnesandnoble.com’s $94,495. Barnesandnoble.com needs more bang for the
buck if it’s going to step up in weight class.

On the plus side, barnesandnoble.com’s revenue growth from 1997’s $11.9
million was more than 500% (though the site wasn’t open for business
until March 1997).

The company also has powerful allies, having struck marketing deals with
AOL, Microsoft, Lycos and CNN, among others. This exposure helped
barnesandnoble.com attract 4.14 million unique visitors to its site in
March, according to Media Metrix.

Good numbers, but in sobering contrast, Amazon.com attracted more than
twice as many unique visitors – 10.7 million – in that same month.
Barnesandnoble.com also is saddled with some heavy losses. The company’s
accumulated debt through the end of 1998 was $96.7 million. In the kind
of competitive markets in which barnesandnoble.com will be operating –
books, music, video and software – pricing pressures can cut into gross
margins, making that a big hole to grow out of.

While barnesandnoble.com certainly doesn’t have to usurp Amazon.com as
the Web’s top retailer in order to be a good investment, the company’s
success will be measured in large degree by how it measures up to its
main competitor. For now, anyway, it doesn’t.

Underwriters for the offering are Goldman Sachs, Merrill Lynch, Salomon
Smith Barney and Wit Capital. Nasdaq ticker symbol will be BNBN.





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