<Amazon.com Falls 14% on Bertelsmann's Online Stake
Seattle, Oct. 7 (Bloomberg) -- Amazon.com Inc., the No. 1 online bookseller, plunged 14 percent after Bertelsmann AG of Germany said it will join forces with Barnes & Noble Inc. to create a major new Internet bookselling competitor.
Seattle-based Amazon dropped 14 7/8 to 93 7/16 in trading of 7.14 million shares. Earlier, the shares touched 91 1/4. Barnes & Noble rose 1 5/16 to 24 7/8.
Bertelsmann is the largest publisher of English-language books and has broad experience in direct retailing to consumers through its book and record clubs, while Barnes & Noble is the largest U.S. book retailer. Analysts said the alliance, in which each company will invest $100 million for equal stakes in the unprofitable barnesandnoble.com, could pose a serious challenge to Amazon's dominance of the industry that it pioneered in 1995.
''Barnesandnoble.com is a pretty real long-term threat to what Amazon is focusing on,'' said Derek Brown, an analyst at Volpe Brown Whelan. ''It could clearly become a powerful force in the online book industry.''
In addition, Internet music retailers CDNow Inc. and N2K said they're discussing a possible combination to compete better with Amazon by creating the biggest music site on the Internet. Amazon began offering compact discs alongside books in June.
A combined CDNow-N2K would be ''more formidable'' than either separate company, said Ray Dirks, an analyst at Security Capital Trading Inc. A merger ''will create a battle in this area.''
Shares Up 260%
Amazon, whose shares had risen 260 percent this year amid expectations of higher sales, said today that the Bertelsmann transaction and the potential CDNow merger would not affect its strategy of providing the ''best in online commerce.''
''We want to be the destination for online commerce,'' said spokesman Bill Curry, without commenting specifically on the entrance of Bertelsmann into the online book market and the potential CDNow merger.
Bertelsmann, which owns publishers Random House Inc. and Bantam Doubleday Dell, as well as Bertelsmann Music Group and direct-mail book and record clubs, expects Internet sales to account for 20 percent of its book revenue by 2010. It plans to open Internet bookstores in Europe in November and to link those sites with barnesandnoble.com in the U.S.
Appleby said it should be clear by the first quarter of 1999, after Christmas sales, whether barnesandnoble.com and CDNow are siphoning off revenue from Amazon.
Bertelsmann, the world's fifth-largest media company, said in August that it would spend ''several hundred million'' deutsche marks to enter -- and, it hopes, ultimately conquer -- the online book market, estimated now at about $156 million. Analysts said the profitable, closely held company would be well positioned to absorb losses while doing battle with Amazon.
700,000 Customers
Barnes & Noble started its Web site in 1997 and has attracted more than 700,000 customers in 175 countries. It generated sales of $22 million for the six months ended Aug. 1.
Analysts say Amazon, by comparison, could report third- quarter revenue of about $130 million.
Before Barnesandnoble.com can begin to close the gap with industry-leading Amazon, Bertelsmann and Barnes & Noble must successfully integrate the resources of the two book giants, analysts said.
''We don't see any near-term impact on Amazon's business,'' Brown said. ''Longer term, it clearly poses a threat.''
Analyst Scott Appleby at ABN AMRO estimates the current U.S. book market at about $25 billion a year and $80 billion worldwide. While online book sales now account for about 2 percent to 3 percent of U.S. sales, that figure could grow to about 10 percent over the next five years.
''Why do booksellers want to sell online?'' Appleby said. ''There's good growth; you've got ubiquitous distribution from one storage site.''
European Venture
Bertelsmann has announced plans to launch a separate European online venture, Books Online, in November.
Amazon, meanwhile, has made its own inroads into the European bookselling market, buying the British online service Bookpages earlier this year and announcing plans for distribution centers in Britain and Germany.
Bertelsmann, the publisher of best-selling authors John Grisham and Danielle Steel, can marshal a vast array of content for its online venture. Its music group, which includes the RCA label among others, is one of the world's five major music companies.
Still, some analysts say the market sharply overreacted today in driving down the price of Amazon.
''It was always clear that Bertelsman was going to enter the market, but no one knew how,'' Buyer said. She said Barnes & Noble's alliance with Bertelsmann may drive other book publishers into the arms of Amazon. ''Now, independent publishers are going to have an interest in the survival of a thriving online service that will sell their books.''
Fast Growth
Ryan Jacob, portfolio manager of the Internet Fund in New York, which owns Amazon shares, said he isn't ready to believe that today's announced combinations will hurt Amazon.
''I have to see some evidence first that they're taking away share from Amazon or affecting their growth. All Amazon has done is grow at an extraordinary pace.''
Amazon's market capitalization of $4.73 billion is more than twice Barnes & Noble's $1.78 billion capitalization.
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