War of the Worlds...Amazon Counterattacks!
FYI, not sure if this has been posted. Interesting reading, if anything.
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IS AMAZON CAUGHT IN A SQUEEZE PLAY?
By Matthew Ragas
Red Herring Online
October 12, 1998
Last week was not a week to remember for Jeff Bezos, CEO of leading online bookseller Amazon.com (AMZN).
Bertelsmann AG, the world's third-largest media group, ended weeks of rumors and officially announced that they had made a $200 million investment in Barnesandnoble.com, the online unit of books retailer Barnes & Noble (BKS). B&N is currently the largest book retailer in the U.S.
Bertelsmann currently controls recording powerhouse BMG Entertainment as well as No. 1 U.S. book publisher Random House, which it recently bought from media mogul Si Newhouse. Bertelsmann is also America Online's (AOL) partner in Europe. On top of this, Bertelsmann enjoys a similar partnership with Lycos Europe (LCOS).
Obviously, Bertelsmann's worldwide online and offline relationships will immediately provide a dramatic boost to Barnesandnoble.com's promotional efforts. Bertelsmann controls numerous radio, TV networks, and print media properties throughout Europe. The company also announced plans to continue with the launch of their new Books Online site throughout Europe in mid-November.
Teutonic logic
The deals appear to make perfect sense for Bertelsmann. Clearly, the German media company realized that Bertelsmann and Books Online were virtual unknowns to U.S. consumers. On the other hand, B&N enjoys strong brand recognition among the U.S. public. For B&N, this marked an essential cash infusion and monumental partnership that was sorely needed for the company to have the proper resources to compete with online upstart Amazon.com.
It still remains to be seen, however, if B&N can really get their act together online. Numerous reports indicate that Amazon.com is much quicker to respond to Web sites' requests to join its traffic-driving affiliate program. And it's no secret that Amazon.com has been much more aggressive in spending millions to lock up prime virtual real estate on many of the Web's largest portals.
On paper, at least for the time being, Amazon.com still kicks Barnesandnoble.com around the block. Amazon.com enjoyed sales of $116 million in the quarter ending June 30. In comparison, B&N's online unit reported paltry sales of $22 million for the six months ended August 1. Clearly, Barnesandnoble.com still has substantial ground to make up in the online bookseller market. Estimates peg Amazon.com's current market share online at between 65 percent and 80 percent.
Why, then did Amazon.com shares slide immediately after this announcement? From a valuation stand point, Bertelsmann's $200 million investment in Barnesandnoble.com values the company's online unit at around $400 million. Internet darling Amazon.com, on the other hand, sports a market cap of around $4.5 billion. Amazon.com currently also trades at around an expensive 17 times sales.
Amazon.com must also now contend with B&N's powerful new publisher-retailer relationship with Bertelsmann's Random House unit. Bertelsmann flatly denies that they will cut any type of favorable book deals with Barnesandnoble.com. But the question still obviously remains: Will Amazon.com find themselves now continually beat on price, particularly on titles published by Random House? Bertelsmann CEO Thomas Middelhoff maintains that they will still "have an arm's-length policy." We'll see.
Music to competitors' ears
Increased competition and potential pricing pressures for Amazon.com don't end there. Large online music retailers N2K (NTKI) and CDnow (CDNW) were both in talks this past week to discuss a possible merger. The combined entity would have a 45 percent share of the online music market and would have had sales of approximately $21 million for the previous quarter.
These talks definitely do not come at the best time for Amazon.com, which is still trying to establish its own online music operations. Besides N2K and CDnow, competitors like expert direct marketer Columbia House, owned by Time Warner and Sony, are bound to boost their online marketing budgets for 1999.
And the online video retailing market, another potential growth market for Amazon, also appears to be heating up.
Online video retailer Reel.com was recently purchased by Hollywood Video (HLYW), the U.S.'s second-largest video retailer.
One can expect that with Hollywood's financial backing, Reel.com will pose a serious threat to Amazon.com in this market for the near future.
Don't forget about video retailing giant Blockbuster. So far, Blockbuster has been virtually nonexistent on the Web. But when the sleeping giant does to decide to wake up to the online world, look out.
Counterattack
A wide-open playing field for Amazon, which hoped to become the "Wal-Mart of the Web," has quickly tightened up. But Mr. Bezos and Amazon's Seattle-based troops aren't going to take this increased competition lying down.
Instead, they're immediately launching their counterattack overseas with a media blitz in Germany, a Bertelsmann stronghold.
Amazon's ad agency, FCB/Wilkens Technics, announced on Friday that the company would launch a German bookselling service on October 19. The agency also announced it will soon be placing full-page ads in various German magazines.
Nothing like taking the battle right into the enemy's backyard.
"If you just add up the sales of Barnes & Noble and Bertelsmann, then sure you could ask, 'Who is Jeff Bezos?'" said Klaus Eierhoff, a Bertelsmann board member.
But obviously Mr. Eierhoff realizes that there is much more to winning the online bookseller war than simply superior offline sales. He estimated that the move to No. 1 online "will be a damn long, difficult, and expensive journey."
You don't have to tell this to Jeff Bezos twice. He's already seen his share price slide from an all time high of $147 to $91.19 on Friday.
Matthew Ragas is editor of the Raging Bull's CyberStock Investor Report. Readers can sign up for a full version of this free weekly report on the Internet stock sector at RagingBull.com.
Will Amazon's counterattack distract its enemies? Tell us what tactics you recommend.
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