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Is Competition Closing In On Amazon .com? After Amazon .com
CEO Jeff Bezos nixed a partnership with Bertelsmann, the
German media giant allied with his main competitor. Now
everyone's asking (again): Is the party over for Amazon ?
Jodi Mardesich and Marc Gunther
11/09/98
Fortune Magazine
Time Inc.
Page 229+
(Copyright 1998)
Earlier this year Jeff Bezos, billionaire founder of Amazon .com, had a
dilemma. He could join forces with Bertelsmann AG to expand his business.
Or he could go it alone, knowing full well that the German publishing giant
would turn to one of his competitors for help in building its online
bookstore.
Bezos turned down the Bertelsmann offer--and sure enough, Bertelsmann
announced Oct. 6 that it would pay $200 million for a 50% stake in
barnesandnoble.com, the electronic arm of the retail bookselling chain
Barnes & Noble. "This venture has one purpose--to compete with Amazon
in the U.S.," says incoming Bertelsmann CEO Thomas Middelhoff.
Amazon .com's record is the one to beat. A virtual unknown only three
years ago, Amazon offers millions of titles that brick-and- mortar
bookstores can't afford to stock because of the overhead. Analysts expect
Amazon .com to bring in as much as $500 million in sales this year--though
profits aren't expected until mid-2000.
The arrival of deep-pocketed competitors has failed to slow Amazon down.
Barnesandnoble.com jumped in last year. It has developed a decent Website
and forked over cash for spots on leading portal sites, just as Amazon has.
Nonetheless, according to an SEC document it filed in preparation for a
planned IPO this fall, barnesandnoble.com sold only $22 million of books
from Feb. 1 to Aug. 1. Amazon sold $203 million in the first six months of
this year.
Now that Bertelsmann has logged in with cash, barnesandnoble.com has
postponed its IPO. Meanwhile, the competitive environment has changed
significantly for Amazon . For starters, Barnes & Noble may be able to
start a price war by selling books from Bertelsmann-owned publishers like
Random House at lower prices. And Bertelsmann should also help
barnesandnoble.com in Europe, where the German publisher has enormous
influence and a joint venture with America Online.
Bezos, too, longs to expand in Europe, and Middelhoff says he would have
been happy to strike a deal; he thinks Bezos would have fit beautifully into
the Bertelsmann culture. "He's a great entrepreneur. I admire him,"
Middelhoff says.
The Bertelsmann CEO pursued Amazon aggressively, at one point even
sending a corporate jet to transport Bezos from Turkey, where he was on
vacation, to Bertelsmann headquarters in Gutersloh, Germany. (Bezos' casual
attire surprised Middelhoff's driver, who went to the airport with orders to
pick up a billionaire. He found an unassuming thirtysomething toting a
bright-yellow backpack.)
The deal between Amazon and Bertelsmann would have resembled the
German company's joint venture with AOL, in which both companies have a
50% stake in a European entity they created together. Bezos says he met with
Middelhoff four times to try to nail down a deal, but "we just couldn't make
it work," he says, without elaborating. Middelhoff thinks the deal fell apart
because Bezos wasn't ever convinced that Bertelsmann would truly focus on
its new online store. "Jeff was nervous about giving up control," he adds.
Many analysts think Bezos didn't need Bertelsmann. " Amazon 's reached
the level of critical mass," says Derek Brown, senior analyst with Volpe
Brown Whelan in San Francisco. "They have the cash to fund what they're
doing, and they have the brand momentum." Brown thinks a deal with
Bertelsmann might have made sense three years ago but not now.
Amazon .com is moving on with plans to expand on its own. It recently
became a premier bookseller on many of Yahoo's World sites. The company
also bought Bookpages, a smallish electronic bookstore in Britain; ABC
Telebuch, a German Net bookseller; and IMDb, a movie database that will
support Amazon 's efforts to sell videos online.
Amazon is extending its operation in other ways too. It opened an online
music store this summer; it's also offering DVD movies, sheet music,
computer and video games, and audiobooks online. Videos are next, and
sundries like soap and vitamins may follow.
Until the Bertelsmann announcement, pundits were all set to crown Amazon
the Wal-Mart of the Net. Now, it seems, any number of players are in the
running. The very same day that Middelhoff made his announcement, online
music retailers CDnow of Jenkintown, Pa., and N2K of New York City
confirmed that they were in merger discussions. Combined, the two would
have as many as 1.2 million customers, analyst Brown estimates. The online
video business is hot too; leader Reel.com was recently acquired by video
rental giant Hollywood Entertainment. And four Internet retailers--CDnow,
Cyberian Outpost, eToys, and Reel.com--just banded together to form what
they call an "online shopping network."
Are these developments validation of Amazon --or portents of doom? The
fans are still rooting for the online pioneer. "I am confident Amazon
remains the company to beat in this space," says Peter Krasinovsky, vice
president of Arlen Communications, a research outfit in Bethesda, Md. No
doubt Bezos would say the same thing.
INSIDE: Microsoft and other techies ante up for the elections, page 230...A
new angel investor, page 234...MarthaWare! page 236...Alsop on E-services,
page 243
Amazon .com Revenues 1st half of 1998 $203 million Barnesandnoble.com 6
months through 8/1/98 $22 million {Chart not available--comparison illustrated
in bar graph} B/W PHOTO: PHOTOGRAPH BY HULTON GETTY--GAMMA
LIAISON {Girl reading amid shelves and stacks of books} COLOR PHOTO:
KIM KULISH--SABA Bezos has to defend many fronts: Amazon may soon sell
videos and vitamins too. {Jeff Bezos in book warehouse} |
