"Who will be the online leader? Will it ever make much money selling books (as opposed to selling stock)?"

Threat to sustainability

B&N’s entrance into the online market positioned the largest US offline book retailer in direct confrontation with Amazon, who was at the forefront of online book retailing. This led to an intense battle between the two in order to achieve dominance in the market, hence a “growth over profits mentality” (Dot-com Bubble 2008) was adopted, resulting in massive spending of shareholder’s money to gain and maintain market share, regardless of underlying profits.

Amazon was seeking to achieve ‘first mover advantage’, whilst B&N is fighting back against this, to prevent Amazon achieving the dominant market share. Most companies have a long term goal of maximizing shareholder value. However, this does not always mean maximizing short term profits. B&N has decided to forego profits in the short term in order to gain, or gain back, market share.

However, the key point in this question is sustainability. A strategy to grow market share at the cost of anything else, including profits needs cash. Provided it has the cash resources, B&N could continue to suffer revenue losses almost indefinitely, but this approach could end up as the survival of the fittest – the company with the largest cash resources can win through by wearing down its competition.

Share Value
Since its IPO, Amazon’s share value has continuously overshadowed B&N’s. High expectations in the market bolstered the share value to incredible levels (1995-2000 Fig. 6); however, this came to an abrupt end in 2000 when the dot-com bubble burst, as a result of companies becoming “grossly overvalued” (Dot-com Bubble 2008).
Success had been inspired by its founder, Jeff Bezos, who had built up a retailing base with intentions to branch out into the online sale of other products. Bezos's visions had given Amazon the ability to seek investment by creating excitement in the future possibilities of the online industry. A high share price can also help Amazon fund its acquisitions, especially if the consideration for such deals is the issue of more shares in the company. This, and the figures on paper of growth each year, has helped build confidence and further increase investment, albeit Amazon failing to make a profit until 2001 (Investor Relations 2008).

Fig. 6 – Barnes and Noble share value compared with Amazon.

Responding to Substitution

Amazon’s first mover advantage had provided them the capability to gain a foothold on the market; to build-up an incredibly strong brand name and brand awareness. Amazon’s increasing customer base has opened up opportunities for them to increase buyer switching costs, with developing customer relations and customer customisation. Although these factors maybe imitatable, whether by Amazon or by the competition, entertaining their customer’s needs and wants would reduce the need for them to look elsewhere.

Over time, Amazon has created a virtual store that could be navigated by the most inexperienced of computer users. Growing as a company in-line with the growth of the internet had also allowed them to become an important instigator in the future of e-commerce. This had also allowed them to grow with the internet generation; becoming the online retailer of choice, building brand awareness online that B&N had become accustomed too offline, whilst minimising the threat of rivals (Ghemawat & Baird 2000).

B&N’s online virtual store operates in very much the same way as Amazon. B&N’s footing offline, however, creates a competitive advantage with its brick and click position; “integrating both offline and online presences” (Gulati & Garino 2000). This benefits B&N with its existing, offline customer base attainable to promote online offerings towards creating total customer lock-in. B&N’s brand name and recognition is attractive to the customer, where positive perceptions have been built up over their long history and established company culture. B&N have closed this gap to create a “multi-channel offering” (Ecommerce Times 2000) with the introduction of internet kiosks in store, and the option to pay or make a return in store; increasing the convenience of the online shop over Amazon. This has allowed B&N to benefit its ‘second-user advantage’ by capitalizing on an opportunity that was presently unavailable to Amazon.

However, “the implications of such intense price competition are the razor-thin margin[s]” (Chakrabarti & Scholnick 2002: p91). Increasing economies of scale and reduced margins has affected the profitability of the market. Survival has become determined by the volume of sales as opposed to a successful product, making it almost impossible for new competition to grow.

Responding to Imitation

Amazon and B&N have spent millions of dollars on developing their proprietary computer systems, with investments, according to Bezos, “skimped on everything except people and computers” (Cited by Ghemawat & Baird 2000). The development and complexity of these systems reduces the threat of new entrants taking advantage.

Leveraging their position in the online market, Amazon has begun to create value by expanding its product portfolio; selling different products on the one website. This can benefit Amazon’s position by “subsidizing book sales” (Book Retailing 2007) by using its sales of other products to create loss leaders. B&N, however, specialize in the sale of books; giving Amazon a competitive advantage on price and cross-product-promotion. Cross-product-promotion is an area which both Amazon and B&N have both gained competitive advantage over offline retailing. Depending on how they use their customer’s information will gain them competitive advantage in the ability to sell other items; targeting customer’s niche segment markets with product recommendations and links (Anderson 2004).

Hold up and Slack

Labour costs are a major holdup for B&N, as of March 1997 Amazon employed only 250 people, in comparison to B&N who employed more than 20,000. B&N‘s network of offline stores command a large amount of employees in comparison to Amazon; thus, resulting in dramatically higher sales per employee costs than Amazon and lower margins.

The commoditization of technology is reducing the life of software, and increasing access to its obtainability (Carr 2003: p45). To keep competitive the software needs to be continually updated and improved to survive against new imitation threats. Outsourced software developments could create holdup between the companies, with the outsourcer demanding a higher slice of the value being created; as could the ISP’s, who are relied upon to stay online. Any holdup between suppliers is reduced by the ordering power of both Amazon and B&N. More suppliers offer more stability, reducing the opportunities for suppliers to increase costs or to walk away from a contract.

Threat to position
Threats to online position may be created by the wholesalers and publishers who may dis-intermediate themselves and enter the market in an attempt to “lure shoppers” (Ghemawat & Baird 2000: p245). Ingram have developed a “drop shipping” (Ghemawat & Baird 2000: p245) service for online retailers, “authorizing the wholesaler to ship orders directly to consumers” (Ghemawat & Baird 2000: p245); not only adding to the threat of imitators, but Amazon’s procurement and logistic model may be susceptible.

Who is the online leader?

In regards to who is the online leader, I would say Amazon has all entrants covered. B&N are in the market to reduce Amazon’s market dominance, whilst continuing to develop its offline network; creating complete customer convenience. In comparison to B&N, Amazon has very limited tangible resources. This, however, does not mean that Amazon is inferior. First mover advantage has stood well, and has seen them go from strength to strength in the retail market. As soon as a substitution or imitation threat affects the industry, Amazon is in a greater position to keep market hold, duplicating or improving on entrants new ideas. Attributing to this is Amazon’s strong cash position, enabling the opportunity for them to continue to spend heavily in the market.

As to whether they will make much money selling books as opposed to stock; Amazon has created an online brand that has dominated the online market in not only the book retailing sector. Amazon’s strong position and consumer assumption has allowed them this diversification; whilst their procurement and logistics model has enabled them to undercut other competitors.

Software and customer customisation has enabled them to increase convenience and facilitate cross-product-promotion. Whilst Amazon may not make money on its stock, cross promotion of other books and multiple sales will enable them to create loss leaders, thus undercutting on competitors price. Amazon’s only concern should be in preparing a contingency to develop from threats to substitution of its procurement and logistics model.

Reference list on request.

Ali_bancroft@manx.net