Assignment #11:

Read Appendix 21B (Case Study of On-line Book Selling)

1. As graduate students, you should be able to read such a study and relate it to the material presented in Chapter 21. This is a VERY short case study and does not present much technical detail.
2. Write one to two pages relating the development of both Amazon's and Barnes and Noble's on-line book selling networks to the material in Chapter 21.

Starting with slide 6 (Technology Push and Demand Pull), discuss, on a very high (non-technical) level the progression of design decisions by each of the two businesses contrasted in this paper.

APPENDIX 21B SELLING BOOKS ONLINE A CASE STUDY

In the Spring of 1994 a 30 year old, recent, Princeton graduate was investigating the Internet for D. E. Shaw's consultancy in New York City. He was astonished by data that indicated that the newly developed Web was growing at a 2300% annual rate. He quickly decided that he must seize the opportunity signaled by this phenomenon or regret it the rest of his life. But the question was, exactly what was the opportunity? Bezos, assuming that products successfully retailed by mail-order companies could also be sold on the web, made a list of 20 possible product categories that he might use the

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burgeoning Web technology to sell. He chose books. One reason was that there are many more books in print than any physical bookstore could possibly stock, or than a mail-order catalog could list. Moreover, the market was fragmented as contrasted with music which he also considered but initially rejected because it is controlled by a small number of large distributors. Too, the distributors had well-documented book lists already on CD ROMs ripe for online use. Less than two months later, on July 4th, Jeff Bezos left D. E. Shaw and New York, and headed west to Seattle to seize the opportunity.

Barely a year later, in July of 1995, Jeff Bezos was selling books from his newly formed bookstore, Amazon.com. He bought print ads claiming to be the "Earth's Biggest Bookstore," a not so subtle dig at the U. S.'s largest retail bookstore chain, Barnes and Noble, which called itself the "World's Largest Bookseller." But the Amazon bookstore was largely "virtual." Initially his company had about 200 books in stock. The rest of the over 2 million titles Amazon advertised were provided through distributors, or the publishers. This provided several advantages. It obviously reduced staffing, "bricks and mortar," and inventory costs. Amazon also received money from its customers up front, and it needn't (and didn't) pay the distributors and publishers for 30 days, providing the newly formed company useful "float." On the other hand, this approach didn't make for fast deliveries; so as time has passed, Amazon has accumulated huge warehouse operations throughout the United States.

Book selling has not been the same since. Nor the stock market for that matter. For example, in traditional book selling, about 80% of sales is from the best seller list, while 20% is in midlist and backlist books. These percentages are reversed in on-line book selling. Another unusual feature of Amazon's evolution is that except for a brief period of profitability in 1995, it has been losing increasing amounts of money each quarter as it invests in

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new product areas. While this is happening the valuation of Amazon as reflected in its stock value is becoming immense.

The Riggio brothers, Leonard and Steve, had not built Barnes and Noble into a chain of hundreds of stores by being unaware of challenges to their business. They quickly realized the significance of the Amazon and that they needed a Internet presence.

They launched their on-line business, barnesandnoble.com in May of 1997. It was a separate organization from the book chain in order to avoid having to collect state sales taxes in all the states with Barnes and Noble stores. This hindered them from integrating their on-line operation with their bricks and mortar stores. Thus, initially, they basically were only able to emulate Amazon and could not benefit from possible synergies with their bricks and mortar stores. In the Fall of 1998 they postponed a planned public offering of barnesandnoble.com shares; instead they sold half the operation to Bertelsmann, the massive German media conglomerate, which among other operations owns Random House and is the largest book publisher in the U.S. The price was $200 million to Barnes and Noble plus an additional $100 million investment in the operation. In May of 1999 a initial public offering of about $485 million was made, ending up with 40% of the shares with Barnes and Noble, 40% with Bertelsmann, and 20% public.

It is important to notice that the electronic technology may be the least important and least difficult aspect of selling on line. More essential may be the physical handling of the products. How to find them quickly in warehouses, how to make sure the cost of maintaining an inventory does not damage profitability, and how to get the products quickly, safely, cheaply, and reliably to their destinations.

Amazon confronted this issue directly. They have built up 7 distribution centers, 5 in 1998 alone, in states with few people, and no or little sales tax (they have to collect state sales tax for deliveries to customers in states

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where they have distribution centers). Seattle, Washington; New Castle, Pennsylvania; Reno, Nevada; Coffeyville, Kansas; Delaware, and Kentucky (2). Moreover, they clearly see their mission to sell almost any product category on-line. Books were only the first of the product categories they marketed. They started offering music CD's in June of 1998, and Videos in November of the same year. Later they added video games, jewelry, consumer electronics and home improvement tools. They have also developed auction sites. They used the high value of their stock to purchase major positions in on-line drug stores, on-grocery sales, pet sales, and car sales, all of which they link to their site. They have also worked with wireless vendors to enable customers to use their Palm Organizers, Sprint Wireless Phones, or other wireless devices to purchase from Amazon.

In the Summer of 1999, Barnes and Noble made a $600 million deal to purchase Ingram the largest distributor of books which has 11 distribution centers across the country. Also a significant part of the transaction was Ingram's print on demand operation, Lightening Print. However, because of challenges to the purchase by the FTC, on anti-trust grounds, the transaction was not completed. Barnesandnoble.com is now developing, in addition to its New Jersey facility, new distribution centers in Reno, Nevada, and Atlanta, Georgia.

For the future, Barnes and Noble has a different vision. They have limited themselves to books, music, video, and software. They noted that all these products are actually just information in one form or another. They look towards electronic delivery of these products to reduce the need for large physical distribution centers. For example, with electronic book inventories, no book need go out of print, and information can be easily updated. Storing bits is cheaper than storing multiple ink and paper copies too. In the near future they see books as being stored electronically, and when sold being downloaded to electronic books, "eBooks," or PCs; printed

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by the customer; printed on demand by the publisher or distributor in small but efficient runs; or printed individually, on demand, at bookstores. Barnes and Noble already offers the Rocket eBook which holds up to 10 books, has about a 20 hour battery life, supports audio and graphics, and offers various search and look-up features. They are also active in the Open eBook Consortium which has developed a non-proprietary standard based on HTML and XML for electronic files for eBooks. Included in the aborted Ingram purchase was Ingram's Lightening Print which has agreements with more than 100 publishers for printing out-of-print books on demand.