According to Kate Delhagen, an analyst from Forrester Research, revenues from online bookstores are going to increase exponentially over the next couple of years. Revenues for online sales of books and music were approximately $156 million in 1997, Delhagen said, and will increase to $1.08 billion by 2001.
With that kind of revenue at stake, Delhagen said that Borders' entry into the market is "better late than never."
Borders is at a strategic disadvantage because it is so late to the game. Distribution deals such as the ones that Barnes & Noble has with America Online and the New York Times have already been inked, and Borders is going to have to spend more on distribution deals and charge lower prices to compete with the existing sites.
"They weren't there when a lot of the deals were getting cut, and now they have to elbow their way into the game," said Bill Bass of Forrester Research. "They're going to have fork over more money now than they would have had to."
Borders has struck several strategic partnerships with established online sites. Many analysts believe that online bookstores best promote and define themselves by the partnerships they form, and Borders seems to be following those guidelines by joining up with such companies as IBM, Infoseek, Salon, and CNET: The Computer Network (publisher of NEWS.COM).
"One of the keys is distribution and promotion of the storefront," Delhagen said. "On a good day 2 percent of visitors may buy. To generate a business out of a 2 percent conversion rate, you have to do a lot of volume."
Borders' deal with Infoseek will include placement as an anchor tenant on the search engine's Book Channel. Infoseek also will offer relevant book titles available through Borders with users' search results. IBM will provide the technology for the site.
Borders would not disclose any details about the nature of the site, its technology, products, prices, or other strategic partnerships. According to Rick Vanzura, vice president of planning and finance for the bookseller, more details will be forthcoming when the company announces its third-quarter results November 13.
Borders, which also operates Walden Books, expects to report a break-even net income of zero cents per share for the quarter, compared to a net loss of $2.7 million or 3 cents per share for the preceding quarter. The fact that Borders was able to shrink its net losses while offsetting spending on the launch of the Web site is impressive, considering that Amazon.com and Barnes & Noble's Internet division are still operating at a loss.
However both Bass and Delhagen say that Borders will have to start spending some of that money it has been saving, if it wants to launch a competitive challenge to Amazon and Barnes & Noble.