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Book Clubs face new online threat

Book clubs still profitable, yet online booksellers gain clout.

As the publishing industry enters one of the most turbulent eras in history, old-fashioned book clubs are nervously peeking over their shoulders as Internet booksellers roar up from behind.

Amid the turmoil, three executives at Time Warner's Book of the Month Club (BOMC) have left the company over the past 15 months, worried that the media giant is not fully committed to the book club division in the face of mounting competition from online retailers such as Amazon.com. The Time Warner executives are certainly not alone with their concerns.

Online book purchases are cannibalizing book clubs and independent book sellers and forcing retail superstores to re-examine their strategy and slow brick-and-mortar expansion, according to a 1998 study done by the Book Industry Study Group (BISG) and the American Booksellers Association. The study found overall book buying declined in 1998, with book clubs' market share falling to 18 percent from a high of 20.3 percent in 1997.

While grabbing but a market sliver of 1.9 percent, it is the impressive 349 percent gains in Internet book sales in 1997 that has most people in the industry jittery.

Analysts who follow book clubs agree that though these clubs are still highly profitable, they are far from a growth industry. Meanwhile, online booksellers are bleeding red ink yet are still considered the wave of the future.

"It wouldn't surprise me at all that Amazon and online booksellers are taking market share from the clubs," said Derek Brown, an analyst at Volpe Brown Whelan. "Online booksellers do a good job of building community online -- just the kind of thing that book club members like."

The book club market, controlled primarily by the BOMC and Doubleday Direct duopoly, garnered a strong following over its nearly 75-year history by catering to middle America, where book stores until recently were few and far between. When joining the clubs, members received several books for a dollar plus postage and committed to buying a few more books.

When Amazon came on the scene, everything changed.

For one, analysts say book clubs are already beginning to receive a greater number of rejections of the monthly selection - a bad sign in the book club market, which depends on members not returning those cards as a reason to send more books. In the past, most members failed to send back the card and many kept the books sent as a result.

"The whole concept of the book clubs has seen its day and gone," said David Simons, managing director at research firm Digital Video Investments. "Book clubs started at a time when it wasn't so easy to get books and there was no discounting at the mom-and-pop operations."

Analysts estimate BOMC to rack-up about $25 million in profit annually - compared to Amazon's $61.7 million first-quarter loss this year.

Nonetheless, rumors have long circulated on Wall Street that BOMC could shut its doors by the end of the year. BOMC editor-in-chief Greg Tobin, along with the other defectors, tried to join Doubleday Direct's rival Literary Guild, a book club unit of German media giant Bertelsmann, according to an executive at Bertelsmann's book club division.

BOMC has yet to name a replacement chief editor, the company said.

Research firm Jupiter Communications estimates that the online book market will grow to $3.7 billion in 2002 from $1.1 billion in 1999. Ken Cassar, an analyst with Jupiter's digital commerce group, divides book consumers into three categories: brick-and-mortar customers, book club consumers, and Internet retail buyers. The book club executive's fear that Internet consumers and book club consumers share similar buying habits is somewhat true, he said.

"Book club and Internet retail customers are both price sensitive and willing to wait for products to come to them," added Cassar.

These facts are not lost on Bertelsmann. The world's third-largest media company paid Barnes & Noble $200 million late last year to take a 50 percent stake in the Barnesandnoble.com joint venture.

Time Warner has yet to announce how and whether it will sell books online, though the firm has "a major e-commerce initiative underway," said company spokesman Peter Costiglio.

Analysts agree that book clubs should treat the Internet as an opportunity rather than a threat, and use the Net to reduce their customer acquisition costs over time. Given the pace of online book retailer expansion, however, book clubs face an uphill battle.

"We are definitely playing catch-up with Amazon," the Bertelsmann source concluded.