Bulls still like online booksellers

Wall Street is applauding yesterday's news that Barnes and Noble plans to spin off its online unit into a publicly traded company.

Prudential Securities today upgraded the book retailer to "strong buy" from "accumulate." Some analysts see the spin-off as a great move for the company's ability to raise money for marketing and consumer awareness efforts. It also is another sign of bullishness about e-commerce. Books are among the best sellers on the Internet.

But Barnes and Noble's stock, along with stock in market-leader Amazon.com, is being dragged down today by a steep downturn in the broader markets. The declines have done little, however, to dampen enthusiasm about the future of online book sales.

"The Web site [has the] ability to raise capital," said Mitch Bartlett, an analyst at investment bank Dain Rauscher Wessels. "These are cash-consuming businesses if they want to drive fast toward market share."

The best example: Amazon.com. Since it was went public last year, the online book giant quickly has become one of the hottest sites on Net, and its stock has skyrocketed. Now Amazon is peddling music, and some analysts speculate that it soon will offer software as well.

Amazon's wild success has prompted others to follow suit.

For example German media giant Bertelsmann has announced plans to launch an online bookstore later this year, and with its recent acquisition of Random House, it is well-positioned to grab a cut of the action. The company already owns Bantam Doubleday Dell.

So how many online book retailers will the market support?

"I think there's plenty of room for several businesses in this industry," Bartlett said, noting that he expects online books sales to account for 10 percent of all U.S. book sales--or $2.6 billion in revenue--during the next five to seven years.

"If they get 25 percent to 30 percent gross margins, the online book sellers [will share] $650 million in profits in a few years, so I think there's plenty to go around," he said.

But other analysts say Amazon--the undisputed leader in online book sales--and Barnes and Noble already have a leg up on Bertelsmann and others.

"Right now Amazon and Barnes and Noble have really taken up most of the links at the search engines and well-traveled sites," said Jason Klein, an analyst with Blackford Securities. "Consequently, it might be difficult to grow revenues very quickly. [Links are] a big driver of sales."

Klein doesn't think Bertelsmann's publishing background necessarily will give the company an advantage over other book retailers.

"There are quite a few obstacles to switching from being a publisher to being a retailer," he said. "It's a different story boxing up two boxes of books for Barnes and Noble's store in St. Louis than it is to go and pick single-copy sales off the shelf. It's a different cost structure and warehouse operations."

Klein said also that most customers are more familiar with Barnes and Noble or Amazon as a brand than the companies' competitors, a key advantage.

"I know Bantam makes books, but I go to Barnes and Noble to buy them," he said.