Battling over Books (and More): The Internet-Based Competition Between Bertelsmann Online and Amazon.com

This case study contrasts the business strategies of two Internet-based retailers: Amazon.com, a young Internet start-up, and Bertelsmann Online (BOL), a subsidiary of a traditional mass-media firm. It presents the global marketing approach followed by each firm for Internet-based book sales, with a particular emphasis on their operations in Germany. It analyzes how Amazon.com and BOL go about building customer relationships and loyalty and, more broadly, the strengths and weaknesses of their competitive strategy. The case concludes by highlighting the future outlook of each firm and some critical success factors in launching an Internetbased venture. Lessons learned from this comparative study are also presented. I. THE BOOK INDUSTRY IN GERMANY A. Industry Overview In 1998, the book industry in Germany had sales of DM11.2 billion. (On 6 January 2000, the exchange rate between the Deutsche Mark and the US Dollar was: US$1=DM1.892). Around 5,500 bookstores operate in the highly fragmented German market. The eighty largest bookstores (as measured by sales) only had a 30% share of the whole market. Hugendubel leads this group with sales of DM299 million, followed by Karstadt/Hertie (DM262 million) and Phönix/Montanus (DM221 million) [1]. Hugendubel operates twenty branches throughout Germany with a total selling surface of 24,000 square meters and 740 employees. Industry-wide, annual sales per employee averaged DM288,500 and annual sales per square meter of selling surface were DM9,120. In Germany, 3,200 publishing houses published 78,000 new publications in 1997. One local bookstore serves about 17,000 customers (compared to 270,000 customers in the US), and the average purchase amounts to approximately DM27. B. Price Fixing in the German Book Industry A unique feature of the German book retailing industry is the way book prices are fixed, requiring book retailers to sell their books at pre-determined prices set by publishers. The book price fixing is a voluntary agreement between all publishers, wholesalers and book retailers in Germany; it is meant to protect the German book publishing industry and small bookstores. The supporters of book price fixing argue that it is necessary for a variety of reasons: First, it protects the smaller bookstores that cannot generate the same economies of scale as the large bookstore chains, such as Hugendubel or Phonix. If book price fixing were to be abandoned, they argue, it would be impossible for the small bookstores to compete against the discounts of large chains, which would have a stronger bargaining position vis-à-vis wholesalers and publishers. Second, it allows publishers to cross-subsidize the publication of seldomly-bought books with the large profit margins from bestsellers. Publishers argue that they would not be able to provide such a wide variety of different books if they could not cross-subsidize, and this is only possible because of the high prices they can charge for their best-selling books. Currently, the economics in the book retailing industry in Germany are as follows: Out of DM 100 paid by the customer for a book, the retailer paid about DM60-75 to the wholesaler, who in turn paid about DM50 to the publisher. Critics of price fixing argue that it undermines competition, which ultimately hurts the customers, who pay more for their books than necessary. It is expected that price fixing will eventually be abandoned as the European Union continues to loosen up regulations within member states. C. Response of Traditional Book Retailers to the Internet Traditional book retailers have shown mixed reactions to the increasing importance of online book retailing. As of today, of the 5,500 book retailers in Germany, only 1,200 are present on the Internet [2]. In addition to Amazon.de, Bertelsmann Online (Bol.de), and other virtual bookstores that ship their books through the postal service, there are other online bookstores, which rely on traditional retail outlets for distribution. For instance, customers of Buchhandel.de choose their books from a selection of 800,000 titles displayed on its web site, and are then directed to a nearby physical bookstore to pick up their purchase. Other bookstores are more skeptical about the possibilities of the Internet. Torsten Brunn, Director of purchasing at Hugendubel, comments: “We have been following the developments in the online business for a few years now. As long as the online book market still remains a market for insiders, it doesn’t make much sense for a mass-provider like Hugendubel to enter the online book market. Only very few customers ask for a Hugendubel homepage. As long as we cannot fulfill the [online] expectations that are placed on us as a market leader, we will not go online. This [the preparation for offering online services] will probably take us until the end of 1999.” [3] At present, 42% of all German households own a PC. Twenty two percent of all German citizens who are above the age of 14 use the Internet, and in the second half of 1998, 2.4 million Germans shopped through the Internet. Approximately 400,000 German Internet users purchased books online in 1998. The average purchasing amount for Internet book buying is approximately DM60-70 [4]. II. THE MEDIA COMPANY BERTELSMANN AG