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Panic prevails for BGI’s management.

BGI (Borders Group Inc.) is having the wool pulled over its eyes. In March it was revealed that borders.com had spent over $100 million on its Web site, an exercise I lambasted a couple of weeks ago. In fact, while Borders as a whole made a profit in 2000, borders.com posted a loss. Last week, BGI announced that it would be giving up its own Web operations and would instead have a co-branded site run by Amazon.

Now I must confess that I once worked in a much-respected independent book store in the San Francisco Bay Area. I left that job about the time that Borders introduced a new superstore across the freeway. In the mid-1990s, this was a common occurrence. Well-funded chains were moving into small neighborhoods, often right next door to small, well-established independent bookstores. So on one level, I am filled with a certain amount of glee that these book behemoths obviously don’t know jack about doing business on the Internet. On the other hand, as a member of the media, I feel it is my duty to point out that the closing of borders.com is the fault of the people in charge, not a flaw in the online book-selling model.

As I wrote previously, the huge losses posted by borders.com are difficult to achieve; it takes a lot of work to spend $100 million on a Web site. Now, to add insult to injury, borders.com has handed its biggest online competitor, Amazon, an inroad into its bricks-and-mortar business.

To understand this point we have to look at a quick history of online bookselling. In 1995, quite a few bookstores had set up e-commerce on a fledgling commercial Internet. Then along came Amazon, selling best sellers at a discount and taking a loss on shipping costs in order to gain market share. The ludicrous idea of losing money on each sale but making it up in volume was given new life, and in a way it worked. Many online competitors closed shop and ceded the online market to Amazon.

Later, the big chains (Barnes and Noble, Borders, and B. Dalton) came online but failed to seriously dent Amazon’s impressive share of the market. Amazon was the undisputed king, but the king had no clothes: Amazon was not showing a profit and did not plan to show a profit for quite a while. While some people were buying from Amazon online, many would research and browse for items of interest and then go to a convenient bricks-and-mortar store to make the purchase. For some, the cost or time delay of shipping was prohibitive; for others the thought of using a credit card online was deemed unsafe. Amazon’s lack of profitability became a concern to investors last year, and its stock has plummeted back to earth in a scene reminiscent of Icarus’s fall from the heavens.

Folks with an appreciation of business acumen will attribute Amazon’s problems to distribution: the question of the easiest way to get the product to the customer. An aspect of shopping that Amazon lacks is a bricks-and-mortar presence. Well, guess what? Part of the deal between Amazon and borders.com is a proviso that Amazon customers will now have an option to place orders online and then pick up the order at a local Borders store.

Let’s be clear on this. BGI first blows a ton of money on its Web presence, then its management decides to throw its Web site away enitrely and settle on a co-branded Amazon/Borders site. Finally, BGI management has given Amazon a foothold on its bricks-and-mortar stores, acting as little more than a local distribution channel for Amazon. I am dumbstruck. Really. I would have expected more grit from a company that grew from one store in Ann Arbor to a multinational chain. There is obviously some business sense among the management of the bricks-and-mortar division. The recent developments at borders.com have left me dumbstruck.

Garth Gillespie is architect and chief technologist for ComputerUser.com.

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