Shift to e-books to hurt bookstores, analysts say

The shift from digital to physical books will ultimately hurt traditional bricks-and-mortar book sellers, analysts said Friday on the heels of Barnes & Noble Inc., the largest U.S. bookstore chain, launching its new e-reader.

Barnes & Noble introduced the Nook Tuesday as a competitor to online retailer Amazon.com's Kindle, which has dominated the e-reader market.

Barnes & Noble, which operates 774 brick-and-mortar stores, also has an e-bookstore that offers more than 1 million titles and an e-reader application that can be used on mobile devices and personal computers, as well as the Nook. The company could become a major player in the digital book business, but that actually may speed the downward trend in its revenue and profit, said Credit Suisse analyst Gary Balter, who rates the company "Underperform."

"As the math currently works, each sale through a Nook is not just unprofitable but potentially replaces a higher-margin sale at stores," Balter wrote in a client note Friday. He lowered his price target to $16 from

One obvious risk is that downloading books reduces the need to go into stores, Balter said.

Goldman Sachs analyst Matthew Fassler wrote to clients Friday that the move to digital formats "clearly challenges Barnes & Noble's store-based model."

E-book readership is small, but growing fast. Forrester Research predicts 3 million e-readers will sell in the U.S. in 2009, and twice that many in 2010.

Fassler said Barnes & Noble's revenue could rise in the short term with sales of the $259 Nook.

"But ultimately, (we) anticipate earnings fallout as the firm confronts broad, intensifying competition with a legacy cost structure," he wrote. Barnes & Noble's chief rival Borders Group Inc. faces similar issues, Fassler added.

"We see more structural risks for this sector than any other in our coverage," he said. Fassler cut his rating on Barnes & Noble to "Sell" from "Neutral."

Shares of Barnes & Noble fell 88 cents, or 4.7 percent, to $17.93 during midday trading. The stock has traded between $10.77 and $28.78 over the past year.

Borders shares fell 16 cents, or 5.7 percent, to $2.64 early Friday afternoon. The stock has traded between 34 cents and $4.48 in the past 52 weeks.

Meanwhile, Amazon.com showed its online model is going strong with a report Thursday that its third-quarter profit jumped 68 percent and revenue rose 28 percent to $5.45 billion. Of that total, Amazon's revenue from printed books, CDs, DVDs and other media, including e-books for the Kindle, accounted for $2.93 billion, 17 percent more than a year earlier.

Amazon's shares climbed $24.24, or 26 percent, to $117.69 Friday, steadily trading above their previous 52-week high of $117.40.