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Online and Offline: You Can't Have It Both Ways

Borders' earnings disappointment provides a good object lesson.
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Borders Group



Ah, the perils of moving to online from offline. A few minutes ago Borders Group announced that it couldn't make its quarter. Like a great novel, the press release is steamy with irony. What caused the shortfall? Storms, major winter storms. And spending for online, which will record a loss of 12 to 14 cents vs. a loss of 7 cents in 1997.

Oh, will the online guys make hay with this one. You can only presume that winter storms didn't cause people to read less, it just caused them to order more books from


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, indoors. The Net's a weather play!

More important, one man's loss is another man's gain. Amazon can lose money like crazy online and everybody says whoopie, they are building a business. But Borders Group can't afford to lose any money because it takes away from how the Street values BGP, which is through the old-fashioned EPS method. Will BGP be spared the wrath of sellers because it doubled its loss online? Not a chance. That's not how the game is played for the bricks-and-mortar folk.

Don't lose this object lesson; it is why the Net gets such a huge premium over the offliners. Once an offliner, you can't straddle the fence without wrecking your gross margins and turning off Wall Street. That's also why the publishing industry is so worried privately about online. How can an offline publishing house build an impressive Web presence without ruining its gross margins, a la Borders, as there is virtually no money to be made by giving away a Web product for free? Borders will send a shiver up the backs of every bricks-and-mortar player that's also trying to make it online. That shiver will be reflected in ever-higher prices for Net stocks, which have no such EPS worries.

James J. Cramer is manager of a hedge fund and co-chairman of At time of publication, his fund is long, although positions can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Cramer's writings provide insights into the dynamics of money management and are not a solicitation for transactions. While he cannot provide investment advice or recommendations, he invites you to comment on his column by sending a letter to