Since 1971, when a young New York University dropout and textbook dealer named Leonard Riggio bought a venerable but sleepy college textbook store named Barnes & Noble, the company has often been at the cutting edge of bookselling: The first to offer discounts on best sellers in the US. The first to build a national brand out of what had been a local business. The first to sell books in a big box venue that offered more selection and lower prices than the competition. And the first bookstore chain in the US to think not only about price but also about ambiance, recognizing the advantages of promoting book-browsing as a leisure activity.

But after decades of remarkable growth, during which its 720 green-fronted superstores and 637 college bookstores have become a familiar part of the American landscape, Barnes & Noble faces two formidable challenges. First, more and more people are buying their books online, more often from Amazon than Barnes & Noble, and second, e-book reading devices such as Amazon's Kindle and Apple's iPad are taking millions of customers out of the market for physical books altogether.

The store model is under pressure, whichever way you look at it, the 69-year-old chairman of the New York company told reporters recently.

The most immediate danger is Amazon. The Internet giant claims to be Earth's biggest bookstore, and not just in terms of volumes for sale but volumes sold. According to book sales statistics collected by Foner Books, more books are sold now on Amazon both in the US and abroad than by any other single outlet anywhere.  

Foner Books' statistics on the North American book market note that in 2009, Amazon's media sales (including books, music, and DVDs) totaled $5.96 billion. By comparison, the big green machine sold $4.3 billion, plus $573 million online through BN.com. Nor does the balance seem to be stabilizing. In media sales alone, Amazon's North American sales have risen by an average of nearly 15% per year over the last 9 years, compared to about 3.12% for Barnes & Noble and 4.75% for BN.com (at least as of 2008). Internationally too, where Barnes & Noble is not active-and in fact doesn't even sell e-books-Amazon media sales are growing even faster. In 2009 Amazon's international media sales reached $6.81 billion.

Thanks to rising media sales and sales in many other categories and investor optimism about its business model, Amazon.com is now valued at nearly $55 billion, compared to $766 million for Barnes & Noble. Despite a generous 7.8% dividend and the acquisition of its profitable college textbook division from Chairman Leonard Riggio in 2009, Barnes & Noble's stock is still down 69% over the last five years-while fast-growing Amazon, which offers no dividends, is up over 300%.

The second challenge, e-books, has the potential to be even more devastating for Barnes & Noble. After years in which e-books and e-book reading devices grew slowly, e-books are fast becoming a mass phenomenon that threatens to displace traditional bookstores much as MP3 players such as the iPod displaced traditional music stores. In April, Goldman Sachs predicted that e-book sales will continue to rise by 47% per year through 2015, at which point they will be $3.9 billion of a roughly $25 billion market-and possibly a major part of the Barnes & Noble business, if the company can quickly reinvent itself for this new era.  

At present, Barnes & Noble is still financially healthy, and well positioned to weather current conditions, analysts say. Unlike its largest brick-and-mortar competitor, Borders, for example, which had to take on new investors this spring to avoid bankruptcy, Barnes & Noble has virtually no debt and is still paying a regular dividend. Yet analysts say the writing is on the text-screen: with sales siphoned off by e-commerce and e-book sales rising, the company can't continue to depend on its physical stores.  

In the past, professors at Emory University's Goizueta Business School say, very few companies have survived this kind of major market shift. However, Barnes & Noble doesn't seem to be going gently into that good night, as they say in the poetry section. Although as late as its last published annual report, in 2008, executives wrote that future sales depended on opening more stores-not exactly a reassuring strategy to investors who see a company that is already operating in all 50 states and where same-store sales actually shrank in 2008-in just the past year, the company seems to have changed its strategy dramatically and begun behaving like the aggressive, street-smart New York company it once was.

The biggest move: the company's decision to appoint a young, tech-savvy CEO. William Lynch, 39, after just a year at Barnes & Noble.com. Lynch has no book experience prior to Barnes & Noble, but served in e-commerce roles for HSN.com (the Home Shopping Network) and Palm.

In explaining the appointment, Steve Riggio, the previous CEO, gave Lynch high marks for his fast-action with the company's Web business. In just a year, he has put our e-commerce business back on its fast-growth track and has helped us quickly establish the company as a major player in the rapidly growing e-book and digital content arena, securing important partnerships with major technology companies, he said in a recent conference call.  

One of Lynch's key moves was to introduce Barnes & Noble's e-reader, the Nook, in October, priced below Amazon's Kindle, and ahead of Apple's iPad, which was introduced in January.

Not just a half-hearted response to the Kindle, the Nook has been promoted aggressively by the company. For example, on June 20, the company dropped the price of the Nook from $259 to $199 and introduced a $149 Wi-Fi-enabled device. Just hours later, Amazon called Barnes & Noble's bluff, dropping the price of the Kindle from $259 to $189, $10 less than the Nook.

Benn Konsynski, a chaired professor of information systems and operations management at Goizueta, applauds Barnes & Noble for a number of initiatives to try to build the Nook's value as an alternative to Apple's iPad and Amazon's Kindle. Barnes & Noble's initiatives will catalyze changes in both Apple's iBooks and in the Amazon market, Konsynski predicts.

One such feature Konsynski finds interesting: a program that allows the owner to lend a copy of an e-book to a friend, much as the owner might lend a traditional book.

Konsynski is not sure everyone will be curled up with a good Nook one of these days, but he does believe that Barnes & Noble will continue to sell books in this new era. Indeed, it has already created BN reader applications for both the iPad and the PC.

But the transition to becoming an e-book seller may not be easy. One e-book publisher-Mark Coker, CEO of Smashwords in Los Gatos, CA-sees it this way: Lower prices, larger selection, and greater convenience led to the rise of Barnes & Noble 20 years ago. Then five years later, even lower prices, even larger selection, and for some, even greater convenience, led to the rise of Amazon. Now, Coker predicts, e-books will succeed for the same reasons. Selections are already nearly unlimited (Barnes & Noble claims that 1 million e-titles are available on the Nook, its e-book reader), costs are a bit lower because distribution is so much simpler and cheaper, and as far as convenience goes, it's hard to top a nearly instantaneous download over Wi-Fi or the 3G cellular data network.

Yet the growth of e-books could still prove expensive for Barnes & Noble, observes Rich Metters, an associate professor of information systems & operations management. First, Metters says, piracy may hurt the book business as it has hurt the music business.

Second, e-book distribution is not free. This is bad news for a company trying to sell books three ways, in stores, through e-commerce, and as a download, he adds.

Although e-book delivery is somewhat less costly than physical book distribution, the difference is not as great as commonly supposed, amounting to only a dollar or two of a book's cost. The pricing doesn't really have a whole lot to do with the physical production and storage and the moving around, he says.

Finally, Barnes & Noble could be hurt simply because it is so deeply invested in traditional book sales distribution. Just as Blockbuster lost out as Netflix and video-on-demand services rose, Metters says Barnes & Noble may have trouble maintaining its stores and building new online capacities at the same time. If things shift over toward more e-books, they're the loser, he says.

At the end of the day, they've got a big structural problem, agrees Howard Davidowitz, chairman of Davidowitz & Associates, a national retail consulting and investment banking firm headquartered in New York City.

Not counting the college division, Barnes & Noble has a little less than 19 million sq. ft. of retail space leased coast to coast, and sales that in recent years have been either flat or falling. In 2009, sales of stores opened at least a year fell 3%. In 2008, they fell 5.4% In 2007, they rose 1.8% but just 0.3% in 2006. Davidowitz, who says he worked with ToysRUs during its retrenching, notes that deciding which stores to close and when can be tough-not impossible if a company generates cash, but tough.

The company, however, is working to try to find ways to make store use complementary to the Nook. Though late to the game in dealing with e-book augmentation of their portfolio, he adds, they are working out a hybrid model that just might work, Konsynski says. They are trying to keep the retail setting relevant.

One feature Konsynski likes: allowing Nook owners to read full e-books as long as they are inside a Barnes & Noble shop, which struck Konsynski as a creative way to mix the traditional store with the new delivery system.

I think the relationship with the store matters, the physical retail store, and it relates in part because I can browse there. Will it lead to physical book sales, will it lead to more e-book sales? I don't know and I don't think they do either, Konsynski says.

Other professors believe  that Barnes & Noble may have more time than investors now reckon.

E-readers are still evolving, for one thing. Steve Walton, an associate professor in the practice of information systems & operations management at Goizueta who taught an executive MBA class with Kindle this spring, said the device was actually difficult to teach with because it is designed for novel-reading, not for reading textbooks or doing research. For example, the same feature that makes it possible to change the type size also makes it impossible for the professor to ask the class to turn to a specific page, and less than easy for a careful reader to go back to an earlier passage.

For another, the stores themselves, although initially attacked for destroying many independent bookstores, have become a beloved part of the retail landscape. Reshma Shah, an assistant professor in the practice of marketing at Goizueta who specializes in retail, argues that the stores themselves will continue to remain an important part of American life.

I believe that until we start to socialize society such that we're moving away from anything physical, there's still going to be a need for that physical curiosity, that exploration. You can't explore on an e-reader, you just can't, but you can walk down an aisle and say wow, look at all these books on music, or look at all these books on art, she says.

Beyond that, Shah says the stores have already evolved into something that is more than a bookstore. When you walk in there, that space is not just about books and buying books anymore. That space is about entertainment, that space is about connecting, that space is about downtime, that space is about family time, adds Shah, who says she often takes her kids there.

Walton agrees that there is something special about the ambiance at Barnes & Noble, where he, too, often takes his kids. But while the bookstore as a destination definitely has value, he's not sure whether Barnes & Noble can sustain a business out of it. My guess is that it's asking too much of an organization to make that kind of a change, he says. They'd almost have to change industries from retail to hospitality.