Amazon faces e-book challenge from Barnes & Noble

US book giant Barnes & Noble is setting its sights on Amazon as it unveils plans to launch its own e-book store, following the acquisition of e-book seller Fictionwise.

Barnes & Noble, the largest bookseller in the US, paid USD15.7m for Fictionwise, which owns the Fictionwise and eReader online bookstore, as well as the eReader and Stanza iPhone applications.

Barnes & Noble says it will continue to operate Fictionwise as a separate business unit. However, it will use Fictionwise technology to support a new online bookstore, which will launch at barnesandnoble.com later this year. The firm is also considering launching its own e-reader device to compete with Amazon's Kindle, reports the Financial Times.

News of the Fictionwise acquisition comes just days after Amazon launched a Kindle for iPhone application, in a bid to open its e-book titles to new platforms. The release followed the recent launch of Amazon's Kindle 2 reader – an updated e-reader that includes more memory, better screen resolution and a new 'text-to-speech' feature, not available on Amazon's first-generation device.

Barnes & Noble's online president and COO, William Lynch Jr, says: "We bought Fictionwise because we like how they've approached the digital and e-book markets. They have one of the most popular applications on the iPhone, and they really understand merchandising. They also have a lot of institutional knowledge about this space."

The acquisition comes just a month after Lynch joined Barnes & Noble from shopping network HSN. He previously worked for four years at IAC-owned gifts.com, where he was COO and co-founder.

It is not the first time Barnes & Noble has attempted to enter the digital media space. In 2001, the retailer began offering a selection of titles in e-book format. However, Barnes' online arm closed the venture in September 2003 citing a lack of public interest.

Barnes & Noble’s move reflects industry-wide enthusiasm for the e-book format, with Amazon and Sony recognised as the market leaders for e-book hardware and a number of firms developing mobile e-book tools. Last month, Google launched a mobile version of Google Book Search.

While Amazon is yet to release sales figures for the Kindle, JP Morgan analyst Imran Khan predicts that the retailer will sell 500,000 Kindle 2 e-book readers this year. Forrester analyst James McQuivey adds that Kindle and Sony Reader currently boast some 1m users and that e-readers are "no longer a niche product".

It remains to be seen how successful Barnes & Noble’s venture will prove to be. Critics claim the firm, which operates 799 bookshops across America, will cannibalise its physical book offerings by going digital, at a time when sales are of vital importance.

However, many are more optimistic about Barnes' prospects. Fictionwise currently offers roughly 65,000 e-book titles. Though this is far below Amazon's 240,000, Fictionwise titles are transferable on many devices, unlike Amazon's titles which are DRM-encrypted. Fictionwise says it is adding 500 new titles a week and predicts it has sold 5m e-books since launching in 2000.