Spinetingler Magazine has a long interview with me today on e-publishing. My thoughts on the subject have changed a bit since I did the interview but probably aren’t new to any of you who’ve read my blog, but even so, here’s a taste:
But have publishers been slow to adapt? Absolutely. Are they pricing ebooks too high? In some cases yes, but I don’t necessarily believe that the arbitrary $9.99 figure set by Amazon makes financial sense for publishers or authors…not while there are still hardcovers and paperbacks being published. The $2.99 price point makes a lot of sense for self-published authors like Joe and me…but does it make sense for Michael Connelly’s latest book from Little Brown? I don’t think so.
There’s no question that publishers should definitely be giving their authors a much bigger ebook royalties…and they will. It’s inevitable. But right now, publishers are in a state of total confusion and terror. They don’t know what to do…Borders is on the verge of collapse, Barnes & Noble is closing stores, ebook sales are exploding… it’s akin to what radio was facing when television came along. So they are trying to cut costs, pruning the midlist, firing editors, hunkering down and waiting out the storm. How they will emerge afterwards is anybody’s guess at this point.
It’s naive to think, though, that James Patterson or Janet Evanovich or authors in their stratosphere are going to be walking away from traditional publishing any time soon…they benefit enormously from the infrastructure and reach those companies provide. You can’t compare what A-list writers get from traditional publishing to what mid-list writers are experiencing. They are different universes. And it’s naive to think that big publishers, or printed books, are going to disappear. I’m sure the ebook world will, like the print world, continue to be dominated by the big publishers and the big authors (the big players in radio became the dominant players in TV, too). But there is more opportunity now for individual authors to take charge of their own careers. That said, it would not surprise me if Amazon, and eretailers like them, eventually institute some kind of filtering system to deal with the deluge of self-published work that they are being hit with. The slush pile has gone digital…and it’s going to be overwhelming, for Amazon and for readers, to wade through it all.
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Nice interview! It sparked my curiosity about the effect of ebooks on the bottom line of Simon & Shuster. In a couple of weeks, CBS Corp, which owns S&S will release its 2010 annual report, but I was able to have a look at their third quarter report for the nine months ending Sept 30, 2010.
S&S is run by Carolyn Kroll Reidy, and it looks like she reports to Leslie Moonves, who reports to Sumner Redstone and the Board of Directors. Moonves has a stellar bio, and Reidy is no slouch, either. It looks like she and her team were able to chop expenses for the first nine months by $12 million dollars, from about $145 million to $133 million, or so. That’s good. As well, 2009 was a horrible year for print book sales while 2010 was a big rebound year, so even if ebook sales hurt S&S, they still made more money than in 2009 due to the rebound. Even still, it looks like their bottom line only increased by $14 million, $12 million of it in cutting expenses. They only made $2 million more than in the first nine months of a horrible 2009 economy. Not so good. However, so far, ebook sales are not hurting S&S very much. The fact that they have a stellar list of big names authors obviously helps.
In two or so weeks, we get to see how the last quarter of 2010 looks. I’m betting they did okay. 2010 isn’t the year of a print book publishing implosion. On the other hand, 50 million more iPads will be sold in 2011 and countless more Kindles, so whatever the impact of ebooks will be, the effects should start showing up in the 2011 financial statements. It still won’t hurt CBS Corp all that much as S&S only accounts for about 8% of their total revenues.
This post continues on with my review of the third quarter financial report of CBS Corp, owner of print publisher Simon & Schuster:
On February 16th, we got to see the financial results of CBS Corp for the last three months of 2010, and for the entire 2010 fiscal year. To say that Chairman Sumner Redstone and CBS boss Leslie Moonves were grinning ear-to-ear would be an understatement–they were turning cartwheels, and had every right to do so, but for print publishing subsidiary Simon & Shuster it looks like the proverbial writing is on the wall.
First, the bad news.
S&S had an operating income of about $60.9 million in 2010, which is up from $42.9 million in 2009. Sounds good, but the truth is that most of this gain came from cost-cutting rather than robust and rebounding sales of print books. In fact, they describe the market for print books as soft. This shows up in the total revenue figures: for 2009, total revenues were $793.5 million while in 2010 they decreased slightly to $790.8 million. But when all of your subsidiaries are rebounding hugely, and print publishing is the exception, it means the print publishing market is declining overall. To keep making money, therefore, S&S will have to keep down-sizing by cutting staff positions, and they will also have to shift their focus to digital offerings. Digital sales more than doubled for the year.
But the overall picture is even worse.
S&S has a stellar list of authors, so if even these talented persons can’t bring in more dollars than in 2009, the writing is on the wall. The future of publishing is not print publishing because the market seems to have peaked and will now decline.
One move S&S could make to defend it’s bottom line is to establish its own on-line book store like Amazon and use it to exclusively sell their ebook editions. Without these ebooks to sell, how could Amazon compete? If you can only buy the next Stephen King book as an ebook from the S&S online store, that’s where legions of fans will go, and Amazon won’t be a factor.
Second, the good news.
Redstone and Moonves hit a home run. CBS Corp is a great place to be working right now!
Fully diluted earnings per share in 2009 were an anemic .26 cents a share; in 2010, .46 cents per share. Basically the earnings of all of their broadcast units surged from a tsunami of advertising revenue bouncing back strongly from 2009. The entire company earned $179.2 million in 2009; in 2010, $319.4 million.
But the big picture gets even better.
Overall, they reduced company debt from $7.4 billion in 2009 down to $6 billion in 2010, and they’ve embarked on a vigorous $1.5 billion dollar share buyback program.
Some persons think corporations need to pay more taxes, but that’s not the case at CBS Corp. They paid income taxes of: $116.3 million in 2009, 38.4% of income; in 2010, $193.1 million, 37.4 %. This is why Rupert Murdock says that corporate tax rates are too high. He’s right. Redstone and Moonves are predicting an even better 2011, and that seems a near certainty with the economy continuing pick up.
Needless to say, CBS is a good place to pitch a TV series right now. What they say they are looking for is very high quality shows that will command premium advertising and sales prices—stories that are information intensive like the CSI franchise.
What to look for:
In another week or so, we’ll get the full-blown Annual Report for 2010. It will show the “total expense figure” for S&S. This figure will show how much they’ve cut back and downsized, and reveal how much they made from book sales. It should be interesting if print book sales were badly under 2009’s.
And next up:
In the middle of April 2011, we’ll see the next quarterly report. The figure to look at for S&S is “total revenue”: this will tell if the print book market is continuing to shrink for them or not. I hope not, but I’m not betting on it.
Oops! Made another typo! The earnings figures for CBS Corp are not for the entire year of 2010, just for the fourth quarter: they earned .46 cents a share just for the quarter, not the entire year. In a week or so, when the complete annual report comes out, I’ll have all the full year figures. Sorry about that!
This is the third post about the profitability, or not, of Simon & Schuster:
The 2010 full-blown Annual Report for CBS Corp trumpets forth the great returns on the year for CBS but it reveals little more about print publishing subsidiary Simon & Shuster. In fact, it would seem that CBS is perhaps hiding the expense figures for S&S in order to preserve its reputation prior to a possible sale. I can’t prove this, but why else hide the expense figures? These figures would clearly show how much money S&S made from selling books in 2010, and how much money they saved from cost-cutting. It might very well be the case that almost all of S&S’s bottom line improvement in 2010 over 2009 came from cost cutting, not from better margins on sales. Should this be more or less true, it would prove that print book sales are decreasing rapidly due to ebook sales. Here are the figures as presented by CBS Corp.
Total sales in 2009 were $793.5 million; in 2010, $790.8 million. Therefore, you’d expect S&S to make a bit less in 2010, but that’s not the case. Operating income in 2009 was $42.5 million; in 2010, $60.9 million—so what happened? Cost-cutting happened. There are other corporate-doodledums that could have occurred, but basically it was cost-cutting. Okay, let’s check this theory by looking at expenses? Were 2010 S&S expenses lower than 2009’s to the amount of $60.9 – $42.5 = $18.4 million?
This is what the 2010 Annual Report says about S&S royalty payments:
“Participation, distribution and royalty costs, which represented 8% of total operating expenses in 2010, 7% in 2009 and 6% in 2008, primarily include participation and residual expenses for television programming, royalty costs for Publishing content and other distribution expenses incurred with respect to television and feature film content, including print and advertising.”
In other words, CBS Corp is lumping S&S expenses in with participation costs and distribution costs for features, TV and print advertising. They won’t tell us how much the S&S expenses are. This is one way they might protect S&S’s reputation for profitability on the Street prior to putting the company up for a sale.
An interesting fact that supports the idea that S&S is depending on cost-cutting to improve the bottom line is their $3.7 million payout for restructuring. Basically, this means letting exec`s go. If they paid each exec a severance of $100,000 dollars each, then 37 would have been let go. That`s a lot. Of course, they could have paid the entire $3.7 million to one person, but that`s not likely. So if, say, 37 or so salaries were saved in 2010, could that have added up to the $18.4 million dollar improvement to the bottom line?—which would mean that in 2010, a bounce-back year, S&S did not make more money selling print books than in a horrible 2009 market, due to the rise of ebooks. 2010, then, would be the year that print book sales turned the corner and were on the way down.
If you were CBS Corp, then, would you want to sell S&S?
If S&S were to be sold, how much would be a fair price? They show total assets of $1, 125.9 billion dollars. But the question is, of course, how much money per year can you make from the use of these assets? If, after all expenses, depreciation and taxes, S&S can clear, say, $50 million a year of net income, then a total cost of, say, $1 billion dollars would value the company at 20 times earnings: 20 X $50 = $1 billion. The buyer, however, might believe that 5 times earnings is fair, $250 million, considering that the print book market is shrinking, but the buyer might see that further cost-cutting could be done to make the company more profitable.
I`m not saying CBS Corp should sell S&S—for one thing, the company has a platinum standard cachet in the print-book market. But they can only downsize so far before it starts hurting the bottom-line instead of helping it. Their real challenge, it looks like, is to grow on-line earnings. However, the 2010 CBS Corp Annual Report says nothing about this. In fact, S&S is hardly mentioned at all. They are, instead, turning cartwheels over their advertising revenue in excess of $9 billion dollars, their debt reduction from $7.4 billion down to $6 billion, their $1.5 billion share buyback program, and their increase in net earnings from $226.5 million in 2009 to $724.2 million in 2010.
2011 will be an interesting year in print publishing. The main question is, how much more will the market shrink? And how much more money will self-published authors reap from high-quality ebooks?
UP-NEXT: the first quarter report on S&S will be out in the first week of April 2011—so will they be profitable selling print books or not? And if so, how much more down-sizing had to be done?