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Saturday, August 31, 2013

E-Books Have Higher Margins Than Print Editions

E-Books = Higher Margins
Many people understand that e-books provide higher margins (not revenues, but margins) than their print cousins on a very simplistic level (which happens to be my level) --- but, we are going to try to examine a little deeper tonight why this is, indeed, a fact of life using some industry financial numbers; while at the same time discussing some numbers involved in the Random House/Penguin merger that support the proposition.

Have I bitten off more than I can chew? Probably --- but, what the hell.

Basically (simplistically), the profit margin can increase when you cut or eliminate costs associated with the production of the product (books in our case - and costs such as printing, binding, warehousing and shipping, etc.). The lower cost to produce the product results in a lower unit price and therefore overall revenues --- but, the profit margin made on each lower unit cost can rise due to these same eliminated production costs. 

Matthew Flamm, writes this for Crain's New York Business :

In last hurrah, Random House books record profits

Thanks to bestsellers like Dan Brown's Inferno and Sheryl Sandberg's Lean In, Random House Inc. boasted record profits for the first half of 2013, parent company Bertelsmann reported Friday in what will be the last earnings announcement for the publisher as a stand-alone unit. Sales, however, dipped slightly.
Random House merged with Penguin on July 1 to become the Manhattan-based global publishing giant Penguin Random House.
Compared to the same period a year ago, Random House revenue fell 3% to 915 million euros or $1.2 billion. Operating income rose 4% to 117 million euros or $155 million. A Penguin Random spokesman credited the increase in profits to "cost discipline" and strong sales growth overseas in e-books, which have higher margins than print editions.
The dip in sales revenue reflected the comparison with the unusually strong first half of 2012, when the Fifty Shades trilogy was topping bestseller lists. The "mommy porn" novels padded this year's sales as well, however, selling an additional 5 million copies in both print and digital editions.
As a portion of worldwide sales, e-books fell to 20% of the total from 22% a year ago, largely due to the drop-off from Fifty Shades, according to the spokesman.
Penguin also recently reported solid results, with a 6% jump in sales and a 14% spike in profits for the first half. Penguin's parent company Pearson owns 47% of the merged company, with Bertelsmann owning the rest.
"We can all take pride in what we have accomplished—both culturally and commercially—in the last eight months pre-merger, and in the last eight weeks as a new company," Penguin Random CEO Markus Dohle wrote in a letter Friday to the company's more than 10,000 employees. "As we begin this ever-important fall and holiday publishing and selling season, let's further deepen our collaboration and shared sense of purpose as we make the most of our fantastic lineup of books worldwide."
Now, more on why e-books have higher margins by Jim Milliot in Publishers Weekly:

E-book Sales Bolster Publishers' Bottom Lines

Higher e-book sales bolster the bottom-line at the big five while curtailing revenue growth

Although costs associated with reaching e-book settlements with the Department of Justice and state attorneys general cut into some houses’ profits, none of the big-five trade publishers posted a margin of less than 9% in 2012. And more than one publisher (or parent company) said higher sales of e-books is boosting its bottom-line—even if e-books are curtailing revenue growth—and should lead to higher margins in the future.
In its 10-K filing with the Securities & Exchange Commission, Simon & Schuster parent company CBS observed that “underlying publishing results reflect margin growth associated with an increase in the mix of revenues from digital book sales, which have lower production and distribution costs than print books. As the publishing business continues to transition to an increasing mix of digital book sales compared to print book sales, profit margins are expected to continue to grow.” S&S was one of the companies whose profits were hurt by legal and settlement costs. In both 2011 and 2012, S&S’s earnings also reflected restructuring charges—$3 million last year, primarily reflecting costs associated with combining several of S&S’s adult imprints, and charges of $2 million the year before due to severance costs.


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