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."

Read original article here

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.

Continued

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Total 2011 Book Sales = $27.2 Billion -- A Breakdown of All the Numbers

Book sales for 2011
all the numbers

Interesting numbers for the four major segments measured by BookStats: k–12, higher education, professional/scholarly and  trade (trade includes fiction & nonfiction).

Which categories are up, down or flat? The reasons why, etc., etc.

How did digital and print books fare? How did one affect the other?

Jim Milliot of Publishers Weekly provides these analytics:

Industry Sales Pegged At $27.2 Billion

With print declines offsetting digital gains, total sales slipped in 2011




Total book sales fell 2.5% in 2011, to $27.2 billion, according to the latest figures released by BookStats. Revenue was down in three of the four major segments measured by BookStats—k–12, higher education, and professional/scholarly—and up slightly in trade.
Within the trade category, the juvenile fiction segment had the strongest performance in 2011, with sales up 11.9%, to $2.78 billion. The increase was led by a huge jump in e-book sales, which rose 378.3%, to $220.3 million, and a solid performance in the hardcover format, where sales rose 14.8%, to $1.29 billion. Sales in juvenile nonfiction fell 2.1% in the year as a 223.9% increase in e-book sales was offset by a 3.3% drop in trade paperback sales. Still, the combination of fiction and nonfiction sales made the juvenile category the fastest-growing segment last year with total sales up 9.4%, to $3.30 billion.

Total adult sales fell 2.6% in the year, to $9.21 billion. Sales of fiction declined the most, off 6.1% in the year, to $4.29 billion, while nonfiction sales dipped 0.6%, to $4.92 billion. Although sales of fiction e-books soared in 2011 to just under $1.3 billion, sales in the print segments declined, with mass market paperbacks and hardcovers particularly hard hit, with sales off 31.8% and 23.1%, respectively. The decline in fiction was due to higher sales of lower-priced e-books, as well as a drop in units, which fell 6.5% in the year. The less severe decline in nonfiction sales was due in part to a drop of less than 1% in units, and while e-book sales rose 136.4%, to $468.2 million, the declines in the major print formats were much smaller compared to fiction: hardcover sales fell 5.9%, and trade paperback sales were off 3.8%.

The religion segment, which BookStats classifies as trade, had a good 2011, with total sales up 7.3%, to $1.45 billion. The segment benefited from a 136% increase in e-book sales as well as a 14.5% increase in hardcover sales. Unit sales in the segment jumped 37%, helped by the huge success of Heaven Is for Real.

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Bookstores Will Survive--But NOT in Superstore Mode

I always deeply suspected that bookstores would never disappear. You see, while completely new technology is exploding the digital publishing business and e-books, guess what? That same technology, and some morphed from it, has leaked over into the print industry as well, resulting in faster and more cost-effective production costs in POD (print-on-demand), improved paper and inking, delivery, etc.

I further suspect that a whole parallel "printed-word tech world", still in it's forced-infancy, will blossom and produce some future, mind-boggling results.

Although bookstores will never disappear completely, the old superstore model will...The surviving bookstores will be locally defined and driven...just like the old neighborhood bar & grille.

Jim Milliot, co-editorial director of Publishers Weekly, has this to say:

Digital Book World: Publishing CEOs Optimistic About the Future

The five publishing executives who took part on Digital Book World’s CEO panel Tuesday morning all agreed that while the industry is undergoing unprecedented changes, their companies are moving to adapt to new realities. Their view was consistent with a survey contacted by James McQuivey of Forrester Research that found 83% of publishing executives believed their company is capable of managing the digital transition.

McQuivey presented highlights of the study just before the CEO panel Tuesday, which also found that 80% of execs believe their staffs will need retraining to compete effectively in the digital marketplace. McQuivey also presented some research findings, including the estimate that consumers spend $1 billion on e-books in 2010, a figure that should reach at least $1.3 billion in 2011. The consensus among those surveyed was that e-books would comprise half of all trade book units by 2014, and 53% said they expected print sales to decrease this year.

The CEOs agreed that they face many challenges, but said there are many opportunities as well. Jane Friedman, CEO of Open Road Integrated Media and former CEO of HarperCollins, said the industry is “vitale and vibrant,” adding that at no point in her career as she seen such change and that things will never go back to the way they were. “It’s the end of the beginning”of the digital transition, Friedman said. Macmillan’s COO said publishing is entering a “golden age,” but added that the question is will it be a golden age for publishers. He noted that unlike some other media industries, publishers have been handed a great gift--millions of devices in the hands of readers that provides publishers the opportunity to create new products. The publishers that prosper, Napck said, will be those that adopt the new skill sets needed to publish in a new marketplace.

While many questions loom over the creation and delivery of digital content, the immediate question confronting publishers in what is happening in the distribution of print books, Thomas Nelson CEO Michael Hyatt said. With the number of bookstores shrinking, publishers will need to find new ways to allow consumers to discover books, Napack said. Just putting books in Amazon is not marketing, he said, adding that publishers will need to more effectively use social media to promote their titles. Hyatt warned that social media can’t be treated as a broadcast medium, but rather needs a targeted message.

Most panelists agreed that the downsizing of the bookstore chains meant that independent booksellers have a chance to mount something of a comeback. Napack said that while independent booksellers’ market share will remain relatively small, their role in bringing books to market will increase in importance. And while there will be fewer bookstores in the future, Napack said he believes there will always be physical bookstores.

Panelists also touched on e-book pricing, with all agreeing with Friedman’s statement that “free is not a business model, it’s a marketing model.” While the “post-agency” e-book price seems to have settled around $9.99, Napack expected there will be a range of prices moving forward. Hyatt observed it would be “mindless” to settle on one price.

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