Harpercollins Reports First Quarter

Harpercollins' 10 year long run of impressive results took another hit when they reported first quarter results which were materially short of the pace set in the corresponding quarter in 2006. From the press release:

"Book publisher HarperCollins owned by News Corp., reported first quarter operating income of $36 million and revenue of $330 million. This compares to operating income of $55 million and revenue of $368 million in the same quarter last year. The year-ago quarterly results benefited by the strong sales of Lemony Snicket's A Series of Unfortunate Events. Current quarter results were highlighted by strong sales of The Dangerous Book for Boys by Conn and Hal Iggulden, Motor Mouth by Janet Evanovich, Ana's Story by Jenna Bush and Deceptively Delicious by Jessica Seinfeld."

From The Bookseller:

"But HCUK c.e.o. and publisher Victoria Barnsley said that despite this, HCUK's volume growth "outstripped the rest of the market", while value grew by 5%. "If you strip out the effects of the new Harry Potter book in July, we held our market share steady at 8.9%, level with the same period last year," she said."

Speaking to Publisher's Lunch, Jane Friedman (CEO) said "I would say we've probably not had a quarter this bad during my tenure." On the flip side she went on to note that the second quarter is off to a good start and one suspects that this quarterly performance is nothing to be concerned about. Indeed on the NewsCorp conference call publishing wasn't even mentioned.

Wolters Kluwer Reports

Wolters Kluwer reported third quarter results inline with expectations and also announced the completion of their initial share buy back scheme and the launch of a second buy back. The company says it expects to buy back €175mm in shares over the next several months. Highlights from the press release are as follows:

Third-quarter 2007:

• Organic revenue growth of 4% (2006: 4%)
• Ordinary EBITA of €153 million, grew 18% and 24% in constant currencies (2006: €130 million)
• Ordinary EBITA margin improved to 19% (2006: 16%)
• Revenues of €799 million, grew 2% and 6% in constant currencies (2006: €786 million)
• Structural cost savings increased to €41 million (2006: €33 million)

Nine months ending September 30, 2007:

• Organic revenue growth of 3%, on track to meet the full-year guidance (2006: 2%)
• Ordinary EBITA of €457 million, grew 20% and 26% in constant currencies (2006: €381 million)
• Ordinary EBITA margin improved to 18% (2006: 16%)
• Revenues of €2,476 million, grew 2% and 6% in constant currencies (2006: €2,431 million)
• Structural cost savings increased to €117 million (2006: €91 million)
• Free cash flow of €194 million (2006: €232 million including €53 million one-time tax refund)
• Divestment of Education generated a sales price of €774 million, a book profit of €595 million and net proceeds of €665 million

Nancy McKinstry, CEO and Chairman of the Executive Board, commented on the company’s third-quarter performance:

“Wolters Kluwer continued to successfully execute our strategy of accelerating profitable growth during the third quarter of 2007. Our good organic growth was fueled by new products and strong growth in online and software solutions. Importantly, all divisions contributed to the significant increase in operating margins realized through revenue growth, operational improvements, and prior restructuring programs. We have a strong, balanced portfolio which enables us to continue our clear growth momentum. Our performance over the first nine months of 2007 has put us well on track to meet our full-year guidance.”

The Eagles Top Billboard Charts

In an update to my post yesterday Walmart has allowed Billboard to record the sales of the new Eagles Album and this has resulted in a number one ranking for the band. Billboard

This represents a policy change in the heady world of charting best sellers since previously Billboard did not record sales when titles were sold predominately through one vendor.

The Eagles' first new studio album in 28 years, "Long Road Out of Eden," takes a short route to No. 1 on The Billboard 200 after Billboard revised a significant chart policy today (Nov. 7).In consultation with Nielsen SoundScan, Billboard will now allow exclusive album titles that are only available through one retailer to appear on The Billboard 200 and other charts, effective with this week's charts. Prior to this, proprietary titles were not eligible to appear on most Billboard charts.

According to the numbers, Long Road Out of Eden sold 711,000 units ranking it second for the year in first week sales.

Radiohead: 2 out of 5 Ain't Bad

Comscore has released a study that suggests that two out of every five downloaders of Radiohead's In Rainbows release were willing to pay something. From the press release:

During the first 29 days of October, 1.2 million people worldwide visited the “In Rainbows” site, with a significant percentage of visitors ultimately downloading the album. The study showed that 38 percent of global downloaders of the album willingly paid to do so, with the remaining 62 percent choosing to pay nothing. The percent downloading for free in the U.S. (60 percent) is only marginally lower than in the rest of the world (64 percent)

Comscore has a 'panel' of 2mm users that allow Comscore to track their internet use. The full press release makes for interesting reading but we don't know how many actually downloaded the album other than a 'significant' percentage. In my back of the envelop calculation, if only 10% of downloaders paid the average $6 then Radiohead nets about $275K. If 25% of downloaders paid the amount would be approximately $650K. If Radiohead receive approximately $1.50 per CD (avg retail $12.95) this would mean they would need to sell 450,000 CDs (in the month) to generate $650K in royalty. My numbers may be fuzzy but if they did sell to 25% of downloaders I don't think those numbers may not be bad at all.

On note that is confusing to me is that the comscore numbers are all in dollars and with the weak US dollar it is surprising that the average paid by non-US residents is lower than the US price. In the UK the typical CD sells for £10-12 (which is $20 - 24). Since their average price paid is lower than the US price that means the typical European has a much lower view of the value of music than the absolute numbers might suggest.

(Tip of the hat to Lorraine Shanley at Market Partners).

Building the Imperfect Beast

“We’re looking for a new paradigm” is how Don Henley put it when discussing The Eagles’ choice of WalMart as an exclusive distributor of the band’s first studio album in 27 years. The comment is laughably patronizing - as though we just aren’t smart enough to see his new commercial nirvana. They own the biggest-selling album of all time; just what “new paradigm” could they be looking for? Speaking of that album (and the more recent Greatest Hits 2), you could bet a large fortune that Eagles fans everywhere would harken for the old stuff anyway.

In July, Prince placed his new album with The Mail on Sunday (UK) for free. He then sold out at least five huge shows later that summer in London. That’s a new paradigm. Radiohead’s new album is available for download at whatever price you think it is worth and Neil Young’s Chrome Dreams II was sent to me free as part of the ticket package for his upcoming shows in New York. New paradigm indeed.

Contrast the minimal attention that this release seems to have garnered with those of other current releases. In the UK, it is being reported that The Eagles will top the Billboard charts and edge out Britney. Now, you might be thinking, is that any competition? But, in fact, her album has been well received over there and broadly here as well. In the US, The Eagles album may not debut in the top three; moreover, because distribution is not widely seen, it may end up dropping like a stone soon after. Since Walmart doesn’t report sales at an item level, you won’t see any of the usual excitement that ensues when a new album moves up the charts. Ergo, ignominious mediocrity. If you contrast the lack of hype around this album – remember, the first in 27 years! - from one of the biggest bands ever and the reaction to Radiohead’s new paradigm; it is comical by comparison.

As a result, fans showing up on the concert tour which is bound to follow aren’t likely to have heard the new stuff. Perhaps, if The Eagles had been more innovative, they could have created broad anticipation for the new stuff. As it is, concert-goers will hit the head when the group launches into those unrecognizable ‘hits’.

Aside from the silliness (or ignorance) of Henley’s comment, there is also a perception issue. Millions of people travel to NYC to shop on 57th Street. Why? Because the experience is evocative of exclusivity. It is unique and the stores are attractions in and of themselves. If something is sold on 57th Street, the consumer characterizes that product in a very particular way. This is no less the case with a big-box retailer like WalMart. Your association with the products sold at Walmart has everything to do with how you perceive WalMart. So, if you have a negative view of Walmart (and not everyone does) will that transfer to The Eagles? It does for me. Mrs PND has an emotive reaction to WalMart, believing the shopping environment to be soulless and barren. I, on the other hand, think of their intolerance and their overarching belief that they can influence culture by limiting or manipulating choice.

When you think about it The Long Road Out of Eden is a rather unfortunate choice of title for this album when you remember that Walmart has a history of locking up employees, dissuading employees from their legitimate right to union representation and engaging in an active effort to deflate employee wages. Clearly, for some Walmart employees there is no “road out of Eden”

Henley said they got some grief for the Walmart deal but I am simply baffled by the fact that they needed to consider this option at all. Indeed, if they were truly looking for a new paradigm, they only needed to poll some of their ‘friends’ from MySpace who could have given them any number of ideas. And I will bet none would have included Walmart.

Center of Her Own Attention

Americans remain blissfully unaware of the talent of Manchester United and England football player Wayne Rooney. On the football pitch, Wayne has few rivals and he is a sports personality whose talent transcends sport to media superstardom. Even as a better player than David Beckham, he will never rival him as a star: He doesn’t have the looks, but he will be big. On the other hand, his girlfriend/fiancee may become bigger than Victoria Beckham and the glow of Wayne’s stardom has reflected on her since they were engaged when she was 17. You see, 21-year-old Colleen McLoughlin has reportedly just signed a five-book deal with Harpercollins. Admittedly this is on the back of her successful autobiography Welcome to My World (Oopps, I almost typed “Wayne” there…) but, without Wayne would there have been an autobiography at 20 years old?

Read the rest of this post on Foreword: Here.

Simon & Schuster Reports

Jack Romanos' final year in charge at S&S continues to go well as the company posted third quarter revenues of $214.2 million up 9% from $197.4 million for the same period last year. Top-selling titles included Become A Better You by Joel Osteen and the continued success of The Secret by Rhonda Byrne. Operating income of $21.6 million was up 6% from $20.3 million versus last year, and which reflected the revenue increase and lower bad debt expense partially offset by higher royalty expenses, employee-related costs, volume-driven advertising and selling expenses and digital archive costs. Year to date company revenues are up 16% to $643.8mm and operating income is up a dramatic 73% to $67.7mm. A better than 10% margin is tremendous work in trade publishing.

Full CBS press release: Here

Seeking Alpha Transcript: Here

Comments from the earnings call:

The company has also made steady progress in the digital warehouse project. This is new storage distribution and transactional system that will digitize and house all Simon & Schuster content and manage license of our intellectual property. By year-end we expect to have 13,000 titles incorporated into the system.

During the quarter we also announced the promotion of Carolyn Reidy to the role of President and CEO of Simon & Schuster effective January 1, 2008, after Jack Romanos retires at year end. Carolyn previously ran Simon & Schuster's Dell publishing division which accounts for the lion share of the division's revenue and as you recall Simon & Schuster had its best year ever last year. Particularly gratifying when you have a deep management bench that allows you to replace one top tier executive with an internal candidate of Carolyn caliber. She is extremely well regarded not only in the industry but, also inside Simon & Schuster as well. We think she will do great things here.

Open Access: Free or Not to Be

The Washington Post reports on the status of a bill in Congress that will require any research papers that are produced/published as a result of government funded research to be made freely available one year after initial publication.

At issue is whether scientists funded by the National Institutes of Health should be required to publish the results of their research solely in journals that promise to make the articles available free within a year after publication.

The idea is that consumers should not have to buy expensive scientific journal subscriptions -- or be subject to pricey per-page charges for non subscribers -- to see the results of research they have already paid for with their taxes. Until now, repeated efforts to legislate such a mandate have failed under pressure from the well-heeled journal publishing industry and some nonprofit scientific societies whose educational activities are supported by the profits from journals that they publish.

The language supporting this legislative requirement is part of an appropriations bill and thus has not been subject to the type of open debate that publishers would like - regardless as to how difficult it is to support the argument. Typically for the government they are jumping on a hobby horse which on the surface looks like an easy win (a 'mom and apple pie' issue) without fully understanding the commercial, academic and cultural issues involved. There are in my view many more egregious and expensive abuses of public trust such as commercial mining or oil drilling on public land where the accrual to private enterprise far outstrips the perceived tax injustice that publishing research is supposed to generate. But that is not necessarily the point: Two 'bads' don't equal a good.

In publishing research and academic papers the publishing industry has created an efficient and effective distribution mechanism that enables the broadest possible access to this material. Under the aegis of legislative dictate it would be entirely probable that the access to this material would deteriorate not improve as our would-be business people (Congress) envision. Having said that, the publishing business is too entrenched in their position and could do with a kick up the bum: Better this comes from a commercial reality than the legislature IMHO.

Harlequin (Torstar) Reports

The revival at Harlequin continues as the company posted slightly improved underlying revenue growth and improved operating margins versus the same period last year. For the parent company Torstar, revenue was stable with prior year (up $3mm on revenues of $369mm). The company will be pleased that revenues improved in their Metroland Media Group and Digital properties. Operating profit for Torstar improved by $14.1mm for the quarter.

A significant proportion of Harlequin revenues are booked in US $ and as a result their underlying revenue improvement of $0.7mm was offset by more than $3.8mm in unfavorable foreign exchange impact. Operating profit for publishing improved 13% to $16.3mm for the quarter. Underlying profit without the impact of foreign exchange was slightly better.

Harlequin management expect the division to continue the improvements they have seen this year; however, underlying results will continue to be adversely impacted by the weak US $. The company also noted that the fourth quarter North America Retail publishing schedule is not expected to be as strong as compared with 2006. Possibly of deeper worry to the company is how to improve results in their Overseas markets particularly the UK where the company owns Mills and Boone.

Harlequin’s publishing operations are composed of three divisions: North America Retail, North America Direct-To-Consumer and Overseas.

Highlights:

Book Publishing operating profits were up $2.5 million in the third quarter of 2007 excluding the impact of foreign exchange.

• North America Retail was up $2.6 million
• North America Direct-To-Consumer was up $0.5 million
• Overseas was down $0.6 million

Year to date, Book Publishing revenues were up $2.1 million excluding the impact of foreign exchange.

• North America Retail was up $4.9 million
• North America Direct-To-Consumer was down $4.9 million
• Overseas was up $2.1 million

Year to date, Book Publishing operating profits were up $8.0 million excluding the impact of foreign exchange.

• North America Retail was up $6.8 million
• North America Direct-To-Consumer was up $1.2 million
• Overseas was flat.

Year to date, EBITDA was up $6.3 million excluding the impact of foreign exchange.

North America Retail had a strong third quarter with price increases on selected series product lines, a strong publishing program and cost savings. The number of books sold was down slightly in the quarter. Cost savings included lower advertising and promotional costs and $0.5 million of lower depreciation and amortization.North America Direct-To-Consumer revenue was down in the third quarter of2007 primarily from declines in a children’s direct-to-home continuity program.

In the core Direct-To-Consumer business, revenue was flat in the quarter as the series price increase offset lower volumes. Lower advertising and promotion costs associated with the fall 2007 mailing provided the third quarter profit improvement.

The Overseas markets continued with mixed results during the third quarter.Year to date the Nordic group is up 30%, the U.K. is flat and Japan is down with challenges in the core series book market more than offsetting growth in single titles and digital products.

Five Questions with Harlequin

Borders Down Under - Update

The Dominion Post (via Stuff.co.nz) is reporting that bidding for the Borders Australian and NZ stores has now closed.

A&R Whitcoulls seems certain to be one of the final contenders for the 20 Australian and four New Zealand Borders stores. Dymocks is another business believed to be still keen. Other parties cited have included Berkelouw Books and possibly large general retailers such as Woolworths.

I predict a quick decision and announcement.

Here is my update from earlier this month.

Riverdeep Syndication

Riverdeep's banks are in the process of delivering their road show (Reuters) to sell the debt proposed as part of the Riverdeep acquisition. If there are any legitimate concerns regarding the financial structure of this deal they are likely to become apparent as this syndication gets underway. As reported earlier this month, an analyst from Dresdner suggested their were concerned about the ability of Riverdeep to service the debt load that their acquisition binge has imposed on the company; however, no one else has voiced a similar concern since that statement was made public. If you want to get in on it you need to be in London on the first of November or New York on the fifth. We wait to see.

Five Questions with Shatzkin on DADs

At the Frankfurt supply chain meeting, Mike Shatzkin presented his white paper on Digital Asset Distributors. I summarized the content of the presentation here but I also followed up and asked Mike to expand on several points in the presentation. Here are his responses.

1. You mentioned that the research that resulted in the white paper on Digital Asset Distributors was developed for Klopotek. What is there interest in this research and why were they interested in this subject?
   
   Believe it or not, Klopotek really had a community interest in the subject (although that also translates into a marketing device.) They are not a DAD -- which we define as an operation that does digital storage, conversion, and distribution in response to a publisher's needs -- and have no interest in becoming a DAD. But they do sell systems to publishers that will have to account for digital activity, tying sales and revenues back into legacy systems to pay royalties, among other things. But, mainly, I think Klopotek -- which has been growing out of their German origins for the past several years -- saw a "thought leadership" opportunity to establish themselves in the English-speaking markets. And I think the White Paper and conferences -- the outputs from the research -- were successful for them in that regard.
   
   
2. You have given this presentation and speech a number of times over the past six months or so. What has been the reaction of the publishing community – not necessarily from the larger publishers – but the medium to smaller publishers? Are you starting to see an appreciation for the issues that this next tier of publisher needs to understand and appreciate as they consider their digital distribution needs?
   
   I don't see much of the smaller publishers; I think it is the nature of my consulting practice. But the mid-size ones are definitely feeling the issues raised by the DAD study. Right now, this is being driven by a combination of driving online sales (getting the content displayed with Amazon, BN.com, Google, Microsoft) and driving online marketing (widgets for MySpace and Facebook) for the consumer publishers. Publishers are also increasingly aware that there is a real ROI in developing a digital workflow, which becomes part of the thought process when they think about DADs. The more complex are the books a publisher creates -- the more highly illustrated and design-intensive -- the more benefits come from the digital workflow improvement.
   
   
3. What role are standards bodies playing in this area? Are the business needs and requirements moving ahead of the standards discussions and recommendations?
   
   Interesting that you raise this. Digital guru David Worlock said to me at Frankfurt that he wondered whether we should be worried so much about "standards" when we don't have a MARKET. Shouldn't we build the market first, he wondered? But Mark Bide, my partner in many ventures including the DADs research, would say that, without standards, you'll never build a market! I am not sure the business needs are yet moving ahead of the standards, but they probably will. I agree with something you have previously pointed out on your blog, which is that the identification of salable "chunks" can't really be done before the fact by publisher assignment of DOIs; it is the consumer who will identify what they want and how they want it put together and we don't really have a process to enable that.
   
   
4. You mentioned at Frankfurt that long term there may only be a few DAD’s but in the short term most publishers should/will contract with one of the existing players. Why do you think this is the case: Both the short term observation and the long term evolution.
   
   Technology drives scale is the answer in both cases. As it stands, all the DADs are struggling to build out their offerings to cover everything they have to do. They will all be challenged to provide real digital workflows -- real DAM capabilities -- or they will suffer competitively. They all need widgets. They all need nimble content conversion capabilities. And in the future they will need the capability to add value in sales of aggregated content. In the short term, obviously the players will choose from the choices on the table. In the US, that really means three major players (four if you are an academic publisher.) The biggest companies aren't quite all spoken for, but it will be increasingly difficult for new entrants to gain the scale that is necessary to play.
   
   
5. What will the evolution in services be for these DADs? Where/how do you think they will begin to differentiate themselves or will their services evolve into a commodity?
   
   One aspect of differentiation will be price and service. Pricing is a bit vague now and service is very hard to measure. But as new use cases arise -- Amazon Kindle, a Google device, new Web services like netGalley develop and need their database populated -- some DADs will handle these things more quickly and smoothly than others. That's why we urge strong service level requirements in publishers' agreements with DADs. In the longer run, I can see DADs "making sales." They can't really do that until they aggregate content and know they have it. But let's say a DAD has 500,000 recipes from 14 publishers and can convince Kroger to make use of them in marketing? If you're a publisher with that DAD, you make a sale. If you're not, you don't. In the physical distribution world, publishers look at "what else is in the bag?" when they pick a distributor or a sales rep group? It is too early for that kind of thinking in digital distribution, but it will come.
   
   
   Mike Shatzkin, mike@idealog.com