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

"Hey Nielsen" What About Books?

Nielsen is capturing the true voice of the consumer with the launch of their new “Hey Nielsen” social networking website. Designed to capture consumers immediate reactions to television, movie and music programming, the site launched in beta a few weeks ago. Nielsen is the market researcher most responsible for what we end up watching, listening to and going to see. They are not necessarily responsible for what we read however, but more on that later. Nielsen hopes that the Hey Nielsen site becomes the social monitor for all pop culture although my initial experimentation with the site seems to indicate that most people are focused on television.

Hey Nielsen works by ranking positive or negative comments based on the volume of submissions related to specific content. A “Hey Nielsen” score is attributed accordingly. Essentially, this social website becomes a panel: Perhaps not as organized or managed as a traditional Nielsen panel but by definition more broad based. Nielsen will be able to capture the immediate feedback generated by new shows, music, movies and other media – even celebrities. This could be a fundamental step forward over the old model of set top boxes and exit surveys.

Crucially for the book industry we don’t have such a facility and it is ironic that Nielsen having such a research presence in the book industry has not placed books into to the Hey Nielsen network. We are generally familiar with the BookScan POS service but it has been left largely to subscribers of this service (both in the UK and US) to derive their own insight into what the raw data suggests about sales trends, tastes and mores. I read about Hey Nielsen before I went to Frankfurt and it was at the supply chain meeting that Nielsen presented more of what we would like to see of their analysis capability.

In a presentation entitled Towards a Better Understanding of a Consumer Jonathan Nowell and Julie Meynick discussed the existing publishing market and environment. The suggested for example that contrary to conventional belief the publishing market in the UK is reasonably healthy with unit sales up 5.4% over last year and up 43% since 2001. In comparison with other media – particularly TV and newspapers – book readership has more than held its own. They followed this over view with some statistics on where books were selling and what genres were moving. There would be little surprise that published material such as hotel and travel guides, dictionaries and astrology are not competing well with online alternatives and are seeing decreased sales.

The last segment of the presentation concerned a review of the panel HarperCollins constructed to better understand their readers. (It is not clear how much direct involvement Nielsen had in this research). Researchers asked over 1000 people to rank how they used different media for different tasks and also describing their visceral reactions to what reading and books meant to them. Nielsen sales data was used to build demographic profiles of readers which in turn has been used by Harpercollins to develop genre profiles of the types of book purchasers that were attracted to specific genres. In the presentation, Nielsen showed the seven defined profiles within Cooking as an example. Each of these profiles has deeper demographic information associated with it to describe the buyers in this segment.

Nielsen showed in this presentation how psychographic data from panel information and sales information from point of sale data could be merged to create a more detailed set of information about existing and potential consumers. This information in turn creates the framework for effective marketing and promotion campaigns that should drive sales.

I saw Nowell later the next day and told him the presentation was interesting and why they couldn’t do something like this in the US. After a pause, he told me to wait and see. In the short term, why can’t they use Hey Nielsen?