E-book Sales Bolster Publishers' Bottom Lines

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.

Random House, of course, was the biggest winner in 2012. Driven by more than 70 million copies sold (in all formats) of the Fifty Shades trilogy, the company reported a 75.7% increase in operating EBIT year over year on a 22.5% increase in revenue, giving Random House what is surely its highest-ever operating margin of 15.2%. In the year, e-book revenue accounted for over 20% of the company’s worldwide sales and represented over 25% of sales for the U.S. group. In the U.S., Fifty Shades sold over 15 million digital copies, while the Fifty Shades Trilogy Bundle sold over 850,000 e-books. RH had another 1 million–copy e-book seller in Gone Girl. The strong showing by Shades in the U.S. helped to push America’s contribution to Random House’s total sales to 54.8% ($1.5 billion at current exchange rates), up from 53.8% in 2011.

Although several of the other trade houses said that the success of Fifty Shades drained sales from their own titles, all four posted sales gains on a worldwide basis for 2012. Year-over-year growth at Penguin and S&S was below 1% and sales at Lagardère rose 1.9%, although revenue at its U.S. subsidiary, Hachette Book Group, fell 3.4%. HBG attributed the drop to the continued shift to digital—the company’s volume was up 1.2%, but the lower prices of e-books generated less revenue. Sales from digital products at HBG—e-books plus downloadable audio—totaled 26% of overall revenue in 2012, compared with 23% in 2011. On a worldwide basis, e-book revenue accounted for 8% of Lagardère Publishing’s total sales last year, up from 6% in 2011.

Penguin Group had the largest decline in earnings in the year, which it said had to do with the slowing sales of backlist titles. Parent company Pearson ate the charges for the e-book legal costs in the year totaling £32 million—a figure that also included expenses tied to the formation of Penguin Random House. E-book sales accounted for 17% of worldwide Penguin revenue in 2012, up from 12% in 2011, while e-books generated almost 30% of sales at Penguin Group USA last year, up from about 20% in the prior year.

Results from HarperCollins are limited to the last six months of both 2011 and 2012, the periods for which parent company News Corp. has made data public as it prepares to split the company in two. The results showed a big jump in both sales and earnings, largely due to the acquisition of Thomas Nelson. But News Corp., too, sees e-books as a positive for the book business. In its proxy filing relating to the spin off, the company said, “as our digital products continue to account for more of our business, we expect to benefit from increased profit contribution and improved working capital dynamics due to diminishing physical plant requirements, inventory and returns related to our print business as well as faster payments for e-books.”

Operating Results of the Top Houses, 2009–2012

Source: Publishers Weekly