My full time job (and passion) is investing; but everyone must have a hobby. So, whereas my friends and colleagues play golf, I write the occasional book. That's why last week I spent two days at the American Booksellers Association convention in San Jose, Calif., both helping to pitch my next book, and chatting with booksellers and publishers about their industry.
And, I'm happy to report, the book industry is alive and well - and destined to achieve higher growth.
Growth? Won't e-books kill publishers and booksellers? Au contraire.
Just as e-trading has done for stock trading, so can e-books revive publishing and book selling: By allowing some instant impulse purchases at cheaper prices, e-books can boost overall volume and also create highly profitable "momentum books."
What are momentum books?
A book publishing's peculiarity is increasing marginal returns - a publisher makes more on the 100,000th book than on the 10,000th. That's why publishers would rather sell 10 million copies of one title, than 10 titles at a million copies each.
But since publishers can't predict which titles will succeed, they must publish many (lucky for me). And e-books, even more than online retailing, give them extra freedom - if a book turns hot, both publisher and retailer can quickly pile up behind it at the expense of laggards. So laggard books today are dropped fast, and successful books break the bank. That's (partly) how The Da Vinci Code sold 80 million copies, earning its author a quarter billion dollars, and how Swedish crime fiction writer Stieg Larsson (author of the Millennium Trilogy, which was published posthumously) sold 18 million copies in two years. In future you'll likely see more of this - and earnings of successful authors, book retailers and some publishers will likely rise.
This is definitely not the common perception.
As you may recall, last year I recommended going long Amazon and selling short Barnes & Noble. The trade, opened at a ratio of 4.0, was closed at a ratio of 7.0. Not bad. But you may also recall that when I closed the trade I muttered that Barnes & Noble looked very cheap - although I wasn't sure it was a good long-term investment. Well, following my ABA convention chats, Barnes & Noble still doesn't look to me like a long-term investment, but it sure looks like an interesting value spec. And I am not the only one to think so: U.S. billionaire Ronald Burkle just bought 17 per cent of the stock, and asked the controlling Riggio family to let him go up to 37 per cent - the same position as the family - without triggering the poison pill.
Now, you may ask: Where can there be value in a U.S. bookstore chain, when Amazon sells both books and e-books cheaper? (By the way, Barnes & Noble also has an online retailer, as well as an e-reader).
And the answer: Due to the temporary strategic importance of bookstores to publishers, the latter may bend over backward to help the former, so as to fight Amazon. But do publishers have the wherewithal to help, with Amazon squeezing them?
They should, soon.
You may recall how, after Amazon's first burst of growth, it went into a temporary plateau. Then it brought out an e-book reader, the Kindle, forcing publishers to sell e-books at $9.99 (U.S.) each. Publishers hated both the low price and the 50/50 price split, yet had no recourse - until Apple presented its iPad as a competitor to the Kindle. And not only did Apple offer publishers a sweeter deal: a 70/30 split (70 per cent to the publisher), it also told publishers they could charge higher e-book prices via the iPad.
With such an alternative channel, publishers reacted immediately: Macmillan told Amazon to raise prices on Macmillan's e-books. And when Amazon said no, Macmillan removed both its regular books and e-books from Amazon's site - or perhaps Amazon did, and Macmillan said 'go ahead,' but the result was the same. Amazon's customers yelped, and Amazon had to publicly capitulate. Other publishers are now pressing for similar, better deals.
The implications are threefold.
The first one is obvious: With the proliferation of selling channels and more marketing choices, publishers' copyrighted material has just become more valuable - as have publishing companies.
Second, Apple should benefit from its mould-breaking role, but likely not as much as in the music business, where it made iTunes into the Amazon of music. In the book business an Amazon already exists.
And the third implication, already noted above: Publishers, whose earning potential has just improved, must see bricks-and-mortar booksellers as allies to be supported in the common stand against Amazon. So, in the midterm, booksellers may have an easier life, and this could make a large U.S. chain like Barnes & Noble more valuable - hence the attempted creeping takeover. And if Mr. Burkle can also get into Barnes & Noble's boardroom (a big if), he could accelerate store closing, cost cutting - and value maximization.
Besides, at 3.8 times earnings before interest, taxes, depreciation and amortization, Barnes & Noble is definitely not expensive.
But remember, it's only a spec.
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