News Corp: HarperCollins And Amazon Ink A Multiyear Publishing Deal

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News Corp‘s (NASDAQ:NWSA) book publishing unit, HarperCollins, and retailer Amazon (NASDAQ:AMZN) have inked a multi-year publishing deal. The new deal for print as well as digital titles will allow HarperCollins to set the retail prices for its e-books. This is a positive development for the publisher primarily due to the pricing power that it will have over its titles. Book publishing revenues have grown at a steady pace in the recent past and now account for close to 20% of News Corp’s overall revenues. We continue to believe that higher e-book sales will drive segment revenues in the coming years. On that note, we discuss below the development around this story.

We estimate revenues of about $9 billion for News Corp in 2015 with EPS of $0.36, which is below the market consensus estimate of $0.50, as compiled by Thomson Reuters. We currently have a $20 price estimate for News Corp, which is around 20% ahead of the current market price of $17.

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See our complete analysis for News Corporation

HarperCollins And Amazon Ink A New Deal

The new deal will allow HarperCollins to set the retail prices of its digital books, and it will receive incentives to provide lower prices to customers. The deal was important for HarperCollins as Amazon accounts for 60% of the e-books market and the publishing house is preparing for the launch of Harper Lee’s Go Set A Watchman, the most anticipated title for 2015. Looking at revenue sharing, the publisher will keep around 70% of the revenue from each title, while 30% is paid to the retailer as commission. [1] HarperCollins has seen steady growth in e-book sales, which now account for over 20% of the consumer revenues. With growth in e-book sales, which have lower production and distribution costs, News Corp can look forward to better margins in the coming years. The deal with Amazon was much smoother for HarperCollins. Last year, Amazon and Hachette struggled to reach a pact and the retailer didn’t take pre-orders for the upcoming titles and also reduced the discount it offered on Hachette titles. After months of negotiations, Hachette and Amazon finally inked a deal in November 2014.

HarperCollins Revenue Growth To Continue In Coming Years

HarperCollins was quick to move to the digital platform and currently provides more than 35,000 e-book titles across devices such as the Amazon Kindle and Apple’s iBook. This aided its overall revenues, which increased from $1.14 billion in 2007 to $1.61 billion in calendar year 2014. The publisher also benefited from high demand for Veronica Roth’s Divergent series in the recent past. We currently estimate the segment revenues to be north of $2 billion by the end of our forecast period and an estimated EBITDA margin of 12% will translate into EBITDA of $250 million, representing 20% of company-wide EBITDA. This growth will be led by continued growth in e-book sales, which will boost the top-line as well as bottom-line for the publisher. Currently, only 25% of U.S. unit sales are e-books and Price Waterhouse Coopers claims that e-book sales will exceed print sales by 2018. [2] Digital books have lower production and distribution costs than print books, and this will help the company see margin growth in the long run.

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Notes:
  1. Amazon, HarperCollins Reach Multiyear Publishing Deal, The Wall Street Journal, Apr 13, 2015 []
  2. PwC Claims eBook Sales Will Exceed Print in 2018, Digital Reader, Nov 18, 2014 []