Can We Profit From Publishing?

Published in Investing on 3 August 2011

Should you bet on the old guard or the new blood?

They say that the best way to become a millionaire is to start off as a billionaire and buy an airline. 

The same thing could be said about the publishing industry, where your pounds invested in publishers like Bloomsbury (LSE: BMY), bookstores like Waterstones, and newspaper groups like Trinity Mirror (LSE: TNI) and Independent News & Media could easily have become pennies over the course of the past half-decade.

It may be tempting to think that in the age of the Internet, being a producer, publisher, or purveyor of paid-for information, or an investor in such, is a sure route to the poor house. So, is the publishing industry doomed or has the old guard simply been replaced by new blood?

Throw out the old, and bring in the new

While Borders was busy going bust, and the share price of Waterstones' owner HMV (LSE: HMV) was being watered down, one bookstore's business was booming. Yes, I'm talking about Amazon (NASDAQ: AMZN.US). People are still buying books, apparently more than ever, just not from the High Street.

While the print press has been in peril, it hasn't prevented people from purchasing papers on their Pads (iPads, that is, but a little alliteration never affected anybody). And Apple (NASDAQ: AAPL.US) takes a slice of every e-journal subscription. So people are still reading professionally produced newspapers and magazines, but increasingly in electronic formats.

While some traditional publishers may be struggling to balance the books -- pun intended -- in between their bestsellers, companies such as CreateSpace (an Amazon subsidiary company) and Lightning Source (an Ingram Book Company subsidiary) have been cashing in on the increasing popularity of print-on-demand self-publishing. So, authors are still writing books, but increasingly cutting out the publisher middlemen just as would-be TV stars have cut out the middlemen by uploading their filmed creations direct to YouTube.

It may be that there is money to be made in publishing, but not by investing in the old guard companies.

Life in the old dogs yet?

On the other hand, reports of the death of the traditional publishing industry might have been greatly exaggerated.

I know there's been a phone hacking scandal recently, but shares in News Corporation (NASDAQ: NWS.US) have held up okay over the past decade -- albeit with a high degree of volatility -- and are well up over the past two decades. More locally, Pearson (LSE: PSON) seems to be doing alright.

At the other end of the scale, if there's one thing we can say about the publishers -- Bloomsbury, Trinity Mirror, Independent News, and let's throw in Johnston Press (LSE: JPR) for good measure -- they're a lot cheaper now than they were a few years ago. 

How to play the publishing game?

As an author and small-scale publisher myself, I know how difficult it can be to make money in this business. I'm tempted to think that, just as in the great California gold rush, the real money might be made by investing not in the prospectors, but in the providers of the prospectors' tools. 

Amazon provides the tools for writers to make their homespun e-books available direct to the worldwide public on the Kindle platform within just a few days at kdp.amazon.com. They can do the same thing for their print publications via the CreateSpace subsidiary at www.createspace.com. Apple provides the devices on which an increasing number of e-newspapers and e-magazines are read.

It sounds convincing, but the contrarian in me is rather cautious because these new publishing barons have already done so well for so long, and their future prospects might already be fully reflected in their prices.

Those of you who have been following my articles, and who know my style, will know how I'll be playing this: by betting instead on the beaten-down old guard publishing stocks in the hope that at least some of them bounce back with a vengeance. 

If it all works out, I'll be a hero; if it all goes wrong, my healthy respect for risk management means that I shouldn't end up as a zero.

More from Tony Loton:

> At the time of writing, Tony held shares or long-term spread bet positions in Bloomsbury, Trinity Mirror, Independent News & Media, Johnston Press and HMV.

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Comments

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UncleEbenezer 03 Aug 2011 , 10:06am

So why not have the best of both worlds? A publisher with traditional strengths that is also a leader in online delivery?

PSON fits my portfolio nicely!

growingmyown 03 Aug 2011 , 4:26pm

Very best of British luck to you, Tony.

But why do you think that any general 'old guard' publisher will be able to compete? As a public, we have become used to having cut price books as the norm.

I'm doubtful that the old guard will be able to sustain rising profits. Just the way I believe it is doubtful that independent bookstores will ever be able to compete with Oxfam bookshops again.

I think that a few publishers will survive but they are either going to have to specialise or evolve in some way eg become the people who help people to self publish.

GMO

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