CBS Publishing Unit: E-Books Are The Future

December 1st, 2010 by Trefis Team
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CBS (NYSE:CBS) recently reported its Q3 2010 earnings. Based on improvements observed in profit margins and advertising revenues, we have updated our price estimate for CBS’s stock to $18.08. CBS traditionally competes with media conglomerates like Disney (NYSE:DIS), News Corp (NASDAQ:NWS) and Time Warner (NYSE:TWX) in the broadcasting and cable networks businesses.

While the company is doing well on most fronts, its publishing division Simon & Schuster continues to see softening sales. The publishing revenues have declined from close to $900 million in 2007 to close to $800 million in 2009, and are further expected to decline in 2010. In our forecast, we estimate that Simon & Schuster and CNet together account for around 8% of our stock price estimate.

The bright side is that the growth in digital publishing is offsetting the decline in traditional publishing and could well drive revenue growth in the near future given the increased adoption of e-books and greater use of tablets as e-reading devices.

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Digital Publishing is Still Small

The company stated in its recent earnings that e-books now constitute around 7% of its total publishing revenue and will continue to be a growing part of the revenue base. This amounts to a little over $15 million in revenues compared to close to $218 million for the total publishing business in Q3 2010. [1]

Given its relatively smaller size, digital publishing (in the form of e-books) has not been able to completely offset the decline in revenues from traditional publishing. However we expect this could change, and we expect to see the publishing division revenues could rebound in 2011 driven by increased amount of digitally published content and an improving economy.

Growing e-book Market

According to Forrester Research, the e-book market in the US is expected to hit close to $966 million in 2010. [2] This amounts to close to 100 million e-books sold assuming an average price of $10 per e-book. Furthermore, Forrester predicts that this market will nearly triple itself by 2015, amounting to close to $3 billion [2]. Apart from dedicated e-readers, growing use of tablets like Apple’s iPad are also driving sales of e-books. Longer term, we believe this presents an opportunity for publishers like CBS (Simon & Schuster) to recoup its declining publishing revenues.

You can see the complete $18.08 Trefis price estimate for CBS’ stock here.

Notes:
  1. Taken from Q3 SEC filings and latest earnings transcript [↩]
  2. eBooks Ready To Climb Past $1 Billion [↩] [↩]