Okay, we'll get started. I'm John Hodulik from UBS, and I'm here with Brian Murray, the President and CEO of HarperCollins Publishers, a unit of News Corp. Brian, thanks for being here this morning.
Thank you.
So we've got 35 minutes for questions. I've got a number of questions to run through. If anybody in the audience has any questions, you can use the app, and I'll see them here, and I can work them into the conversation. So, Brian, why don't we start sort of big picture? What is the current state of the book industry and HarperCollins' sort of place in that industry?
Sure. The market in the U.S. has been increasingly robust, I would say, as the calendar year moved forward. In the very beginning, it was sort of a little bit flattish, up a little bit, but starting in May, we really started to see consumer spending lifting quite nicely, and if you look at, you know, public data from the American Association of Publishers, they've published through September. You could see July and August were particularly strong. September was okay, but that quarter, you know, really, really nice lift in consumer spending, and I would say HarperCollins, you know, in that mix, we've been on a good run. We've had a little bit of a lift in market share and a rising market, and so, you know, we're feeling pretty good about, you know, how the year may close out.
And the reports we're getting from retailers are that there's, you know, healthy traffic. You know, Barnes & Noble reported they've had good store traffic. So we're all hopeful that this is gonna be a good holiday for the book business.
What drove the strength in July and August for the industry?
so.
Is it more economic stuff or titles or?
I think it's a little bit of both. We definitely saw a little bit more retail competition starting in May, June, and continue through the rest of the year. The number and the frequency of retail promotions, I think, not just in book category broadly, but then we also saw the knock-on effect in the book business. There was a lot of promotional pricing that was happening. I think, you know, consumers really responded to some of the aggressive promotions in the marketplace, and we've seen a lift there. And then HarperCollins, you know, we were lucky to have in our backlist J.D. Vance's book.
I remember that.
And when he was announced as the vice presidential candidate in July, boy, did sales take off. And we reported just in that.
I bought it.
That quarter.
I haven't read it yet.
Yeah. I mean, it's amazing, you know, that book has had three, four lives for us. You know, it was a very nice success in 2015, I think it was, when we first came out. But then, when Trump won the Republican nomination back then, people were pointing to J.D. Vance's book to understand who was voting for Trump. And so we had another wave. That was the second wave, and that was a very big wave. And then a film was made.
Wow.
That was the third wave.
That's awesome.
And now here we are again, and you think, "All right, we've sold four million copies, but, you know, there's 350 million people in the country.
Mm-hmm.
Here you go, he's vice presidential.
And I assume he's gonna be in the pole position four years from now, right? And you'll get another wave.
Let's hope. Let's hope. That's sort of our business model in a lot of ways, is we try to publish really good books. And, and if we're lucky, you know, those individuals go on to be, very well known in other areas where they or books get made into film and television. And so building our catalog is, is really a key strategy at HarperCollins to try to have great books in our backlist so that, you know, we can get several bites at the apple.
Makes sense. Yeah, so on that note, can you give us a sense for what the at HarperCollins, what the sort of main focus is for management in terms of the growth drivers of the company?
Sure. So, there's always a set of organic initiatives that we're looking at, you know, how we can grow in a market. 'Cause typically, the book publishing market spending grows, you know, 2%-3% per year. So as management, our goal is to try to double that. And so that we really run a big portfolio, you know, we're making investments in new books, new storytelling, new authors all the time. And, you know, while the spending on books may be growing modestly at 2%-3%, there's certain genres where we'll see a tremendous amount of interest. So recently, we've really seen a lot of particularly young readers, a lot of young women have been reading voraciously in the romantasy. It's kind of a combination of romance and fantasy. That is a booming area.
It's been booming for the last three, three to four years, and so that's just an example, and so at HarperCollins, we're trying to always anticipate where do we think the readers will be in, you know, one, two, or three years and make sure that we're placing a, you know, the right proportion of investments in resources, and into, into acquiring authors that write in those areas so that we can grow faster than the market as a whole, so we've seen recently there's been a little bit of a decline in nonfiction book buying.
Wow.
But there's been more than offset by fiction. And I think it's just the world we live in with all the geopolitical risks. I think the economy, I think our election, I think a lot of people are trying to escape into other worlds.
Right.
And fiction is where they're going. The more serious nonfiction market has been down a little bit. And, you know, that's okay with us as long as the overall spending continues to grow. And as I said, it's up quite nicely this calendar year so far.
Makes sense. The digital business, and more specifically audiobooks, are the fastest growing portion of your digital business. It's been around a while. So why has it accelerated in the past few years?
The audiobook format, it has been the fastest growing. It's eclipsed for us now, the e-book format. I think what's happened in the last year really has been, again, competition. You know, when there's brisk competition for the consumer, you know, the suppliers benefit, the creators benefit. We've seen with the entrance of Spotify, Audible has continued to grow, but they've, you know, had to lift their game. Consumers have benefited, the creators have benefited. I think what Spotify entered in a very smart way. You know, they had several hundred million listeners of music and of podcasts. So it was a very small adjacent shift for them to monetize the audiobook listener.
What they were able to do, I often think Audible, you know, kind of had that core audiobook listener, probably listened to a lot of books a year. They had been sought out that format, whereas Spotify was able to monetize the more occasional audiobook listener, because they had this very large consumer relationship with music listeners and podcast listeners. You didn't have to sign up with a full commitment.
Right.
To so many books per year. You could kind of do it with your 15 hours free. You could sample, and I think that that entry strategy, I mean, we now know a year later that entry strategy has been very successful for Spotify. And, and as a result, we kind of get a little bit of an incremental growth in our business in total. And we've seen continued growth from Spotify and growth from Audible. So a really good outcome for publishers.
I'm surprised to hear you say that audiobooks is bigger than e-books. That's in terms of total revenues. It's bigger than the e-books you said.
For HarperCollins, that's true.
Right.
Yeah, and you know, the e-book format, you know, had been declining for us.
Wow.
And then the market has been very soft for the big publishers, been coming down a little bit.
How are people going through the pandemic? Are people going back to paper books?
During the pandemic, we all spent our personal and professional lives staring at a screen.
Yeah.
Right? And so, we had this amazing boom in the book business, about almost 20%, 15%-20% increase in spending during the heights of the pandemic. It lasted for about two years. People went to print because they wanted to disconnect.
Right.
From their personal and professional lives. And so we've seen the print format kind of have this a little bit of a resurgence. And the e-book format has been the one that suffered.
Right.
Audiobook listeners, though, you know, they're often doing that at a different time. I think of that as an incremental consumption of a book. And so, we're still getting growth in digital, but the strength of the print book has been surprising. And not only that, but this holiday period, one of the most amazing trends that I've been in publishing for a long time now is that we're seeing young people go in and buy deluxe editions of hardcover books.
Right.
Of backlist books that they love.
Wow.
So, a lot of these romantasy books we published: Bridgerton.
Oh.
There are these beautiful $30 books. They look like beautiful Bibles.
Wow.
They're at the front of stores everywhere. And even though, you know, young women have read them either in e-book or in paperback before, they're giftable. They're absolutely gorgeous. And this is a trend we see. We have Wicked. We have the books by Jerry, by Jerry Maguire, not Jerry Maguire, Gregory Maguire, sorry. And those books are out in the bookstores right now with these beautifully designed books for $30. And they're selling like crazy. So this trend of having backlist books uppriced into beautifully designed books is something that's new, and retailers are wholly supporting it. And that's been driving the overall business in our business at HarperCollins.
Gotcha. And just focusing on the digital side, it sounds like the audiobooks is growing, and it's bigger, and it's growing and offsetting the declines you're seeing in the e-books at this point.
That's correct. Yeah.
Wow.
So our overall mix is still growing in digital, but it's not at the expense of the print books. We're getting growth in print, and we're getting a little bit more growth on digital. But the decline is coming from e-books. That audiobook, as you said, the audiobook growth is offsetting the declines in e-books.
So maybe back to the Spotify relationship. How did the economics of the Spotify partnership work?
It's, you know, all of our deals with our distributors are on a wholesale model. So we get paid like on a consumption basis on a.
Okay.
On a per listen, you know, sort of model, and I mean, I can't go into much more detail than that. It's just that wholesale model, you know, works very well for authors and for publishers, and I just like to point out, it's different than the music business where that was a subscription pool, and so, you know, that music model is kind of as a pooled model where a certain percentage of the subscription goes to a pool, and then that's paid out to the artists, that's not how it works.
This is a lot more direct.
It's much more direct. We know exactly, like I can tell an author, this is exactly what your royalties will be for every listen on Spotify.
Right.
Or on Audible. So, that model's worked really well for us. And Spotify and some other audiobook distributors have found really good ways to work in that model. And I think it's very creative for our authors in that regard.
Got it. Now, I'm a Spotify user, but I don't, Batya on our team covers Spotify. But, I believe as a Spotify sort of family customers, we get one book, effectively one book a month, I believe. 'Cause my wife listens to audiobooks.
Yep.
Is that, so that sort of caps to a certain extent what you guys are gonna get paid from Spotify? Is that sub?
No.
Oh, no.
No, yeah. Let me tell you.
So yeah.
You know, our deal with Spotify is one relationship, and it's that wholesale consumption model I was talking to you about. Obviously, the relationship between Spotify and their consumer is a different relationship.
Right.
Right? And so they have to manage their economics between those two. And it's up to them to decide how to do it.
Right.
But their offer, I also have a family, I have four kids. So, I'm the credit card holder.
Sure.
The Spotify.
That's right.
My oldest daughter convinced me to do that deal a long time ago. I'm still paying for it. But the way it works right now with Spotify, and this is important to note because I do think there's a lot more growth potential for us through Spotify. As a family plan, right now, you can have six accounts, but only the credit card holder can listen to the audiobook.
Oh, okay.
So maybe if your wife's listening.
She must be the credit card holder.
She's probably the credit card holder. That's a technical issue.
Okay.
Right now, I think it's 15 hours a month, and then if you can listen to that at 1x for no extra cost, your wife can listen to that at no extra cost. That's basically a book, so you were right about that, but if she wants to listen to a second book, she can just top up, and you can keep listening, so there, it's not capped in any way, but you do begin to pay above plan if you go beyond those 15 hours, so we don't see any cap, but more importantly, the technical limitation around only having one.
Right.
The credit card holder. Spotify is working on that. I don't know when it will change, but it, we've been told it will change, and that's gonna open up, you know, a lot more potential audiobook listeners, so you'll be able to listen on video.
Yeah. You would think that that would create some, especially given how many subscribers they have.
Correct.
I mean, that would open up.
I.
Any sense on the timing of that?
I don't know the timing of that. It's not. It basically, my understanding is a technical issue that they're working on.
Yeah.
So that gives us some real hope, I think, that we'll see another sort of step-level improvement in our business with Spotify. And then also, Spotify continues to roll out internationally around the world, their audiobook program. And so those are two very encouraging developments that I expect to come in the near future that will help us drive that growth that we're seeing at Spotify.
Great. Now that Spotify has been in the audiobook industry for over a year, have you seen any differences in the Audible offering or additional promos? Or what are they doing in response?
Yeah. They have, as I mentioned, they've continued to grow. We've seen growth from them. They have gotten more aggressive on promotions for their customers. We've also seen. I think at the end of November, Audible now has an offer that goes to Amazon Music consumers. They're paying subscribers. So they've like Spotify was able to get an audiobook offer out at very low cost, low risk to their music and podcast listeners. Audible is now doing the same thing through Amazon. So those are examples of, you know, kind of more offers for consumers, more promotion for our books. And I think that's been part of what's led to the continued growth at Audible.
Yeah. Are there any other potential entrants into the audiobook market? You know, Apple, Google, any of these other guys that may be interested?
Yeah. They're in the business. They have not been, you know. Apple tends not to be an aggressive retailer. They kind of set their terms, they set their offer, and then that's kind of it, so I would love to see Apple get a little bit more focused on that. And Google's kind of similar. You know, they just seem to have bigger fish to fry.
Yeah.
And so at the moment, there is another, there are a couple of other regional players, particularly in Europe. And in the Nordics, there's Storytel is a big audiobook player. So I'm hopeful there'll be some others. But at the moment, it's really this, it's really Spotify and Audible sharpening their consumer offers and expanding internationally that I think is gonna drive most of our growth in the near term.
And again, I'm not as familiar with the book publishing business, but it sounds like you have three categories. There's sort of paper, you know, sort of traditional books, audiobooks, and e-books. Over the next five or maybe 10 years, how does that evolve over time? I mean, do we think audiobooks continue to take market share? It sounds like, again, paper books are growing again. What is the sort of long-term, you know, sort of state of the book publishing industry?
Well, we.
What does that do to your economics?
Yeah. So we're agnostic on the format. We work hard, though, to make sure that the economics work for us. You know, so we wouldn't be agnostic if there was a huge difference.
Yeah.
One way or another. And that's been decades in the making to ensure that our pricing and margins are adequate in these different formats. We really just wanna have our content in front of the consumers so that they can choose whatever format they would like it to be in. And then we know there's different kinds of consumers that are out there. You know, there are some consumers who are price inelastic, and they just want high quality and beautiful books to hold and to share and to gift. And there's others who are very elastic. So really, we try to work at, you know, pricing, promotion, various formats so that we can find those potential readers wherever they may be, whether they're online or whether they're going into bookstores. So we do a lot more trying to make sure we're reaching those consumers.
So the more formats, the better. You know, we've tried to develop other formats in the past. You know, they, some of them haven't worked. You know, there was at the early days of the App Store, there were a lot of books that were being packaged as like enhanced books, available for sale in the App Stores. Just didn't quite catch on.
Yeah.
You know, with AI, there are all these ideas of kind of talking books, you know, where you can have a book sitting on top of a large language model, and you could converse with an author. You know, we're playing with those types of products. They're kind of interesting. I got, I don't know how you market or price or sell them.
Yeah.
But we're experimenting. It's fascinating. So there will be other formats in the future, but I, I can't tell you right now that they're gonna move the needle, on our overall economics.
Makes sense. So the past few quarters, you've seen some nice margin expansion. What's driving this? And do you, is there room for that to continue?
Yeah. We're very happy with the momentum. You know, after you know, we had an unbelievable run during the pandemic where I mentioned consumer spending on books went up 15%-20%, and then we had a little bit of a bubble burst, and as a book publisher, we really finance the entire creative supply chain. You know, when that bubble burst, it took us about a year to get through it. And we had definitely had margin contraction. We've been working really hard, particularly over the last 12-18 months to kind of bring everything back in line and get back to equilibrium. That's our own costs as well as pricing, and you know, the teams really managed to do a good job to get that margin expansion and kind of get back to where we were before.
As our business continues to grow digitally, we do see margin expansion. You know, and when our business, you know, when the mix of product shifts from new books are more expensive because of all the investment and editing and the risk we take, and yet when it shifts to backlist, like with Wicked or with J.D. Vance, you know, we'll see our margins will rise. So there's always gonna be a little bit of ebb and flow. But as a team, what we try to do is to make sure that our cost structure is appropriate so that we get these very solid margins, and we're getting back to that level right now. And you know, I feel good about the momentum we're seeing on the top line, and we're expecting kind of similar results.
Got it. You mentioned AI and, you know, talking about new book formats. How do you think, I mean, obviously very early days, but how can AI transform the your business and maybe the book publishing business in general?
Yeah. It's absolutely fascinating what AI is, seems to have the potential to do. So there are risks and opportunities. You know, our business, you know, we're an IP business at its heart, and it's founded on copyright. And so there are all these debates right now about, you know, all the content that was illegally used to create these large language models. So that's one of the risks I think that we have. And we're trying to do deals. We've done, we've announced one, and maybe there'll be others, and there could be lawsuits. So there are some risks. There's also risks around generative AI. There could be an explosion of low-quality content.
Right.
I think our high-quality content will win. It's always won in the past. You know, there's been explosions of self-published content before. And there was, you know, there were narratives out there like, "Oh, you don't need a publisher anymore." Well, that's been proven not to be true. And I think the same will be true of generative AI. But it's still a risk that we're managing. But there's also the tremendous opportunities, just within our business. So many of our activities in marketing and selling, in editing, some of the tools that we've been able to deploy within the company show tremendous productivity improvements, and so we've got, you know, dozens of initiatives in a lot of different departments to try to realize those productivity improvements going forward, and they're going very well.
And then on the revenue side, you know, areas such as translation from English to other languages or from other languages into English show real promise, both from a time and cost perspective. So and then also taking books from, you know, when we have the text of a book, you know, you can now create a very high-quality audio, again, very, very fast. So we still will use for our majority of our books. We'll still use, you know, real voice actors for the audiobook recording. But there are segments of our catalog where it was not economic for us to make that kind of investment. And now with AI tools, we can make audiobooks available, particularly for like smaller markets, you know.
Yeah.
Where we couldn't justify a big expense to have a professionally recorded audiobook. So I would see, you know, new revenue opportunities coming from translation and from, kind of text-to-speech digital narratives that are gonna open up new, you know, revenues for us as we go forward. So those things I think are very exciting. And then there are, you know, potentially, you know, licensing deals or new types of, products. Like you can already today, the technology is there. If you wanted to do an AI cooking site based on cookbooks.
Yeah.
Would not be difficult to do. Again, the challenge is, you know, how do you monetize? How do you bring traffic to it? But the technology enables those sorts of focused niches to be developed on the back of book content. And we have incredibly large catalog of books. So there's rights issues, there's technology issues.
Yeah.
There's all kinds of issues. But when we look at the capabilities of these large language models and, you know, we can already see, and we're starting to pilot some different products to really think through about how would you enter a market or try to begin a market, as we go forward.
I mean, it just seems like, I mean, have you guys, it seems like there's a huge opportunity to better monetize your library as you were saying.
Absolutely.
Through audiobooks in every language and every book, like you said, maybe even eventually video content created from cookbooks and other how-to books and maybe even non-fiction books.
Yeah.
I mean, just given how we're having a segment later today, on AI and content creation. Have you guys sized at all or attempted to size the potential revenue opportunity from better monetizing the library? Do you guys call it a library? Is that the question?
Well, yeah. Yeah.
Or a library backlist?
Yeah. Same thing. We use both terms.
Yeah.
Yeah. We have, I mean, it's fun to size those things.
Yeah.
You know, they can be quite big.
Yeah. Exactly.
But I don't wanna, but I can't say that they're like, you know, they're here medium term.
Yeah.
There's a lot of things have to happen to build markets. The technology, you know, to us seems to have come into existence overnight.
Right.
We know that's not really the case. There were years spent building it, but there are now tools where you can do. I mean, yes, you can imagine taking a manuscript, pouring it in, and having a movie script or television script come out and then using Sora to like.
Totally.
You know, a storyboard. I mean, yes, those sorts of, you know, it's not too many leaps of the imagination, to see that. Now, that's very simplistic.
Right. There's licensing. There's a lot of other issues.
There's a whole nother level of quality and all kinds of issues that, but in terms of, you know, again, maybe speed to market or getting concepts, clear concepts to the professionals in film and television, like that. That's kind of easier to do now, you know, so there are these really big opportunities I feel like that are out there, but it's very, very early days, and it's hard to draw a link back to, you know, next year, you know.
Right.
Next quarter.
Sure.
But it's happening. And we're spending a lot of time trying to figure that out.
Gotcha. And you mentioned that you did, you have signed one AI licensing deal. Can you talk about that? And are there a lot of these deals out there?
I can't really say much about it.
Okay.
Because of an NDA. It's a
Okay.
It's, you know, it's an early, you know, it's a fascinating time, but there's these companies. Everybody wants to keep their deals close to the vest.
Yeah.
which I respect, and we are, you know, we have heard from other companies. There's been some conversations, but I really don't know. I mean, this is, it's so new, I can't tell, you know, just 'cause you're talking doesn't mean you're gonna have a deal. But.
Right.
Talking is good at these early days, so.
Right. And, yeah, we covered Paramount and, yeah, we saw the KKR purchase of Simon & Schuster.
Mm-hmm.
Just any thoughts on transaction? It's, you know, that actually had ran into some, obviously some, regulatory issues. New administration, what's your view on the sort of M&A landscape in publishing?
Yeah. We're, we remain very active in M&A. It has to be a good fit for us. You know, we have a track record of trying to pay a disciplined price. And then we're very good at folding them in and realizing, you know, cost synergies. But it has to be a good fit for us. We recently bought a very good German publisher. That's the most recent deal. There's a few others that we're looking at, but they're more on the bite-size fold-in, nothing of the scale of Simon & Schuster. It remains a terrific asset, very well-run, terrific library of books. And, you know, if it comes on the market at some point, we would always take a look.
Did you guys look at Simon & Schuster?
Oh, yeah.
Was that? Yeah.
I think three times, I think I've looked at it.
I see. Looked at it too much.
So yeah.
Okay.
Yeah.
Gotcha. You know, a couple wrap-up questions here. What do you think they are, the biggest threats to your business or the things investors should worry about?
I think it's just with all businesses right now the geopolitical situation, changing administrations, you know, potential tariffs. We've done a lot of work over the last five years to really try to minimize the risk of tariffs, but there's still risks. Certain types of books are printed economically, you know, in the Far East, children's books and some Bibles, but we've dramatically reduced our exposure there, but it still remains a little bit. So.
What, where are most of your books published or actually printed?
Most of them, almost all of our kind of just black-and-white novels history are done in North America.
Okay.
But when it comes to specialized printing like Bibles, there's a really good cost-quality equation in China. And so we've found other partners. We've really diversified our manufacturing supply chain over the last five years, but it still remains, you know, paper is sourced outside.
Yeah.
You know, a lot of it comes from Canada. I mean, there's the uncertainty around tariffs. There's, you know, when wars break out, there's all kinds of issues. We've had, you know, supply chains disrupted, even when tankers get caught in the Red Sea, you know, that caused a headache.
You had a lot of books on that.
And the strikes, the port strikes were a real threat going into this holiday period. I mean, I'm very, very happy 'cause we had books on boats that would not have come out.
Right.
You know, they're designed to come out for this period. You're not gonna sell them in January, February. Those are the sorts of, you know, macro geopolitical risks that I'm mostly concerned about. Then, you know, I mean, AI. I said it's a little bit of a risk, but I still see far more opportunity than risk to our business. Anyway, that's how I think about it.
What about a stronger dollar if we, you know, looking ahead, is that, I mean, given your revenue mix and it sounds like most of your costs actually, I guess, would be in U.S. dollars, right? Just given like licensing and.
Yeah.
It sounds like you print most of your books in North America.
Yeah.
I mean, what is a stronger dollar, good guy or bad guy for you?
It has an impact, but it's not a major, like a lot of our deals are all done in U.S. dollars.
Mm-hmm.
So, yeah, it can have an impact, but it's not something that really keeps me up at night.
Gotcha. Okay. And then just lastly, you know, you guys are part of News Corp, a lot of different pieces to the puzzle there. What are the, the sort of benefits you see as being part of, of that organization?
Look, scale is really important in business today. I mean, if you, we were talking about Spotify and Amazon and Apple. I mean, these.
Right.
These AI companies, I mean, they are the, you know, the Magnificent Seven, whatever. There's so many different names. They are big, global, well-capitalized companies. We deal with all of them at HarperCollins, you know. It's helpful to be part of a larger media company. I've been in this job for a long time now, and I've seen that play out time and time again. I'm happy where we are. The support we've had from News Corporation over my many years here has been terrific. They're continuing to support us either through M&A and certainly in all of our organic initiatives. I think we're in a good spot.
Sounds good. Let's leave it there, Brian. Thanks for joining us.
Sure. Thank you.