Finding undervalued stocks or bonds has similarities to finding gourmand-satisfying food at a reasonable price. In both cases the key is good intelligence and market analysis, finding sweet spots the herd has overlooked, and rigorously bypassing all the market hype. That's the essence of this new column, Food For Thought, where Richard Morais explores strategic investment ideas and good food with a special guest at the table. This week's guest: Thomas O. Ryder.
The market for electronic publishing is set to surge, but how to profit is anything but clear. During a culinary escapade through New York's barbeque circuit, Thomas O. Ryder, the former chairman and chief executive of Readers Digest Association and a current Amazon.com (AMZN) board director, shared his wisdom. The culinary tour, by the way, was made possible by Ryder's son, Rob, a restaurateur who has built Connecticut's top-rated source of comfort food, The Cookhouse in New Milford.
"I estimate 60% to 80% of all books will be published electronically within the next decade," says Tom Ryder, who is also on the board of World Color Press (a Canadian printer in the process of being acquired by Quad/Graphics for $1.3 billion). "This is a total transformation of the publishing business and it's going to happen very fast. The big publishers are going to have to adapt or die. They will no longer be in the packaging and logistics business.'"
Between Bourbon and Beer: E-Publishing
Ryder, who is also responsible for turning American Express (AXP) into a publishing colossus, and I continued to talk in the back of his "big-ass" limousine as we proceeded to the next stop on "The Ryder Boys' Urban, Bourbon, Beer & BBQ Tour." I was invited by the Ryder Boys to help with their "research and development," but past experience with the Ryders, as Tom once told me, suggested the true objective of the evening was to "test the tensile strength" of our shirts.
Before the bourbon and beer did its damage, however, I got Tom Ryder to help me understand the e-book wars breathlessly reported in the news almost every day.
Ryder explained the battles are not really between Amazon's Kindle, Apple's iPad, Barnes & Noble's Nook, and Sony's Digital Reader -- as most of the press will lead us to believe -- but between traditional publishers weighted down by 19th century printing, warehousing and distribution assets and an emerging generation of nimble e-publishers who will supply content to the reading tablets that will be ubiquitous within ten years.
Apple and Amazon Are Frenemies
Among the traditional publishers are the Random House, Penguin, HarperCollins, and Simon & Schuster imprints at Bertlesmann, Pearson (PSO), News Corp (NWS), and CBS (CBS). Some of these revered publishers will successfully transform and flourish, predicts Ryder, but others will die.
Listening to Ryder, it became clear investors need to understand Apple and Amazon are frenemies. Amazon supplies its e-books to the iPad through its "Kindle for iPad app". Furthermore, Ryder says, it's not "crazy to suggest" Amazon will eventually supply electronic books to other e-readers as they come to market.
Hewlett Packard (HPQ), Google (GOOG), Nokia (NOK) and Microsoft (MSFT) are just a few firms furiously working on their own e-readers. By supplying e-books to all comers, Amazon hopes to remain atop the unfolding business, however it plays out on the tech front.
I push back a little. When television, VCR and DVD came along, similar dire predictions were made about Hollywood and movie theaters. But these new technologies didn't kill movie theaters, they simply added more distribution that ultimately enabled Hollywood to finance big budget films like "Titanic." Same will probably happen in publishing. After all, not a lot of people are going to take an iPad or a Kindle to the beach. Books are here to stay.
True, says Ryder, but the new delivery systems were still transformative for the film industry, and attendance at movie theaters did fall dramatically over time. He's right: in 1930, weekly cinema attendance was 80 million but by the end of the century attendance was down to 27 million.
Ryder imagines a future book industry dominated by a few branded electronic clearinghouses -- such as Amazon, Google or Barnes & Noble (BKS) -- around which flourish entrepreneurial niche e-publishers providing the clearinghouses with content. A lot of these new e-publishers, says Ryder, will be built by the editorial and marketing talent cast off by the traditional publishers forced to downsize. Ryder points, as an example, to Jane Friedman, formerly chief executive at News Corp.'s HarperCollins. Squeezed out in 2008, Friedman co-founded Open Road Integrated Media, a "digital content company" that "publishes and markets e-books."
E-Book Pure Plays Will Become Easier to Find
Such e-publishing start-ups will largely be financed by venture capital; Open Road is, for example, backed by Kohlberg Ventures. Meanwhile, e-book assets lurking in monsters like Amazon, Google or Sony (SNE) are swallowed by the firms' other businesses. That makes it hard for retail investors to find a pure play at this early stage of the e-book industry. That will change in the coming years, as the editorial content providers for e-tablets establish themselves and eventually go public.
In the meantime, says Ryder, the best investment play in this space might be a short. Investors should "watch the periphery, the suppliers of the publishing industry," such as printing companies and paper suppliers. Not all are going to survive. There are 36,000 printing firms in the U.S., says Ryder, heading into a period of "tragedy and opportunity."
We eventually hit five BBQ hell-holes in all, sampling deviled eggs and blue cheese dipping sauce; "wet" and "lean" briskets; Memphis dry-rub and Kansas City wet ribs; fried pork bellies; and deep fried Oreo Cookies.
Time to stiff-leg it back to Penn Station and a train home. The slaw, fatty brisket, beans, bourbon, fried Oreos and pork bellies had worked itself into a percolating stew within the walls of my stomach. As I said my farewells, Rob Ryder leaned over and gave me some brotherly advice. "Do not sit in the quiet car."
Richard C. Morais is the author of The Hundred-Foot Journey.