Media Do 3678

メディアドゥ

Recent Updates

2021-10-27

1H FY02/22 report update

2021-10-13

Revision to its dividend forecast

2021-10-13

1H FY02/22 flash update

Get in touch

Palace Side Bldg. 5F, 1-1-1 Hitotsubashi, Chiyoda-ku, Tokyo 100-0003, Japan

https://www.mediado.jp/

03-6212-5113

Summary

Media Do is Japan’s leading wholesaler of e-books by market share.With e-books, “wholesaling” refers to the process of obtaining content-use permission from publishers, storing e-book data on company servers, and delivering e-book data to e-bookstores.

Internet & Direct Marketing Retail

Key dates

2020-03-02

Coverage initiation

Full Report

2021-10-27

1H FY02/22 flash update

2021-10-13

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Executive summary

Business overview

Top share of e-books wholesaling: Media Do Co., Ltd. (hereinafter, the company) is Japan’s leading wholesaler of e-books by market share. According to the company’s own research, it has a share of around 80% of the market for e-book distribution through wholesalers on a gross merchandise value basis. With e-books, “wholesaling” refers to the process of obtaining content-use permission from publishers, storing e-book data on company servers, and delivering e-book data to e-bookstores. The company simplifies operations and reduces headaches for publishers and e-bookstores by mediating contracts, providing systems, managing campaigns, and summarizing data as an e-book wholesaler. The e-book wholesaling framework is unique to Japan and in high demand as the nation has a large number of relatively small publishers and less oligopoly by foreign e-bookstores such as Kindle in the Japanese e-book market. This situation creates a strong need for the wholesaling of e-books. In FY02/21, almost all of the company’s sales and operating profit came from the eBook Distribution business. Its earnings structure as of FY02/21 is close to that of a wholesaler, and its main cost, royalties (cost of sales), is a variable cost. However, the company’s contribution margin is high at about 11% thanks to its high market share and the fact that it sells e-book data, which offers substantial economies of scale. Cost other than royalties and advertising expenses amounted to JPY6.3bn, which were mostly fixed costs.

Value chain: The top three suppliers of e-book content are estimated to be Kodansha Ltd., Shogakukan Inc., and Shueisha Inc. (each of which is a major manga publisher and a major shareholder of Media Do; the three companies accounted for 45.4% of the company’s total purchases in FY02/19; FY02/21 data has not been disclosed, but the percentage of purchases from these top suppliers continues to remain high). The company mainly sells to LINE Corporation (unlisted), which as a group accounted for 20.3% of total sales in FY02/21 (20.9% in FY02/20). Next was Amazon.com, Inc. (NASDAQ: AMZN) and its group companies at 13.8% (12.8%), followed by NTT Solmare Corporation (subsidiary of NTT [TSE1: 9432]) at 12.7% (below 10%), and BookLive Co., Ltd. (shareholders include TSUTAYA Co., Ltd. and Toppan Printing Co., Ltd.) at 10.2% (11.5%). These four groups account for around 57% of the company’ sales. Media Do also does business with more than 99% of other publishers that supply e-books, including all of the top 20 by readership (2020 survey on the e-book business, by Impress Corporation, of the top 20 e-bookstores where customers had made purchases or paid fees). The company noted that DMM.com’s (unlisted) e-book store DMM Books, which has been running aggressive sales campaigns in recent years, is also a customer. The company says its wholesaling business had a share of around 35% of the overall Japanese e-book distribution market in FY2020 (including cases in which publishers and e-bookstores transact business with each other directly) in terms of the gross merchandise value (GMV) of e-books.

Expanding Japanese market for e-books: Media Do’s growth has benefited from a market shift from paper to e-books and from people spending more time on their smartphones. In addition, in FY02/21, the company benefited from people staying at home due to the COVID-19 pandemic. In FY2020, the market for e-books was worth JPY482.1bn (+28.6% YoY), with manga accounting for approximately 83% of the total (2021 survey on the e-book business, by Impress Corporation). The FY2020 e-books market turned out to be larger than the previous estimate of JPY444.2bn. Impress Corporation believes this sharp expansion of the e-books market is owing to the trend of stay-at-home consumption amid the COVID-19 pandemic and the impact from bestsellers. The estimate for the value of the e-books market in FY2021 has been raised considerably from JPY481.2bn to JPY537.8bn.

The FanTop non-fungible token (NFT) service: The company also plans to use blockchain technology to move beyond e-books and enter the digital content market (estimated by the Digital Content Association of Japan’s Digital Content White Paper 2020 at roughly JPY4tn). As the first step, the company launched its FanTop NFT service in October 2021. Based on the limited information provided by the company, it appears that the company is planning an earnings structure similar to that of its eBook Distribution business. The business will likely involve the company collecting a set fee from the buyer (user) and paying a set fee to the respective rights holders (publishers, authors, bookstores, etc.), with the remainder being the company’s profit. As with e-books, securing a certain level of GMV will be important. According to the company, users generally shoulder around 10–15% of fees when using NFTs, and the company will likely reference this figure when designing an earnings structure for its NFT marketplace business. As of April 2021, the company noted that it was difficult to forecast GMV with reasonable accuracy.

Earnings trends

FY02/21 performance: For full-year FY02/21, the company reported consolidated sales of JPY83.5bn (+26.8% YoY), operating profit of JPY2.7bn (+43.8% YoY), recurring profit of JPY2.7bn (+54.5% YoY), EBIDTA of JPY3.4bn (+28.7% YoY), and net income attributable to owners of the parent of JPY1.5bn (+71.8% YoY). Full-year results left the company with 98.3%% of its upwardly revised full-year target for consolidated sales, 95.1% for operating profit, 97.1% for recurring profit, and 101.3% for net income. In the company’s mainstay eBook Distribution business, sales were up 27.6% YoY. The greater than expected market growth was attributed to an increase in the amount of discretionary time available as people worked from home and refrained from going out to prevent the spread of the new coronavirus infection, which led to an increase in entertainment demand for “stay-at-home” consumption, and the ongoing shift from paper-based books to e-books. Additionally, proactive expansion of campaigns and promotions by e-bookstores and publishers led to increased adoption of e-books among users.

FY02/22 company forecast: For FY02/22, the company announced that it forecasts consolidated sales of JPY100.0bn (+19.7% YoY), operating profit of JPY3.0bn (+12.6% YoY), recurring profit of JPY2.8bn (+3.7% YoY), EBITDA of JPY4.0bn (+16.9% YoY), net income attributable to owners of the parent of JPY1.6bn (+5.3% YoY), and EPS of JPY100.90. The company expects continued expansion of the e-books market. The damage caused by pirate manga websites is rising, however, and at present the company expects business performance to be negatively impacted. The company noted that it expects sales growth related to M&A activities carried out in FY02/21 to be slightly less than JPY5.0bn, which puts sales growth in the eBook Distribution business excluding M&A at around JPY11.5bn (about +14% YoY, taking into account external factors such as the impact of pirate websites). The company forecasts stay-at-home demand to run its course and fall YoY in FY02/22. In FY02/21, sales in the eBook Distribution business grew 32.6% YoY in Q1, 31.5% YoY in Q2, 27.2% YoY in Q3, and 20.1% YoY in Q4. The company has stated that it views this fiscal year as a year to prioritize investment in order to solidify a foothold for future profit growth, by investing in advertising in Nagisa to capture growth in the manga app market and accelerating business development through the use of non-fungible token (NFT) and blockchain technology, as a way to realize its Digital Content Asset (DCA) concept. Total investment impacting EBITDA is expected to be JPY1.1bn.

Medium-term management plan: The company withdrew its medium-term management plan at its FY02/21 results announcement. It plans to announce a new medium-term plan as soon as it is finalized. The company had previously indicated that it would revise its medium-term plan targets upward when announcing full-year FY02/21 results. However, it decided to postpone the announcement of its new medium-term plan, citing the difficulty in providing a reasonably accurate projections as of April 2021. The company attributes this to major changes in its operating environment, including the emergence of a new type of content using blockchain technology (non-fungible token [NFT]), its capital and business alliance with Tohan Corporation (incorporating NFTs in bookstores nationwide), and the acquisition of Nihonbungeisha. Given that the company plans to launch its NFT marketplace in 2021, it will likely announce a new medium-term plan after it has a better estimate of how the NFT-related business will affect earnings (i.e., after FY02/22 results announcement).

Strengths and weaknesses

Media Do’s strengths are:
Its having the top share of the Japanese market for wholesaling e-books, a proof that its services provide high levels of convenience in transactions with publishers and e-bookstores;
Its major business partners including large publishers, which have long business relationships with and capital investments in the company; and Complex functions and know-how are demanded of eBook wholesalers, creating a barrier for entry.

Shared Research thinks the company’s weaknesses include:
While some logistics functions are non-essential for e-books, reliance on wholesaling is lower, and publishers and e-bookstores conduct around 50% of transactions directly;
The company relies on the eBook Distribution business for most of its sales and profit, so is vulnerable to pirate websites and other external factors.; and
Having a top share of the market for e-book wholesaling introduces limitations due to conflicts of interests with large publishers and large e-bookstores.

Key financial data

Income statement		FY02/14	FY02/15	FY02/16	FY02/17	FY02/18	FY02/19	FY02/20	FY02/21	FY02/22
(JPYmn)		Parent	Parent	Parent	Parent	Cons.	Cons.	Cons.	Cons.	Cons. Est.
Sales		5,545	8,075	11,243	15,533	37,213	50,568	65,860	83,540	100,000
	YoY	35.7%	45.6%	39.2%	38.2%	139.6%	35.9%	30.2%	26.8%	19.7%
Gross profit		1,021	1,142	1,306	1,638	4,618	5,739	6,691	7,730
	YoY	31.5%	11.8%	14.4%	25.4%	182.0%	24.3%	16.6%	15.5%
	Gross profit margin	18.4%	14.1%	11.6%	10.5%	12.4%	11.3%	10.2%	9.3%
Operating profit		252	413	552	656	930	1,468	1,853	2,664	3,000
	YoY	562.1%	63.7%	33.7%	18.9%	41.7%	57.9%	26.2%	43.8%	12.6%
	Operating profit margin	4.6%	5.1%	4.9%	4.2%	2.5%	2.9%	2.8%	3.2%	3.0%
Recurring profit		228	413	553	657	831	1,492	1,761	2,720	2,820
	YoY	623.2%	81.0%	33.8%	18.8%	26.5%	79.6%	18.0%	54.5%	3.7%
	Recurring profit margin	4.1%	5.1%	4.9%	4.2%	2.2%	3.0%	2.7%	3.3%	2.8%
EBITDA		491	616	724	854	1,777	2,388	2,659	3,422	4,000
	YoY	49.6%	25.4%	17.6%	17.9%	108.1%	34.4%	11.3%	28.7%	16.9%
	EBITDA margin	8.9%	7.6%	6.4%	5.5%	4.8%	4.7%	4.0%	4.1%	4.0%
Net income		176	240	335	415	358	-1,243	884	1,519	1,600
	YoY	-	36.0%	39.5%	23.9%	-13.6%	-	-	71.8%	5.3%
	Net margin	3.2%	3.0%	3.0%	2.7%	1.0%	-	1.3%	1.8%	1.6%
Per-share data (split-adjusted; JPY)
Shares issued (year-end; '000)		4,460	9,665	9,939	10,050	11,389	12,341	14,175	15,370
EPS (JPY)		44.5	25.5	34.1	41.7	32.6	-106.0	64.6	104.5	100.9
EPS (fully diluted; JPY)		38.6	23.7	33.0	38.7	27.0	-	60.9	102.8
Dividend per share (JPY)		-	2.0	7.2	8.8	10.5	10.5	13.0	21.0	TBD
Book value per share (JPY)		322	192	225	270	360	354	409	788
Balance sheet (JPYmn)
	Cash and cash equivalents	1,277	1,740	2,325	2,057	5,686	7,747	8,089	12,703
Total current assets		2,482	3,712	4,791	5,360	14,587	21,349	24,988	33,902
	Tangible fixed assets	85	66	157	423	499	510	341	303
	Investments and other assets	171	193	341	2,628	4,248	2,914	2,955	2,651
	Intangible assets	169	149	196	273	7,365	6,190	5,777	6,329
Total fixed assets		426	408	694	3,324	12,113	9,615	9,073	9,285
Total assets		2,908	4,121	5,486	8,683	26,700	30,964	34,062	43,187
	Short-term debt	54	-	-	157	2,448	1,323	1,662	1,181
Total current liabilities		1,458	2,256	3,247	4,576	13,490	17,562	21,396	25,425
	Long-term debt	5	-	-	1,303	8,938	8,740	6,578	5,471
Total fixed liabilities		13	9	1	1,340	8,991	8,940	6,828	5,593
Total liabilities		1,471	2,265	3,247	5,916	22,481	26,503	28,224	31,018
	Shareholders' equity	1,437	1,852	2,234	2,717	4,096	4,368	5,791	12,105
Total net assets		1,437	1,856	2,238	2,767	4,219	4,461	5,838	12,169
Total interest-bearing debt		58	-	-	1,460	11,387	10,063	8,240	6,652
Cash flow statement (JPYmn)
Cash flows from operating activities		757	608	1,031	950	1,470	2,458	1,928	2,544
Cash flows from investing activities		-255	-564	-793	-2,083	-7,961	-482	-77	-1,275
Cash flows from financing activities		614	119	47	1,465	9,944	-364	-1,506	3,349
Financial ratios
ROA (RP-based)		10.4%	11.8%	11.5%	9.3%	4.7%	5.2%	5.4%	7.0%
ROE		20.0%	14.6%	16.4%	16.8%	10.5%	-29.4%	17.4%	17.0%
	Financial leverage (equity multiplier)	2.5	2.1	2.4	2.9	5.2	6.8	6.4	4.3
	Total asset turnover	2.5	2.3	2.3	2.2	2.1	1.8	2.0	2.2
	Net margin	3.2%	3.0%	3.0%	2.7%	1.0%	-2.5%	1.3%	1.8%

Source: Shared Research based on company data; per-share data adjusted for stock split

Impact of making Digital Publishing Initiatives Japan a subsidiary

Digital Publishing Initiatives Japan became a subsidiary in April 2017, so has been included in the scope of consolidation since FY02/18.

Recent performance at Digital Publishing Initiatives Japan (before becoming part of Media Do)

(JPYmn)	FY02/18	FY02/19
Sales	20,609	29,535
Recurring profit	1,037	1,675
Net income	741	1,028

Source: Shared Research based on company data

Recent updates

1H FY02/22 report update

2021-10-27

Shared Research updated the report following interviews with Media Do Co., Ltd.

1H FY02/22 flash update

2021-10-13

Media Do Co., Ltd. announced earnings results for 1H FY02/22.

On the same day, the company announced a revision to its dividend forecast.

After previously deferring from issuing a forecast, the company announced that it expected to pay a FY02/22 year-end dividend of JPY21 per share.

Announcement of the acquisition of Everystar Co., Ltd

2021-09-29

Media Do Co., Ltd. announced the acquisition of Everystar Co., Ltd.

The company announced that it will acquire Everystar Co., Ltd. from DeNA Co., Ltd. (TSE1: 2432; shareholding: 70%) and make it a subsidiary. The acquisition price is JPY2.1bn, and the share transfer execution date is scheduled for December 1, 2021. The share transfer will be executed as soon as the preconditions are met, and the company is currently assessing the likely impact on its business performance. The company says it will promptly announce any matters requiring disclosure as soon as they arise.

Everystar Co., Ltd. operates a novel submission site. It publishes submitted works and sometimes adapts them into manga and/or video versions. Media Do intends to enhance Everystar's functions as a community site for novel submissions, and to create an environment where a variety of works can be produced through direct communication with readers and users. In addition, the two companies will pursue synergies in new content creation by leveraging Media Do's imprint business. This will include publication of submitted works and promotion of content in other media (manga, video, etc.), as well as submitting originals to e-bookstores that work on unique contents and to the fast-growing Webtoon Entertainment.

In FY03/21, Everystar recorded revenue of JPY881mn, operating profit of JPY233mn, recurring profit of JPY235mn, and net income of JPY162mn. Its net assets were JPY1.8bn.

Q1 FY02/22 Report Update

2021-08-05

Shared Research updated the report following interviews with Media Do Co., Ltd.

Trends and outlook

Quarterly trends and results

Cumulative		FY02/20				FY02/21				FY02/22		FY02/22
(JPYmn)		Q1	Q1–Q2	Q1–Q3	Q1–Q4	Q1	Q1–Q2	Q1–Q3	Q1–Q4	Q1	Q1–Q2	% of Est.	FY Est.
Sales		15,454	31,881	47,967	65,860	20,292	41,734	62,007	83,540	28,408	55,233	55.2%	100,000
	YoY	44.3%	37.3%	32.6%	30.2%	31.3%	30.9%	29.3%	26.8%	40.0%	32.3%		19.7%
Gross profit		1,599	3,306	4,946	6,691	1,925	3,929	5,869	7,730	2,105	4,939
	YoY	26.8%	26.2%	20.6%	16.6%	20.4%	18.8%	18.7%	15.5%	9.4%	25.7%
	Gross profit margin	10.3%	10.4%	10.3%	10.2%	9.5%	9.4%	9.5%	9.3%	7.4%	8.9%
SG&A expenses		1,164	2,378	3,580	4,837	1,193	2,399	3,717	5,065	1,268	3,251
	YoY	8.4%	14.2%	13.9%	13.3%	2.5%	0.9%	3.8%	4.7%	6.3%	35.5%
	SG&A ratio	7.5%	7.5%	7.5%	7.3%	5.9%	5.7%	6.0%	6.1%	4.5%	5.9%
Operating profit		434	928	1,365	1,853	732	1,529	2,151	2,664	836	1,688	56.3%	3,000
	YoY	132.1%	73.0%	42.3%	26.2%	68.7%	64.8%	57.6%	43.8%	14.2%	10.4%		12.6%
	Operating profit margin	2.8%	2.9%	2.8%	2.8%	3.6%	3.7%	3.5%	3.2%	2.9%	3.1%		3.0%
Recurring profit		456	851	1,243	1,761	734	1,583	2,198	2,720	846	1,683	59.7%	2,820
	YoY	141.1%	59.4%	31.6%	18.0%	61.0%	86.0%	76.8%	54.5%	15.3%	6.3%		3.7%
	Recurring profit margin	3.0%	2.7%	2.6%	2.7%	3.6%	3.8%	3.5%	3.3%	3.0%	3.0%		2.8%
EBITDA		636	1,335	1,973	2,659	914	1,893	2,699	3,422	1,065	2,222	55.6%	4,000
	YoY	54.4%	30.6%	18.4%	11.3%	43.7%	41.8%	36.8%	28.7%	16.5%	17.4%		16.9%
	EBITDA margin	4.1%	4.2%	4.1%	4.0%	4.5%	4.5%	4.4%	4.1%	3.7%	4.0%		4.0%
Net income		265	484	888	884	450	910	1,264	1,519	617	836	52.3%	1,600
	YoY	326.4%	-	-	-	69.8%	88.0%	42.3%	71.8%	37.1%	-8.1%		5.3%
	Net margin	1.7%	1.5%	1.9%	1.3%	2.2%	2.2%	2.0%	1.8%	2.2%	1.5%		1.6%
Quarterly		FY02/20				FY02/21				FY02/22
(JPYmn)		Q1	Q2	Q3	Q4	Q1	Q2	Q3	Q4	Q1	Q2
Sales		15,454	16,427	16,086	17,893	20,292	21,442	20,273	21,533	28,408	26,825
	YoY	44.3%	31.3%	24.2%	24.3%	31.3%	30.5%	26.0%	20.3%	40.0%	25.1%
Gross profit		1,599	1,707	1,640	1,745	1,925	2,004	1,940	1,861	2,105	2,834
	YoY	26.8%	25.7%	10.6%	6.7%	20.4%	17.4%	18.3%	6.6%	9.4%	41.4%
	Gross profit margin	10.3%	10.4%	10.2%	9.8%	9.5%	9.3%	9.6%	8.6%	7.4%	10.6%
SG&A expenses		1,164	1,214	1,202	1,257	1,193	1,206	1,318	1,348	1,268	1,983
	YoY	8.4%	20.3%	13.3%	11.6%	2.5%	-0.7%	9.7%	7.2%	6.3%	64.4%
	SG&A ratio	7.5%	7.4%	7.5%	7.0%	5.9%	5.6%	6.5%	6.3%	4.5%	7.4%
Operating profit		434	494	437	488	732	797	622	513	836	852
	YoY	132.1%	41.4%	3.4%	-4.1%	68.7%	61.3%	42.3%	5.1%	14.2%	6.9%
	Operating profit margin	2.8%	3.0%	2.7%	2.7%	3.6%	3.7%	3.1%	2.4%	2.9%	3.2%
Recurring profit		456	395	392	518	734	849	615	522	846	837
	YoY	141.1%	14.5%	-4.5%	-5.4%	61.0%	114.9%	56.9%	0.8%	15.3%	-1.4%
	Recurring profit margin	3.0%	2.4%	2.4%	2.9%	3.6%	4.0%	3.0%	2.4%	3.0%	3.1%
EBITDA		636	699	638	686	914	979	806	723	1,065	1,157
	YoY	54.4%	14.6%	-0.9%	-5.0%	43.7%	40.1%	26.3%	5.4%	16.5%	18.2%
	EBITDA margin	4.1%	4.3%	4.0%	3.8%	4.5%	4.6%	4.0%	3.4%	3.7%	4.3%
Net income		265	219	404	-4	450	460	354	255	617	219
	YoY	326.4%	-	98.4%	-	69.8%	110.0%	-12.4%	-	37.1%	-52.4%
	Net margin	1.7%	1.3%	2.5%	-	2.2%	2.1%	1.7%	1.2%	2.2%	0.8%

Source: Shared Research based on company data
Note: Figures may differ from company materials due to differences in rounding methods.

Impact of pirate websites
Pirate websites had a negative impact on sales in 2H FY02/18 and Q1 FY02/19.

Seasonality of sales

Sales growth tends to be higher during Q2 (which includes August summer vacations) and Q4 (winter vacations in December and January). This increase is because young students and office workers read more manga during these times, and because e-bookstores tend to run more sales.

New segments (from FY02/20)

By segment (cumulative)			FY02/20				FY02/21				FY02/22
(JPYmn)			Q1	Q1–Q2	Q1–Q3	Q1–Q4	Q1	Q1–Q2	Q1–Q3	Q1–Q4	Q1	Q1–Q2
Sales			15,454	31,881	47,967	65,860	20,292	41,734	62,007	83,540	28,408	55,233
	YoY		44.3%	37.3%	32.6%	30.2%	31.3%	30.9%	29.3%	26.8%	40.0%	32.3%
	eBook Distribution		15,127	31,208	46,896	64,529	20,064	41,206	61,163	82,349	28,074	52,881
		YoY	42.3%	35.4%	30.7%	28.6%	32.6%	32.0%	30.4%	27.6%	39.9%	28.3%
	Other		326	673	1,070	1,329	228	528	843	1,190	334	2,352
		YoY	255.8%	285.3%	274.7%	229.8%	-30.1%	-21.5%	-21.2%	-10.5%	46.5%	345.5%
Operating profit			434	928	1,365	1,853	732	1,529	2,151	2,664	836	1,688
	YoY		132.1%	73.0%	42.3%	26.2%	68.7%	64.8%	57.6%	43.8%	14.2%	10.4%
	Operating profit margin		2.8%	2.9%	2.8%	2.8%	3.6%	3.7%	3.5%	3.2%	2.9%	3.1%
	eBook Distribution		408	896	1,401	1,861	688	1,442	2,090	2,594	872	1,530
		YoY	67.7%	47.6%	32.9%	15.0%	68.6%	60.9%	49.2%	39.4%	26.7%	6.1%
		Segment profit margin	2.7%	2.9%	3.0%	2.9%	3.4%	3.5%	3.4%	3.2%	3.1%	2.9%
	Other		-71	-177	-238	-286	-69	-97	-183	-248	-121	-23
		YoY	-	-	-	-	-	-	-	-	-	-
		Segment profit margin	-	-	-	-	-	-	-	-	-	-
	Adjustments		97	209	203	279	113	184	244	319	85	180
By segment (Quarterly)			FY02/20				FY02/21				FY02/22
(JPYmn)			Q1	Q2	Q3	Q4	Q1	Q2	Q3	Q4	Q1	Q2
Sales			15,454	16,427	16,086	17,893	20,292	21,442	20,273	21,533	28,408	26,825
	YoY		44.3%	31.3%	24.2%	24.3%	31.3%	30.5%	26.0%	20.3%	40.0%	25.1%
	eBook Distribution		15,127	16,081	15,688	17,633	20,064	21,142	19,957	21,186	28,074	24,807
		YoY	42.3%	29.5%	22.3%	23.4%	32.6%	31.5%	27.2%	20.1%	39.9%	17.3%
	Other		326	347	397	259	228	300	315	347	334	2,018
		YoY	255.8%	317.9%	257.9%	120.6%	-30.1%	-13.5%	-20.7%	34.0%	46.5%	572.7%
Operating profit			434	494	437	488	732	797	622	513	836	852
	YoY		132.1%	41.4%	3.4%	-4.1%	68.7%	61.3%	42.3%	5.1%	14.2%	6.9%
	Operating profit margin		2.8%	3.0%	2.7%	2.7%	3.6%	3.7%	3.1%	2.4%	2.9%	3.2%
	eBook Distribution		408	488	505	460	688	754	648	504	872	658
		YoY	67.7%	34.2%	13.0%	-18.5%	68.6%	54.5%	28.3%	9.6%	26.7%	-12.7%
		Segment profit margin	2.7%	3.0%	3.2%	2.6%	3.4%	3.6%	3.2%	2.4%	3.1%	2.7%
	Other		-71	-106	-61	-48	-69	-28	-86	-65	-121	98
		YoY	-	-	-	-	-	-	-	-	-	-
		Segment profit margin	-	-	-	-	-	-	-	-	-	4.9%
	Adjustments		97	112	-6	76	113	71	60	75	85	95

Source: Shared Research based on company data.
Segment breakdowns for FY02/19 have been retroactively adjusted to the post-revision segments, effective from FY02/20.

Adjustments refer to sales and profits/losses not attributable to any segment. Media Do receives business advisory fees from subsidiaries based on the previous year’s sales in each subsidiary. Since FY02/20, the company generated profits not attributable to any segment as sales including business advisory fees exceeded its expenses.

Starting in Q1 FY02/20, the company changed its reporting segments from eBook Distribution, Media Promotion, and Other, to eBook Distribution and Other, leaving it with two reporting segments instead of three. The YoY comparison figures were retroactively adjusted to reflect the changes in the company’s segmentation scheme.

Sales progress vs. initial forecast

% of Initial FY Est.	FY02/20				FY02/21				FY02/22
	Q1	Q1–Q2	Q1–Q3	Q1–Q4	Q1	Q1–Q2	Q1–Q3	Q1–Q4	Q1	Q1–Q2
Total sales	25.8%	53.1%	79.9%	109.8%	26.4%	54.2%	80.5%	108.5%	28.4%	55.2%
eBook Distribution	25.9%	53.3%	80.2%	110.3%	26.5%	54.5%	80.9%	108.9%	-	-

Source: Shared Research based on company data

1H FY02/22 results

Summary

For 1H FY02/22, the company reported consolidated sales of JPY55.2bn (+32.3% YoY), operating profit of JPY1.7bn (+10.4% YoY), recurring profit of JPY1.7bn (+6.3% YoY), EBITDA of JPY2.2bn (+17.4% YoY), and net income attributable to owners of the parent of JPY836mn (-8.1% YoY). 1H results left the company with 55.2% of its full-year target for consolidated sales, 56.3% for operating profit, 59.7% for recurring profit, 55.6% for EBITDA, and 52.3% for net income.

In the company’s mainstay eBook Distribution business, 1H FY02/22 sales were up 28.3% YoY, with Q1 sales up 39.9% YoY and Q2 sales up 17.3% YoY.

In the Other business, 1H FY02/22 sales were up 345.5% YoY. An increase in the number of consolidated subsidiaries due to M&A activity served to boost sales by 572.7% YoY in the three months of Q2.

The company made no change to its initial full-year FY02/22 forecast. For details of the company's assumptions, please refer to the "Company forecast for FY02/22" section below.

After previously deferring from issuing a forecast, the company announced that it expected to pay a FY02/22 year-end dividend of JPY21 per share.

Overview of results by business segment

eBook Distribution business

For 1H FY02/22, the eBook Distribution business reported sales of JPY52.9bn (+28.3% YoY) and segment profit of JPY1.5bn (+6.1% YoY).

Consumers’ lifestyles continued to change prompted by an increase in the amount of discretionary time as more people teleworked and refrained from going out in efforts to prevent the spread of COVID-19. The shift from paper books to e-books also continued to make progress, contributing to sustained market growth. The company saw the continued implementation of large-scale promotional campaigns by some e-bookstores seeking to benefit from this market expansion as a good opportunity to expand its distribution share and strategically focus on top-line growth measures. Some of the company’s contracts with large e-bookstores stipulate that the company’s percentage sales commission decreases gradually as the sales amount increases, but the royalties paid to publishers do not vary with sales amount. Due to this, royalties and other costs as a percentage of eBook Distribution sales are rising, with the percentage reaching 91.1% in 2Q, exceeding 91% for the second consecutive quarter.

In the eBook Distribution business, sales rose at a rate of around 15–20% YoY over June-August 2021. This was due to a slowdown in stay-at-home consumption demand following the surge in Q2 FY02/21 and the absence of special factors, such as large-scale e-bookstore campaigns, as compared with Q1.

The company in Q2 posted an extraordinary loss (impairment loss) of JPY394mn on goodwill at consolidated subsidiary Nagisa. The company declared a goodwill impairment loss after examining earnings progress against initial expectations and judging that recovery would not be possible following the decrease in advertising revenue in Nagisa’s mainstay manga app business resulting from complying with digital platformer regulations regarding online advertising. Going forward, Nagisa plans to focus on its FanTech business (on-demand video streaming service that specializes in 2.5-D/voice content), which is performing favorably.

With regard to the obligation for platformers to provide in-app payment services, out-of-app payment guidance is expected to be made possible, but the timing of this is unknown. This is expected to have the advantage of making it easier to purchase e-books. However, the downside will be the previously mentioned negative impact on ad delivery by e-bookstores, who are clients of Media Do. As such, the company thinks the impact from changes to platformer regulations will be neutral overall.

Other business

In 1H FY02/22, the Other business reported sales of JPY2.4bn (+345.5% YoY) and a segment loss of JPY23mn (versus a loss of JPY97mn in 1H FY02/21).

The company's consolidated income statements from Q2 FY02/22 reflect the inclusion of earnings at Firebrand group (Quality Solutions, Inc., Net Galley, LLC. and related subsidiaries) and Nihonbungeisha Co., Ltd.

Following a third-party allocation of new shares and an decrease in Media Do's equity stake, MyAnimeList was removed from the company's scope of consolidation at the end of Q1 FY02/22 and is now treated as an equity-method affiliate. The company in Q2 accordingly booked a gain on changes in equity of JPY208mn as extraordinary gains.

Topics

Acquisition of Everystar Co., Ltd. shares and its conversion into a subsidiary

The company on September 29, 2021 announced that it would acquire Everystar Co., Ltd. from DeNA Co., Ltd. (TSE1: 2432; shareholding: 70%) and make it a subsidiary. The acquisition price is JPY2.1bn, and the share transfer execution date is scheduled for December 1, 2021. The share transfer will be executed as soon as the preconditions are met, and the company is currently assessing the likely impact on its business performance. The company says it will promptly announce any matters requiring disclosure as soon as they arise.

Media Do acquired Everystar in view of global expansion of the content business, as well as the rising value of original content due to the strong compatibility between digital and content. Going forward, the company plans to expand business areas that produce original content, but it is still far from acquiring well-known IPs and actively entering content editing and publishing fields, which is the forte of publishers. As such, it plans to continue to maintain good relations with publishers.

In FY03/21, Everystar recorded revenue of JPY881mn, operating profit of JPY233mn, recurring profit of JPY235mn, and net income of JPY162mn. Its net assets were JPY1.8bn.

Release of the FanTop NFT platform

On October 12, 2021, the company released its FanTop NFT platform.

The company launched the platform with an initial offering of digital NFTs for three types of publications and five types of sales content. The initial content was intentionally selected for having different fan bases and different levels of popularity to allow for test marketing. The company plans to decide which areas to focus on based on analysis of how well each content type sold.

Company forecast for FY02/22

		FY02/20			FY02/21			FY02/22
(JPYmn)		1H Act.	2H Act.	FY Act.	1H Act.	2H Act.	FY Act.	1H Act.	2H Est.	FY Est.
Sales		31,881	33,979	65,860	41,734	41,806	83,540	55,233	44,767	100,000
	YoY	37.3%	24.2%	30.2%	30.9%	23.0%	26.8%	32.3%	7.1%	19.7%
Cost of sales		28,574	30,594	59,168	37,805	38,005	75,810	50,294
	YoY	38.7%	26.3%	32.0%	32.3%	24.2%	28.1%	33.0%
Gross profit		3,306	3,385	6,691	3,929	3,801	7,730	4,939
	YoY	26.2%	8.5%	16.6%	18.8%	12.3%	15.5%	25.7%
	Gross profit margin	10.4%	10.0%	10.2%	9.4%	9.1%	9.3%	8.9%
SG&A expenses		2,378	2,459	4,837	2,399	2,666	5,065	3,251
	YoY	14.2%	12.4%	13.3%	0.9%	8.4%	4.7%	35.5%
	SG&A ratio	7.5%	7.2%	7.3%	5.7%	6.4%	6.1%	5.9%
Operating profit		928	925	1,853	1,529	1,135	2,664	1,688	1,312	3,000
	YoY	73.0%	-0.7%	26.2%	64.8%	22.7%	43.8%	10.4%	15.6%	12.6%
	Operating profit margin	2.9%	2.7%	2.8%	3.7%	2.7%	3.2%	3.1%	2.9%	3.0%
Recurring profit		851	910	1,761	1,583	1,137	2,720	1,683	1,137	2,820
	YoY	59.4%	-5.1%	18.0%	86.0%	24.9%	54.5%	6.3%	0.0%	3.7%
	Recurring profit margin	2.7%	2.7%	2.7%	3.8%	2.7%	3.3%	3.0%	2.5%	2.8%
EBITDA		1,335	1,324	2,659	1,893	1,529	3,422	2,222	1,778	4,000
	YoY	30.6%	-3.1%	11.3%	41.8%	15.5%	28.7%	17.4%	16.3%	16.9%
	EBITDA margin	4.2%	3.9%	4.0%	4.5%	3.7%	4.1%	4.0%	4.0%	4.0%
Net income		484	400	884	910	609	1,519	836	764	1,600
	YoY	-	-	-	88.0%	52.3%	71.8%	-8.1%	25.5%	5.3%
	Net margin	1.5%	1.2%	1.3%	2.2%	1.5%	1.8%	1.5%	1.7%	1.6%

Source: Shared Research based on company data

Supplement to Q2 earnings announcement (October 13, 2021)

The company made no change to its initial full-year FY02/22 forecast, but it announced a dividend of JPY21 per share at end-FY02/22 (the dividend forecast was previously undetermined).

According to the 2021 survey on the e-book business by Impress Corporation, the e-book market is expected to grow at an average annual rate of approximately 7% up to 2025 based on the value of the market in 2020. Given that the results of the survey by Impress Corporation have been revised upwards in all recent revisions, Media Do believes the e-book market can be expected to grow at an annual rate of at least 7% for the time being, and if the company is able to raise its market share, it believes growth in sales would exceed the market growth rate.

At the start of the year, the company had been planning to invest JPY350mn in advertising in Nagisa, on which it declared a goodwill impairment in Q2. Following the impairment declaration, the company now intends to invest in FanTech (on-demand video streaming service that specializes in 2.5-D/voice content), which it thinks holds promise. The company says the investment amount remains the same.

On September 30, 2021, LINE Digital Frontier Co., Ltd., which operates LINE Manga and is a major business partner of Media Do (accounting for 20.3% of total sales in FY02/21), announced a take-over bid for eBook Initiative Japan Co., Ltd. (TSE1: 3658). eBook Initiative Japan has resolved to support the TOB. If the TOB goes ahead, eBook Initiative Japan would become a wholly-owned subsidiary of LINE Digital Frontier and be delisted from the stock market. eBook Initiative Japan announced a business alliance with LINE Digital Frontier on June 1, 2021, under which it would be contracted with a portion of the back-end operations for LINE Manga. After taking into consideration the impact from the TOB, Media Do judged that no changes needed to be made to its initial forecasts for full-year FY02/22.

Supplement to Q1 Earnings Announcement (July 14, 2021)

The company made no change to its initial full-year FY02/22 forecast. The company claims that the impact of the DMM Books campaign was partially factored into the initial forecasts announced on April 13, 2021. Specifically, the direct impact on results expected from the DMM Books campaign at the time of developing the initial forecasts was factored into initial forecasts. On the other hand, the increase in future demand as a result of increased new users through the campaign, and indirect impact, such as e-bookstores other than DMM Books becoming more active in holding campaigns, were not factored into initial forecasts. Furthermore, from July 2021 on, the effects of the campaign cannibalizing future demand are expected to wind down and growth rate is expected to rise once again.

The impact of business alliance between eBook Initiative Japan Co., Ltd. (TSE: 3658) and LINE Digital Frontier Co., Ltd.

In June 1, 2021, eBook Initiative Japan Co., Ltd. (TSE: 3658) announced a business alliance with LINE Digital Frontier Co., Ltd., which operates LINE Manga and is a major business partner (comprising 20.3% of total sales in FY02/21). Under this agreement, eBook Initiative Japan would be contracted with a portion of the back-end operations for LINE Manga. However, the company explained at the Q1 FY02/22 earnings briefing that transferring back-end operations from itself to eBook Initiative is a difficult task. As of July 2021, there are functions that only the company can support (for example, individual chapter distribution that divides and distributes manga by chapter). Each publisher will need to agree on changes in wholesale distributer. eBook Initiative is an e-bookstore and lacks the know-how as a wholesaler to distribute to other e-bookstores. For that and other reasons, the company maintains that not all of the details in the eBook Initiative announcement will be possible to achieve.

Impact of M&A (Nagisa, Firebrand, Nihonbungeisha)

The company expects the following impact from M&A.

Q2: JPY1.8bn in sales, JPY50mn operating loss after amortization of goodwill
Q3: JPY1.5bn in sales, JPY80mn operating loss after amortization of goodwill
Q4: JPY1.6bn in sales, JPY60mn operating loss after amortization of goodwill
Full-year: JPY5.0bn in sales, JPY250mn operating loss after amortization of goodwill

Initial full-year company forecast (April 13, 2021)

For FY02/22, the company announced that it forecasts consolidated sales of JPY100.0bn (+19.7% YoY), operating profit of JPY3.0bn (+12.6% YoY), recurring profit of JPY2.8bn (+3.7% YoY), EBITDA of JPY4.0bn (+16.9% YoY), net income attributable to owners of the parent of JPY1.6bn (+5.3% YoY), and EPS of JPY100.90.

Sales

The company expects continued expansion of the e-books market. The damage caused by pirate manga websites is rising, however, and at present the company expects business performance to be negatively impacted. The company noted that it expects sales growth related to M&A activities carried out in FY02/21 to be slightly less than JPY5.0bn, which puts sales growth in the eBook Distribution business excluding M&A at around JPY11.5bn (about +14% YoY, taking into account external factors such as the impact of pirate websites). The company forecasts stay-at-home demand to run its course and fall YoY in FY02/22. In FY02/21, sales in the eBook Distribution business grew 32.6% YoY in Q1, 31.5% YoY in Q2, 27.2% YoY in Q3, and 20.1% YoY in Q4.

From March 25, 2021 to April 12, 2021, which falls under Q1 FY02/22 for the company, DMM Books, operated by DMM.com (unlisted), ran a major campaign to attract new users (ended ahead of schedule, with the end date having been moved up). Specifically, DMM Books, which is one of the company’s customers, distributed 70%-off coupons for up to 100 titles to users who had never purchased a title before.

The company has not included sales contributions from the planned 2021 launch of its NFT marketplace business in its initial forecast. As of April 2021, the company noted that it excluded these contributions as it was difficult to produce reasonably accurate estimates.

Costs and investments

Royalties and other costs as a percentage of eBook Distribution sales gradually rose from 88.1% in FY02/20 to 89.3% in FY02/21, and the company expects this trend to continue. This is because some of the company’s contracts with large e-bookstores stipulate that the company’s percentage sales commission decreases gradually as the sales amount increases, but the royalties paid to publishers do not vary with sales amount.

The forecast assumes the company will realize JPY300mn in cost reductions YoY from system development investments made through FY02/21, but expects a JPY200mn YoY rise in goodwill amortization from M&A activities (which would not affect EBITDA).

The company has stated that it views this fiscal year as a year to prioritize investment in order to solidify a foothold for future profit growth, adopting measures such as investment in advertising in Nagisa to capture growth in the manga app market and acceleration of business development through the use of non-fungible token (NFT) and blockchain technology, as a way to realize its Digital Content Asset (DCA) concept. Total investment impacting EBITDA is expected to be JPY1.1bn. This includes JPY350mn for new system development (next-generation system development for internal digital transformation and integration with publishing ERP software), JPY350mn in advertising for Nagisa, JPY210mn in blockchain-related investments (including NFT marketplace and GREET), JPY140mn in ongoing investments in subsidiaries, and JPY80mn in other system enhancements.

Shareholder returns

The company plans to carry out dividend payouts and share repurchases based on share prices, with a total shareholder return of at least 20% in FY02/22.

Medium-term outlook

The company withdrew its medium-term management plan at its FY02/21 results announcement. It plans to announce a new medium-term plan as soon as it is finalized. The company had previously indicated that it would revise its medium-term plan targets upward when announcing full-year FY02/21 results. However, it decided to postpone the announcement of its new medium-term plan, citing the difficulty in providing a reasonably accurate projections as of April 2021.

The company attributes this to major changes in its operating environment, including the emergence of a new type of content using blockchain technology (non-fungible token [NFT]), its capital and business alliance with Tohan Corporation announced in March 2021 (incorporating NFTs in bookstores nationwide), and the acquisition of Nihonbungeisha. Given that the company plans to launch its NFT marketplace in 2021, it will likely announce a new medium-term management plan after it has a better estimate of how the NFT-related business will affect earnings. For more information on the NFT marketplace, please refer to NFT Marketplace under Business description in the Business section.

Blockchain
A type of database using encryption technology for the distributed handling and storage of transaction logs among directly connected terminals over a communication network. Decentralized management using blockchain technology has three advantages over the conventional approach of centralized management: more resilient to system failure, enables traceability and makes forgery difficult, and transactions are low-cost. Blockchain technology has inherent scalability issues, however, as processing time increases as the number of transactions rises.

At its FY02/21 results announcement, the company noted that it intends to prioritize investment in FY02/22 and FY02/23.

Transitioning from an e-book wholesaler to a publishing platform operator

The company aims to transition from an e-book wholesaler to a publishing platform operator. It thinks of a publishing platform operator as an entity that underpins the entire e-book distribution market including wholesaling, and also has the following functions, which it redefined along with the 1H FY02/21 results:

Target market: This has been expanded from the “e-book market” to the “entire publishing industry including paper books, as well as the entire content market.” This is because digital transformation will necessarily include paper books and the publishing industry as well as digital books. The company plans to use blockchain technology to move beyond e-books and enter the digital content market valued at around JPY4tn (estimate by the Digital Content Association of Japan’s Digital Content White Paper 2020).

Social significance of business: From the previous definition of “streamlining distribution in the e-book market,” the company has redefined its role as “exploiting technology to contribute to the digital transformation of the publishing industry.” The Japanese publishing industry has many small and medium-sized players compared with Europe and the US. Because they may find it difficult to spend large amounts on digital transformation, Media Do aims to help facilitate the process, resulting in coexistence and coprosperity. Because publishers are the customers for the company’s core eBook Distribution business, it is important for the company that the publishing industry overall continues to prosper.

Digital content market size

Source: Shared Research based on company data

Business

Business description

Media Do is Japan’s leading wholesaler of e-books by market share. According to the company’s own research, it has a share of around 80% of the market for e-book distribution through wholesalers on a gross merchandise value basis. With e-books, “wholesaling” refers to the process of obtaining content-use permission from publishers, storing e-book data on company servers, and delivering e-book data to e-bookstores. The company simplifies operations and reduces headaches for publishers and e-bookstores by mediating contracts, providing systems, managing campaigns, and summarizing data as an e-book wholesaler. The e-book wholesaling framework is unique to Japan and in high demand as the nation has a large number of relatively small publishers and less oligopoly by foreign e-bookstores such as Kindle in the Japanese e-book market. This situation creates a strong need for the wholesaling of e-books. In FY02/21, almost all of the company’s sales and operating profit came from the eBook Distribution business. Its earnings structure as of FY02/21 is close to that of a wholesaler, and its main cost, royalties (cost of sales), is a variable cost. However, the company’s contribution margin is high at about 11% thanks to its high market share and the fact that it sells e-book data, which offers substantial economies of scale. Cost other than royalties and advertising expenses amounted to JPY6.3bn, which were mostly fixed costs.

eBook Distribution

The eBook Distribution business consists of Media Do Co., Ltd., and Digital Publishing Initiatives Japan Co., Ltd., which engage in e-book “wholesaling,” Media Do Tech Tokushima Co., Ltd, which handles e-book related operations, and Nagisa Inc. which operates manga app “Zero Comic” (formerly Manga Zero). This section mainly provides an overview of the e-book wholesaling business model.

Role and function of e-book wholesaling

Through wholesaling, Media Do simplifies operations and reduces labor for publishers and e-bookstores by mediating contracts, providing systems, managing campaigns and data, and tallying totals. E-book wholesalers are called upon to fulfill different functions than wholesalers of paper books.

Contract mediation: The company sources content from multiple publishers and provides that content to multiple e-bookstores. The greater the number of suppliers (publishers) and selling destinations (e-bookstores), the more convenience the company’s mediation function provides.

System provision: The company stores on its servers the content data it receives from publishers, ensuring the content is handled appropriately and delivered swiftly to readers; e-bookstores need only link with the server. Rating systems (regulations on what expressions may be used) differ by sales route. Wholesaling sometimes requires revision of inappropriate content. To customers of the Alliance service model (see Service models under the eBook Distribution business section), the company may also provide a viewer (e-book reader software) and other system elements.

Campaign management: E-books present numerous marketing possibilities. For example, to expand the customer base the first volume in an e-book series might be offered for free, with charges assessed for later volumes. Content may be offered for free for a limited period, or apps can divide up stories and allow readers to purchase individual stories. Sales campaigns can facilitate flexibility in price-setting. Wholesalers are required to accurately manage a diverse range of marketing measures on behalf of numerous publishers and e-bookstores. Media Do also makes campaign suggestions.

Data management and tallying: These office functions include monitoring daily sales, managing and tallying lists of the content readers download and readers’ usage history, and outputting this data for publishers and e-bookstores.

Flow of cash through the value chain

Of cash from sales to readers, e-bookstores typically receive around 40%, wholesalers 10%, and publishers 50% (with author royalties paid out of this portion). Based on this, Shared Research calculates Media Do’s contribution margin (sales minus royalties) to be 16–17% (10%÷60%). However, from the company’s disclosure documents, we calculate the royalties as a percentage of eBook Distribution sales for FY02/21 at around 89%, indicating that the company’s contribution margin (sales minus royalties) was approximately 11%. This is because some of the company’s contracts with large e-bookstores stipulate that its percentage sales commission decreases gradually as the sales amount increases. However, as the percentage of royalties the company pays to publishers does not change based on sales amount, higher sales reduce the company’s contribution margin.

Under its Alliance service contract (see Service model under the eBook Distribution business section), e-bookstores receive 70% of the amount paid through apps, as 30% of what readers pay goes to platform operators (e.g., Apple and Google; less than 30% depending on sales value). That 70% is then divided among publishers, wholesalers, and e-bookstores. To avoid paying fees to platform operators, many eBook retailers only offer browser-based payment services and limit the content provided through their apps to the items for which users have already paid.

Although e-bookstores have the right to set the prices at which e-books are sold to end-customers, publishers do influence price-setting to a certain degree, for several reasons. Shared Research thinks possible reasons include that the selling prices of paper books, which are based on resale prices, provide a starting point for setting prices on e-books; that under the Japanese publishing industry’s resale price maintenance system, it is customary for content producers to set prices; and that e-bookstores need publishers to cooperate with them, for the e-bookstores to roll out campaigns while maintaining a certain level of profit margins.

For e-books, author royalties typically represent a fixed percentage of sales at e-bookstores. By comparison, royalties for paper books are determined at a fixed percentage of the number of books printed. Publishers typically pay the author royalties in both cases.

Cost structure

Royalties are variable costs; most other expenses are fixed costs.

From Media Do’s disclosure documents, we calculate royalties as a percentage of eBook Distribution sales for FY02/21 at around 89%, indicating that the company’s contribution margin (sales minus royalties) was approximately 11%. Some of the company’s contracts with large e-bookstores stipulate that its percentage sales commission decreases gradually as the sales amount increases. However, as the percentage of royalties the company pays to publishers does not change based on sales amount, higher sales reduce the company’s contribution margin. The ratio of royalties and other costs to eBook Distribution sales has trended upward, rising from 88.1% in FY02/20 to 89.3% in FY02/21.

We understand that increasing the portion of the value chain allocated to wholesalers is not the company’ intention, nor would publishers and e-bookstores easily agree to such a proposal. For this reason, to increase its profit margin the company needs to boost the gross merchandise value while preventing fixed costs from rising.

How the company forecasts performance

Media Do’s forecasts are comprehensive, incorporating an assumed rate of growth for the overall e-book market and sales fluctuations at individual e-bookstores.

Wholesaling (Media Do)

Domestic share

In FY2020, the market for e-books was worth JPY482.1bn (2021 survey on the e-book business, by Impress Corporation). Of this amount, the company estimates it accounted for JPY158.0bn flowing through wholesaling. Based on this assumption, the company’s share of the wholesaling market in FY2020 accounted for around 35% of the gross merchandise value in Japan (including the gross merchandise value from direct transactions between publishers and e-bookstores). As of FY02/21, the company handled more than 2mn titles.

The main reason publishers and e-bookstores use the wholesaling route for e-books is to avoid complexity (engaging in direct, one-on-one business with numerous publishers and e-bookstores, mediating contracts, and managing campaigns). Accordingly, wholesaling becomes more convenient as the number of publishers and e-bookstores grows. Japan has many publishers rather than a few large ones. Also, oligopoly by foreign e-bookstores such as Kindle has not been prevalent in the Japanese e-book market. This situation creates a strong need for the wholesaling of e-books. Media Do estimates that it has the top share of the market (at around 80%) for gross merchandise value via wholesaling. This figure suggests the company’s e-book wholesaling services therefore offer the highest level of convenience to publishers and e-bookstores.

Media Do made Digital Publishing Initiatives Japan Co., Ltd. (DPIJ) a subsidiary in April 2017. As DPIJ’s shareholders included a publishers’ alliance and the Innovation Network Corporation of Japan, the subsidiary had a large share of the market for wholesaling text-based content. This area of Media Do’s business had been lacking; merging with DPIJ allowed it to overcome this weakness. The company also avoided the risk of a commission war by making Digital Publishing Initiatives Japan Co., Ltd. a subsidiary.

E-books present numerous marketing possibilities. For example, to expand the customer base the first volume in an e-book series may be offered for free, with charges assessed for later volumes. Content may also be offered for free for a limited period, or apps can divide up stories and allow readers to purchase individual stories. Flexibility in price-setting can facilitate sales campaigns. Wholesalers are required to accurately manage the diverse range of marketing measures on behalf of numerous publishers and e-bookstores. Managing campaigns appropriately requires personnel as well as systems. As of FY02/20, the company had 350 employees, more than three times the 110 people employed at MobileBook.jp, a competing e-book wholesaler. In FY02/20, the company managed more than 10,000 campaigns and says it is the only wholesaler with the personnel to handle that sort of volume.

Agreements with publishers and e-bookstores

E-bookstores usually choose which wholesaler they wish to use, but in some cases publishers designate the wholesaler.

Under exclusive agreements, all transactions flow through Media Do, so wholesaling volume (gross merchandise value) is large. At the same time, commission rates are advantageous to publishers and e-bookstores, so the arrangements benefit all parties.

Media Do suggests exclusive agreements for new e-bookstores with growth potential. In case of small e-bookstores, publishers sometimes suggest the e-bookstores conduct business through wholesalers.

Text-based content has a lower sales volume than manga, and publishers tend to be smaller in scale. Accordingly, at e-bookstores that primarily handle text-based content or those that provide a comprehensive range of content, the company’s share of wholesaling tends to be higher than at e-bookstores specializing in manga.

Selling destinations (e-bookstores)

The company does business with more than 150 bookstores, including all of those ranked in the top 20 by user frequency (Impress Corporation, 2020 survey on the e-book business indicating the top 20 stores where customers had made purchases or paid fees).

The company mainly sells to LINE Corporation (unlisted), which as a group accounted for 20.3% of total sales in FY02/21 (20.9% in FY02/20). Next was Amazon.com, Inc. (NASDAQ: AMZN) and its group companies at 13.8% (12.8%), followed by NTT Solmare Corporation (subsidiary of NTT [TSE1: 9432]) at 12.7% (sales not disclosed for FY02/20 as it accounted for less than 10% of total sales), and BookLive Co., Ltd. (shareholders include TSUTAYA Co., Ltd. and Toppan Printing Co., Ltd.) at 10.2% (11.5%). These four groups account for around 57% of the company’ sales. The company noted that DMM.com’s (unlisted) e-book store DMM Books, which has been running aggressive sales campaigns in recent years, is also a customer. The difference in growth rates among e-bookstores is dependent on how aggressive they are in their sales campaigns, and the industry is structured to benefit those capable of shouldering campaign costs, such as by having ample capital or other income sources.

The LINE group operates LINE Manga, the Amazon.com group Kindle, NTT Solmare Comic CMOA, and BookLive the Booklive app as e-bookstores/apps. The company has exclusive agreements with LINE Manga and Comic CMOA.

LINE Corporation announced that it will sell 70% of its stake in LINE Digital Frontier, which operates LINE Manga, to US-based Webtoon Entertainment Inc. As a result, LINE Digital Frontier will become a wholly owned subsidiary of Webtoon Entertainment. Webtoon Entertainment Inc. operates e-comic service WEBTOON in South Korea and the US. Line Corporation plans to use the proceed from the sale of its stake in LINE Digital Frontier to acquire shares in Webtoon Entertainment and expects to have a 33.4% stake. The sale took place in August 2020 and the sale price was undisclosed. As LINE Digital Frontier will no longer be a consolidated subsidiary of LINE Corporation, the company expects that LINE Corporation will no longer disclose the transaction volume of LINE Manga.

LINE Manga’s transaction volume and Media Do Holdings’ sales

LINE Manga	FY12/18			FY12/19				FY12/20
(JPYmn)	Apr–Jun	Jul–Sep	Oct–Dec	Jan–Mar	Apr–Jun	Jul–Sep	Oct–Dec	Jan–Mar	Apr–Jun	Jul–Sep
Transaction volume	3,600	4,900	5,300	6,000	6,300	6,200	6,400	6,800	7,600	8,200
YoY growth	25.9%	59.1%	89.3%	114.3%	75.0%	26.5%	20.8%	13.3%	20.6%	32.3%
QoQ growth	28.6%	36.1%	8.2%	13.2%	5.0%	-1.6%	3.2%	6.3%	11.8%	7.9%
MediaDo	FY02/19				FY02/20				FY02/21
(JPYmn)	Mar–May	Jun–Aug	Sep–Nov	Dec–Feb	Mar–May	Jun–Aug	Sep–Nov	Dec–Feb	Mar–May	Jun–Aug
Sales	10,708	12,510	12,956	14,393	15,454	16,427	16,086	17,893	20,292	21,442
YoY growth	38.2%	24.2%	36.8%	45.1%	44.3%	31.3%	24.2%	24.3%	31.3%	30.5%
QoQ growth	8.0%	16.8%	3.6%	11.1%	7.4%	6.3%	-2.1%	11.2%	13.4%	5.7%

Source: Shared Research based on company data

LINE
This communication app commenced service in June 2011. In addition to one-on-one and group chat functions (like WhatsApp), LINE offers free telephony, and via a news tab the app disseminates breaking news, weather, fortune telling, and rail transit information. The LINE app can also be used for payments, delivery, shopping, manga, and other services. Monthly active users in Japan number 86mn (as of October 2020). Although LINE and LINE Manga are independent, the LINE app can be used for some LINE Manga services, and LINE can guide users toward LINE Manga.

Sales to major customers in FY02/21

Sales to major customers in FY02/21 were as follows: JPY17.0bn to LINE Digital Frontier Co., Ltd. (+23.3% YoY), JPY11.5bn to Amazon Services International Inc. (+36.1% YoY), JPY10.6bn to NTT Solmare Corporation (subsidiary of NTT [TSE1: 9432]; sales not disclosed for FY02/20 as it accounted for less than 10% of total sales), and JPY8.5bn to BookLive Co., Ltd. (+12.9% YoY). Sales to the LINE Group were affected by intensifying competition from LINE Manga’s competitor Piccoma (operated by South Korea’s Kakao Corp. [KRX: 035720] group). Sales to Amazon rose faster than the company’s overall growth driven by stay-at-home demand as well as growth in text-based content, where Amazon and Media Do maintain a strong competitive edge. As for NTT Solmare, sales climbed enough for it to be considered a major customer and require disclosure, thanks to aggressive promotions by its e-bookstore (Comic CMOA) as well as an exclusive agreement raising the company’s share in NTT Solmare transactions. Sales to BookLive grew slower than the company’s overall growth as BookLive conducted more direct transactions with publishers, which lowered the company’s share in BookLive transactions.

The impact of business alliance between eBook Initiative Japan Co., Ltd. (TSE: 3658) and LINE Digital Frontier Co., Ltd.

On September 30, 2021, LINE Digital Frontier Co., Ltd. announced a take-over bid for eBook Initiative Japan Co., Ltd. eBook Initiative Japan has resolved to support the TOB. If the TOB goes ahead, eBook Initiative Japan would become a wholly-owned subsidiary of LINE Digital Frontier and delist from the stock market. eBook Initiative Japan announced a business alliance with LINE Digital Frontier on June 1, 2021, under which it would be contracted with a portion of the back-end operations for LINE Manga. After taking into consideration the impact from the TOB, Media Do judged that no changes needed to be made to its initial forecasts for full-year FY02/22.

Suppliers (publishers)

Media Do receives permission from publishers and other content holders to use their content, paying royalties in exchange. Publishers are therefore analogous with “suppliers” in general corporate transactions. The company has accounts with more than 2,200 publishers, of which 1,680 are non-manga publishers. The company says it does business with all major publishers (members of the Japan Book Publishers Association, excluding publishers of non-print media, such as audiobooks). The company says it conducts business with more than 99% of domestic publishers that supply e-books.

The top three suppliers of e-book content are estimated to be Kodansha Ltd., Shogakukan Inc., and Shueisha Inc. (each of which is a major manga publisher and a major shareholder of Media Do; the three companies accounted for 45.4% of the company’s total purchases in FY02/19; FY02/21 data has not been disclosed, but the percentage of purchases from these top suppliers continues to remain high). Media Do’s distribution agreements with these companies are one-year contracts that renew automatically if neither party objects.

Systems, infrastructure, and engineers

Content distribution system, e-bookstore system

The company had two distribution systems in place for a time after merging with Digital Publishing Initiatives Japan (DPIJ), but put a fully integrated distribution system in place in FY02/21. The integrated distribution system combines the best features of each of the two former systems. It is based on the system used by DPIJ, which had numerous connections, and includes the Contents Agency System (CAS) functionality of the company’s former system. By integrating its multiple content submission and distribution systems, the company expects to reduce content distribution costs and build its content submission and distribution system into a consistent publishing-industry database. By integrating submission operations and making royalty distribution more efficient, the company intends to help publishers improve operating efficiency. It thinks that helping publishers concentrate on production will let them focus on creating and digitizing more content. Using the new database to connect to all publishers and e-bookstores will help the company ascertain sales conditions instantaneously, facilitating more sophisticated marketing efforts at both publishers and e-bookstores. The company also aims to make the system compatible with the new distribution framework using blockchain technology it is planning.

Previous system: CAS

The company previously used the CAS solution, which it had developed. The new integrated distribution system has the same basic functionality as CAS.
CAS comprised a content distribution system, called md-dc, and an e-bookstore system, MDCMS.

md-dc, the content distribution system, was used to store and distribute e-book data files digitalized from the various types of books publishers provided (comics, text-based books, magazines, and photo collections). This system also handled the tallying of sales and royalties due to individual publishers, and produced reports. Media Do says its system has been 99.999% utilized and is capable of handling up to 6.0bn downloads per month. Having access to Media Do’s distribution system means e-bookstores have no need to store content on their own servers. This ability to handle an increased access volume benefited e-bookstores.

MDCMS, the e-bookstore system the company developed, included all the key functionality of other e-commerce sites, such as member management, ranking, point, and payment functions. The system was also equipped with data analysis functionality to facilitate sales management (graphing), track the ongoing status of members and performance throughout their membership periods, analyze access, and manage advertising results.

End-customer information

In cases where Media Do provides its e-bookstore system, end-customer information is stored on its system. However, the company cannot use end-user information without permission, as it belongs to e-bookstores (the exception being information related to its own bookstore). When it needs to analyze end-customer sales information related to marketing measures, the company obtains permission from e-bookstores before extracting this information from its system and analyzing it. On the other hand, the company uses sales information on books it handles itself to determine which items are selling well across the e-book market, as well as strong-selling titles at individual e-bookstores.

Infrastructure

In March 2019, the company began moving its system infrastructure from an on-premises structure onto the cloud.
The shift to a cloud-based structure was completed in 2020, and the company completely shut down its former system in February 2021. The company expects to reduce infrastructure costs by half with the shift to the cloud.
The company’s cloud infrastructure uses Amazon Web Services.

In the past, the company opted for on-premise infrastructure, believing it provided the better security needed for handling copyrighted material. With cloud servers having become more secure, the decision to move to the cloud was based on the need for redundancy in response to a surge in campaign demands and the use of blockchain technology, more expandability, and strong preference by engineers.

Publishing ERP Software as a Service (SaaS) business: PUBNAVI

Sales management and stamp duty management related to e-books have become increasingly complex, presenting a challenge to many small and medium-size publishers. Stamp duty management: For printed books, stamp duty is levied based on the print run, but for e-books, stamp duty is levied based on sales volume. E-books also do not go out of print. Therefore, the number of e-book titles to be managed will continue to increase. Sales management: E-books can be sold in various formats not available with printed books, such as installments and composite volumes, and subscription model (unlimited volume). More alternative sales models are likely to appear going forward. The company therefore plans to begin joint development of a Software as a Service (SaaS) sales and stamp duty management service primarily for small and medium-size publishers. The company has formed an alliance with Kowa Computer Co., Ltd., which has extensive experience in system integration for printed books, and the two companies will share revenue from system usage fees. The company plans to cultivate new customers and increase distribution share by providing solutions that help streamline business processes and improving the features of its e-book wholesale system. The service is scheduled to go live in November 2021.

Engineers

The company said that it had over 100 engineers as of FY02/20.

The Media Do workplace offers many growth opportunities. The company’s engineers are in charge of a wide range of areas from front-end through back-end, and are required to tackle new fields such as blockchain technologies and the Go programming language.

The company has a specialist engineer recruitment team and is improving its recruitment with initiatives such as internships and owned media operations.

Industry organizations

Media Do is a member of the World Wide Web Consortium (W3C), a global standardizing body for internet technology. W3C manages EPUB, the international standard for e-books. The company discusses future international standards for e-books with the Digital Publishing Business Group, a body established within W3C. The company is the Group’s only Asian co-chair.

As international standards for e-books significantly affect e-publishing’s creative environment, as well as distribution platforms in general, in April 2017 the company jointly established the Advanced Publishing Laboratory (APL) with the Keio Research Institute at SFC, Kadokawa Corporation, Kodansha Ltd., Shueisha Inc., and Shogakukan Inc. APL makes recommendations for future publishing-related research, including international e-book standards for the publishing of Japanese text (such as the use of vertical script and annotative glosses to indicate pronunciation).

Change in business segments (FY02/20)

On March 1, 2019, Media Do Co., Ltd. merged with Digital Publishing Initiatives Japan Co., Ltd., a consolidated subsidiary. At that time, the company revised its former three business segments (eBook Distribution, Media Promotion, and Other) into two (eBook Distribution and Other).

In the eBook Distribution business, the company aims to build new platforms to handle expansion in the e-book publishing market through efficient wholesaling and leveraging blockchain and other cutting-edge technologies. The new Other business segment includes the media business which handles investment in areas aimed at invigorating the publishing industry, and peripheral businesses. The company aims to further clarify the purpose of individual businesses going forward.

The company aims to boost profitability in its mainstay eBook Distribution business by reducing costs and increasing efficiency.

The company sees the Other business segment as an area for up-front investment.
The figure below shows the relationship between business segments up through FY02/19, and that from FY02/20. Although the Other business segment has the same name as before, investors should be aware that the segment’s business content has changed significantly.

Previous (up to FY02/19) and new (from FY02/20) segments

Source: Shared Research based on company data

Previous eBook Distribution business segments (by service model)

In the eBook Distribution business, Media Do handles e-book content on behalf of publishers and other content holders, uses its systems to wholesale the content to e-bookstore clients, and also distributes e-books for sale at e-bookstores the company operates itself. In addition to systems, the company creates sales and support structures, provides strategic planning and e-book business consulting, and produces and provides operational support for e-bookstore sites.

Specifically, this business focuses on three service models: Distribution, Alliance/Platform provision, and Store operation. The composition of sales by service model in Q1 FY02/20 was around 72% for Distribution (file-based transactions), approximately 26% for Alliance (transactions that include the provision of e-bookstore systems, mainly LINE Manga), and around 2% for Store operation and other models.

Under the Distribution and Alliance/Platform provision models, the company acts as a one-stop provider by offering customers a service package that includes e-book content, an e-book distribution system, an e-bookstore system, and expertise in e-bookstore operation.

Under all service models, publishers pay author royalties. The company says, however, that in the future it would like to handle agency payments of author royalties, and announced that it would release a Software as a Service (SaaS) sales and stamp duty management service in November 2021.

eBook Distribution business flow

Source: Shared Research based on company data

Sales by service model

Sales by service model (Quarterly)			FY02/18				FY02/19
(JPYmn)			Q1	Q2	Q3	Q4	Q1	Q2	Q3	Q4
Sales: eBook Distribution			7,446	9,831	9,247	9,699	10,510	12,325	12,806	-
	Distribution		4,926	7,208	6,674	7,258	7,849	8,856	9,020
		% of total	66.2%	73.3%	72.2%	74.8%	74.7%	71.9%	70.4%	-
	Alliance		1,881	2,000	1,879	1,809	2,022	2,736	3,027
		% of total	25.3%	20.3%	20.3%	18.7%	19.2%	22.2%	23.6%	-
	Store operation		357	351	318	297	321	346	339
		% of total	4.8%	3.6%	3.4%	3.1%	3.1%	2.8%	2.6%	-
	Other		281	271	374	335	316	386	419
		% of total	3.8%	2.8%	4.0%	3.5%	3.0%	3.1%	3.3%	-
Royalties (% of eBook Distribution sales)			83.0%	83.7%	83.4%	84.0%	84.9%	85.9%	85.7%	-
	Distribution		87.3%	87.3%	88.2%	88.1%	-	-	-	-
	Alliance		91.9%	89.9%	90.9%	90.8%	-	-	-	-
	Alliance/Platform		82.1%	80.3%	78.2%	78.9%	-	-	-	-
	Own e-book store		39.1%	39.1%	37.3%	37.0%	-	-	-	-

Source: Shared Research based on company data; disclosed through Q3 FY02/19

Disclosure of sales by service model
The company discontinued this disclosure in Q4 FY02/19, citing two reasons. First, conditions have changed, with distribution making up a higher share of the total due to the merger with Digital Publishing Initiatives Japan. Second, the percentage of LINE Manga in Alliance service has grown.

Service models

Distribution

Under this service model, the company wholesales e-book content to e-bookstores. Principal customers include BookLive Co., Ltd. (shareholders include TSUTAYA Co., Ltd. and Toppan Printing Co., Ltd.), and the group companies of Amazon.com (NASDAQ: AMZN).

Content owners (such as publishers), permit Media Do to use their content.

The company uses its content distribution system to provide content to e-bookstores, and end-customers (readers) can read the content via each e-bookstore.

End-customers (readers) pay e-bookstores for the use of content.

E-bookstores pay royalties and wholesaling fees to Media Do. The company then pays royalties to publishers.

E-bookstores or publishers typically bear advertising expenses.

Alliance

This service model involves wholesaling, based on the provision of an e-book distribution system. Media Do also operates e-bookstores with Alliance service partners. This arrangement benefits Alliance partners because they can leave e-book infrastructure up to Media Do and dedicate themselves to marketing. The Alliance model also benefits the company because having Alliance partners with strong marketing capabilities makes it easier to boost gross merchandise value (GMV). A major client under this service model is the LINE Digital Frontier (LINE Manga). As LINE Manga uses a system provided by Media Do, nearly 100% of the GMV for LINE Manga is through wholesaling by the company.

Content owners (such as publishers), permit Media Do to use their content.

The company uses its content distribution system and e-bookstore system to distribute content to end-customers (readers).

End-customers (readers) pay allied e-bookstores for the use of content.

Allied e-bookstores pay royalties to the company, which pays content owners (such as publishers).

The company and Alliance partners divide up earnings.

Alliance partners or publishers typically bear advertising expenses.

Store operation

1. Comic Navi

The company operates Comic Navi, its own bookstore site for distributing e-book content. Previously, Comic Navi allowed the company to ascertain trends among end-customers (consumers), but the revised medium-term plan positions the e-bookstore’s role as a way to leverage system development in response to client needs. Whereas Comic Navi’s systems were previously built for e-book stores with monthly turnover of JPY100–200mn, it is enhancing the system’s recommendation function to handle larger bookstores, with monthly turnover of JPY500mn to JPY1.0bn. As well as meeting the needs of existing e-bookstores, Media Do plans to use the system to encourage new clients to make the switch to its own services. Operating a store does put the company into competition with some clients (e-bookstores). However, Comic Navi is relatively small in scale, and clients tend to think the benefits Comic Navi provides (functional enhancements via its systems) outweigh any competitive concerns.

Content owners (such as publishers), permit Media Do to use their content.

The company uses its content distribution system and e-bookstore system to distribute content to end-customers (readers).

End-customers (readers) pay the company’s e-bookstore for the use of content.

The company pays royalties to content owners (such as publishers).

Comic Navi bills readers monthly and provides access to the manga available within their scope of allocated points, which depends on service level. Media Do attributes Comic Navi’s low cancellation rate to this framework. Being a wholesaler allows Media Do to offer many types of products. The company also expects Comic Navi’s turnover to increase because the e-book market itself is in a growth phase. Comic Navi allows the company to generate profit on sales through both the wholesaling and the e-book store functions, and while Media Do expects losses in FY02/21 and FY02/22 due to the impact of investments, it expects to recoup its investment by FY02/32. It targets sales of JPY1.2bn, JPY1.4bn, JPY 2.0bn, and JPY3.0bn in FY02/20, FY02/21, FY02/22, and FY02/23 respectively, ramping up to expected monthly sales of JPY250mn by FY02/23—a profit level several times higher than that of FY02/20.

2. Zero Comic (Nagisa)

In October 2020, the company made manga app operator Nagisa (Zero Comic, formerly Manga Zero) a subsidiary, acquiring 68.8% of its shares excluding Nagisa CEO Yokoyama’s stake. The acquisition price was not disclosed. Nagisa operates a Manga business, under which it develops and operates “freemium” apps for manga (Japanese-style comics) and also a FanTech business, under which it operates an on-demand video streaming service that specializes in 2.5-D/voice content. With its prowess in application development and business plan execution, and market track record of more than 40,000,000 downloads of its apps, Nagisa promises to further enhance the competitive position of Media Do in the app market. More specifically, post-acquisition plans call for working together on the development, distribution, and promotion of platforms and solutions that will help Media Do maximize the market reach of its digital content, re-examining distribution channels used for apps and other digital content, making better use of customer data, and finding new ways to market manga content. Media Do explains that it has invested in app businesses, mainly making Nagisa a subsidiary, with the primary goal of acquiring lite users. It says new services are more likely to grow through app-based services, not through browser-based services. Accordingly, the company believes that technology and expertise associated with app-based services will be necessary for the development of new services that will drive market expansion.

In Q2 FY02/22, the company posted an extraordinary loss (impairment loss) of JPY394mn on goodwill at consolidated subsidiary Nagisa. The company declared a goodwill impairment loss after examining earnings progress against initial expectations and judging that recovery would not be possible following the decrease in advertising revenue in Nagisa’s mainstay manga app business resulting from complying with digital platformer regulations regarding online advertising. Going forward, Nagisa plans to focus on its FanTech business (on-demand video streaming service that specializes in 2.5-D/voice content), which is performing favorably.

Other business

Subsidiaries handle Other business.

Media Do International, Inc.

This company’s role is to spread the Media Do group’s business mission overseas and increase business opportunities for rights owners including authors and publishers.

ARTRA entertainment Inc.

This subsidiary provides e-comic coloring and other services to assist with drawing comics. Although recruiting is below targets, Media Do says demand for the subsidiary’s services is high and performance is improving.

J-Comic Terrace Corporation

This company operates Manga Library Z, a free e-comic service, and distributes other e-books. As of September 2019, this subsidiary’s sales were below its initial target due to a downturn in advertising market conditions and an increase in similar free services.

Flier Inc.

This company provides the Flier service, offering book summaries aimed at promoting book sales. Monthly fees are set according to service level. At first, it focused on individual users, but it is now focusing on services for corporations as of 2021. Members numbered over 800,000 as of July 2021. The company targets a membership of 1.2 million by 2022.

MangaNews Inc.

This company runs MangaNews, which provides manga-related information, centering on manga review articles. Although the company aims to promote manga sales through review articles, it has fallen short of initial targets, and Media Do declared a goodwill impairment loss on the company in FY02/19.

Jive Ltd.

This company handles the imprint business. Media Do explains that the imprint business is low-risk, as digital printing makes small-lot reprinting possible, and web marketing allows the number of copies to be determined accurately.

Profit margins are usually lower for paper books than for e-books, due to costs of printing, returns, and disposal. As a result, profit margins are higher at publishers that have transitioned more fully to e-books, and the margins are improving at large publishers in particular. (According to research by Media Do, in 2015 three large publishers—Shueisha, Shogakukan, and Kodansha—had net margins of 1.26%. That figure had improved to 4.63% by 2018.) Resources are one reason small and medium-sized publishers find the transition to e-books difficult. Small and medium-sized publishers do not possess adequate personnel or expertise to grow e-book sales. Cash flow is another reason. With paper books, publishers are paid when they deliver books to wholesalers. When sales are via e-bookstores, publishers receive payment about two months after the books are sold. This float makes the transition to e-books difficult from the standpoint of cash flow.

The company thinks small and medium-sized publishers can improve profit margins in three ways: by supporting cash flow while promoting a transition to e-books, by using print on demand (POD) to lower return rates on unsold paper books, and by standardizing and increasing the efficiency of marketing, systems, and back-office functions.

Media Do aims to grow by expanding the overall distribution of publications, including the two main types that form the basis of publishing culture in Japan: the producer-driven approach typical of paper books and the market-oriented approach used with e-books and POD. Jive Ltd. was Media Do’s first acquisition in the imprint business, followed by receipt of the Next F label business.

*Imprint
Among Western publishers, “imprint” refers to a publishing label or brand name. Large Western publishers may own multiple imprints. The sharing of management organizations, expertise, inventory management, and production management systems across imprints helps make the publishing process more efficient. Companies keep imprints unique through editorial independence.

Quality Solutions Inc. and NetGalley LLC

A variety of NFT services are emerging overseas, of which the company highlights NBA Top Shot as a successful example. NBA Top Shot is a service that enables users to collect, buy, and sell photos and videos of NBA players as digital cards. Between its service launch at the end of 2020 and April 2021, NBA Top Shot has processed over 3mn transactions and reached USD500mn in GMV (according to service operator US-based Dapper Labs website). The service achieved high-frequency trading and high GMV as ordinary users such as fans (between several tens of thousands to hundred thousand people) got involved not for speculative holding and selling, but to add to their collection. The company believes that the key to building a successful NFT marketplace does not necessarily lie in building technology, but in attracting fans as ordinary users and distributing content that fans will want to collect. NBA Top Shot mainly consists of ordinary users and distributes a large number of low-priced content, which has in turn generated high GMV. The company will likely develop its services targeting a similar customer base at a similar price range.

Acquisition price: Quality Solutions Inc. USD8.9mn (JPY924mn), NetGalley LLC USD5.3mn (JPY554mn)

Recent performance at Quality Solutions Inc. (FY12/19): Sales of USD7.6mn (JPY791mn), operating profit of USD67,000 (JPY7mn), net loss of USD372,000 (JPY39mn), net assets of negative USD398,000 (JPY41mn)

Recent performance at NetGalley LLC (FY12/19): Sales of USD3.3mn (JPY339mn), operating profit of USD471,000 (JPY49mn), net income of USD471,000 (JPY49mn), net assets of USD1.0mn (JPY106mn).

Nihonbungeisha Co., Ltd.

The company acquired all outstanding shares of Nihonbungeisha, making it a wholly owned subsidiary. Nihonbungeisha publishes a wide variety of magazines and books in both paper and digital formats, including lifestyle practical guides, comic books, and novels, and in recent years has also moved into developing and distributing manga apps. The company’s aim behind acquiring Nihonbungeisha is threefold. First, it will be able to broaden its offerings to e-bookstores by owning proprietary content. Second, owning proprietary content will enable the company to expand into new businesses outside of its eBook Distribution business. Finally, creating a successful digital transformation example for small- and medium-sized publishers will not only help the company sell its know-how externally, but also attract more publishers to join the group.

In FY03/21, Nihonbungeisha anticipates sales of JPY3.5bn and operating profit of JPY190mn. Although sales are trending lower compared to JPY4.1bn in FY03/19, it expects to post operating profit in FY03/21, driven by progress in the shift to e-books, which now accounts for about 40% of its sales, and better inventory management and physical distribution of books. The acquisition cost was JPY1.5bn.

Overseas sales

Overseas sales ratio

In FY02/21, Japan accounted for more than 90% of Media Do’s sales. The company attributes this to differences between the Japanese and overseas e-book business environments.

The company explains that wholesaling is a rational approach in Japan, which has large numbers of publishers and bookstores. The need for wholesaling is relatively low overseas, where publishing and bookstores both tend to be oligopolistic.

Japanese and overseas markets also differ in content handled. Manga accounts for most of the Japanese market for e-books, whereas text-based content makes up most overseas e-book markets.

Media Do’s initiatives

The company established Media Do International, Inc. in San Diego, California, in 2016 to promote its business in overseas markets. The company had intended to distribute Japanese content (manga) to e-bookstores, as it did in Japan, but the overseas business has not expanded as it had anticipated. The company attributes this to a small body of content being translated for overseas markets and the fact that wholesaling barely exists overseas.

The company is utilizing grants and working to increase the volume of translated content in other ways. It also intends to boost content export by creating networks with local publishers and e-bookstores.

The company is leveraging MyAnimeList, LLC (equity-method affiliate from FY02/22, following a private placement of shares), which it acquired via Media Do International in March 2019, to gain direct access to end-customers and allow it to boost content recognition and buying motivation.

FanTop NFT service

Common features of NFT (non-fungible token)

NFTs use the same blockchain technology as cryptocurrencies, with the difference being that NFTs are digital content with unique identifiers, using serial numbers to verify ownership. As of 2021, it is mainly used for trading collectible items. However, while the user will have verified ownership of the content, this does not mean that the copyright will be transferred to the user. As such, copyright holders can increase the number of NFT content available. At the same time, third parties can make copies without proof of ownership. Without a mechanism to verify the copyright holder in the NFT marketplace, it is difficult for users to verify whether NFT content is created with the permission of the copyright holder. It is worth noting that an Ethereum 1.0-based marketplace is not suitable for low-priced content given its high distribution costs.

Blockchain
A type of database using encryption technology for the distributed handling and storage of transaction logs among directly connected terminals over a communication network. Decentralized management using blockchain technology has three advantages over the conventional approach of centralized management: more resilient to system failure, enables traceability and makes forgery difficult, and transactions are low-cost. Blockchain technology has inherent scalability issues, however, as processing time increases as the number of transactions rises.

Background and significance of the company’s entry into the NFT marketplace

The company’s mission, and also its business policy, is “establishing a cycle to create sound copyrighted works.” This cycle refers to distributing copyrightable works in keeping with their fair use and returning the proceeds to the authors. In this way, the company says it intends to facilitate the development of culture around the world and help create social affluence. The company’s management vision is to “deliver more content for everybody to enjoy.” It believes that copyrighted content contributes to cultural development, and an environment for providing access to anyone around the world is emerging. To enable delivery of all sorts of content to people all around the world, the company aims to support all stakeholders, including content creators, producers, sellers, and users.

In the current e-book market, there are cases where copyright holders are unable to collect royalties because of pirate websites. The company believes that blockchain technology can contribute to addressing this issue. It says the technology is well-suited to digital content because it enables traceability, is difficult to forge, and can control supply. Through the control of supply (by having the concept of a fixed number of issues), a service offering an asset model capable of achieving a premium such as that which exists on limited editions becomes a possibility. Through a new distribution format using blockchain technology, the company plans to create a secondary market for e-books. In addition to the conventional sales, subscription, and advertising models, the company aims to create a Digital Content Asset (DCA) model with a mechanism to boost, spread, and visualize fan loyalty. This involves using blockchain technology to establish ownership of music, books, and other digital content, enabling users to not only purchase and consume the content, but also sell it. The company intends to expand the options available to writers and artists, for example by enabling them to limit content distribution to just 100 people.

A secondary market facilitates the shift of content from consumption by users at the point of purchase to one based on assets that have a disposal value. By selling content on to others after they are done using the content, customers can recoup part of the cost of purchase, using the money to buy other content. The company believes such changes in user behavior will lead to increases in the gross merchandise value of content. As of August 2021, there appears to be resistance among publishers because they cannot forecast the impact of the secondary market. However, the company plans to gradually gain the understanding of publishers through NFT initiatives and construct a secondary market.

Service expectations

Release date

The company started selling NFT content in October 2021. Also in 2021, it plans to release a viewer app and start secondary distribution on its NFT marketplace. In 2022, it plans to start USD payment-based distribution on MyAnimeList and start offering a white-label (OEM) system.

Expected customer base, price range, and content

A variety of NFT services are emerging overseas, of which the company highlights NBA Top Shot as a successful example. NBA Top Shot is a service that enables users to collect, buy, and sell photos and videos of NBA players as digital cards. Between its service launch at the end of 2020 and October 2021, NBA Top Shot has processed over 10mn transactions and reached USD700mn in GMV (according to service operator US-based Dapper Labs website). The service achieved high-frequency trading and high GMV as ordinary users such as fans (between several tens of thousands to hundred thousand people) got involved not for speculative holding and selling, but to add to their collection. The company believes that the key to building a successful NFT marketplace does not necessarily lie in building technology, but in attracting fans as ordinary users and distributing content that fans will want to collect. NBA Top Shot mainly consists of ordinary users and distributes a large number of low-priced content, which has in turn generated high GMV. The company will likely develop its services targeting a similar customer base at a similar price range.

The company expects the market to be global, but will likely focus on distributing content from Japanese companies that it has close ties to for the time being. As the first NFT content, it launched a digital supplement service with business partner (see below) and major book wholesaler Tohan Corporation. As of July 2021, the company has begun discussing this plan with Kadokawa, Kodansha, Shueisha, and Shogakukan, all of which are major suppliers for the company. However, there are discrepancies in the amount of interest among content owners.

The digital supplement service provides NFT-enabled content to readers that visit bookstores and purchase products. For example, paper books can be sold with limited edition digital supplements (videos, music, etc.), making digital content into digital collectibles. This will make it easier for the company to use bookstores as a contact point as it will lead to higher sales and unit prices of paper books while also boosting bookstore traffic. In addition, since the company can identify users that have the digital supplement, it can leverage this data and directly market to fans who purchased books. Further, since delivery, management, and other operations are more efficient compared to physical supplements, the company can carry out a variety of campaigns and initiatives simultaneously without limiting these to certain stores. The company also plans to use its equity-method affiliate, MyAnimeList, to generate leads for the NFT marketplace.

Earnings structure

Based on the limited information provided by the company, Media Do appears to be planning an earnings structure similar to its eBook Distribution business. The system will likely involve the company collecting a set amount of fee from the buyer (user) and paying a set amount of fee to the respective rights holders (publishers, authors, bookstores, etc.), with the remainder being the company’s profit. As with e-books, securing a certain level of GMV will be important. According to the company, users generally shoulder around 10%–15% of fees when using NFTs, and the company will likely reference this figure when building its system. In addition, other sources of income should be considered, such as margin gained from premiums when issuing limited contents compared to common contents, or fees for issuing serial numbers upon initial issuance. As of April 2021, the company noted that it was difficult to forecast GMV with reasonable accuracy.

Capital and business alliance with Tohan Corporation and issuance of new shares by private placement

On March 25, 2021, Media Do resolved to form a capital and business alliance with Tohan Corporation, one of Japan’s largest book wholesalers. In connection with this, the company will issue new common shares to be placed with Tohan via a private placement and purchase common shares from Tohan, these shares coming from Tohan’s treasury stock holdings and now being sold to Media Do via a private placement.

With the alliance, the two companies are looking to combine their respective strengths and resources, which in the case of Media Do is its highly competitive e-book distribution system and related expertise and its development capabilities in the blockchain technology that is the key to the distribution of a wide range of digital content, and in the case of Tohan, is its extensive physical network, including its sales network and brick-and-mortar bookstore chain. The decision to form an alliance was made based on the recognition of the two companies that the creation of a firm, long-term alliance would allow them to further advance the digital transformation of the publishing industry while helping them increase the value of their own businesses in terms of both enterprise and shareholder value.

Following Media Do’s private placement of newly issued shares with Tohan, Tohan holds a 3.09% stake in Media Do, making it Media Do’s eighth largest shareholder. Following Tohan’s private placement of its own shares (drawn from its treasury stock holdings) with Media Do, Media Do will surpass Kodansha Ltd. to become Tohan’s largest shareholder (Kodansha held a 5.57% stake in Tohan as of end-September 2020). Media Do and Tohan signed the alliance agreement on March 25, 2021; under the agreement, the payment date was for April 12, 2021.

Media Do will acquire 3,917,192 shares of Tohan’s common stock (currently held as treasury shares) via a private placement. With a total value of JPY2,938mn, the transaction leaves Media Do with a 5.56% stake in Tohan. In FY03/20, Tohan reported consolidated sales of JPY408.2bn, operating profit of JPY1.3bn, a net loss attributable to owners of the parent of JPY6.0bn, and net assets of JPY97.4bn.

Overview of business alliance with Tohan

The details of planned business alliance between Media Do and Tohan is summarized below.

Promote digital transformation of publishing industry: Plans call for Tohan to make use of Media Do’s publishing ERP system (currently under development) and the marketing solutions capabilities of Media Do group member NetGalley LLC to accelerate a switch from Tohan’s traditional producer-driven approach to a market-oriented approach, reduce the return rate of its paper-based publications, and improve profit margins of its bookstore chain. Media Do and Tohan are also looking to pull together information on e-books and paper books published and sold that it can then offer as a resource to sellers of paper books and e-books, libraries, book review websites, and businesses handling information on other types of publications.

Promote digital transformation of publications distribution industry (including sales of e-books): The two companies will work together on R&D for a new type of publications distribution model, one that will combine the portability of e-books and other digital publications with the real-life experience of a physical book store and the sense of ownership that comes from paper books and magazines. For its part, Media Do is currently working to develop a new platform for content distribution that makes use of blockchain technology. This effort is proof-of-concept trial run of a new approach to book-selling that provides the consumer with the same physical experience of going into a brick-and-mortar bookstore to buy paper books or other publications. Examples include the provision of limited number of special edition digital content in the form of non-fungible tokens (NFTs) representing digital assets with unique identifying codes made possible by blockchain technology.

Work together in digital library business: OverDrive, Inc. is the largest player in the global digital library market and Media Do is its exclusive agent in Japan. Tohan, with its nationwide network of 21 branch and sales offices, has one of the largest book distribution networks in Japan, and many of the bookstores with which it does business have strong track records of book sales to public schools and public libraries all around Japan. With the alliance between Media Do and Tohan bringing together the solutions capabilities and resources of both companies, the two companies will be in a better position to provide nationwide support for the installation of digital library systems and the ongoing acquisition of digital publications by those libraries.

Extend cooperation to other areas and share management resources: In addition to exploring the possibility of the digital transformation of publications and publication content through cooperative efforts to promote the digitalization of printed books and digital textbook-related businesses, the two companies will consider sharing expertise, systems, personnel, and other management resources.

Technology

Media Do intends to use a consortium blockchain, considering the balance of both speed and security. The system will be able to process transactions at a rate of 5,555tps (transactions per second), or 480mn tps per day. According to the company, assuming an average transaction value of JPY10, the system can handle JPY1.7tn of transactions per year. Amazon Managed Blockchain will make up the infrastructure, which—according to the company—is both cost-effective and can flexibly respond to the required business styles in several companies. There are other companies that are also attempting to provide a similar service using Ethereum’s blockchain platform. However, the company thinks that the Ethereum’s platform will be limited to high value content that is not traded frequency (such as some artworks), because the platform’s processing speed is not sufficient for frequently traded items with a large transaction volume like e-books and cost per transaction is high.

GREET (video co-watching platform)

The company plans to use blockchain technology to move beyond e-books and enter the digital content market valued at around JPY4tn (estimate by the Digital Content Association of Japan’s Digital Content White Paper 2020). The company said that as of October 2020, in its blockchain business it was developing five products other than those related to e-books. One of these is GREET, a product that visualizes the history and spread of influence among users. The company has already released an alpha version to business associates in March 2021, and plans to release it to the public in December 2021.

Specifically, influencers will act as organizers and hold screenings (co-watching events) of their favorite video works. The earnings model relies on the influencers’ followers becoming viewers of these videos and paying for the tickets, with the proceeds divided among the screening organizer, the content copyright holder, and the company.

The COVID-19 pandemic of 2020 has seen the market for experiences suffer a blow amid recommendations to avoid the so-called 3C’s (closed spaces, crowded places, and close contact). This has boosted the need for infrastructure to complement actual experiences. The company also thinks that live online performances have promising growth prospects due to lack of physical constraints (of capacity or distance).

Market and value chain

Japan’s e-book market

Market scale and composition

E-book market scale

In FY2020, the market for e-book publishing was estimated to be worth JPY482.1bn, up 28.6% YoY (2021 survey on the e-book business, by Impress Corporation).

The FY2020 e-books market turned out to be larger than the previous estimate of JPY444.2bn. The institute's analysis shows that the e-book market has expanded significantly due to in-home consumption caused by voluntary restraint from going out following the spread of COVID-19 and the impact of blockbuster titles. The FY2021 projection was also significantly upgraded to JPY537.8bn (from JPY481.2bn previously).

Japan’s e-book publishing market is set to keep growing in FY2021 onward, although the pace of growth may level off. By FY2025, Impress expects the e-book publishing market to have a value of around JPY674.7bn.

This survey projects a value of JPY641.4bn for the e-book publishing market in FY2024. This figure represents a 13.1% upward revision from JPY566.9bn in its 2020 survey.

The company projects that the rate of growth in the eBook market in FY2021 will be somewhere between roughly 15% to just under 20% of what it was in FY2020. This projected growth rate is higher than the growth rate forecast made in 2020 survey on the e-book business by Impress Corporation. Even if home-shopping demand associated with the COVID-19 pandemic gradually declines, the company believes that the larger number of users it has acquired due to the spread of the pandemic will habitually utilize eBooks, much in the same way that eBook usage increased following the resolution of past issues associated with eBook piracy.

E-books
In this survey, e-books refer to digital content with copyright management that is similar to books and magazines. The size of the e-book market is defined as the total purchase amount of distributed e-books (text-based content, e-comics, photo collections, e-zines, etc.) by users in Japan, including monthly subscription fees and charges for manga apps. However, it does not include electronic newspapers, textbooks, information provision for companies, game-oriented products, and academic journals. Note that until the 2020 survey, the scope of "e-books" did not include magazines, and electronic magazines were referred to as "e-publishing".

E-book market scale

(JPYbn)		2011	2012	2013	2014	2015	2016	2017	2018	2019	2020	2021	2022	2023	2024	2025
												Forecast	Forecast	Forecast	Forecast	Forecast
e-books		65.1	76.8	101.3	141.1	182.6	227.8	255.6	312.2	375.0	482.1	537.8	577.1	609.3	641.4	674.7
	YoY	-	18.0%	31.9%	39.3%	29.4%	24.8%	12.2%	22.1%	20.1%	28.6%	11.6%	7.3%	5.6%	5.3%	5.2%

Source: Shared Research, based on “2021 survey on the e-book business” by Impress Corporation

Manga as a percentage of e-books

Of the e-book market in FY2020, manga accounted for JPY400.2bn (83.0% market share), text-based and other content (e.g., literature, practical guides, and photo collections) JPY55.6bn (11.5%), and magazines JPY26.3bn (5.5%) according to a 2021 survey on the e-book business by Impress Corporation.

Media Do thinks the market for text-based e-book content will increase as people who are more accustomed to reading text electronically grow.

Manga as a percentage of e-books

(JPYbn)		2013	2014	2015	2016	2017	2018	2019	2020
Comics		73.1	102.4	127.7	161.7	184.5	238.7	298.9	400.2
	YoY	27.4%	40.1%	24.7%	26.6%	14.1%	29.4%	25.2%	33.9%
	% of total	72.2%	72.6%	69.9%	71.0%	72.2%	76.5%	79.7%	83.0%
Text-based		20.5	24.2	30.8	35.9	39.6	43.9	48.4	55.6
	YoY	32.3%	18.0%	27.3%	16.6%	10.3%	10.9%	10.3%	14.9%
	% of total	20.2%	17.2%	16.9%	15.8%	15.5%	14.1%	12.9%	11.5%
Magazine		7.7	14.5	24.2	30.2	31.5	29.6	27.7	26.3
	YoY	97.4%	88.3%	66.9%	24.8%	4.3%	-6.0%	-6.4%	-5.1%
	% of total	7.6%	10.3%	13.3%	13.3%	12.3%	9.5%	7.4%	5.5%
電子書籍計		101.3	141.1	182.6	227.8	255.6	312.2	375.0	482.1
	YoY	31.9%	39.3%	29.4%	24.8%	12.2%	22.1%	20.1%	28.6%

Source: Shared Research, based on “2021 survey on the e-book business” by Impress Corporation

Size of market for manga (including printed manga)

In 2014, the manga market had a total value of JPY313.8bn, with paper manga making up JPY225.6bn (72% market share) and e-manga JPY88.2bn (28%). In 2020, the market for paper manga had a value of JPY207.8bn (+24.9% YoY; 37.8% market share), and the e-manga market size was JPY342.0bn (+31.9% YoY; 62.2%) according to Research Institute for Publications.

The company summarizes that the growing popularity of smartphones has increased the number of reader contact points and prompted growth in the e-manga market. Also, the overall market for manga is increasing, and e-manga demand is replacing demand for paper manga, to some degree.

Market structure for e-books and printed books (2020)

Source: Research Institute for Publications
Note: Manga is included in Comics and comic magazine included in Magazines.

Why manga represent a high percentage of e-books

The company says manga are better suited to e-books than text-based books for the following reasons.

According to the company, people tend to read e-books in segments of around 30 minutes, and that manga are better suited to this type of consumption than text-based books, which take longer to read.

The company says it can use marketing measures for manga that work only with e-books, making sales easier for publishers. For example, to expand the customer base the first volume in an e-book series may be offered for free. Content may also be offered for free for a limited period, or apps can divide up stories and allow readers to purchase individual stories.

Manga can be digitized less expensively than Japanese text-based books: several thousand Japanese yen per volume versus JPY20,000–100,000 for text-based books. This difference arises because manga can be treated as images, whereas digitizing Japanese text is complicated as it includes a vertical writing mode and combination of syllabaries (Chinese characters, plus the two phonetic readings of katakana and hiragana for pronunciation guides). Because the profitability of text-based books is falling in Japan, publishers are limiting the scope of digitization. By comparison, books written in alphanumerics like English can be digitized for around JPY1,000, making them less expensive and more profitable than Japanese e-books.

According to an in-house study by Media Do, text-only works account for only around 5% of e-publications in Japan, compared with around 30–40% of the e-publishing markets in the United States and China.

Differences from the music industry

The publishing and music industries have some similarities. Both have been affected by a shift in content provision from physical to digital offerings, but the number of players differs. The publishing industry is characterized by numerous small and medium-sized entities, and even major publishers have a relatively small market share. By comparison, the music industry is dominated by a small number of labels with a high market share.

The issue of pirate websites

The popularity of pirate websites, which offered content free of charge and without the need for user registration, started spreading by word of mouth from around September 2017. Media Do’s performance was affected, with the gross merchandise value (GMV) decreasing notably among manga targeting younger readers. Issues associated with piracy have been resolved for the time being. Following the closure of major pirate manga websites that had had a major impact between 2017 and 2018, the damage caused by pirate websites that had previously not attracted attention is now on the rise. Pirate websites targeting Japanese users but with servers established in other countries, such as Vietnam, are being identified one after another, and the total number of accesses to the top ten such websites is expected to exceed that of the former major pirate websites.

Impact, damage (2017–2018)

Although accurately assessing the impact and damage of pirate websites is difficult, Media Do gauges the impact by looking at fluctuations in YoY growth at manga stores targeting young readers, which were most notably affected. Sales at these stores rose at an annual pace of around 40% both before pirate websites became popular and after they were shut down. During the period when pirate websites were most prevalent (November 2017 to March 2018), these stores had annualized growth of around 10%. Also, sales of the newest episodes of certain popular titles at e-bookstores were more than 30% lower than for previous episodes among customers aged 15–19. Among the 20–24 age group, these sales were down more than 20%. From this data, the company estimates that in the hardest-hit e-book categories pirate websites depressed sales by around 30%.

According to assumptions by the Content Overseas Distribution Association quoting urgent measures to counter pirate websites (April 2018 meeting of cabinet ministers responsible for anti-crime measures at Intellectual Property Strategy Headquarters), the damage was assessed at approximately JPY300.0bn, based on GMV. These same assumptions note that 96% of access to these sites was from Japan, and that most of the damage was to the domestic market.

The company’s sales in 2H FY02/18 and Q1 FY02/19 were also affected by pirate websites. Although an accurate impact assessment is difficult, company estimates that pirate sites may have reduced sales by around 10% during this period, extrapolating from Q2 FY02/19 sales of JPY12.3bn (after the pirate websites had closed), compared with sales of JPY9.7bn in Q4 FY02/18 (before the pirate sites had closed). If quarterly sales were affected by JPY1.0bn and the company’s percentage of royalties was 86%, Shared Research estimates that quarterly operating profit was reduced by around JPY140mn.
Media Do says it became aware of pirate websites’ impact around September 2017. Rumors of pirate websites had begun circulating around then, and the company says they were beginning to have a clear negative impact on sales growth rates.

According to the company, the user base most susceptible to impact from pirate websites is that of lite users, which primarily consists of individuals who utilize apps. Furthermore, pirate websites are more likely to impact performance from content that is short in length than performance from long content.

The problem’s development

The Japanese government began considering measures for blocking access to pirate websites, announcing Emergency Measures for Countering Pirate Websites in April 2018. The emergency measures called for internet service providers to block the three most malicious sites. Access to pirated content on the three sites was blocked at around that time, so the industry assumed the pirate website issue was ending. However, internet service providers had not actually blocked the sites. Around July 2019, overseas authorities detained a suspected operator. As similar pirate websites emerged after that point, it became evident that the authorities had not actually resolved the underlying problem.

The procedures that rights holders must follow to make takedown requests under the US Digital Millennium Copyright Act (DCMA) presents a language barrier for Japanese authors. Also, once a manga artist makes a takedown request, pirate websites may target his or her works in retaliation.

Also, pirate websites used Cloudflare’s content delivery network (CDN). Acting as a reverse proxy for websites, this CDN prevents outside access to servers, with information about the original servicer and operators of pirate websites shrouded by Cloudflare. Furthermore, the pirate websites used non-US providers between themselves and Cloudflare, complicating access to original servers by rights holders wishing to make takedown requests.

Blocking
Service providers or carriers cut off access forcibly to prevent viewing of illegal content on the internet, such as child porn or pirated content.

CDN
Content delivery network (CDN) services facilitate smooth user access to content with concentrated access. Through decentralized management at numerous large-scale servers located around the world and by placing copies of websites on these servers, this framework optimizes content distribution speed and facilitates distributed, high-volume access.

The problem’s development

Blocking must be conducted with caution to avoid infringing on the “secrecy of communication” (Article 21-2 of the Constitution of Japan, Article 4-1 of the Telecommunications Business Act).

The emergency measures apply to cases in which (1) the number of content uploads is such that they clearly infringe the legitimate interests of the copyright holder, (2) takedown, arrests, or other methods do not effectively protect those rights, (3) methods and practices do not infringe the secrecy of communication more than necessary, and (4) the infringement on the copyright holder’s rights via the site is extremely clear. Also, the measures indicate that if conditions for emergency evacuation (Article 37 of the Penal Code) are satisfied, the claim of illegality may be rejected.

In addition to secrecy of communication, blocking could be perceived as hindering freedom of expression (Article 21 of the Constitution of Japan), and technically viewers could be inadvertently prevented from browsing a variety of content across the board. These factors made it difficult to block pirate websites other than those that were particularly malicious and caused particularly serious damage, to avoid abusing measures for preventing the browsing of illegal and harmful information in general.

The proposed emergency measures, which were enacted as extraordinary emergency measures until legal systems could be put into place, were limited to the blocking of the three sites through voluntary initiatives of the private sector. The measures also provided that the blocking be performed under an appropriate administrative structure supervised by the private sector. If new, particularly malicious pirate websites emerged, the measures called for the necessary systems to be established quickly, with a deliberative assembly comprising the related company and experts swiftly convened under the Intellectual Property Strategy Headquarters. After that point, a review session was held to discuss measures for addressing pirated content on the internet, but opinions on stepping up blocking methods were non-cohesive, and the interim guidelines were abandoned.

Government’s perspective on blocking domains hosting websites that infringe copyrights

In the Emergency Measures for Countering Pirate Websites, the government outlined its perspective with respect to domains designated for blocking and indicating that blocking be conducted carefully.

We recognize that some or all sites on the target domains were established to distribute manga, anime, films, and other copyrighted material over the internet.

Some sites on the target domains contain a considerable amount of content that clearly infringes on the rights of the copyright holders, and the sites have been accessed a considerable number of times from Japan.

Where multiple sites exist within the target domains, the administrators of the individual sites are considered to be the same party.

Taking into overall consideration a variety of factors, such as that (1) sites included in the target domains do not respond sincerely to the exercise of copyright holders’ rights or takedown requests, (2) the infringing parties and the operators cannot be identified, hindering the exercise of rights and takedown requests, and (3) the sites were not taken down even when criminal prosecution was threatened, we recognize that no other option exists than to block the target domains.

Criminal penalties against users who download pirated content

Music and video (movies)

Since 2010, Japan’s Copyright Act has forbidden the downloading of pirated content, including music and video (movies). October 2012 revisions to the Copyright Act assigned a punishment of “imprisonment for two years or less or a fine of JPY2mn or less (or both)” to parties who, knowing both that the music or video was available for sale or paid delivery and that the content was distributed illegally, stored (downloaded) such music or video on their own personal computers.

Books

Revisions to the Copyright Act were enacted in June 2020, which assigned penalties for users who download printed book content. Regulations on so-called “leech sites” went into effect in October 2020. Other amendments came into effect in January 2021.

In January 2020, Japan’s Agency for Cultural Affairs summarized a report by an investigative commission for Copyright Act reform on the downloading of manga and other pirated content, despite being aware that the content was illegal. The report suggested that negligible downloads, such as smartphone screenshots or copying a single frame from a manga running to dozens of pages should not be considered illegal. The report included a recommendation on introducing criminal penalties for so-called “leech sites,” which lead internet users to pirate sites. Although its initial proposal called for regulating against all forms of download, including screenshots, the commission subsequently narrowed its proposed scope of regulation following repeated criticism that the original proposal would cause internet use to atrophy.

E-book characteristics

From the perspective of readers (customers) and publishers

E-books differ from paper books in several ways.

Readers’ (customers’) perspective

Advantages of e-books

E-books make it easy to change fonts, enlarge text, change background colors, and otherwise improve readability for each reader. Accessibility to e-books is also high.

E-books having the same content as paper books are often less expensive. E-books present opportunities for making free content available or lowering prices significantly through campaigns.

As long as readers can access the internet, they can buy e-books whenever, wherever they like. Paper books are becoming available at fewer locations as the number of physical bookstores decreases. If purchased on the internet, readers pay delivery charges, and the books take time to arrive.

Readers can move about easily with numerous e-books, whereas the number of paper books that can be carried is limited by the space they take up and their weight.

E-books do not deteriorate, whereas paper books are affected by moisture and other factors.

Disadvantages of e-books

E-books generally cannot be lent to others, whereas paper books can be rented or used in conjunction with diverse service models, such as manga coffee shops.

Paper books can be read even if a bookstore closes, whereas e-books cannot.

Some sort of device is needed to read e-books. For paper books, such terminals are unnecessary.

When books include drawings or complicated typesetting, those books tend not to be digitized, so can only be read in paper form. Even if digitized, e-books are usually released after paper books go on sale.

Publishers’ perspective

Advantages of e-books

E-books make diverse marketing measures possible, while the marketing of paper books centers on trial readings. For example, to expand the customer base the first volume in an e-book series may be offered for free, with charges assessed for later volumes. Content may also be offered for free for a limited period, or apps can divide up stories and allow readers to purchase individual stories. Flexibility in price-setting can facilitate sale campaigns.

Different from paper books (for which royalties are paid based on the number of copies printed in most cases in Japan), on e-books author royalties are paid based on the number of e-books sold.

Paper books involve printing and storage costs; e-books do not. E-books are preferable from the perspective of inventory risk and working capital.

Paper books are generally sold on a consignment basis in Japan, whereas e-books are not returned. Under the consignment system, return rates are high, at around 40% by value (2018 study by the Research Institute for Publications).

Japan’s systems for reselling and setting prices

The Japanese publishing industry has a resale price maintenance system for paper books, but this system does not apply to e-books. Because e-book prices can be set freely, prices on paper books and e-books with the same content tend to differ, with e-book prices fluctuating according to timing.

Under the resale price maintenance system, publishers set selling prices, which bookstores uphold.

Although the Antitrust Act generally prohibits retail price maintenance agreements, certain exceptions are allowed. Paper books are granted such an exception, based on the perspective that they promote culture and education. The resale price maintenance system guarantees that a book has the same price at all locations across Japan, signifying that readers have equal-opportunity access to published works.

The resale price maintenance system applies only to tangible objects including physical books, therefore e-books are exempt.

Consignment sales system for paper books
This system is used widely for paper books. Under this system, three-way agreements among publishers, wholesalers, and bookstores state that books that remain unsold at a bookstore may be returned within a specific period. For bookstores, this arrangement has the benefits of reducing inventory risk and allowing storefront displays to show a diverse variety. The advantage to publishers is that it ensures that even books that are not selling well will be put on display. Like the resale price maintenance system, the consignment sales system helps ensure a diversity of paper books. However, the system encourages publishers to supply more quantity than bookstores can sell and tends to reduce the quality of publishers’ planning, so return rates on paper books are high. The consignment system is unnecessary for e-books, which exist as electronic data and represent no inventory risk to bookstores.

E-book value chain in Japan

Sales routes

Principal sales routes

E-books are sold through five routes, with sales channels (1) and (2) shown below being the main routes. Media Do indicates that as of September 2019, around 40% of e-books sold in Japan went through wholesale routes, or sales channel (1), while some 50% are sold through direct transactions between publishers and e-bookstores, or sales channel (2). Around 10% went through sales channel (3), where publishers sell to consumers through directly managed e-bookstores. Sometimes, e-bookstores use an advertising model (free content that generates advertising revenue) rather than a sales model. Content may also go through multiple sales channels. In such cases, even if the name under which it is sold remains the same the flow of data (a server which stores data for users to download) differs.

Sales channel (1): Publishers sell e-books to wholesalers, who sell them on to retailers, who sell them on to consumers (readers).

Sales channel (2): Publishers sell e-books to retailers, who sell them on to consumers.

Sales channel (3): Publishers sell e-books directly to consumers. In particular, large publishers build and operate their own e-book delivery sites to sell directly to consumers.

Sales channel (4): Authors sell e-books to retailers, who sell them on to consumers.

Sales channel (5): Authors sell e-books directly to consumers via websites the authors operate.

Main distribution routes for e-books

Source: Shared Research, based on data from the Japan Fair Trade Commission (Case 12 of FY2016), on the acquisition by Media Do Co., Ltd., of shares in Digital Publishing Initiatives Japan Co., Ltd.

Flow of data
In sales channel (1), e-book data and metadata produced by publishers themselves or consigned third parties is sent to wholesalers. Wholesalers convert the content they receive from publishers into appropriate formats and send it on to e-bookstores.
In sales channel (2), the publishers themselves or consigned third parties may provide data in formats suited for each e-bookstore and send this data to the e-bookstores. Alternatively, the e-bookstores may convert data they receive from publishers into the necessary formats.

Sales channel (2), which bypasses wholesaling

Unless wholesalers have exclusive agreements in place with publishers, e-bookstores may purchase content from other wholesalers. Publishers may also sell content directly, unless prohibited by contract. Sales routes that do not pass through wholesaling exist for several reasons.

Based on historical business practices

E-book wholesaling did not exist before 2006, when Media Do entered the eBook Distribution business, so e-bookstores and publishers conducted business directly.

Business between large publishers and large e-bookstores

Unlike for paper books, the wholesaling of e-books requires no physical logistics, so e-bookstores and publishers may see no major benefit in using wholesalers. Large publishers and large e-bookstores may enter direct agreements that cut out wholesalers.

Media Do explains that agreements that involve wholesaling are not based on content by content but on content varieties (separating manga from text-based books, for instance). The company says such agreements prevent companies from engaging in direct sales, rather than wholesaling, for specific content likely to sell many copies.

Transactions with special distribution formats

The wholesaling system generally assumes a certain distribution format. If e-bookstores wish to use a special sales method, publishers and e-bookstores may enter direct agreements.

Differences from sales routes overseas

In Japan, around 40% of e-books are sold via the wholesale route. Wholesaling exists because bookstores stock numerous items and Japan has many publishers and bookstores, so wholesaling is more efficient than publishers and bookstores handling transactions directly.

Overseas markets tend to be dominated by a few large publishers. Japan has many publishers, and Media Do has accounts with more than2,200 of them. The company says Japan’s four largest publishers have a total market share of only around 30%. It attributes this situation to an environment that makes it easy even for small publishes to enter the market.

Other than Amazon (Kindle), many e-bookstores such as LINE Manga also have a high share of the market in Japan. The company says this may be because Kindle is better suited to text-based content than to manga and has focused on text-oriented devices and apps. For manga, however, users tend to prefer other sites and apps better suited to manga.

E-bookstores selling their content directly

E-bookstores may seek to differentiate themselves by offering proprietary content.

The trend toward e-bookstores offering proprietary content is particularly pronounced with manga apps, and Media Do thinks this tendency will grow going forward. That said, it is unusual for large publishers to provide their main content only to specific e-bookstores, and such cases only comprise a small portion of the overall market. With manga apps, sometimes content is offered in advance only to specific e-bookstores for a certain period.

For text-based content, the company explains that e-bookstores may bear the cost of digitizing books in exchange for exclusive sales rights arrangements.

Stamp duty management and sales management issues

Sales management and stamp duty management related to e-books have become increasingly complex, presenting a challenge to many small and medium-size publishers.

Stamp duty management: For printed books, stamp duty is levied based on the print run, but for e-books, stamp duty is levied based on sales volume. E-books also do not go out of print. Therefore, the number of e-book titles to be managed will continue to increase.

Sales management: E-books can be sold in various formats not available with printed books, such as installments and composite volumes, and subscription model (unlimited volume). More alternative sales models are likely to appear going forward.

End-customers (readers)

Individuals are the end-customers (readers) for e-books and e-book apps.

Usage is high among people aged 10–39 (2021 survey on the e-book business, by Impress Corporation).

Compared with those aged 20–39, people aged 10–19 are less likely to use paid content, but access to free content is high.

E-book consumption by gender and age

		10s		20s		30s		40s		50s		60 or older
		2020	2021	2020	2021	2020	2021	2020	2021	2020	2021	2020	2021
Male	SUM	51.4%	50.2%	53.4%	53.3%	54.8%	56.3%	45.2%	47.9%	40.1%	39.1%	34.7%	35.1%
	Paid	20.6%	19.3%	25.2%	29.5%	27.2%	28.5%	22.6%	22.6%	19.2%	16.9%	15.0%	13.8%
	Free	30.8%	30.9%	28.2%	23.8%	27.6%	27.8%	22.6%	25.3%	20.9%	22.2%	19.7%	21.3%
Female	SUM	53.4%	52.0%	50.6%	54.2%	48.6%	51.7%	43.8%	44.5%	37.6%	35.9%	26.1%	24.1%
	Paid	14.5%	14.4%	21.4%	24.5%	23.6%	25.5%	18.8%	19.3%	15.3%	13.8%	10.3%	10.1%
	Free	38.9%	37.6%	29.2%	29.7%	25.0%	26.2%	25.0%	25.2%	22.3%	22.1%	15.8%	14.0%

Source: Shared Research, based on “2021 survey on the e-book business” by Impress Corporation

Trends at competitors

A competitor in e-book wholesaling is MobileBook.jp Inc., a subsidiary of Dai Nippon Printing Co., Ltd. (TSE1: 7912).

In March 2017, the company gained the largest share of the Japanese market for e-book wholesaling when it acquired Digital Publishing Initiatives Japan Co., Ltd. The company says it had a market share of around 80% in e-book wholesaling in FY02/19.

Now that it has an 80% share of the gross merchandise value (GMV) that flows through wholesaling, rather than competition with other wholesalers the company’s strategically important considerations are growth of the e-book market as a whole and expansion of the share of GMV accounted for by wholesaling.

The company says that while competitors outsource system development, it gains a technological advantage by developing its own systems.

The company is also larger than competitors in terms of employee numbers. This scale allows the company to handle more campaigns.

Comparison with competitors in the e-book wholesaling industry

	Fiscal year	Net income	Employees
Media Do Holdings	FY02/21	JPY1,519mn
MobileBook.jp	FY09/20	JPY162mn	110

Source: Shared Research based on company data
As MobileBook.jp is unlisted, only information on net income and number of employees is available.

Products that compete for consumer contact time in a broad sense

As manga accounts for more than 80% of the e-books sold in Japan (according to the 2021 survey on the e-book business by Impress Corporation), Shared Research thinks most Japanese e-books are accessed for an entertainment purpose. E-books are usually read on mobile devices, such as smartphones, tablets, and dedicated e-book readers, making e-books akin to mobile amusement, a category where competing products scramble for a share of consumer contact time. In this sense, the company competes with Facebook, Twitter, Instagram, and other social media, as well as mobile games, music, and movies.

Since the closure of pirate websites, the e-book market has grown thanks to the consumer exposure to manga those pirate websites encouraged, helping to entrench a manga consumer base (rather than a base for products that compete in a broad sense).

Strengths and weaknesses

Strengths

The company has the top share of the Japanese market for wholesaling e-books, providing high levels of convenience in transactions with publishers and e-bookstores.

The main reason publishers and e-bookstores use the wholesaling route for e-books is to avoid complexity (engaging in direct, one-on-one business with numerous publishers and e-bookstores, mediating contracts, and managing campaigns). Accordingly, wholesaling becomes more convenient as the number of publishers and e-bookstores grows. Overseas markets tend to be dominated by a few large companies, but Japan has many smaller publishers and few oligopolistic foreign e-bookstores such as Kindle in its e-book market. This situation creates a strong need for the wholesaling of e-books. Media Do estimates that it has the top share of the market (at around 80%) in terms of gross merchandise value (GMV) that flows through wholesaling.

Major business partners include large publishers, which have long business relationships with and capital investments in Media Do Holdings.

Three prominent manga publishers, Kodansha Ltd., Shogakukan Inc., and Shueisha Inc., are major shareholders of Media Do. These publishers are also major business partners, accounting for 45.4% of the company’s total purchases (of JPY43.7bn) in FY02/19. Total purchases from the top three providers of e-book content and share breakdown for FY02/20 are not disclosed in annual securities reports, but they contain a comment that the share of the top three providers remains at a high level. The company’s competitiveness and market share in wholesaling are attributable to the trust-based relationships it has built with these large publishers over years of business with them and through their investment in the company. Shared Research thinks the company plans to leverage these relationships when it releases its NFT marketplace, which is currently planned for FY02/22.

Complex functions and know-how are demanded of eBook wholesalers, creating a barrier for entry

It is the wholesaler’s role to provide various functions to reduce the labor and effort of publishers and e-bookstores. The main functions of wholesalers for e-books are being contract intermediaries, providing systems, managing campaigns, and managing/compiling data. Complex functions and know-how are demanded for this role, creating a barrier for entry for eBook wholesalers. Specifically, the wholesaler must store the content data provided by publishers on a server and allow e-bookstores to swiftly distribute appropriately processed content to users just by linking to the server. Rating systems (expression restrictions) also vary depending on the sales route. If needed, wholesalers must revise and appropriately process content. Furthermore, diverse marketing campaigns are also possible at e-bookstores. For example, an e-bookstore may make the first volume free for a limited time to expand the reader base for volumes two and later. It could also divide a book by each chapter on the application so that readers can purchase each individually. It is also possible to conduct discount sales by flexibly changing the price settings. While it is possible to conduct various marketing initiatives like this, wholesalers are required to organize diverse and multiple campaigns among multiple publishers and e-bookstores and manage them accurately. Wholesalers must also monitor daily sales, manage and compile lists of content downloaded by users (readers), manage the use history, output these data, and conduct other administrative tasks.

Weaknesses

While some logistics functions are non-essential for e-books, reliance on wholesaling is lower, and publishers and e-bookstores conduct around 50% of transactions directly.

For paper books, around 80% of the GMV flows through wholesaling (The New and Easy-to-Understand Framework for the Distribution of Publications, 2019–20 edition, Media Pal). Media Do estimates that as of September 2019, wholesaling accounted for only around 40% of the GMV for e-books in Japan, with approximately 50% of GMV occurring as direct sales between publishers and e-bookstores. E-books can be downloaded as digital data, rendering unnecessary some distribution functions handled as part of wholesaling, such as physical distribution and returns of unsold books. Conversely, publishers and e-bookstores can easily engage in direct transactions, without requiring wholesaling. The main reason publishers and e-bookstores employ wholesaling in their e-book transactions is to reduce complexity: decreasing the need to engage in direct, one-on-one business with numerous other publishers and e-bookstores, mediating contracts and managing campaigns. That said, large publishers and large e-bookstores may deal directly with other large publishers and large e-bookstores if they consider the advantage of wholesaling to be relatively low.

The company relies on the eBook Distribution business for most of its sales and profit, so is vulnerable to pirate websites and other external factors.

The eBook Distribution business accounted for most of Media Do’s sales and profit as of FY02/21, making the company vulnerable to outside factors affecting the e-book market. Pirate websites are one such example. The company says the emergence of pirate sites had caused the overall market for e-books to shrink at one point, reducing its sales by around 10% at the time of maximum impact (from FY02/18 to FY02/19). In addition, the company missed its sales target by about JPY1.5bn in FY02/21, of which it estimates about half was attributed to pirate websites.

Having a top share of the market for e-book wholesaling introduces limitations due to conflicts of interests with large publishers and large e-bookstores.

Media Do has the top share of its market, accounting for 80% of the GMV that flows through wholesaling (company estimate). The company attributes this share to the high level of convenience it provides and solid relationships built over years with its suppliers (large publishers) and selling destinations (large e-bookstores). The flip side of this arrangement is that it takes away the company’s leeway to engage in any large-scale business that would endanger its position in wholesaling or create conflicts of interests with large publishers and large e-bookstores.

Historical performance and financial statements

Income statement

Income statement		FY02/14	FY02/15	FY02/16	FY02/17	FY02/18	FY02/19	FY02/20	FY02/21
(JPYmn)		Parent	Parent	Parent	Parent	Cons.	Cons.	Cons.	Cons.
Sales		5,545	8,075	11,243	15,533	37,213	50,568	65,860	83,540
	YoY	35.7%	45.6%	39.2%	38.2%	139.6%	35.9%	30.2%	26.8%
Cost of sales		4,524	6,933	9,937	13,895	32,596	44,829	59,168	75,810
Gross profit		1,021	1,142	1,306	1,638	4,618	5,739	6,691	7,730
	Gross profit margin	18.4%	14.1%	11.6%	10.5%	12.4%	11.3%	10.2%	9.3%
SG&A expenses		769	729	754	981	3,688	4,271	4,837	5,065
	SG&A ratio	13.9%	9.0%	6.7%	6.3%	9.9%	8.4%	7.3%	6.1%
Operating profit		252	413	552	656	930	1,468	1,853	2,664
	YoY	562.1%	63.7%	33.7%	18.9%	41.7%	57.9%	26.2%	43.8%
	Operating profit margin	4.6%	5.1%	4.9%	4.2%	2.5%	2.9%	2.8%	3.2%
Non-operating income		1	2	2	3	37	83	42	126
Non-operating expenses		25	1	1	3	136	59	134	71
Recurring profit		228	413	553	657	831	1,492	1,761	2,720
	YoY	623.2%	81.0%	33.8%	18.8%	26.5%	79.6%	18.0%	54.5%
	Recurring profit margin	4.1%	5.1%	4.9%	4.2%	2.2%	3.0%	2.7%	3.3%
Extraordinary gains		-	-	-	1	-	110	296	0
	Gain on sale of fixed assets	-	-	-	1	-	12	0	-
	Gain on reversal of share subscription rights	-	-	-	-	-	4	1	0
	Gain on sale of investment securities	-	-	-	-	-	9	295	-
	Gain on negative goodwill	-	-	-	-	-	85	-	-
	Other	-	-	-	-	-	0	-	-
Extraordinary losses		14	6	30	12	20	2,312	458	221
	Loss on retirement of fixed assets	0	2	-	0	2	11	23	0
	Office relocation expenses	-	4	-	11	-	-	-	-
	Loss on valuation of investment securities	10	-	30	-	-	1,217	180	31
	Provision for doubtful accounts	-	-	-	-	-	337	151	139
	Provision for loss on business of associates	-	-	-	-	-	-	-	40
	Amortization of goodwill	-	-	-	-	-	260	-	-
	Provision for loss on business liquidation	-	-	-	-	-	-	15	-
	Impairment losses	3	-	-	-	12	484	55	-
	Loss on transfer of businesses	-	-	-	-	-	-	32	-
	Settlement package	-	-	-	-	7	-	-	-
	Other	-	-	-	-	-	2	-	10
Income taxes		38	167	188	231	431	540	724	985
	Implied tax rate	17.8%	41.0%	36.0%	35.8%	53.1%	-76.1%	45.3%	39.4%
Net income attributable to non-controlling interests		-	-	-	-	22	-5	-8	-6
Net income attributable to owners of the parent		176	240	335	415	358	-1,243	884	1,519
	YoY	-	36.0%	39.5%	23.9%	-13.6%	-	-	71.8%
	Net margin	3.2%	3.0%	3.0%	2.7%	1.0%	-	1.3%	1.8%

Source: Shared Research based on company data
Note: Figures may differ from company materials due to differences in rounding methods.

Cost of sales

Media Do’s cost of sales includes royalties and cost of production (mainly engineers’ labor costs and system costs).

Royalties and other costs

Royalties and other costs			FY02/14	FY02/15	FY02/16	FY02/17	FY02/18	FY02/19	FY02/20	FY02/21
(JPYmn)			Parent	Parent	Parent	Parent	Cons.	Cons.	Cons.	Cons.
Sales: eBook Distribution			4,625	7,028	10,620	15,326	36,223	50,164	64,529	82,349
	Royalties and other costs		2,984	5,360	8,338	12,240	31,182	43,223	56,869	73,502
		As % of eBook Distribution sales	64.5%	76.3%	78.5%	79.9%	86.1%	86.2%	88.1%	89.3%

Source: Shared Research based on company data

Royalties are rising as a percentage of sales in the eBook Distribution business, for two main reasons.

Royalties make up a higher percentage of sales for general books (other than manga), and these general books make up a growing share of the company’s product mix.

Some of the company’s contracts with large e-bookstores stipulate that the company’s percentage sales commission decreases gradually as the sales amount increases, but the royalties paid to publishers do not vary with sales amount. Therefore, the company’s margins fall as sales amount rises.

SG&A expenses

SG&A expenses		FY02/14	FY02/15	FY02/16	FY02/17	FY02/18	FY02/19	FY02/20	FY02/21
(JPYmn)		Parent	Parent	Parent	Parent	Cons.	Cons.	Cons.	Cons.
SG&A expenses		769	729	754	981	3,688	4,271	4,837	5,065
	Advertising expenses	458	391	354	346
	Provision for doubtful accounts	14	9	5	5
	Bad debt expenses
	Directors' compensations	102	62	57	86
	Salaries and allowances	68	91	138	168	957	959	1,189	1,482
	Depreciation	4	19	19	50
	Commission fees	47	69	85	113	756	745	966	959
	Retirement benefit expenses					24	29	30	32
	Amortization of goodwill					441	781	462	480
	Bonuses and provision for bonuses					168	257	330	46

Source: Shared Research based on company data

Commissions paid

These payments are mostly for the use of servers and other distribution system infrastructure.

Non-operating income (expenses) and extraordinary gains (losses)

FY02/19 extraordinary losses

System impairment loss: JPY480mn

The company posted an impairment loss on parts of a system it was developing prior to the merger with Digital Publishing Initiatives Japan (software in progress) that became unnecessary after the merger.

Lunascape Corp.: JPY260mn

This company originally anticipated browser-based sales of new e-books, but it is currently handling subcontracted development for Media Do. This change in business direction resulted in a valuation loss.

Loss on valuation of investment securities

Internet Research Institute Ltd.: JPY540mn

Media Do recorded a valuation loss due to a decline in this company’s share price after its listing in the Tel Aviv Stock Exchange in Israel.

Creatubbles Pte. Ltd.: JPY760mn

Media Do recorded a valuation loss on this company due to slower-than-expected business expansion stemming from insufficient public awareness of its services.

FY02/20 equity-method losses and extraordinary losses

For the shares the company holds in three companies (one overseas listed and two unlisted), it recorded a JPY180mn loss on valuation of shares (extraordinary losses) and a JPY114mn loss from equity-method investments due to loss on valuation of shares, considering the impact of the further spread of the new coronavirus infection on their businesses and the decline in stock prices. A total of JPY152mn loss from equity method investments (the above-mentioned loss and a JPY38mn loss from other equity-method investments) was partially offset by JPY84mn equity-method investment profit. As a result, the income statement shows a JPY67mn equity-method investment loss. The overseas listed company’s valuation was reduced to its market price, and the valuations of the two unlisted companies were reduced to nearly zero, assuming a heavy negative impact from the new coronavirus pandemic.

FY02/20 Extraordinary gains

Gain on sale of investment securities

In Q3 FY02/20, the company posted a JPY290mn gain on sale of investment securities when it sold some of its holdings in Amazia, inc. (TSE Mothers: 4424), a business partner.

Balance sheet

Balance sheet (JPYmn)			FY02/14	FY02/15	FY02/16	FY02/17	FY02/18	FY02/19	FY02/20	FY02/21
			Parent	Parent	Parent	Parent	Cons.	Cons.	Cons.	Cons.
Assets
	Cash and deposits		1,277	1,740	2,325	2,057	5,686	7,747	8,089	12,703
	Notes and accounts receivable		1,141	1,910	2,401	3,201	8,469	12,313	16,022	19,921
	Inventories		6	0	1	0	-	-	-	-
	Prepaid expenses		45	42	39	56	-	-	-	-
	Deferred tax assets		27	25	32	36	-	-	-	-
	Other		7	8	5	21	434	1,290	876	1,278
	Allowance for doubtful assets		-20	-13	-10	-11	-2	-0	-0	-0
Total current assets			2,482	3,712	4,791	5,360	14,587	21,349	24,988	33,902
	Buildings and structures		7	43	31	191	260	349	330	357
	Tools, furniture, and fixtures		29	24	124	226	676	778	368	380
	Machinery, equipment, and vehicles		-	-	-	6	-	-	-	-
	Construction in process		49	-	2	-	-	-	-	-
	Other		-	-	-	-	69	21	14	14
	Accumulated depreciation		-	-	-	-	-506	-638	-372	-449
Total tangible fixed assets			85	66	157	423	499	510	341	303
	Goodwill		-	-	-	-	6,588	5,807	5,416	5,713
	Software		85	97	141	102	210	193	261	357
	Software in progress		33	13	32	155	461	100	37	199
	Content		51	39	22	15	-	-	-	-
	Other		0	0	1	1	106	90	61	59
Total intangible assets			169	149	196	273	7,365	6,190	5,777	6,329
	Investment securities		0	0	33	1,754	3,739	2,903	2,958	2,761
	Shares in subsidiaries and affiliates		-	72	72	648	-	-	-	-
	Long-term loans receivable		-	15	15	-	-	-	-	-
	Long-term loans to associates		-	-	-	28	-	-	-	-
	Long-term prepaid expenses		3	1	3	30	24	13	4	2
	Deferred tax assets		96	74	68	4	120	-	166	96
	Guarantee deposits		72	31	151	165	365	335	322	375
	Other		-	-	-	-	0	0	1	31
	Allowance for doubtful assets		-	-	-	-	-	-337	-497	-615
Investments and other assets			171	193	341	2,628	4,248	2,914	2,955	2,651
Total fixed assets			426	408	694	3,324	12,113	9,615	9,073	9,285
Total assets			2,908	4,121	5,486	8,683	26,700	30,964	34,062	43,187

Liabilities
	Notes and accounts payable		1,029	1,929	2,890	3,998	9,856	14,481	18,247	22,507
	Short-term debt		54	-	-	157	2,448	1,323	1,662	1,181
	Accounts payable–other		192	127	133	160	-	-	-	-
	Accrued expenses		2	5	1	13	-	-	-	-
	Income taxes payable		104	96	130	129	376	357	519	686
	Consumption taxes payable		19	51	26	17	-	-	-	-
	Deposits received		5	4	4	50	-	-	-	-
	Provision for bonuses		-	-	-	-	122	196	202	14
	Provision for loyalty points		45	44	44	49	41	45	46	84
	Asset retirement obligations		6	-	14	-	-	-	-	-
	Provision for directors' bonuses		-	-	-	-	-	5	-	-
	Provision for loss on business liquidation		-	-	-	-	-	-	15	-
	Provision for loss on office closure		-	-	-	-	-	14	-	-
	Other		0	-	5	4	647	1,143	701	950
Total current liabilities			1,458	2,256	3,247	4,576	13,490	17,562	21,396	25,425
	Long-term debt		5	-	-	1,303	8,938	8,740	6,578	5,471
	Provision for directors' retirement benefits		-	-	-	-	-	39	-	-
	Net defined benefit liability		-	-	-	-	-	54	-	-
	Asset retirement obligations		8	9	1	37	-	-	-	-
	Deferred tax liabilities		-	-	-	-	-	31	177	2
	Other		-	-	-	-	53	76	72	79
Total fixed liabilities			13	9	1	1,340	8,991	8,940	6,828	5,593
Total liabilities			1,471	2,265	3,247	5,916	22,481	26,503	28,224	31,018
Net assets
	Capital stock		776	864	897	912	928	1,651	1,899	4,415
	Capital surplus		480	567	601	616	1,831	2,546	2,778	5,489
	Retained earnings		181	421	736	1,080	1,273	-90	665	2,000
	Treasury stock		-	-	-	-	-0	-0	-0	-1
	Accumulated other comprehensive income		-	-	-	109	65	263	448	201
		Valuation difference on marketable securities	-	-	-	109	56	256	443	198
		Foreign currency translation adjustments	-	-	-	-	9	7	5	3
	Share subscription rights		-	4	4	50	100	72	48	11
	Non-controlling interests		-	-	-	-	22	21	-1	53
Total net assets			1,437	1,856	2,238	2,767	4,219	4,461	5,838	12,169
Working capital			117	-19	-488	-796	-1,387	-2,168	-2,225	-2,586
Total interest-bearing debt			58	-	-	1,460	11,387	10,063	8,240	6,652
Net debt			-1,219	-1,740	-2,325	-597	5,701	2,316	151	-6,051

Source: Shared Research based on company data
Note: Figures may differ from company materials due to differences in rounding methods.

Funds raised through the exercise of warrants (FY02/21)

The rise in cash and deposits and net assets in FY02/21 were mainly attributable to the exercise of warrants (JPY4.9bn). The remaining warrants were cancelled following the private placement of new shares to Tohan Corporation (approximately JPY2.4bn) announced in March 2021. The company raised a total of JPY7.4bn.

Impact of acquiring Digital Publishing Initiatives Japan (DPIJ) (FY02/18)

Goodwill

Media Do acquired DPIJ’s shares in March 2017, making it a subsidiary. The acquisition put JPY5.1bn in goodwill on the balance sheet.

The amortization period is 20 years, so goodwill amortization amounts to JPY254mn per year. The company explains that the amortization period is relatively long because wholesaling operates like infrastructure for the distribution of publications.

Goodwill exceeded net assets as of FY02/19, but Media Do believes it has enough operating cash flow to recover this goodwill. The company has no intention of financing to balance this equation, as goodwill will decrease through amortization, while net assets can grow through the accumulation of profits.

Recent performance at DPIJ (before merging with Media Do)

(JPYmn)	FY02/18	FY02/19
Sales	20,609	29,535
Recurring profit	1,037	1,675
Net income	741	1,028

Source: Shared Research based on company data

Long-term debt, capital surplus

Media Do acquired DPIJ by purchasing shares (JPY7.8bn) and through a share exchange (JPY3.1bn in common stock).

The company raised some of these funds through long-term debt. As a result, interest-bearing long-term debt rose in FY02/18.

The company issued new shares in the share exchange, causing its capital surplus to increase in FY02/18.

Cash conversion cycle

Media Do pays publishers after it receives payments from e-bookstores, so its cash conversion cycle (working capital) is usually slightly negative.

The company maintains no inventories in principle as its mainstay business is eBook Distribution business.

The company’s typical collection cycle for accounts receivable is 60 days from month-end.

Agreements with publishers determine the company’s obligation to pay publishers if e-bookstores go bankrupt. Under some agreements, the company must shoulder some of the obligation; in other cases, it has no obligation to pay publishers unless receivables are collected.

Cash conversion cycle

					FY02/14	FY02/15	FY02/16	FY02/17	FY02/18	FY02/19	FY02/20	FY02/21
Accounts receivable turnover					5.3	5.3	5.2	5.5	6.4	4.9	4.6	4.6
Days in accounts receivable					68.8	68.9	70.0	65.8	57.2