Random House and Penguin Merge to Meet the Digital Imperative
Nancy K. Herther
Posted On November 8, 2012
On Oct. 29, 2012, Random House and Penguin Group—the two largest trade houses in the U.S.—and dominant publishers of mass-market paperbacks, announced they were merging to form a new company called Penguin Random House. The deal was initiated by Penguin’s parent company Pearson, whose CEO Marjorie Scardino explained that, “the two publishers will be able to share a large part of their costs, to invest more for their author and reader constituencies and to be more adventurous in trying new models in this exciting, fast-moving world of digital books and digital readers.”
Thomas Rabe, CEO of Bertelsmann, owner of Random House, stressed that this move would allow the new company to delve deeper into digital publishing and be able to “more effectively publish books—both in traditional and digital formats.”
“The merger will create the largest consumer book publisher in the world,” noted The New York Times, “with a global market share of more than 25 percent and a book list that includes contemporary best-sellers like Random House’s Fifty Shades of Grey and Penguin’s backlist of classics from authors like George Orwell.”
The companies first made public disclosures about a potential merger the week before the merger was announced. News Corp.’s Rupert Murdoch, was reported by the British Sunday Times the day before the merger to be preparing his own offer to acquire Penguin. Murdoch’s News Corp. already owns HarperCollins, and reportedly wanted to prevent the Random House-Penguin merger. The Times reported he was preparing a £1 billion ($1.24 billion) offer for Penguin later in the week. This rumor led to predictions of a major bidding war that was averted by the merger announcement the next day.
The New York Times Media Decoder Blog noted that this merger could “signal a move toward further consolidation among the major publishers, much the way the music industry realigned itself as it made the painful transition to the digital marketplace. Facing intense competition from Apple’s iTunes, the industry shrunk from six major record companies to three.”
Longtime editor Alan Rinzler believes the deal will pass through regulatory channels with relative ease. “I doubt the feds will want to prevent inevitable consolidation and efficiency-seeking in book publishing, but who knows.”
Impacts on Trade Publishing
Before this new announcement, trade titles were generally controlled by the “Big Six”—Hachette Book Group, HarperCollins, Macmillan, Penguin Group, Random House, and Simon & Schuster—and many have anticipated moves by the publishers to realign to meet the challenges of self-publishing, internet-based sales, and the need to re-conceptualize the publishing paradigm for the new century.
How will this impact authors and their agents? “Penguin Random House has assured the literary agents and their employees that the publisher will still seek very distinct voices in literature,” GoodeReader.com blogger Mercy Pilkington reflects. “Rather than limiting the number of opportunities for great books to find publication, it would seem that this merger would mean a greater opportunity, since the publisher may now be in a position to take even greater risks, especially on debut authors, since it will control as much as 30% of the market together.”
“Within U.S. (and globally) media products are the third biggest category for internet sales so more and more power is now concentrated in to online retailers such as Amazon,” explains Daniel Latev, head of Retailing Research at Euromonitor. “I think Amazon now sells more digital books than printed. iBookstore (Apple), which is still [a] relatively small player, is growing fast. Apple announced last week that 400 million books were downloaded (almost half of this over the last year). So with this massive advancement of digital books, publishers are feeling uncomfortable. This is still a very heavily protected industry (similar to the music industry) but I guess publishers will need to change the way they operate in order to be more competitive.”
Industry giant, Peter Jovanovich, though unable to comment on the specifics of the Penguin Random House deal (since he is still employed by Pearson), noted to NewsBreaks that “consolidation is not news in the publishing industry. When I started in the publishing business in 1972, there [were] as many as 30 different trade publishers; and at least twenty different school and college publishers. Professional publishing was also quite diverse with twenty different or more medical and scientific publishers. In all of these areas, the field has shrunk to five or six players, or in some instances, as few as three. And, the same trend is notable in so many other industries. For a period in the ‘80s, I oversaw a chain of farm magazines. In the ‘60s, there were 10 or more different tractor manufacturers, seed companies, fertilizer companies, etc. They all advertised in these farm magazines. Starting in the ‘80s, consolidation hit all aspects of agricultural businesses; and, as a consequence, advertising in farm magazines entered a long secular decline. Could tractors and trade books be affected by the same long-term trends?” A good question seemingly being answered with changes in the industry today.
Rowland Lorimer, director of Simon Fraser University’s Canadian Centre for Studies in Publishing reports to NewsBreaks that, in the long run, “agents will lose out, and some next-to-celebrity authors. Other authors e.g., regional, even national, can do fine with the Canadian-owned sector. Young writers really have little need in Canada to self-publish, there are about 250 Canadian-owned book publishers available to publish anything that is market ready and has potential.”
“I think some people would just take the self publishing plunge whether this merger was happening or not,” believes Michael Norris of Stamford, Conn. market research firm, Simba Information. “The thing that self-publishing enthusiasts need to remember is that rejecting an author’s work is part of what makes publishers important. There is so much content available out there that the publisher needs to show all buyers that their house is where the content filtering process ends. Self-publishing is part of the filter because a number of authors who succeed with that model happily move to a traditional house once they’ve gotten traction with their book.”
“The biggest advantage is the combined entity has that much more data to look at so they can determine what works and what doesn’t with selling books,” Norris continues. “I do not see the combined entity as having more negotiating heft with Amazon as some people have suggested because Amazon is simply going to keep growing and acquiring influence (as it has always done) no matter the size of the publishing players.”
The Urge to Merge
Rinzler notes that, “it’s likely that other Big Six companies will also merge and consolidate, but not only because of technology, which has made discounted Amazon sales, self-publishing and low margin ebooks the growth centers of the book business. Consolidation has been underway for several years since the traditional business model of multiple imprints with duplicated overhead was so inefficient and wasteful.”
Sociologist and media power expert Mitchell Hobbs tells NewsBreaks that, “The merger between Penguin and Random House will likely be the first in a new round of horizontal integration and industry consolidation. Like the newspaper and music industries, publishing is facing a series of recent challenges to its business model, which are forcing the major corporations to reconsider their medium to long term operations. The first of these challenges comes from the new players, such as Amazon, Barnes & Noble, and Apple. These companies have been the leaders of the digital distribution innovations within the industry, and have begun to replace the old distribution system used by publishers to bring books to the marketplace. In the future, these companies will likely become increasingly interested in content production, thereby entering the market space currently dominated by the established publishers.”
“Indeed,” Hobbs continues, “if authors begin working directly with the suppliers of ebook hardware, such as using Apple’s iBooks Author, then publishers will be marginalized, and useful only for their back catalogues (at least until their copyright entitlements have expired). Moreover, the piracy of ebooks is only now starting to be felt by the industry, and yet it will foreseeably expand as more readers make the switch to digital books. Given these challenges, the major publishers are looking to the future, seeking new content synergies with old competitors in order to expand offerings and gain access to new markets. Industry consolidation also brings, in theory, economies of scale and enhanced negotiating power, both of which are attractive to publishers seeking to navigate the cultural currents of the digital revolution.”
HarperCollins appears ready to expand its operations through potential mergers as well. “The impacts of the merger for the publishing industry are not yet clear,” Hobbs concludes. “However, self-publishing will continue to expand and evolve, as younger authors seek the best possible channel for the distribution of their intellectual property.”
“There will of course be huge cost savings in the back office from this merger,” publishing consultant Joe Esposito believes. “But perhaps the primary rationale is upstream, with the relationship with agents and authors. In the print world, publishers typically pay a royalty of 28% of their net receipts for hardcovers, half that for trade paperbacks. (Let’s not get into how those figures are derived, as there is nothing more complicated than a publisher’s discount schedule.) With ebooks, publishers routinely pay royalties of 25%. There is a big push by authors to move that number up to 50%, which would immediately increase the costs of publishing houses everywhere, and not even the most assiduous cost-cutter could find enough people to fire in the warehouse, accounting, the production department, and elsewhere to offset that increase in author royalties. A combined Penguin Random House, however, would be in a position to get agents to toe the line, and also in a leadership position in the industry, inviting other publishers to say, ‘If Penguin Random House does not pay 50%, why should we?’ You don’t have to collude over a lunch table to get uniform practices in an industry where certain players have common interests.”
“Some authors will still want to convert their self-published books to traditional publishers, who will seek out the success stories,” Rinzler explains. “That’s happening right now, as self-published books with good sales numbers are being snapped up every day by the big houses. The Shades of Grey books are a good example, since they were originally self-published in Australia, where they sold 200,000 copies, before bought by Knopf. Other authors will prefer to remain self-published, since they have more control and the potential for a bigger share of the profits, and other authors, i.e., a best-seller like Barry Eisler, will leave their publisher and go indie.”
Bertelsmann & Pearson Move Into New Directions
Penguin is owned by Britain’s Pearson and Random House is owned by Germany’s Bertelsmann. Bertelsmann will own 53% of the new entity and provide its CEO Markus Dohle as CEO of the new company. Pearson will own 4%, with its CEO John Makinson taking on the role as chairman of the Board of Directors. The deal is expected to close during the second half of 2013, after regulatory and other approvals.
Pearson’s press release stated that, “the two companies believe that the combination will create a highly successful new organisation, both creatively and commercially, with the breadth and investment capacity to deliver significant benefits. Readers will have access to a wider and more diverse range of frontlist and backlist content in multiple print and digital formats. Authors will gain a greater depth and breadth of service, from traditional frontlist publishing to innovative self-publishing, on a global basis. Employees of the new organisation will be part of the world’s first truly global consumer publishing company, committed to sustained editorial excellence and long-term investment in a rich diversity of content.”
Penguin is still involved with the ebook lawsuit brought by the DOJ against Apple and a group of major publishers in their efforts to collude to keep Amazon at bay. “My main interest in watching the news from the merger will be about how Penguin Random House handles the Department of Justice lawsuit over alleged anti-trust violations,” notes Pilkington. “Penguin is one of the two publishers who did not settle the matter out of court, and Random House is the lone Big Six publisher who seems to have not been involved in the alleged price fixing with Apple.”
Pearson, Penguin’s parent company, is strong in the educational market and seems focused on building strengths in that area. “Pearson is headed into learning systems, which is far enough away from trade publishing that they are letting Penguin out for Random House management,” explains Lorimer.
On Nov. 5, 2012, Pearson announced its open educational resources platform Project Blue Sky, which is intended to help instructors better “search, select, and seamlessly integrate Open Educational Resources… using text, video, simulations, Power Point and more, instructors can create the digital course materials that are just right for their courses and their students.” The system, using Gooru Learning’s search engine, allows for easy integration of content from more than 25 Open Access sites including MIT OpenCourseWare, Connexions, and Wikiversity.
Thomas Rabe, chief executive of Bertelsmann, said in an interview that the merger would also allow the combined company to invest more in emerging markets, which show more promise for growth than developed markets such as the U.S. and Western Europe.
Continuing Trend to Digital
The move to digital-only continues. Macmillan Dictionaries announced this spring that they would no longer publish print editions of their dictionary products. "The traditional book format is very limiting for any kind of reference work,” Macmillan editor-in-chief Michael Rundell noted. “Books are out of date as soon as they’re printed, and the space constraints they impose often compromise our goals of clarity and completeness. There is so much more we can do for our users in digital media.” Macmillan Education’s publisher for Dictionaries, Stephen Bullon, noted that “our research tells us that most people today get their reference information via their computer, tablet, or phone, and the message is clear and unambiguous: the future of the dictionary is digital.”
Newsweek announced last May that it would end the print edition of the news weekly at the end of this year. “Our decision is driven by our optimism, our belief in ourselves—and our belief, above all, in our readers,” editor-in-chief Tina Brown noted. “You have increasingly adopted digital and, in effect, we are following you. Newsweek Global, as the new all-digital publication will be called, will be a single, worldwide edition of Newsweek, produced for a restless, news-hungry, opinion-forming audience that pays keen attention to world events. Just like the print magazine, Newsweek Global will be supported by paid subscription. It will be available for tablet, Web, and mobile devices, with selected content available on thedailybeast.com.”
“Most importantly, though, is the emphasis Penguin Random House has already out on digital,” Pilkington believes. “The publisher addressed that from the very beginning, promising the industry that they will be in a position to make great breakthroughs in ebooks. Hopefully this will translate into a better cooperation with ebook lending through public libraries.”
Simba Information’s Norris urges a degree of caution over concern: “Book content is now rendered optically, and while there are some great conveniences to the consumer that are being realized with that, print books are still in use and there are still far more print buyers than digital buyers, and for the moment consumers have a lot of choices when they want to buy content.”