The publishing world is abuzz with the news that two of the world’s largest publishers, Random House and Penguin, have agreed to merge, potentially creating a mega-sized publisher that looks to dwarf its competitors. Monday’s announcement confirmed several days of rumours and speculation following the Financial Times report on Thursday that Random House and Penguin’s parent companies, Bertelsmann and Pearson, had entered merger talks. The size of the deal and its implications for the industry have sparked frenzied discussion on everything from the fate of existing staff to the design of the new logo (I’ve included some of my favourites in this article).
Before we get into what it all means, here’s a summary of the major details that we know about the deal so far:
- The new company will be named Penguin Random House (rather cumbersomely and unimaginatively according to much of the chatter on twitter at #randompenguin, #penguinhouse & #penguinrandom)
- Ownership will be split 53% – 47% between Bertelsmann and Pearson
- The final transaction is not scheduled to take place until in the second half of 2013, following regulatory approval, and it is “business as usual” for both companies until then
- The combined Penguin Random House market share is predicted to be around 25-30% globally, with slight variations in different countries
- Random House had 5,343 employees and Penguin had about 3,500 employees (according to Digital Book World)
- The new Penguin Random House will include the self-publishing service Author Solutions and online retailer Bookworld in Australia, both owned by Pearson
Most publishing pundits have been expecting consolidation in the industry over the next few years. Hachette Australia MD, Malcolm Edwards sees consolidation as the logical response to the dominance of Amazon and other online retailers, much in the same way food companies have merged to compete with supermarket monopolies:
“I don’t believe it will be the last of these mergers. It is entirely predictable. There are five big publishers; I expect that in three years, or five years, there will be two.” Malcolm Edwards (to Susan Wyndham SMH Oct 27)
However, the timing and magnitude of this Penguin-Random combination seems to have taken everyone by surprise. Even Rupert Murdoch was caught flat footed as he launched a last minute counter offer of £1b to buy Penguin outright from Pearson on the weekend. News Corp owns competing trade-book publisher Harper Collins and the hypothetical ‘Harper Penguin’ would have itself become the largest publisher in the world, had Random House not beaten them to the punch. The Harper offer must have been tempting to Pearson but it appears that the giant educational publisher was not prepared to entirely give up their stake in trade publishing.
Murdoch’s frustration was evident as he took to twitter yestaerday, criticising the Penguin-Random deal while conveniently seeming to forget that his own failed attempt to do exactly the same thing:
“Bertelsmann-Penguin faux merger disaster. Two publishers trying to contract while saying opposite. Let’s hear from authors and agents!” @rupertmurdoch
Murdoch does make a worthwhile point, however, regarding the official messages being released by Penguin and Random House following the announcement. In letters to Random House and Penguin employees, booksellers, authors and agents executives from both companies make assurances that the merger will not reduce publishing diversity and opportunities for new authors. Penguin CEO John Makinson addresses these fears directly in his letter to employees:
“I have no doubt that some authors, agents and customers will express concern to many of us that this merger will reduce choice and competition. I believe, and so I know does Markus, that exactly the opposite will happen. The publishing imprints of the two companies will remain as they are today, competing for the very best authors and the very best books.” – Penguin CEO John Makinson
It seems, for now, that both publishers are committed to maintaining their own imprints and with them some measure of diversity but it’s impossible to predict exactly how the merger will affect the number of publishing ‘slots’ that will be available to new and existing authors in years to come. Trade book publishers have already been reducing their lists and, while it will certainly be important for Penguin Random House to protect their existing shelf space in retail stores, it’s difficult to imagine that they will be looking to increase their publishing quotas.
For all the positive spin coming from the executives, the reality of corporate mergers is one of rationalisations, consolidations and redundancies. With increased size comes increased economy of scale, allowing duplications and inefficiencies to be identified and eliminated. This includes internal departments from editorial to marketing, sales, publicity and accounting, as well as external contractors and partners such as printers, warehouses, distributors and freelancers. The long wait between now and mid-2013 when the merger is proposed to take effect will be a tense one for everyone involved.
In the meantime, the prospective mega-publisher casts a long and ominous shadow, not only for those caught up in the immediate fall out, but for the industry as a whole. Penguin Random House’s predicted market share would be somewhere near 30% giving it a substantial edge over its competitors, whose obvious response will be to seek their own consolidation. Harper Collins’ failed bid for Penguin indicated its desire to acquire one of its competitors and we may soon see Harper Macmillan or Hachette & Simon & Schuster to challenge the new number one. However, Investment Bank, Jefferies International, summed up the modern reality of the book trade in a research note to its clients:
“The gorilla of the book business is no publisher, it’s Amazon and it will stay that way”.
Certainly sheer size is one of the weapons that publishers now feel they need to combat the dominance of Amazon and stay relevant in the digital marketplace but it’s not the only tactic they are employing, as careful reading of their announcements reveals. For example, along with the publishing departments and imprints, the following key assets are also being retained by Penguin Random House:
- Self-publishing service Author Solutions, owned by Pearson
- Australian online retailer Bookworld, owned by Pearson
- Random House’s Author Portal
The recent acquisitions and development of these companies and projects gives an indication to the type of roll Penguin Random House will look to play in the future. With Amazon blurring the lines between retailer and publisher, publishers, are beginning to push back by developing direct to customer sales channels to protect margin and provide alternatives to the online behemoths. Many are investing in self-publishing divisions (and Author Solutions is one of the largest) that can complement and feed into their traditional publishing business by providing an outlet and testing ground for all those slush pile manuscripts. They are also (finally) learning from Amazon’s successful approach to author relations by providing more tools and interfaces, such as the Random House Author Portal, that allow authors greater access to sales figures and internal publishing processes.
So what does this merger really signify for the book trade?
That two of the largest and proudest publishing houses in the world now see it necessary to join forces shows just how far the biggest publishers in the world have been pushed by Amazon and Co. It’s a tipping point beyond which the distinctions between author, publisher, wholesaler and retailer will all be irreversibly broken as companies hybridise themselves in order to access all sectors of the market. This process had already begun quietly, much to the despair of brick & mortar bookshops who are least well equipped to adapt and have up till now clung to assurances from major publishers that they would not seek to sell direct to the public. These booksellers are the biggest casualties of the escalating arms race between the online retailers and the Big 6 publishers.
Consolidation at the top of the publishing tree does create opportunity though, especially for small and medium publishers. Independent publishers can experiment with new business models and services as they seek to attract new authors, disenfranchised by the new mega-publishers. We are already seeing many publishers offering authors alternatives to the old royalty system and making great use of social media and digital marketing tools to target niche audiences and open new sales channels. For all the good intentions of the executives at Penguin Random House, and for all the talent and expertise that will be concentrated in their editorial and publishing departments, the commercial realities of blockbuster publishing will continue to take its toll on the midlist and it will be very interesting to watch who steps up to take full advantage.