Tuesday, October 30, 2012

Penguin/ Random merger. What does it mean.

The following article was written by Forbes contributor Jeremy Greenfield
Penguin and Random House, by many accounts the two largest trade publishers in the world, have agreed to merge operations. The deal will be subject to regulatory approval and isn’t expected to close until the second half of 2013. The new company will be called Penguin Random House. Many more details here.
But assuming it does close, what does it mean for the book publishing industry? Here are some quick thoughts, organized into two groups: Obvious and Less Obvious.
1. Obvious: When two large companies merge, there are cost-savings to be had in combining shared business functions. In the case of Random House and Penguin, there’s a lot to combine. Pearson, Penguin’s parent company, said in its statement that it would find efficiencies in combining warehousing, distribution, printing and “central functions” costs. Central functions will be things like legal, accounting and operations management. The company will likely also combine technology systems and thereby reduce technology maintenance costs. Read more.
2. Obvious: Scale. A merger between these two companies will create a behemoth publisher that would have had about $4 billion in revenues in 2011, one that should have the resources to make bigger investments across the board. The company would have 9,000 employees and would have locations in about 20 countries around the world, including China, India, all major English-speaking countries and many countries in the Spanish-speaking world. This size and reach would give Penguin Random House advantages in recruiting, expanding internationally, making digital investments and in negotiating with partners. Read more.
3. Less Obvious: Negotiations with partners. It’s been speculated the Penguin Random House would control about 40% of the U.S. trade book business. The company would have a dozen of the top-25 best-selling ebooks this week. That gives the company more negotiating power, specifically with its largest trading partner, Amazon. Amazon is thought to be a ruthless negotiator, squeezing its partners for more efficiency and to help maintain its razor-thin profit margin. Though publishing deals between Amazon and major publishers have not been made public, it’s thought that Amazon is able to craft fairly advantageous deals for itself. Penguin Random House would potentially have the market power to negotiate better deals for itself. That said, the company’s $4 billion in revenues in 2011 put it at about a tenth the size of Amazon with its $48.08 in revenues. Read more.
4. Less Obvious: Negotiations with authors. Random House CEO Markus Dohle, who will be CEO of the combined firm, sent a letter to literary agents today, reassuring them that the merger was a good thing for them and their clients (authors). But the larger Penguin Random House might have the negotiating power to squeeze better terms from agents and authors in exchange for unmatched marketing and distribution resources. (“If you sign with us, you’ll sell more copies in more countries and make more money,” they might be able to say.) Read more.
5. Less Obvious: Further consolidation in publishing. Before today’s news, there were rumors about a News Corp takeover of Penguin that would see it merged with HarperCollins, which would have likely created the largest trade publisher in the world. Now that a Penguin takeover is off the table (pending regulatory approval of the Penguin-Random House marriage), it is likely that News Corp will seek another suitor for HarperCollins, like Macmillan, Hachette or Simon & Schuster, the three remaining major publishers. Read more.

What all this means for the Australian publishing industry is hard to tell But I am sure it will mean a couple of things.It will consolidate two of the biggest players, if not the biggest two players in the Australian market into one entity. That entity will have a lot of clout. Quite often such amalgamations in such a creative area as publishing will actually reduce innovation and creativity as there are to many corporate hurdles to jump through to create something a bit different or to publish a new author. We may see a bit of dumbing down of the market as this new organization will only publish authors with history.

As a result there will be openings for creative new players in the market that don't have massive overheads and are willing to take gambles in both ebook and pbook publishing.

One example is our own Selfpublishing ebook website www.downloadbooks.net.au . This website takes on new unpublished authors at very little cost. These are authors that would not ber published by PenguinRandom.

What also will happen to the publishers  other than Penguin and Random that are distributed out of the Penguin and Random distribution centres. They may have to find new homes for their sales force and distribution.

What also about bookshops. Already Penguin and Random probably supply about 10% each of book supplied per month into our shop. Its a bit scary when one publisher will supply over 20% of our stock. You wouldn't want to have a dispute with them.

There will be fun times ahead.

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