October 30, 2012
As Sandy barreled its way up the East Coast, wreaking havoc in communities from Washington north to New Jersey and New York, a hurricane of a different form swept through the publishing industry: Bertelsmann and Pearson PLC have agreed to merge their respective book publishing firms, Random House and Penguin, into what will become an industry behemoth. (Sadly, the companies opted against calling the new firm “Random Penguin”; it will be named Penguin Random House.)
The big winner in this deal? So far, it looks like Amazon (AMZN). Perhaps that isn’t surprising, given that it’s Amazonphobia that helped trigger this pact, and it’s the challenge posed by e-books and e-readers that will help the merger win speedy approval from antitrust regulators. Both publishers have struggled to profit from e-books; both may see profits on their e-book sales erode as a result of a recent decision regarding price-fixing in the e-book market.
Will a new behemoth player in the publishing world have enough clout to hold back the tide? It’s hard to see how that can happen. Sheer size may help the new firm negotiate more attractive terms and conditions on e-books sold via Amazon and the Kindle, and the merged entity certainly will be able to cut costs significantly, perhaps postponing the day of reckoning.
Those factors may drive other publishing houses like Simon & Schuster, HarperCollins and Hachette to continue the wave of consolidation, exploring deals both large and small. But mergers are no panacea. At some point, publishers will have to develop a proactive strategy for digital content, figuring out how they can simultaneously compete and cooperate with Amazon, which isn’t going away any time soon.
That’s something Marjorie Scardino, chief executive of Pearson PLC, referred to her in her comments about the deal, remarking that together, the two publishers will be “more adventurous in trying new models in this exciting, fast-moving world.” That is what is needed, but it won’t happen overnight. Meanwhile, Amazon is forging ahead with its own plans, moving into publishing on its own behalf, recruiting editors and publicists from the likes of, yes, Random House.
Word of the deal – apparently months in the making – leaked out late last week, rapidly followed by rumors that Rupert Murdoch’s News Corp. (owner of HarperCollins) was interested in snapping up Penguin from Pearson (which has been emphasizing its educational publishing operations and selling non-core assets for some time.) Bertelsmann will have a 53 percent stake in the new joint venture – but intriguingly, either firm will have the right to initiate an initial public offering of shares in the merged entity after five years have elapsed.
The success of such an offering would assume, of course, that between now and then they have succeeded in finding a new approach to the pesky competition from e-book vendors and disruptive technologies from the likes of Apple (AAPL) and Google (GOOG), which are likely to continue to evolve at a rapid clip.