Home » Big Publishing » A New Era for Books: The Random House-Penguin Merger Is Just the Start

A New Era for Books: The Random House-Penguin Merger Is Just the Start

9 November 2012

From The Atlantic:

The merger of Random House and Penguin unquestionably represents an enormous change in the scale of publishing companies. It is a direct response to the power of the digital marketplace, but shifting ownership in the publishing industry is nothing new.

It is worth rolling back time to consider how these two leading publishing companies came into being. Random House is a conglomerate of once-independent imprints — Alfred A. Knopf, Doubleday, Crown, Pantheon, Ballantine, to name just a handful. They were acquired over decades by a succession of proprietors. From 1980 to 1998, the Newhouse family presided over the company, and its value rose from somewhere in the $60 million range to well over $1 billion, when it was bought by Bertelsmann, based in Gutersloh, Germany.

Penguin is closely identified with its British origins in the 1920s, but it too is composed of multiple imprints — Viking, Putnam, Dutton, and many others that were assembled in an inexorable process of growth, always intended to provide a stronger base for publishing as the distribution methods for books evolved.

. . . .

In recent years, consolidation among publishing companies reached a level that was widely known as the Big Six: Random House, Penguin, HarperCollins, Hachette, Macmillan, and Simon & Schuster, all divisions of much larger companies. Together, they represent about half the total sales of trade books, with the balance spread among medium-size publishers, led by W.W. Norton, Bloomsbury, Scholastic and the Perseus Books Group, as well as thousands of smaller publishers, some of which are barely more than niche participants. With dizzying speed, the shift of digital sales meant that every publisher from virtually the smallest to the very largest has had to adapt.

Link to the rest at The Atlantic and thanks to Meryl for the tip.

PG doesn’t believe that adapting to survive in an ebook world and combining to create ever-larger business organizations are the same thing.

In in markets undergoing rapid change driven by disruptive technology, large established businesses are overturned by small businesses with lower costs and greater agility. The small businesses are typically run by people who are not part of the legacy business tradition.

The RH/Penguin merger strikes PG as a plan to create a larger and slower dinosaur.

Big Publishing

39 Comments to “A New Era for Books: The Random House-Penguin Merger Is Just the Start”

  1. I agree, PG. The bigger the ship, the longer it takes to turn, and by the time they do, they may be too close to avoid the iceberg.

    • Interesting analogy, except it was turning that doomed the Titanic. Had they just struck the iceberg head-on, the bow of the ship would have been severely damaged, but the ship would have remained afloat. By attempting, in a panic, to turn, the Officer of the Deck spread the damage far enough that the ship’s watertight bulkheads were not sufficient to save her. Alas, the OOD was not familiar enough with the new ship’s handling and design characteristics to realize this. Until it was too late.

      Sometimes the best solution really is to do nothing. Especially if you really don’t know what you’re doing.

      Which is a truism or friends in DC should pay more heed to, but that’s a different subject.

  2. I commented on the original article yesterday, but nobody else has, so the conversation must move here. :)

    I agree with the premise in the article. Being nimble helps during the start-up phase of an industry and then again when its going through change now. The difference between those two conditions is that in the shakeout phase there exists large organizations who can still see the writing on the wall, make acquisitions, and make change. Those large organizations that don’t go away or dwindle to the point where they’re bought.

    In economics, there’s a concept called the Rule of Three. Basically, in any highly competitive free-market industry consolidation will result in only three major firms. One of the best empirical examples is the US auto industry before Japanese imports entered. At the turn of the century there were something like a hundred auto manufacturers (startup and growth phases). As the industry started to mature and a dominant design emerged firms started to face stiff competition from each other a shakeout began. To survive, most of the firms started to bulk up through acquisitions eventually leaving us with Ford, GM, and Chrysler. Also see the broadcast networks before cable (there aren’t much more than three major owners of content providers on cable now – just give it time).

    One could argue that the publishing industry had managed to maintain its wider oligarchy through certain practices, that weren’t outright collusion, but effectively the same. Authors shopped their books not for the best deal, but for the firm that would actually give them a shot. On the other side, the publishers all charged the same wholesale price, so no firm had a price advantage and a comfortable piece of market share.

    To me, the greatest pressure is not Amazon alone, but the larger shifts within the industry that favor a small number of retailers (the firms you mentioned) and the technology shift. Any time 25% of your product changes its fundamental delivery medium you’re in a for a titanic shift in the industry. What the publishing industry has going for it, however, that other industries did not is that the new technology is actually more profitable than the old. Kodak didn’t shift to digital when it should have because it was less profitable than film, at the time – until it was too late. Ebooks aren’t like that. What the publishers have, though, is a lot of fixed costs tied up in physical books which are shrinking in sales volumes. By merging they’re able to share some of those fixed costs and shift more focus to ebooks and growing with the new technology.

    So, yes. Others will merge and the Big 6 may someday by the Big 3.

    • Excellent points, Richard.

      I would mention that the new technology is more profitable than the old if you can maintain your old pricing. One of the characteristics of disruptive technology change is that new market entrants typically enter at substantially lower price points.

      • Well, given that the incremental cost is pretty close to $0 but not exactly $0, even discount pricing can be more profitable than old pricing. I don’t know enough about the full economics of producing an ebook, but I do know that certain ebook only costs will come down as the technology matures (e.g. formatting for various reader formats).

        But your absolutely right, new entrants enter a lower price point and a lower quality point, as well. Often, however, it turns out the customer doesn’t need all the functionality of the older product. Computers were kind of like this. Lower priced, lower quality, lower margin microcomputers turned out to be a better business than mini computers. Here, the added quality of a physical book (put in on the shelf to impress your friends, loan out as much as you want, resell it, license never expires, etc…) aren’t needed by many customers who will gladly trade these features for a lower price and functionality they like such as fitting 2000 books in the palm of your hand.

        But, in this case, the barriers to the industry incumbents are mostly ones in their minds. Once they mentally get over the change they will be well positioned. Those that don’t will be consigned to history, but I do not think they’ll all end up there. They can let the indies and little publishers test out various models and then the incumbents pick the best ones or buy a company or two already doing it.

        • Except the incumbents are lumbered with hugely expensive business structures built for a different time. Sure, the Big Six can dump their New York offices and set up in Detroit to reduce costs, but I don’t see anyone who works there wanting to suggest such an idea.

          • You’re right about costs. It’s not just NYC offices, but a lot of capital assets tied up in producing paper books, long-term labor contracts, relationships built-up around a diminishing model, etc…

            Paradoxically, this is why mergers make sense. They provide a reason and rationale for shedding many of these outmoded business structures.

            If firm A used to sell 100 physical books and firm B used to sell 200 physical books, but now customers only want 75 and 125 books respectively – they can merge, dump all the fixed costs for firm A and now have production to match demand.

            Physical books are still 80-75% of book sold, and the rate of ebook adoption is slowing. Many observers on the outside of traditional publishing expect the 75% threshold to hold in the medium to long-term.

            Oh, and firms always benefit from being in the same local area. Silicon Valley for software, Detroit for auto manufacturing, Dallas for energy companies, NYC for finance and publishing, Paris for fashion, etc… There are many reasons for this. The costs for not being there can be a lot more than the cost of rent and a cost-of-living adjustment for their small staff. DEC decided to be a lot more closed than HP in its dealings with other firms – the result was that Boston was surpassed in technology by Silicon Valley.

            So, if publishing know-how starting appearing in Detroit around a few key firms and a publishing house could move there without giving up the very real benefits of being around other publishing houses, then firms that don’t move would be at a small disadvantage until a critical mass was reached.

            What’s more interesting is the idea of the know-how being distributed evenly around the country (or world) through the Internet. Oddly, this doesn’t seem to have happened even in the Internet field itself. Silicon Valley is still more relevant than ever. If any industry could be become dispersed over the Internet, it’s the Internet industry itself.

            My main point, however, is that the percent of publishing houses that will fail to adapt to the changing landscape is less than 100% (but probably more than 0%). Merging is a viable option for adapting and it won’t be the end of the journey for Penguin and Random House. Will they be ultimately successful in the end? I don’t know, they don’t really know – but one of the many benefits of bulking up is buying time to figure it out. Will some within those firms reject change (moving to Detroit)? Yes. Does that mean they won’t do it? No. These people aren’t stupid. Not all of them, anyway. Some are there because they don’t have to work (trust-fund, rich spouse, etc…) and they’re out of luck. The rest will roll up their sleeves and figure it out.

            • Detroit for auto manufacturing

              Except — according to Wikipedia — Subaru is in New Jersey; Nissan is in Tennessee and Mississippi; Toyota is in Mississippi, Kentucky, San Antonio, Indiana, Alabama, and West Virginia; and Honda’s homepage puts it in Ohio, Georgia, Alabama, Indiana, and South Carolina…

              I think companies should take a long, hard look at whether they could — or should — be moving to less-expensive places to do their business… >_> Those dinosaur car companies were out-competed for more than one reason.

    • To survive, most of the firms started to bulk up through acquisitions eventually leaving us with Ford, GM, and Chrysler.

      I’m not convinced that’s a good comparison. Early cars could be designed cheaply and you could sell just about anything with limited regulation. Over time, the cost of developing a new mass-market vehicle and the difficulty of meeting all the relevant regulations has meant that only a huge corporation can do it and, in many cases, even a huge corporation isn’t enough and they have to co-operate with other companies to build a common platform.

      That’s not true of publishing, where I can write a book on my sofa for the cost of a jar of coffee and a few packets of biscuits. The only comparable situation I can see is creating best-sellers, where a big publisher may have the marketing muscle to push a book throughout the media, and I don’t.

      • It was just an example of the Rule of Three concept. I mentioned why publishing had managed to stave off the Rule of Three… until now.

        The Rule of Three is not that there will only be 3 firms total, but only 3 major competitors. There are reasons why 4 tends to reduce to 3 and why 2 tends to increase to 3. For more information see “The Rule of Three: Surviving and Thriving in Competitive Markets” by Sheth and Sisodia.

    • I saw your comment, which was very interesting and wanted to add that I think the Big Three in publishing will be: Amazon, Apple and Google.

      The Publishers are highly likely to fade into extinction. They are not doing what they need to do to survive.

      • So far, however, Amazon, Apple, and Google are not really players in publishing (Amazon’s the only one that’s made a decent effort at it). They are, however, quickly becoming large players in content retail and distribution.

        Finding authors, taking a risk on a book, editing books, and marketing it are very different activities and competencies from selling it directly to consumers. Publishers have tried to reach customers directly and haven’t succeeded. It remains to be seen if Amazon will be successful on the publishing side. However, publishing is only tangentially related to their core strategy of selling to customers. If the publishers had not tried to enact agency pricing Amazon probably wouldn’t have even gotten into publishing itself. Now that agency pricing seems like its going away, Amazon may care a lot less about publishing.

        Now, I can hear you already: what about indie publishing? The version of you in my head that asked this question is right: the traditional publishers aren’t really players in this space, though they are trying (to gouge aspiring authors). However, indie publishing represents both a tiny fraction of the revenue from book sales and a “minor league” for the publishers. Like I was saying to PG, the publishers will let the indies and small publishers try stuff out before sweeping in and buying it. Many successful indies turn to traditional publishers for dealing with the stuff those companies still do well and that the indie has not spent the last several decades learning how to do.

        Are indie published books a challenge? Yes. Do they signify the death knell of an entire industry? No. Look at music: indie artists are doing better than ever, but the traditional producers that adapted are still there and still thriving.

        The traditional publishers will adapt. Maybe not all of them, but more than none of them.

        • Finding authors, taking a risk on a book, editing books, and marketing it are very different activities and competencies from selling it directly to consumers.

          That’s quite true. They are such very different competencies that nobody actually has them. Traditional publishing operated by maintaining an oligopoly of distribution, and forcing the pipeline to accept whatever garbage they decided to pump in at their end.

          • They certainly got fat and lazy on a cushy situation (see my reply to Edward where I said: These people aren’t stupid. Not all of them, anyway. Some are there because they don’t have to work (trust-fund, rich spouse, etc…) and they’re out of luck. The rest will roll up their sleeves and figure it out.)

            But to completely dismiss them and any chance that they will shed the fat is to leave yourself blind to what they may actually accomplish. A recent example comes to mind: Tuesday. I’m a news junkie and even I didn’t realize how much conservative media had led itself to believe Romney was going to win at least 55% of the popular vote and 300 electoral votes. When he didn’t they were completely blindsided. It hadn’t even occurred to them to doubt their conclusions because they truly believed all the other publishing polling data was biased. It not only affected how wounded they felt Tuesday night, but is also affected Romney’s strategy down the stretch.

            I’m not saying that if you dismiss traditional publishing it will come back, but I’m saying that if you do they might and you’ll get sucker punched by the shock of it.

            • Richard, I’m not a business person. I look at this more from a sociological perspective.

              Here’s what I see. A labor force (writers) making a natural transition to better working conditions. Higher pay, more control and respect, completely open access.

              I don’t know if you’ve been around the web for awhile, but I’ve been struck lately by how incredibly fast this is moving. A year ago, the tone on the blogs was much different than it is today. Writers are moving away from Traditional Publishing fast.

              There is absolutely no service the Big Six provides that can’t be provided by someone else. Writers need a way to sell their books to a reader. Everything else, they can do themselves, or piecemeal out. Full service agencies, for a flat fee, are also a growing option.

              I don’t care how lean, mean, innovative – or conversely – big, powerful, consolidated Publishers are. They no longer control the market, they are no longer mandatory, they are optional.

              They are stuck in a culture that continues to disdain the writer. Unless they can successfully break free of that very entrenched culture, they will lose the writer. They lose the writer, they can not survive. Period.

              You may say there are thousands of writers. But not all writers are equal. Writers who can reach wide audiences are rare. Publishers can not just have any writer, they need good ones. And the good ones are even more likely to migrate fast.

              So, I’ll sum up: We are seeing a natural and completely inevitable migration of writers to better working conditions that is happening very quickly. That is the force that will determine the future of Publishing, everything else pales in relevance.

              And the fact that Publishing is focusing on everything BUT that, makes me shake my head at their future prospects.

              • Mira,

                I respectfully disagree with your position, due probably to a different outlook on people, and more exposure to music and photography than writing.

                While the midlist fiction authors on linked blogs are definitely changing their tune, I suspect that there may be an echo chamber effect going on – much like, pardon the political, the effect that left a stunned blog audience on kos after the congressional midterms and on pjmedia after the presidential election.

                The technology now exists to completely bypass very abusive recording contracts and market music worldwide, from much better and cheaper recording technology down the pipeline to ease of marketing via myspace or band-owned domains, to ease of sales via .mp3 on band websites or retailers like itunes and amazon.

                This has not ended pickers flocking to Nashville, hoping they’ll get a contract and be the next Dolly Parton or the next Little Big Town. If anything, it means there are more of them, and the quality’s improved from the fierce competition. (In this town, even the guy with a guitar at the bus station has a stack of professional-quality CD’s for sale in his guitar case, and the commuters are as likely to buy them because the music’s good as to give him change out of charity.) If you think the contracts got better – they didn’t.

                I don’t predict, therefore, the demise of big publishing. They’ll be slow to adapt. They’ll hemorrhage writers, for sure, especially in fiction. They’re losing their total control of the market. But all six of them collapsing and dying? No.

                • Dorothy,

                  I also respectfully disagree.

                  Although, I will say, that if you know the term mid-list, you have some exposure to writing. :)

                  Music and writing are very different things. Nashville, for example, still controls alot, for example, the ability to reach listeners through the radio, television and touring, which can make a musician a super-star. The technology may exist for musicians to sell their music without going through a company, but Nashville controls a great deal of access, and they offer the dream. Make it big in Nashville, and you will be rich and famous beyond your wildest imagination. But you can not get there without Nashville. That’s why people will put up with terrible contracts – they don’t really have a choice if they are after the gold.

                  Publishers do not control access in the same way. The only thing they control right now is getting books into print. And print is on it’s way out; it’s being replaced by a new digital technology.

                  And there are no golden contracts in Publishing. Publishers treat their best selling authors marginally better than their mid-list and debut. There are no red carpets.

                  But more important writers can now achieve best-selling status without Publishers. So, why should they put up with terrible contracts on the way up? Why should they even sign with Publishers once they are best-selling? Why give them huge chunks of money? They don’t need them.

                  If you watch the transition, it’s not just mid-list moving indie, it’s debut, best-selling and (even) celebrity.

                  Publishers are optional now. Nashville really isn’t. That’s the difference.

                  Of course, if Publishers made themselves more attractive to writers, they would have a shot at becoming, if not optional, at least desirable. But they are not doing that, and thus my prediction they will not survive.

                  • There are some good points made in the article PG just posted today: http://www.thepassivevoice.com/11/2012/over-it-bookish-conversations-we-never-want-to-have-again/.

                    Publishers are optional, but they have a long head start and the human ability to adapt. To believe they ALL will remain static whistling Dixie as their world crumbles down around them is more of a fantasy than the former belief within the industry that ebooks and self-publishing wouldn’t amount to much.

                  • Nashville might be necessary, but only if you assume that those who listen to country and western music shun the internet. (Granted, the majority of them might, but that may be changing.)

                    I know that in independent music, a musician would go a long way studying the recent success of Amanda Palmer, who spent decades building a fanbase so that when she went without a music label, her fans were able to support her through Kickstarter. Her recent album funded by Kickstarter made the Billboard charts.

                    Not sure if her music videos are on the music channels, so if that’s your dream, then that may be harder. But youtube is proving to be an interesting place for a group to build an audience. So I wouldn’t be surprised if the music video channels won’t fall to new media eventually – or pick up what’s trending there to survive.

              • Mira,

                I agree with you that there are fundamental shifts going on in the publishing industry. You’re right to point to the changing attitudes among authors themselves, not just customers.

                Even from a sociological perspective, people respond to incentives – on both sides of the equation. There’s a great RSA Animates talk on how motivation is not really about money, but that if you reward something you get more of it and if you punishing something you get less of it: http://www.youtube.com/watch?v=u6XAPnuFjJc (10 minutes, very worthwhile, based on the book Drive by Daniel Pink).
                There’s also the related concept in psychology of Extinction. Rather than punish an activity you don’t want, you ignore it completely and that also results in less of it (though, you get a spike of it at first). Many parents use this technique with children, but it also works with recalcitrant employees, vendors, and clients.
                http://en.wikipedia.org/wiki/Extinction_(psychology)

                I don’t know if you’ve been around the web for awhile

                I’ve been on the Internet since the summer of 1991 and I’ve been following the writing blogs for almost two years. I mentioned in another reply on here that I have self-published friends and hope to join their ranks myself soon. Some of my other good friends have braved the industry and told me horror stories of publishing – one of the many reasons I shelved my own aspirations of being published years ago. We spend a great deal of e-mail bytes bashing traditional publishers and their outmoded business model. My morning and evening routines include reading not just Passive Voice but DWS, his wife Kathryn Rusch, Joe Konrath, David Gaughran, and a smattering of lesser known authors and freelance editors.

                There is a certain echo going around, as Dorothy describes. Democrats were shocked by Kerry’s loss in 2004 and Republicans were even more shocked at Romney’s loss this week. There’s a famous Pauline Kael quote she supposedly made after Nixon won and she couldn’t believe it, “I live in a rather special world. I only know one person who voted for Nixon. Where they are I don’t know.” Which, through the ages gets boiled down to: “I can’t believe Nixon won, nobody I know voted for him.” I heard similar things by callers into NPR shows in the aftermath of the 2004 election. By dismissing information and dismissing whole firms we leave ourselves open to nasty surprises. I’d rather see it coming so I can adapt myself.

                Another biographic bit: I tend to occupy the lonely middle ground on many social, political, and economic issues. I do believe in a few absolute truths, but that some of the traditional publishers aren’t going to learn from their mistakes and adapt isn’t one of them. A few months ago I thought that. Just like I once thought the big auto manufacturers would soon go extinct. Two almost did, but Ford would have remained because they had seen the writing on the wall and took steps to avoid collapse before GM and Chrysler did.

                Every *function* a publisher performs in bringing a book to readers can be bought a-la-carte or as part of a self-publishing package these days. But what can’t be bought is scale and relationships. Like it as not, those relationships still matter because 75-80% of the market are still physical books and those relationships have a very real tangible value that does not directly show up on the company financials. The delivery technology has changed, but the product – the story – is still the same.

                This is why Amanda Hocking made a deal. This is why E.L. James made a deal, and John Locke, and Michael J. Sullivan, etc… This is why authors like DWS advocate a balanced approach to publishing. Traditional publishing isn’t evil, but must be handled with caution and used in certain circumstances.

                If every author seeking a publishing contract decided today that they would not sign a contract that did not include a specific date when rights reverted back to them what do you think would happen? Would publishing just shut its doors? No, they would adapt and give in.

                The more authors that see self-publishing as a viable choice, the more publishers will have to think about their contracts. A few will move some things around and trick authors. That will work for a while, but those publishers who do not treat authors as valuable relationships and assets will fall to the wayside. The more these tactics are ignored – the faster the behavior will be extinguished. Remember what I said about relationships have value? The publishers that forget that in regards to their authors will fail.

                Here’s another great idea from psychology: growth mindset. I created a list of books on the topic of a growth mindset on Goodreads: http://www.goodreads.com/list/show/27246.Growth_Mindset. Carol Dweck was the first person to go into this research and her book is now my list after reading an interview with Goodreads’ founder, Otis Chandler. I’ve very familiar with the concept, however, and loved Talent is Overrated which introduced me to the concept. The basic premise is: do you think that people are stuck with the abilities and attitudes they currently have, or do you think people can adapt and grow? Turns out, most people believe (deep down) in a more fixed mindset even if they publicly espouse a “growth mindset.” It also turns out, however, that people can and do adapt and can make amazing changes – given the right incentives and environment.

                Do you take constructive criticism and use it to get better or do you take it as a personal attack? I don’t know you, but if you’re a writer then you know you have roll with the criticism and learn from it. Do you give good feedback to others? If you’re in a writers group then you have to learn to give good feedback and not just say, “that was great!” Did you always have these attitudes or did you have to learn them? Some people were raised with a growth mindset and so it comes naturally. Others, not so much.

                The way I see it:
                The chance that any given big publisher will adapt: probably pretty low.
                The chance that at least one big publisher will adapt: fairly high.
                The chance that all the big publishers will adapt: I would be willing to say infinitesimal.
                The chance that two publishers will adapt if they merge: slightly higher than if they didn’t.

                What I know for sure: publishing will look a lot different five years from now than it does today.

  3. I agree with your analysis, PG. Nimble and innovative is essential in a changing market.

    Clearly the writer of this article hopes Publishing will survive, and their perception is colored by that.

    For example, at the end of the article, they say this:

    “Publishing has shown itself to be more resilient and even more innovative than outsiders (and even many insiders) predicted”

    At which point, I stopped reading and started staring into space thinking about how good humans are at total self-delusion.

  4. This time will not be one comet, but millions of meteors striking the publishing world.

  5. Suit one: Jesus, we’ve got to do something to get ahead of this digital revolution! We’ve got to be able to act faster, make decisions more streamlined, compete to attract good, reliable author-vendors, be more competitive on pricing.

    Suit two: I know! Let’s get even bigger!

    Suit one: Great. Let’s take lunch.

    • Actually, Suit One would say: We need a meeting! A Skype! An All-Hands conference call! Get the secretary to schedule something for the top 100 execs and at least 4 members from every relevant department. Let’s put together an intra-company survey! And a memo! We should target the end of Q1-2013 for submission of survey questions, with results and analysis targeted by the end of Q2. I know that’s really pushing it, but we need to move fast here! We’ll show THEM just how nimble we can be!

      Yes, I spent FAR too long in the corporate world…

  6. Sure, mergers create a bigger slower dinosaur… but it also creates fewer dinosaurs. IMHO, consolidation is a form of shrinkage.

  7. Is there a museum of publishing?

    Maybe we should get started on one…I’d like to take my kids to it a few years from now.

    • In that vein, I love this clip from The Onion about a life-like Blockbuster museum. Blockbuster is a great example of what happens when you cannot adapt fast enough and your attempts to do so fall flat (too little, too late).
      http://www.theonion.com/video/historic-blockbuster-store-offers-glimpse-of-how-m,14233/

      • Blockbuster’s problem was not that it failed to adapt. Blockbuster’s problem was that it was perfectly adapted to an environment that went away.

        • Any company that is successful perfectly adapts to the environment in which it finds itself. It’s what they do when a new technology appears on the horizon that matters. They’re called “technology S-curves” and they’re usually less profitable than the tried-and-true business. Firms that successfully navigate the shift from the old to the new are the ones that see the writing on the wall and accept less money for continued survival.

          • As Clayton Christensen has pointed out, very few firms ever successfully navigate the shift when the technology is disruptive — which ebook technology is. To take just one example, of the six big mainframe computer manufacturers that existed in the U.S. in 1980, only one — IBM — successfully made the transition to PCs. In the short term, none of the other companies could afford the revenue loss from cannibalizing their own businesses with PCs. In the long term, none of them could afford the prohibitive cost of entering the PC business after the major players were established.

            Big publishing’s problem is that it is being superseded by a new industry, in which the existing publishing firms have neither the advantage of incumbency, nor the advantage of being first movers, nor the advantages of accumulated competence, appropriate business structures, or superior access to markets; and yet they have the huge disadvantage of a cost and debt structure built up to maintain their position in the old industry. They don’t even have the advantage of owning the products: with rare exceptions, copyrights are owned by the authors and are liable to revert to them, and new products are acquired individually on an ad hoc basis.

            There is no more reason why Random House should successfully make the transition to ebook-centric publishing than why Kmart should successfully challenge Amazon in online retailing.

            • Now we’re talking! Innovator’s Dilemma is exactly what we’re talking about. Very few firms do navigate this shift (I gave the example of Kodak and the move to digital, which they actually pioneered and then abandoned). I also touched on the move from mini computers to microcomputers (PCs) in an earlier reply around here somewhere.

              However, I disagree that the big publishers do not have an incumbent advantage. They do not have an advantage with the ebook technology specifically. They made the same mistake music producers made – they came to see the medium of delivery as the product itself. Ted Levitt famously said of drill consumers, “They don’t want quarter-inch bits. They want quarter-inch holes.” However, we cannot make that same mistake. The ebook is yet another medium to get the story from the head of the author into the head of the reader. The story is the product. However, things need to happen to facilitate that transfer from the author to the reader. Even indie authors need editors (though, they don’t all use them). They need people to coach them through the process (writing groups), create cover art (DeviantArt), market their book, manage international rights, etc… All of these functions can be bought on the open market without the help of an agent or publisher – but it ain’t all easy street.

              When indies do put it all together and work hard on the ancillary activities to get their book out there they face a huge discoverability problem, “Richard Finn – author extraordinaire” does not have any clout on Goodreads or co-op budget with Amazon. These things come – but they come with time (except the co-op, that comes with shloads of money). If an indie author fails to sell a book, he tried, he accomplished it – now he or she can go back to their day job. When a book from a traditional publisher fails its just one more author roadkill. Next!

              Random House was able to swoop in and license Fifty Shades of Gray. No small publisher could do that. Certainly, E.L. James did great, but she’s an exception, and not a new entrant into the publishing business to rival the other firms.

              I buy a ton of indie books (more than I can read), but when I go to Amazon’s home page or B&N I see books from a lot of big publishers and a few small publishers. I don’t see any indie books at first, but start to see them when I dive into categories.

              The big publishers that fail to adapt and fail to find their customers where their customers are receptive to hear about books – they’ll lose whatever incumbent advantage they have. According to Goodreads founder, Otis Chandler, the big publishers are a-calling.

  8. Bibliosaurus

  9. Radio Shack is losing millions of dollars a year. Best Buy offered to buy them, and they said no thanks. Why? Because Radio Shack had about a billion dollars in the bank, plus assets. They can afford to wait and see if their mobile phone biz will save them. It won’t, but by the time they figure it out their old market (electrical components and odd cables for gadgets, all consumed by everyday people) won’t exist.

    If big publishers can cut their costs enough, they can bleed for a while until smaller businesses show them the way. They have an advantage over Radio Shack in that their core business (selling stories) isn’t likely to ever go away.

    They also have a large population of zombies who go giddy whenever they are chosen to provide a product for almost no compensation. There’s always that.

    • They have an advantage over Radio Shack in that their core business (selling stories) isn’t likely to ever go away.

      Ah, but that isn’t their core business. Their core business is preventing other people from selling stories. Controlling shelf space through co-ops and end-cap placement; controlling distribution by leaning on wholesalers not to carry independently published books; controlling reviews by propping up the right New York publications with heavy advertising buys. Those methods are all ceasing to work.

      The only economically significant output of a traditional publishing house is rejection slips. Everything else that they do can be done by people upstream of them (authors) or downstream of them (booksellers).

      • Your right to attack their tactics, but I think you’re confusing marketing techniques and anti-competitive practices with core strategy. One can have both poor tactics and a poor strategy, but a good core strategy can make up for awful tactics.

        Since Random House and Penguin are subsidiaries, its hard to get at their costs, but their parents do report some individual data for the firms. Random House is owned by Bertelsmann SE & Co, a European based firm, that does €1.7 billion (> $2.1 billion) in revenue on its own ($235 million in earnings before interest & taxes). Penguin is owned by Pearson in the UK and they reported £1.045 billion last year ($1.67 billion, $177 million in operating profit).

        For both firms, their profits are increasing with digital. Ebooks don’t have a lot of the same tactical issues with physical books. They do still have a tight grip on co-op space at Amazon, B&N, Apple, and Google. They also still have review publications that won’t look at anything from small publishers. But little of that seems to matter in the growth of ebooks from other sources. Yet, these guys are still making more money. And, like I said in an earlier reply, they’re not using the indie and small publisher ebooks like a kind of minor league. They’ve created new ways to gouge authors with self-publishing platforms, but they are furtive steps into addressing this new front.

        Some of the incumbents will find a way. Many won’t and we can dance on their graves, but so far none have fallen by the wayside (unless you consider a merge to be failing – but ask Anheuser-Busch if it feels like the InBev merger was failing – they’re selling more beer than ever, and a lot of overseas where they weren’t selling before).

        • Many won’t and we can dance on their graves, but so far none have fallen by the wayside

          Houghton Mifflin Harcourt, chapter 11, May 2012. More to follow, I can assure you.

          • I have no doubt others will enter Chapter 11, but like Houghton did a month later, they’ll emerge. Nice catch, though, I forgot about that. I was ready to put on my grave dancing shoes, but I found that they did (quietly) come out of bankruptcy.

            Let’s see some good ole Chapter 7.

        • Your right to attack their tactics, but I think you’re confusing marketing techniques and anti-competitive practices with core strategy. One can have both poor tactics and a poor strategy, but a good core strategy can make up for awful tactics.

          All right, what is publishing’s core strategy, and what part of it cannot be subsumed either by authors or retailers? I’ve been studying the industry for nearly thirty years, and I cannot identify any core strategy except maintaining an oligopoly of distribution.

          • Again, I believe that’s more of a set of tactics. I could be wrong, though. I’m an outsider with friends who’ve published their own books and aspirations of being an indie myself.

            Their core strategy seems to be attempting to find home runs while milking their existing catalog. Part of accomplishing that is playing nice with their “competitors” in a larger-than-nature-should-allow oligarchy. The strategy Penguin and Random House appear to be employing now is one of protection through size (that way you can get closer to explicit collusion). That they’re even looking at mergers in this environment tells me that they have people willing to examine the problem at arm’s length. Some of those people will be successful in steering their firms through the storm into safe harbor.

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