What the ruling against the PRH-S&S merger means for the publishing business

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From Mike Shatzkin:

Judge Florence Y. Pan ruled . . . that the acquisition of Simon & Schuster by Penguin Random House could not go forward. The ruling was explicitly to protect the “competition” for the “anticipated top-selling books”. In other words, the big books by big authors for which only the Big Five can compete regularly (with occasional bids coming in from a couple of other next-tier houses) will continue to have five well-funded suitors. The judge ruled that cutting that number from five to four would reduce the spend among that cohort of books, which is almost certainly true. (I comment on the fact of it; I have no idea about the law.)

What this decision says to me is:

1. None of the Big Five can merge with each other without triggering the same concern Judge Pan cited in making this decision. That will not be good news to Hachette and HarperCollins, both of which opposed the PRH-S&S merger but probably hoped they could pursue S&S if the publisher remained independent.
2. The five biggest publishers are probably at their high water mark for market share. The only way to expand a publishing house is to have a larger number of active titles. Publishing new titles profitably has become exceedingly difficult. But publishers can increasingly milk sales out of the long tail of backlist, thanks to the new digital marketing world we live in. So the biggest publishers have grown their title base by acquisition. This decision would appear to cut off that avenue, or at least cut publishers off from the biggest potential additions.
3. The biggest winner with today’s decision is Ingram. The list of titles distributed and managed under their auspices can continue to grow, because Ingram doesn’t buy the companies or own the titles under their umbrella. Instead, they provide services that require scale to publishers without the publisher needing to finance the overhead. They can pay “by the drink”. So Ingram’s steady growth in title count and sales volume can continue.
4. The expectation here had been that publishing would continue to consolidate until sometime later this decade PRH would be the only one left. Thanks to this decision, that won’t be. The Big Five will continue to operate as shrinking but very profitable entities for a long time. In fact, one would expect over time that they too, one by one, will give up maintaining overheads in favor of using Ingram themselves. So there won’t be One Big Publisher in ten years, but there very well might be One Big Distributor.

The one part of all that which probably requires more explanation is the second point, that publishers can’t reliably publish new titles profitably anymore.

When I (and most of today’s senior executives) were coming up in the business, almost all books sold were sold in bookstores. So only publishers with a selling relationship with the stores and the operations capability to deliver to them could play. There was a moat around their activity that prevented interlopers or amateurs (or “self-publishers”) from being truly competitive. For that reason, for many years, established publishers could reliably push out some thousands of copies of every title they issued and, in fact, achieved positive cash flow on a very high percentage of them. And then some stuck around to become longterm backlist.

In those halcyon days, three decades ago (or shortly before the arrival of Amazon and then ebooks), there were no more than 500,000 individual titles available in English in the world. So each new book from publishers competed against 500,000 existing books and was assured a minimal exposure through bookstores.

Today Ingram has nearly 20 million titles set up for printing on demand, which means they can ship a copy you order today to you tomorrow even if it isn’t printed at the moment. So each new title is competing against 40 times as many competitive titles as one did back then. And there is no assured distribution at all. Bookstores have shrunk in number and in size so that perhaps as little as 20-25 percent (or perhaps as much as 30-35 percent, but no more…) of print book sales are made at actual retail stores. All the rest of it, print and (of course) ebooks, is transacted online. There are advantages to being a big publisher in that context; you have more digital marketers on your staff and more digital tools and information to apply to selling what you have. And anything you have can be sold anytime. No need to get “inventory in place” in order to capitalize on a marketing break.

But the moat is gone. The inherently advantaged position of a title issued by an established publisher is diluted to near meaninglessness.

Link to the rest at Mike Shatzkin

PG hasn’t posted anything by Mike Shatzkin for a long time.

For those who are not familiar with him, Mike is a long-time participant in New York publishing. His father was also in the publishing business, so traditional New York publishing is in Mike’s bones.

During the early years of TPV, Mike’s posts were very helpful to PG’s understanding about the ins and outs, traditions and folkways of the traditional publishing business.

Mike described a time when there were lots of different publishers in New York, small, medium-sized and large. But even the large publishers were small compared to the dinosaurs of today’s publishing world. The publishing world Mike wrote about was innovative and peopled with more than a few characters who went their own way and did things differently.

Mike also told of an era when there were many more printers than Ingram. He tracked the growth of Ingram to pretty much a trade publishing printing and distribution monopoly. Ingram replaced another bevy of small printers, distribution warehouses, etc., who couldn’t compete because they were too small.

When PG first read about the actions of the U.S. Justice Department to stop Penguin Random House from acquiring Simon & Schuster, he wondered whether Justice would take a look at Ingram as another potential for an antitrust action in the book business.

PG found a partial list of Ingram’s publishing clients on their website. Observant visitors to TPV will note the absence of Simon & Schuster and Penguin Random House and any of the the other remaining US publishing conglomerates on Ingram’s client list so the list is much longer than the one Ingram published.

When PG first found the list, the thought came across his mind that, if he were Ingram’s corporate counsel, he would advise taking down any list of a whole bunch of Ingram customers so as to not wave a red flag toward antitrust authorities.