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E-books, star authors, and lawsuits: Six reasons Penguin and Random House make more sense together

October 29, 2012
October 29, 2012

Penguin and Random House’s merger combines the defensive and the offensive.

Technology provides publishers with a golden opportunity to revitalize a product, which has been in the doldrums for years. But the same opportunity presents huge challenges, which perhaps only publishers with real scale can effectively address.

Their union was announced today: Random House owner Bertelsmann will own 53% of the merged entity, while Pearson, owner of Penguin and the Financial Times will own 47%. Here are six reasons they had no choice:

1. A new kind of hard cover. From January 2011 to January 2012, sales of adult e-books grew by 49%, while sales of children’s and young adult e-books grew by 475%, according to the Association of American Publishers. At a fundamental level, the publishers’ product is changing. In the same way that BluRay discs now come with multiple extras (think actor commentaries, extra scenes, behind-the scenes-footage) the same will be true of e-books. The skills required to market books are changing, as are the manufacturing and distribution system. Publishers with scale will be better placed to invest in the technology required to address this dramatic transition

2. So many gadgets. New technology will accelerate this growth – the iPad mini now joins the Kindle, Nexus 7 and other small tablets with great functionality and convenience. People are reading more books and these devices will further accelerate the shift to electronic consumption of books.  The question is, what will happen to publishers’ economics as a result of this transition?

3. Stick together.  Technology is creating powerful new customers for book publishers – Amazon, Apple, maybe Google and others are replacing the fragmented, country-wide bookstore chains as major customers with incredible financial strength.  Amazon now controls 90% of the e-book market in the UK, and close to 40% of sales of all books.  The publishers have taken note of what happened to the record labels when iTunes muscled in and are huddling together to protect themselves.

4. Star power. For some time now, the book market has become increasingly hit-driven with star authors/celebrities earning escalating advances from publishers. The merger gives the new company the scale to compete more aggressively for hot authors while effectively removing a competitor (and therefore some of the heat) from the market

5. Back-office savings. There will be savings in distribution and functions such as payroll, human resources, information-technology. Importantly, the merger may allow the combined group to re-engineer its distribution platform to prepare for the inexorable decline of print in favor of e-books in a way that is impossible without such a catalyst

6. Regulatory clout.  The European Commission recently found in a “preliminary assessment” that the publishers Hachette Livre, HarperCollins, Macmillan and Simon & Schuster, and the retailer Apple, had, by “jointly” moving to an agency model for e-books, “engaged in a concerted practice with the object of raising retail prices of ebooks,” in breach of European law.  Technology is driving greater regulatory scrutiny of many markets, book publishing included, and greater scale will allow publishers to better coordinate their response to regulatory review.

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