Pearson

How Capital Is Behind Large Publishing Mergers

One of the least explored and analysed questions of the Random House/Penguin merger is why? Why did these two giant publishers feel combining and increasing their scale was so important? Because scale is the key to understanding the merger, just not the scale you think.

Scale is not always good, at a certain point scale can actually create its own problems, especially when scale attracts regulatory attention and increased oversight. Scale also creates management problems and scale created through mergers offers the possibility of management turf fights as rival teams deal with the inevitable right-sizing of the new combined entity. So why merge at all? What scale was being sought?

To Battle The Tech Giants

The most regular suggestion offered was that the companies wished to brace for the forthcoming battles with tech giants like Amazon, Apple, Google and others. I find this somewhat plausible but not really convincing, any alliance between publishers would still be in the ha’penny place with regards to those giants.

Even more though I think publishers are not in Amazon’s business (despite Amazon’s efforts to in fact be in everyone’s itself which you can take seriously or treat as a very clever distraction tactic), nor Apple’s, nor Google’s nor do they have the resources internally to be in those businesses. Barnes & Noble have shown us just recently what happens when you try to compete in a business you don’t know, it can be costly even when you do it very, very well. So scaling to compete in a field you don’t really have skill or abilities for would be exceptionally foolish.

To Save Money

Another possibility floated was that by combining they could make savings and that has more justification  Sales teams will surely be slimmed down where there is duplication, IT infrastructure can surely be streamlined and cost savings made. All that has value, but equally the risk of not being able to carry off those savings, of instead finding it difficult and failing is pretty high. Many a merger has fallen down on the lack of delivery on the promise. I think if they merged just for savings then the merger will probably be a disappointment.

Where does that leave us? Well we know, from subsequent actions, that Pearson was keen to move further into educational publishing and services and keen to shift its trade publishing assets. I wrote about this urge some time ago. That explains one side of the deal, but not the other and even then we might expect Pearson to seek the highest bidder rather than a merger or alliance. Still not getting very far along the road, are we?

Assume Intelligence

Let’s assume that the leadership at Random House and Penguin (or Bertelsmann and Pearson) are smart capable folks who can to some extent look at the future trends and sense where their industry might be going. One important aspect of those trends is for content that plays well across platforms. Not just a book, but an app that does something interesting maybe even a casual game based on the book and, if everything looks right, a movie.

The cost of developing such content (at that point intellectual property or IP is probably a better term) is dramatically higher than the cost of publishing books. Developers, designers, producers and a host of other skilled and expensive staff are required just to get the IP to market in salable form. This is not an attack on editors or narrative books in general, just that on average the cost of developing a book is predictable within a certain range. Obviously some books are more expensive than others but few require the scale of investment a well thought through app or game requires.

Combined with this rising cost of creation, the cost of acquiring content from authors, as I mentioned earlier in the week, is increasing especially for those with proven market power. The more likely a property or an author’s work is to translate across platforms, the more expensive it is likely to be.

Marketing To Everyone

Finally in cost terms, marketing across platforms is also expensive. This is a double pronged problem. On the one hand different platforms have different demands for marketing and different costs too. What works for a book will not always work for an app or a game. The second problem is that the cost of production being higher means that revenue expectations for a product will be higher too, hence the audience required to generate that revenue is larger meaning that niches probably won’t suffice(1) and marketing to a wider audience becomes much more important.

These kinds of projects can have lucrative pay-offs when they strike the big time. Harry Potter, The Hunger Games, The Twilight Saga and Fifty Shades of Grey have all moved beyond being simple books and into the realm of media franchises each with a different set of products on offer.

While I don’t yet have the evidence of it, I believe that these franchises are but the early examples of the trend towards bigger and more lucrative hits that will see publishing become an even more hit driven business than it currently is*.

If I’m correct about this shift I expect to see large publishers shedding distractions and concentrating more on their top brands or their brands with the most potential (occasionally producing titles/IP with prestige status). I’ve written before about the kinds of changes publishers must make and as Mike Shatzkin writes, they are beginning to make those changes:

Both Hyperion and Wiley are showing us what the publisher of the near future is going to look like. They will be more focused. They will be shedding overheads so they can expand or shrink their offerings more readily to respond to opportunities and circumstances. They will be less dependant on the trade bookstore and book review trade networks. And Hyperion’s decision says something more about the future that Wiley’s doesn’t: book publishing will increasingly be an activity operating in tandem with or in service of other objectives of the owning organization.

But how does this relate to the merger? The biggest and most obvious demand that the increased costs suggests to me is for a significantly larger capital base to secure, fund, manage and protect IP projects that require much larger creation and marketing costs. Seen in that light the Penguin/Random House deal is not a defensive move designed to protect publishing from the technology sector but an offensive move that places the new entity as a leader of equal if not larger scale to the movie studios like Sony, Time Warner, Disney, NBC/Universal and the like.

Transmedia Takes Capital

As transmedia and cross-platform content becomes more important the real rivals of publishers are not the platforms that enable them to reach their customers** but the creators of content which might be chosen by those very consumers in the place of their own. In short the book publishing industry is facing convergence with other forms driven by digital distribution and consumption.

In that world, where all content is now in competition with all other content, publishers need to increase their firepower to enable them to acquire, create and market the best content they can and in so doing enable them to charge the highest price they can, all the time facing down their rivals trying their damnedest from the other direction.

That to me explains why Penguin and Random have chosen to combine. In short, it’s all about the money, but for investing in projects rather than profit (that will come later when they get some hits). I fully expect other publishers to do the same, we might even seen publishers combine with other major content creators be they games developers, movie studios,  I could be wrong of course, but I hope I’m right.

Money
AttributionShare AlikeSome rights reserved by 401(K) 2013

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(1) To be clear, I don’t rule out the viability of certain niches, nor the ability of some publishers to thrive as more modest sized entities publishing across several different niches or indeed solely focused on a single niche, but this piece is about larger publishers.

* With the obvious caveat that not all books will be hits and not all writers and publishers will be able to compete in that pace. But that’s okay, some writers and some publishers will make a decent living in the space below, perhaps many perhaps few, that is yet to be determined.

** Of which I have long believed anyway there is only one, The Internet!

Go Read This | Pearson buys stake in Nook Media | The Bookseller

On the face of it this seems an odd move for a company so keen to unload its trade business into a joint venture with Random House in the driving seat. However, the college stores and the fact that students and their instructors are rapidly moving online are clearly the driving factor on this deal, reminding us just how much Pearson sees education as its future:

Will Ethridge, chief executive officer of Pearson North America, said: “With this investment we have entered into a commercial agreement with NOOK Media that will allow our two companies to work closely together in order to create a more seamless and effective experience for students. It is another example of our strategy of making our content and services broadly available to students and faculty through a wide range of distribution partners.”

Worth noting too is the increased value now being placed on B&N’s Nook business. Seems that their device play has worked even better than might have been expected, even this time last year.

via Pearson buys stake in Nook Media | The Bookseller.

Go Read This | Penguin and The Economist form partnership | Media | guardian.co.uk

I’ve been wondering why this hasn’t already happened. I expect to see parts of Penguin get event closer to parts of the rest of Pearson as publishing companies shift and adapt under pressure from digital change. The tools of The Economist in particular could be valuable to Penguin as this effort shows:

The Penguin Economist Specials will launch tomorrow (1 March) with five titles priced at £1.99. The subjects include China by James Miles; employment prospects by Matthew Bishop; mobile digital gadgets; the increasing success of video games; and women’s continuing workplace problems.

via Penguin and The Economist form partnership | Media | guardian.co.uk.

The Publishing Recession

Eoin Purcell

Troubled Times
There is little point denying it, we are in the middle of some big changes in global publishing. It’s moments like this that remind you why working and living in what some might see as backwater, has its advantages. That said we are not immune to it here either.

The Irish Story
Sales have been a bit sluggish and while we need only €12 million in sales over the next three weeks to match 2007 figures (that’s a target of just over €152million sales according to Bookscan) there are only two pre-christmas weeks left and while volume is boyant, average selling price is taking a hammering in the last few weeks.

The Publishing Crunch
It is not just that many of the largest American publishers have decided to lay off staff (there are So-Many-Stories-I-Just-Don’t-Know-Which-One-To-Pick). Even Newspaper companies chimed in with bad news Tribune Co. went into bankruptcy and New York Times Co. announced that they would mortgage their office block to reduce debt. There is a real sense that publishing is entering some kind of crisis.

Is There Any Good News?
The New York Times pointedto the strong year that Hachette has had in the US but paired that story with the uttery depressing tale of Houghton Mifflin Harcourt which is depressing enough on its own.

So Just What IS Going On?
For perhaps the most coherent explanation of what kicked the US element of this off, read this post by moonrat over at the Editorial Ass blog:

In October, bookstores returned so many books that most publishing companies had more coming into them than going out of them. For some companies, the incoming number was more than several months’ outgoing.

Although bookstores are suffering (and how), it was the publishing houses that had to absorb the cost of this cash flow creator. This is why Impetus, a relatively new indie company without the history to survive this shock, folded. Some houses lost so much money in returns in October that profits from the entire rest of 2008 have been negated.

Where Does This Leave Us?
Publishing cautiously is the only answer I have. It’s a bad time for small publishers and mid-list authors. Bizarrely new or debut authors might just have a punt, acquiring new authors tends to be cheaper and if the work is right, marketing it can be easier too. That makes sense in a poor market, just as publishing known entities with solid histories does. I’ll add some more thoughts when I have them!

Refreshed from my Chicago trip but only defrosting now!
Eoin

The Economist, cool? Who saw that coming?

Eoin Purcell

Project Red Stripe
Maybe its the inter-company rivallry (what with a million penguins at penguin) in the Pearson stable (though they only own 50%), maybe its just a heady year or two in media but THIS is definitely a cool idea:

We’re a small team set up by The Economist Group, the parent company of the eponymous newspaper. Our mission is to develop truly innovative services online. We already have some ideas, of course. But as champions of free markets, we abhor the concept of a closed system. This is why we would like you to submit your idea (or ideas). Just think big – and we’ll do the rest.

They are accepting ideas here and have suggestions and hints here oh and Jeff Jarvis mentions them here.

Loving the name and the cool-ness of it all
Eoin