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Publishers Random House, Penguin to merge

  • Article by: ERIC PFANNER
  • New York Times
  • October 29, 2012 - 7:18 PM

PARIS -- The book publishing industry is getting smaller to get stronger.

Confirmation on Monday that Random House and Penguin will merge narrows the business to a handful of big players, led by a new international giant, Penguin Random House. And it could set off a long-awaited round of consolidation, analysts said.

Bertelsmann, the owner of Random House, and Pearson, which owns Penguin, said Monday that they had agreed to combine the two houses to create the largest consumer book publisher in the world.

Analysts said the deal between Bertelsmann, of Germany, and Pearson, of Britain, would give the combined companies greater scale to deal with the challenges arising from the growth of electronic books and the power of Internet retailers.

Together, Penguin Random House will have a global market share of more than 25 percent, and a book list that includes contemporary best-sellers like Random House's "Fifty Shades of Grey" and Penguin's back list of classics from authors including George Orwell.

With e-book sales growing, publishers are increasingly worried about the leverage wielded by Internet giants like Google, Apple and, especially, Amazon.com. These companies have huge resources to invest in new technology, including digital sales platforms and algorithms that steer people to books that match their interests. Their scale gives them the power to negotiate better terms on book prices.

"That is very attractive in a business that is going to become more and more digital," said Douglas McCabe, an analyst at Enders Analysis in London.

The remaining of the Big Six publishers could face increased pressure to respond to Penguin Random House, which will be based in New York. The other four are also owned by larger media conglomerates: HarperCollins, which is part of News Corp.; Macmillan, which is owned by Georg von Holtzbrinck of Germany; Hachette, whose parent company is Lagardere of France; and Simon & Schuster, a division of CBS.

"I wouldn't be surprised if all the major trade publishers were having conversations like this," said Ned May, an analyst at Outsell, a research firm. "I would expect to see similar realignment."

The deal requires approval by regulators in the United States and Europe. But if it is completed and further consolidation occurs, midsize players in the crowded field of publishing mass-market books might find it especially difficult to compete, analysts say, with bigger players more able to extract favorable terms from customers or to invest in digital operations.

Small publishers with a niche focus and loyal groups of authors and readers might manage to remain independent, McCabe said.

While the music industry, which was hit earlier and with greater force by the digital revolution, has shrunk to three major players -- Warner Music Group, Sony Music Entertainment and the pending combination of Universal Music Group and EMI -- the publishing world has remained relatively fragmented.

John Makinson, the chief executive of Penguin, who will serve as chairman of the new company, said that with consolidation inevitable, "we decided it was better to get in early rather than be a follower."

Under the agreement, Markus Dohle of Random House will be CEO of Penguin Random House, which would have annual revenue of about $3.8 billion. No cash is changing hands; Bertelsmann would control 53 percent of the combined entity, Pearson 47 percent.

The combined company is expected to invest heavily in e-books and what Dohle called digital product development. He said that did not necessarily mean the publisher would produce its own e-reader device, as some industry watchers had anticipated.

'Creative potential'

Thomas Rabe, the CEO of Bertelsmann, said the merger would allow the combined company to invest more in digital operations and emerging markets, which show more promise for growth than do developed markets like the United States and Western Europe. He said the merger would allow the publishers to cut back-office costs, making it possible to spend more on authors.

"The intention is to continue to invest in the creative potential of the businesses," he said.

Marjorie Scardino, chief executive of Pearson, said synergies were not the primary motivation for the deal. She said the combination would help Penguin Random House "invest in books and in new ways of deploying them." This could include digital platforms selling books directly to consumers, as well as new digital formats.

"There are a lot of things changing with reading," she said, "and a lot of things that are going to happen that don't happen now."

Enthusiasm about the agreement has been more muted among literary agents, however, with some responding to reports of a possible deal last week by saying it could reduce the number of outlets for authors.

Richard E. Snyder, former chief executive of Simon & Schuster, said concerns about the effects of consolidation had been overstated. In a business that is always scrambling to find the next best-seller, it is literary agents, not publishers, who hold the real power, he maintained, and the combination of Penguin and Random House will do little to change that.

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