Concerns over Amazon’s power underlie plan to create £2.6bn super-publisher – yet industry is relatively healthy
Fear of Amazon may not yet be a phrase in the dictionary, but it is the sentiment that underlies the proposed merger between Random House and Penguin, to create a super-publisher with worldwide revenues of £2.6bn. Yet, the curiosity is that for all the underlying worry, the book industry remains far healthier than other media segments battered by the digital revolution.
Ebook sales are lifting off – helped not least by discreet readers of Random House’s Fifty Shades of Grey trilogy – and in the first half of this year soared by 89% to £145m in the UK. Printed books, meanwhile, were only slightly affected, dipping by just 0.4% in value to £982m – meaning that, taken together, the books market in Britain at least was up 6% between January and June 2012.
That contrasts sharply with the declines seen in the music business in the UK and globally that have seen the industry gradually shrink from six music majors in the 1990s to the three today. But with Amazon dominating 90% of the ebook market, publishers believe they need sheer size to maintain their position in a business where technology and commercial relationships are changing fast – already shown by the demise of high-street chains Borders and more than 2,000 bookstores since 2005.
David Roche, the former chief executive of Borders UK, says the merger is justified simply because “it is very important to have healthy publishers – because they do the work of selection, editing for readers”. He believes, also, that if Pearson, Penguin’s British owner, is not fully committed to the business, then “actually, it’s better off” as a minority part of an enlarged group controlled by Bertelsmann-owned Random House.
Book publishers are also eager to gain some power over setting consumer prices, switching in Europe (but not in the US) to an “agency model” in digital where they – rather than Amazon – choose what to charge, in return for handing over a fixed percentage at or around 30% to the digital retailer. That compares to the traditional model, where publishers charge a trade price, leaving it to the retailers to choose how to charge and discount.
The move to agency-selling with one less major player reduces cut-throat competition between hoped for bestsellers in the runup to Christmas, for example, and could help sustain higher prices – although it is precisely these sort of notions that trouble competition watchdogs. At the same time, if publishers felt the need to become their own retailers, the Penguin brand, in Britain at least, is arguably the best known to consumers, and could be a place to start.
Agents and authors are already calling “scary” the prospect of a transatlantic publisher housing – as well as EL James – Salman Rushdie, John le Carré, Pippa Middleton, Richard Scarry and Jamie Oliver.
But Roche also argues that there is “far more change to come” in the books business, reflecting an underlying industry nervousness. Pearson sources, seeking to justify the deal, point also to emerging competition from self-publishing – once considered a vanity activity. In July, the British group bought Author Solutions, a US-based self-publisher, for $116m (£72m) – to gain a foothold in generating revenues from a sector that grew by 60% to reach 211,000 titles in 2011, according to figures from Bowker, the US books market researcher.
The result of a combination between the businesses is that Penguin, founded in 1935 to offer the public quality affordable books, would end up as about 40% of the proposed group assuming it was structured as a nil-cash merger, according to Deutsche Bank analysts. Random House gained profits of £161m against Penguin’s £111m last year, although the larger company was already flattered by the sales of EL James’s sado-masochistic phenomenon.
However, with Universal Music’s takeover of EMI setting a new 30%-plus bar for market share acceptability, the book combination looks unlikely to unsettle regulators. This is a point likely not lost on Thomas Rabe, the Bertelsmann CEO who is a veteran of the German group’s music industry mergers – the surprise deal that led to the creation of Simon Cowell’s employer, Sony BMG. He will hope too that Pearson and Bertelsmann can reach a better consensus on who to run the company: the music joint venture was hurt by arguments between its shareholders until Sony bought Bertelsmann out.
On the evidence of the first nine months of 2012, Random House, currently top, and Penguin, at number three, would have a combined share of 31.4%, although 4% of this is probably accounted for by the Fifty Shades effect alone. In the US, the two, ranked first and second, achieved 29.4% in the same period, according to Nielsen Bookscan.
Significantly, the merger proposal, described as quite advanced, comes as Dame Majorie Scardino enters her final months as Pearson CEO. She was always personally engaged, approving some of Penguin’s largest advances, even if Pearson is principally an educational publisher today. But it is not certain whether she will be allowed to conclude the deal smoothly: over at the News Corp-owned HarperCollins, executives are openly wondering if Rupert Murdoch will make a counter move.
If you need Amazon, Apple or Google to reach readers, size matters
From Fifty Shades to Jamie Oliver, the mooted Random House-Penguin combination would create by far the world’s biggest book publisher, responsible for about one in four books published in Britain. If that sounds too much, consider that Universal has just swallowed up EMI in music, an operation with a market share of over 30%. Music has gone from four to three majors; why not books, leaving the other two – News Corp’s HarperCollins and Lagardère’s Hachette – wondering, “what next?”.
What the two industries have in common is that over them looms Amazon, Apple or Google – vast US concerns that largely monopolise the digital routes to the consumer. The publishers’ thinking is that being twice the size gives them a chance in negotiations with Amazon, although the worry is that as the inevitable savings follow, authors have fewer places to hawk their wares.
The proposed “combination” would leave the larger Random House, earnings £149m, in the driving seat. Penguin’s income is €130m. It also implies that Pearson, Penguin’s owner, is not cashing out, at least for now. Privately held Bertlesmann, the German owner of Random House, is overly endowed with money. But a minority position in media’s most mature business is not a long-term position. On the other hand, it sharpens the investor focus on Pearson’s world-leading education business.
And it makes the status of the Financial Times look more anomalous.
Publisher Pearson says it is holding talks with German media group Bertelsmann about combining their Penguin and Random House businesses.
Visit link: Pearson in Penguin merger talks
The death of Arthur Sulzberger and departure of Marjorie Scardino have sparked palpitations at the New York Times and FT – because the number-crunchers might now take over
Two-and-a-half pretty significant things happened last week, all of them illuminating one of the great media conundrums of this or any other time. Who should be allowed to own newspapers? What’s the sanctified way of becoming that otherwise most loathed of all species: the press baron?
Arthur Ochs “Punch” Sulzberger, the old (86 years) lord of the New York Times manor was a very good baron indeed. But would he have relished the send-off his beloved Gray Lady gave him, the endless pages of eulogy, the miles of roseate remembrance?
I rather doubt it. Sulzberger was a quiet, self-effacing chap who (as his executive editor Max Frankel recalled) would occasionally submit a little piece for publication – and never complain when it didn’t appear. He pottered the back roads of New York society, making connections, soothing irate advertisers, but otherwise he left his journalists to get on with it. He just watched their backs.
And he also built in a doughty “A” and “B” share stock structure that allowed the ruling family to survive as guardians of their treasure. “As many other well-known newspaper families have abandoned the business – most recently the Bancrofts of Dow Jones and the Wall Street Journal – so the Sulzbergers have remained steadfast in their belief that they were put on this earth to preserve and protect the New York Times“, wrote the Times business guru, Joe Nocera.
Shall we see Punch’s like again, many other NYT writers seemed to ask between the lines. Probably not: his son, Arthur Jr, is hands-on, occasionally maladroit and indubitably less revered. Now dad’s gone, no one can be utterly sure that the curse of the Bancrofts won’t eventually point its moving finger at the Times. Change in the highest reaches is always unsettling – which is absolutely the point about Marjorie Scardino’s retirement as chief executive of the Pearson Group, sparking palpitations at the FT.
The Financial Times accounts for only 4% or so of Pearson revenue. It makes useful money today, but it has lost pots of cash through some of the years Scardino was in overall charge. Come rain or shine, though, she stuck by it resolutely. The FT, she said, would only be sold “over my dead body”. She was a manager with a special gift for, and understanding of, journalism. She and her husband had a Pulitzer prize to prove it. But her successor is a finance man from Pearson’s dominant education division. He says how highly he values the Financial Times. Others think that could mean a £750m sale when the time is right. Come in Thomson Reuters? Bloomberg versus Dow Jones versus Reuters is all the pluralism the markets may think they need. We’ll see; but the bulwarks of passionate commitment may have weakened.
Meanwhile, over at the Independent Alexander Lebedev is under intense pressure. Prosecutors gather to charge him with hooliganism and assault after a John Prescott moment on a TV chat show. He says he’s making “contingency plans” for the papers he owns. He doesn’t deny that his businesses in Russia are losing cash, or difficult to sell. It’s only half a significant switch as yet. Since nobody can be quite sure why Lebedev bought the Evening Standard and Indy in the first place, nobody can tell how staunchly he’ll stick by them. But more uncertainty, more anxiety, more contingent fretting inevitably follow.
So there stand our three benign barons: a family stalwart, a corporate wizard, an unexpected oligarch. Some of the praise heaped upon them – by Nocera over Sulzberger’s share structure, for instance – is a touch astigmatic. Think of all the Wall Street wrath about Rupert Murdoch’s A/B shareholding that makes News Corp a family fiefdom. Think, too, of the Daily Mail and General Trust voting arrangement that sees Rothermere dominance go on and on. Was Punch Sulzberger a hero for never telling his editors what to do? So why can Jonathan Rothermere be criticised for not calling Paul Dacre to account over his paper’s McCann coverage?
The plain fact from this week of change is that there is no template for media ownership, constructed and imposed. Pluralism arrives from all points of the human compass. And if there’s one true enemy of journalism’s variety and independence, it enters wearing a white collar and dark suit, accompanied by accountants.
Just turn to the Economist of a few days ago and see what the phone-hacking furore and subsequent putative separation of News Corp into entertainment and newspaper divisions has meant out there on the stock exchanges: the “A” shares up 53% in a year and changing hands at $25 a time – the best since before credit crunching began.
Investors love what the hacking furore has forced Murdoch to do. It’s a split they’ve pushed for all along. Who wants to be wasting good money on words and pictures when cable TV and the rest are so much more profitable? Who wants to pay for Times of London or New York Post losses at a moment when (as Lebedev mordantly observes) “nobody’s buying newspapers”? Only, you fear, the best of the barons: the ones who put journalism first.
■ Diversification is the name of the survival game. But even so, you have to roll an eye over the Washington Post’s latest commercial buy whose profits will help to keep the paper going (or not). Yes, it’s a hospice.
With a successful shift towards digital products and services under way, the Pearson chief has secured a £9.6m pay package
Job: chief executive, Pearson
Industry: publishing, education, digital media
2011 ranking: 18
Dame Marjorie Scardino marked her 15th year running Financial Times and Penguin owner Pearson in 2012. She also predicted that the company would pass another milestone this year, with more than half its revenues coming from digital products and services for the first time, up from a third in 2011.
Scardino, an American-born British citizen, received cash and share awards worth £9.6m in 2011, making her Britain’s highest-paid female director of a FTSE 100 company. Pearson boosted pre-tax profits 72% to £1.1bn last year, thanks largely to the sale of its 50% stake in the FTSE International as it moved away from financial data to focus on news and analysis.
Education remains by some distance the biggest part of Pearson’s business, accounting for two thirds of its total £5.9bn revenue in 2011. However, in the US, which accounts for the biggest share of Pearson’s education business, the company is vulnerable to public school funding cuts.
The FT is doing its bit in the shift away from sales of physical products, with digital subscribers overtaking print circulation – 301,471 versus 297,227 – in the three months to the end of June, after 31% year-on-year growth. The FT also had nearly 2.1 million daily unique visitors to its website globally and 2.7 million web app users, while mobile devices account for 25% of FT.com’s traffic.
The Economist, in which Pearson holds a 50% stake, is on a roll, hitting record circulation of 1.62m in March – of which 123,000 are digital subscribers.
Penguin’s US book business took a hit in the first half of 2012 from the runaway success in print of two titles published by rivals, Fifty Shades of Grey and The Hunger Games.
However, Penguin is expected to do better in the second half of the year, with new titles from Jamie Oliver, Ken Follett, Jeremy Clarkson and Pippa Middleton.
Ebook sales have soared by a third in the past year and now account for nearly 20% of Penguin’s total revenue. In 2009, ebooks accounted for just 2% of Penguin’s total revenues, growing to 12% in 2011.
International publisher Pearson is setting up a college in the UK to teach degree courses, a first for a FTSE 100 company.
Read the original here: Publisher launching degree course