Is the Market too Frigid for Penguin?

By K. A. Manji
Bertelsmann and Pearson have agreed to merge their publishing arms, Random House and Penguin Publishing. In the new literary marketplace, they argue, bigger is not only better but essential to survive. The argument will likely prove convincing enough to regulators, with the industry already taking the merger as inevitable, and the market touting the benefits of the combined entities’ power. Revenue of $3.8 billion. Together to hold 25% of the global market. But then why is Pearson so eager to be rid of their share?

It’s true. Perhaps not blatantly blurted, but read between the lines and the subtle message is there. Pearson wants out. The terms of the deal stipulate that both parties will hold their shares for at least three years, after which a sale can be pursued, and after 5 years an IPO can be issued by either or both companies. It would seem, then, that one or both of them want to eventually divest themselves of their shares. Except that it was Pearson who was shopping for a buyer leading up to the merger. Pearson considered a bid from News Corporation, the owner of HarperCollins, rejected at the last minute only because of the tax liabilities in the proposed sale. Entertaining bids from competitors, and placing multiple exit clauses in the merger contract, does not sound like a company which has complete faith in their product. But why?

Revenues for the year have been flat for Penguin Publishing. And for all the talk of a combined entity holding 25% of the market, consider that in 2009 the same combined entity would have held over 30% market share. What has changed? Two significant shifts in the literary industry are the growth of ebooks and, arguably related, the self publishing market.

Bowker, the official ISBN registrar in the U.S., reported 6% growth in published titles, but nearly the entire growth was due to the self publishing market. And Bookstats reported that American publishers generated a 3200% increase in revenues from ebooks since 2008, the fastest growing and most profitable segment of the publishing industry. Unfortunately, the general consensus among publishers is not to rejoice but to fret, that consumers will become accustomed to lower priced ebooks and, with Amazon controlling 65% of the ebook market, that the publishers’ profits will get squeezed.

To counter the coming squeeze, Random House and Penguin Publishing have decided to merge and thereby look for efficiencies, as evidenced in the quoted $161 million in savings the merged entity plans to realize through combined warehouses and distribution. Considering the fact that operating efficiencies seldom reach projections in mergers, is it reasonable to believe profit margins can be maintained?

Analysts are predicting, in the quest for operating efficiencies, a cut in the publisher’s stable of midlist authors, and subsequently a trimming of staff. This is the formula the big music companies followed after their mergers, and it seems likely that the same strategy will be employed here. But, there is only so much that revenues can be squeezed. For profits to grow, revenue must grow. And that means a more focused strategy on the self publishing market, and a revised ebook strategy. Can the merged entity successfully pivot?

According to Penguin’s exit clauses, in their opinion, not likely. It will take 3 years before revenues have been squeezed to exhaustion, by the time they realize there is absolutely no more to cut or combine, and then they will seriously have to consider a pivot. Just in time for Penguin to leave. Profit margins will drag in those 3 years but still be respectable at that point, they are hoping, to attract a suitor. And in case no suitable suitor arrives they set themselves up for an IPO exit, their backup plan, whereby shareholders gamble on the deft pivot of a giant. Does that sound difficult? Unlikely to be successful? Well, Pearson agrees.

Talk is of the remaining big publishers now also looking to merge. With News Corporation having already bid on Penguin it seems likely they will be involved in the next play. We will see from the terms of the deal what their opinion is of the literary market.

K. A. Manji is the founder of, crowdsourcing beta readers for authors.

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