Books, Business Models, Commerce, Economics, Education, Historical

Why Did Publishers Get So Big?

Attack of the 50 Foot Stormtrooper

Attack of the 50 Foot Stormtrooper (Photo credit: .guin)

The recent announcement that Random House will merge with Penguin Books to form a new joint venture fulfills the expectations of many observers of the trade publishing scene. Consolidation is inevitable, the argument goes.  The big will acquire the small and join forces with the other bigs. Big is better. It allows you to tell Jeff Bezos where to get off and unleashes all kinds of innovation. This argument, short on details though it is, may even be true. But even if it is true, it does not seem inappropriate to investigate what the rationale for bigness is. After all, such transformative companies as Mendeley and Pinterest started with a tiny staff. Big is big, but small can become big, too, if it understands the dynamics of the Internet and can scale rapidly.

For many people the rationale for bigness is all-too-evident: greed. But while greed can be a strong motivator, it is not a strategy. To put this another way, why does greed always reach for bigness? What is it about bigness that makes it economically irresistible?

The rationale for bigness among book publishers has changed over the years. Go back a few decades and the nation was dotted with independent bookstores, one in every town center of any size. The distributed nature of independent bookstores presented challenges for publishers that wanted to sell books through those outlets. How can you have a salesperson call on each store? Note that this was long before the cost of telemarketing plummeted and the Internet was only a dream of Vannevar Bush.  Publishers thus had to reach a size sufficient to field a national sales force. This meant hiring between 25 and 30 people, whose cost included a car. Now, what sales volume does a publisher have to achieve to keep the cost of that sales force to a manageable level? Hence the rationale for bigness — big enough to blanket the country with a sales organization.

With the advent of the superauthors, another reason for bigness arose: the need to be able to guarantee large sums of money to authors. This was about the time that I got into the business, and I remember it well. The proximate cause of the rise of these highly paid authors was the ubiquity and low cost of photocopying machines, which made it possible for literary agents to submit manuscripts to multiple publishers at the same time. Thus the literary auction was born. A million-dollar advance by a $10 million company is not feasible, but a million-dollar advance by a $100 million company is just the cost of doing business. Smaller publishers that could not afford these sums got swept up by the bigger players.  Just think of all the companies that are now part of Random House: Knopf, Crown, Ballantine, Fawcett, House of Collectibles, Bantam, Doubleday, Dell, Fodor’s, and on and on. And now there is Penguin. This rationale has not exhausted itself.

Bigness also became important with the advent of the national book chains. This seems like ancient history, but it’s not that many years ago that companies like Waldenbooks and B. Dalton exploded across the country, putting independent booksellers out of business and challenging publishers on discounts and pricing. A big publisher had more clout with these chains, and thus publishers got bigger. This is similar to the rationale to get bigger to offset the predations of Amazon, and identical to the rationale once used to counter Barnes & Noble and Borders. Remember Borders? Sometimes, the rationale for bigness can survive the collapse of some of the instigators of bigness.

The push for bigness thus has many causes. There are economies of scale (a consolidated accounting department is cheaper to operate than two independent accounting departments), the need to offset other powerful players in the value chain, the aim of having sufficient resources to market products as widely and successfully as possible, and on and on. Bigness, in other words, is a natural response to the publishing ecosystem.

With Random House merging with Penguin, the rationale has been extended to include the opportunity to address a globalizing book market, the possibility of building direct-to-consumer capabilities, and new (but unspecified) areas of activity for e-books. Maybe so, but I find these arguments to be weaker than some.  Yes, the book industry like everything else is globalizing, but this is a smaller opportunity for consumer publishers than it is in the English-only world of STM. If direct-to-consumer is such a great idea, why do you need to be the world’s largest trade publisher to do it? And e-books? Well, is the notion that the new Penguin Random House will be able to get out from under the digital thumb of Amazon in China and India, even as Amazon’s control of the book business in the U.S. tightens with every day?

There will of course be huge cost savings in the back office from this merger, but perhaps the primary rationale is upstream, with the relationships with agents and authors. In the print world, publishers typically pay a royalty of 28% of their net receipts for hardcovers, half that for trade paperbacks. (Let’s not get into how those figures are derived, as there is nothing more complicated than a publisher’s discount schedule.) With e-books, publishers routinely pay royalties of 25%. There is a big push by authors to move that number up to 50%, which would dramatically increase the costs of publishing houses everywhere, and not even the most assiduous cost-cutter could find enough people to fire in the warehouse, in accounting, the production department, and elsewhere to offset that increase in author royalties. A combined Penguin Random House, however, would be in a position to get agents to toe the line, and also in a leadership position in the industry, inviting other publishers to say, If Penguin Random House does not pay 50%, why should we? You don’t have to collude over a lunch table to get uniform practices in an industry where certain players have common interests.

Bigness outside of trade publishing has a different rationale. In K-12 publishing size is critical because of the immense cost of marketing in the political environment of state- and district-funded purchasing. In college publishing, the original rationale was not unlike the trade, the need to field a national sales force, but now the rationale is more about having the size to support the building of platforms. Pearson’s many acquisitions are a case study in how higher education publishing, and higher education itself, is evolving.  Professional books have meekly followed the trade example, but the emergence of large aggregators of books (eBrary, Project Muse, EBL, etc.) is a new element in this game. There always are arguments for bigness.

In the journals world the rationale was clear early on, but, amazingly, not evident to most customers. Most journal revenue comes from academic libraries; libraries have limited budgets; libraries spend every penny of those budgets. Thus the game is to crowd out other publishers. Over the years in conversation after conversation I have tried to make the point to librarians that journal publishers behave as they do not because they see libraries as their enemies but because publishers see other publishers vying for the same limited library budget.  I have made no headway. The market-share struggle is the rationale behind the Big Deal — and you have to be big to market a Big Deal — and it is the reason STM publishers moved so aggressively to all-digital solutions, as the benefits of these platforms become greater the larger they grow.  Librarians do not cancel core journals; they cancel the journals on the margin. The aim of bigness in STM journal publishing has been to marginalize the competition.

Bigness also plays a role in the so-called “gold megajournals.” PLoS ONE is essentially a commodity business — a Web hosting service with a flag depicting Harold Varmus flying at the top. Like Derek Jeter endorsing Ford (I just saw a tacky commercial) or an aging starlet promoting a restorative skin cream, Varmus provides marketing glamour to a service that boasts that it makes no determinations as to what is important or original. Lose the marketing sheen and the pricing of the commodity becomes unsustainable. Thus, PLoS ONE is now pursuing the tried-and-true strategy of scale: the cost to process each article drops as the number of articles increases, inasmuch as the service has a high level of fixed costs. I am impressed with PLoS ONE’s business acumen. (I find PLoS’s cultural pronouncements to be silly, but that’s marketing for you.) The management of PLoS also knows the value of network effects and the principle known as the law of increasing returns. Size matters in such a situation. As PLoS gets bigger, it may become unstoppable.

Meanwhile, the world of STM, college texts, and trade — especially trade — is increasingly populated by start-ups. These small entities, at least initially, will pursue niches where size does not matter. As they progress they will move into areas where size does matter. This is why publishers get big. They are driven forward by an impersonal tide, and greed has nothing to do with it.

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About Joseph Esposito

I am a management consultant working primarily in the world of digital media, software, and publishing. My clients include both for-profits and not-for-profits. A good deal of my activity concerns research publishing, especially when the matter at issue has to do with the migration to digital services from a print background. Prior to setting up my consulting business, I served as CEO of three companies (Encyclopaedia Britannica, Tribal Voice, and SRI Consulting), all of which I led to successful exits. Typically I work on strategy issues, advising CEOs and Boards of Directors on direction; I also have managed a number of sticky turnarounds. Among other things, I have been the recipient of grants from the Mellon, MacArthur, and Hewlett Foundations, all concerning research into new aspects of publishing.

Discussion

14 thoughts on “Why Did Publishers Get So Big?

  1. “Thus the game is to crowd out other publishers. Over the years in conversation after conversation I have tried to make the point to librarians that journal publishers behave as they do not because they see libraries as their enemies but because publishers see other publishers vying for the same limited library budget”
    This is exactly right. Library XX has a journals budget of $7m, and its a Big Publishing company’s rep’s job to come back with 40% of that, or whatever share his company thinks they ‘ought’ to get. So as well as getting business on merit, strategies that make it harder for the competition to compete, are of course pursued. No better way of inhibiting the opposition’s competitive ability than to soak up as much budget as possible so there’s less left for the competition. The 80-20 idea is old hat – 20% of market players pick up about 80% of available revenues. Except in STM its now more like 90-10, 90% of revenues going to 10% of players.

    Posted by bill hughes | Nov 6, 2012, 7:36 am
  2. But isn’t capitalism in general driven by the dynamic of growth? Publicly owned companies that do not grow their business year to year see their stock prices go down. So, the question to ask is: is growth an imperative even for non-profit companies, like society publishers and university presses, which are mission driven? Some of the factors Joe points out here, like economies of scale, of course apply across the board. But without the need to turn a profit, university presses are not obliged to grow the way their commercial counterparts are, and many presses have remained stable in size for a very long time. For them, it is more important to make sure they do not require a larger subsidy from their parent universities than it is to increase their surpluses every year.

    Posted by Sandy Thatcher | Nov 6, 2012, 1:03 pm
  3. I’m not convinced “big” is the answer. As I mentioned in a short article last week (http://oreil.ly/Uvu28N), aren’t each of these two large publishers already big enough to negotiate their best deal with Amazon as well as expand globally? IOW, just how big is big enough? While the big six appear headed towards becoming the enormous 2 or 3 I think the future belongs more with the smaller publishers. After all, the bigger you are the harder it is to be nimble and innovate.

    Posted by Joe Wikert | Nov 6, 2012, 1:14 pm
  4. I expect this the enormous benefits of consolidation of the print supply chain (as print plays a smaller role in driving revenues) is the key dynamic of driving the desire for “bigness” in publishing right now. It’s not very sexy, but relief from the burden of the print supply chain may buy time to create new and necessary underlying business structures.

    Posted by PeterTurner | Nov 6, 2012, 1:52 pm
  5. The more consolidation occurs the bigger the reduction of choice becomes available to the reader. However it is inevitible as it is a way for both large and small companies to, reduce costs, reduce competition and extend their market penetration.

    Posted by Michael Moore | Nov 6, 2012, 6:43 pm
  6. As usual–
    Thanks again for making the reasoned and logical points regarding various segments of the industry. Business decisions are often more complex than simple greed.

    Posted by Barbara Miller | Nov 6, 2012, 8:57 pm
  7. On the other hand waves of consolidation are often signs of turmoil, fear and weakness. Every merger is actually a takeover. Just look at the banking industry. In many cases consolidation is the opposite of growth, rather it is a contraction of the industry. These days publishing sounds worried. Maybe that is the primary explanation, not growth.

    Posted by David Wojick | Nov 7, 2012, 6:58 am
  8. Bigger requires a much higher overhead to support inflated salaries of top heavy senior management.

    The Internet reaches a vast marketplace of billions of potential consumers while the declining number of brick-and-mortar bookstores might be serving a dwindling local customer base of only several thousand. The traditional channels for book distribution controlled by big publishers are disappearing.

    Early in the first decade of the 21st century, mainstream publishers, book distributors/wholesalers, bookstore chains, and book reviewers conspired to keep books released by POD publishers out of the chain stores. Distributors imposed rigid requirements to handle small publishing accounts—most of their profits came from the big publishers. Bookstore chains refused to stock books unless they were reviewed by the major reviewers—besides, the chains wanted to continue benefiting from sweetheart deals offered by the mainstream houses. Reviewers refused to write reviews for books that didn’t have national distribution through the chains—mainstream houses had big advertising budgets so reviewers knew which side of the bread the butter was on.

    Motivated “independent authors,” blocked from the traditional marketplace, launched their own innovative efforts to promote their books directly to consumers and Amazon was very happy to promptly fill the increasing flow of orders. Authors became very skillful at motivating individuals to order their books. They responded to fan mail, wrote blogs about their books, and acquired lots of posted reviews written by folks who actually bought and read the entire book.

    The marketplace changed from a few hundred mid-size publishers vying for shelf space to several hundred thousand authors working tirelessly to get exposure for their books beyond the bookstores. Former employees downsized out of jobs were quick to sell their skills and talents on a freelance arrangement to soon to be published authors.

    Consumers didn’t really care how or by whom the book was published as long as it told a good story and/or provided beneficial information. Many consumers boycotted ebooks with higher prices caused by imposed “agency pricing.” Successfully getting exposure on the Internet has become more important to authors than having their books in bookstores with fewer customers.

    Authors with increasing sales of ebooks are going to be asking the big publishers interested in acquiring their content specifically what the mega-publisher can do to promote and market the authors’ books. It’s going to have to be very enticing for ebook authors to give up 70% in royalties in exchange for a mere 25% from an overpriced ebook.

    Authors are also becoming more reluctant to surrender editorial control to a big publisher with a dismal track record of book sales—demonstrated by all the traditionally published book that failed to earn out the advance. Authors are disappointed when they see the fruits of their labor die on the tangled vines of big publishers.

    Now it seems the biggies are going to try selling direct to consumers. They’re going to discover the leveled playing field is occupied by authors who have been successfully selling directly to consumers through Amazon for more than a decade.

    Indeed we publish in interesting times.

    Enjoy often…John

    Posted by John F. Harnish | Nov 9, 2012, 1:58 pm
    • Schumacher in the UK coined the phrase ‘small is beautiful’. It works. Perhaps the publishing industry is still living in the ice age. In due time, they too will melt away. James Cowan

      Posted by James Cowan | Nov 10, 2012, 7:22 pm

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