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Old 11-07-2012, 09:22 AM   #1
fjtorres
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Why did the Big Publishing Houses get so big?

Scholarly Kitchen has some historical musings and a hint of things to come if the Random Penguin merger goes through unhindered:
http://scholarlykitchen.sspnet.org/2...rs-get-so-big/

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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.
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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.
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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.
Boldface mine.
Explains why the Author's Guild is upset, no? Not only can the Random Penguin resist raising ebook royalties, they'll be in a good position to.... trim all royalties, say to 25% on hardcover. A point here, a point there...

He also addresses the benefits to the publisher in other markets besides consumer publishing, like journals, libraries, and academic publishing.

A good read: recommended.
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Old 11-07-2012, 06:45 PM   #2
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I've taken the position that the publishing industry would be in a much better position to adapt to e-books if they hadn't consolidated. A bunch of smaller publishing houses could experiment with different models and the best would win. The consolidation has just allowed the BPH to think they can rig the market and force the consumers to buy under their terms. That just makes an unhealthy marketplace. I'm sure there will eventually be a market correction and it won't be favorable to the companies that are rigging the market or the authors that are in bed with them.
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Old 11-07-2012, 08:43 PM   #3
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The article is all about publishing being a concentrated industry, but provides zero evidence that it is. Concentrated compared to what? Peach growers? Yes. Supermarkets? Who knows? Office supply stores? No. Airliners? Certainly not. Computer operating systems? No. eReaders? Obviously not.

In almost all industries, prosperous firms are looking to acquire, while others are declining or going bankrupt. Here is a slice of mid-nineteenth century US publishing:

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In 1832, William Ticknor and James Thomas Fields had gathered an impressive list of writers, including Ralph Waldo Emerson, Nathaniel Hawthorne, and Henry David Thoreau. The duo formed a close relationship with Riverside Press, a Boston printing company owned by Henry Oscar Houghton. Shortly after, Houghton also founded a publishing company with partner George Mifflin. In 1880, Ticknor and Fields and Houghton and Mifflin merged their operations, combining the literary works of writers with the expertise of a publisher and creating a new partnership named Houghton, Mifflin and Company.
The explanation for why firms merge has to do with capitalism as a whole, not publishing per se.

A number of current New York Times bestsellers are listed as being published by the author. Taking this into account, it may be that the average publisher size is declining.
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Old 11-08-2012, 06:22 AM   #4
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Originally Posted by Barcey View Post
I've taken the position that the publishing industry would be in a much better position to adapt to e-books if they hadn't consolidated. A bunch of smaller publishing houses could experiment with different models and the best would win. The consolidation has just allowed the BPH to think they can rig the market and force the consumers to buy under their terms. That just makes an unhealthy marketplace. I'm sure there will eventually be a market correction and it won't be favorable to the companies that are rigging the market or the authors that are in bed with them.
They can experiment with different imprints - MacMillan are testing DRM-free with their TOR imprint, HarperCollins (UK at least) seem to be trying a number of different price points for different imprints.
The advantage of experimenting with one of your imprints rather than your entire output is that, if it goes wrong, you can cover the costs with everything else.
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Old 11-08-2012, 06:42 PM   #5
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With rare exceptions, small companies want to become big companies and big companies want to become bigger companies. Again with exceptions, individuals want more money, better housing, better cars etc. Very few companies or individuals want to have less than the already have.

It does happen that individuals give away all their worldly goods and live in poverty, but not that I know of in a business.

Expecting a business to act in a way that the business feels would take away from their bottom line is an excercise in futility.

Helen
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Old 11-08-2012, 07:30 PM   #6
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Expecting a business to act in a way that the business feels would take away from their bottom line is an excercise in futility.

Helen
The thing is, a fair amount of corporate mergers don't add to the bottom line at all. In a lot of cases the short-tern disruption and distraction from the merger efforts negates the estimated benefits. And in a lot of cases a merger designed to achieve higher efficiencies through consolidation results in higher overhead because the combined company ends up with a lower market share than the two individual companies held.

The economist has a column on this, from last week:
http://www.economist.com/news/financ...america-may-be

Quote:
Merger studies support this. The “winner’s curse” describes the phenomenon of mergers destroying value for the shareholders of an acquiring firm. Research by McKinsey, a consultancy, provides one explanation: close to two-thirds of managers overestimate the economies of scale a merger will deliver, often overegging the benefits by more than 25%. Size can even drive costs up, if firms get too big to manage efficiently.
The question here is that the reason publishing has become concentrated to the extent it is (whether it is 'too concentrated" or not) is for a series of reasons that in many cases no longer apply. But the gut reaction of the bigger players continues to be to try to get bigger because it has always worked for them in the *past*.

As the Economist points out, getting bigger sooner or later hits a point where it becomes counter-productive.

In the case of the Random Penguin the stated rationale for the merger bodes ill for consumers and authors but the people who should be most leery are the stockholders.
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Old 11-09-2012, 01:03 AM   #7
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The thing is, a fair amount of corporate mergers don't add to the bottom line at all. In a lot of cases the short-tern disruption and distraction from the merger efforts negates the estimated benefits. And in a lot of cases a merger designed to achieve higher efficiencies through consolidation results in higher overhead because the combined company ends up with a lower market share than the two individual companies held.

The economist has a column on this, from last week:
http://www.economist.com/news/financ...america-may-be



The question here is that the reason publishing has become concentrated to the extent it is (whether it is 'too concentrated" or not) is for a series of reasons that in many cases no longer apply. But the gut reaction of the bigger players continues to be to try to get bigger because it has always worked for them in the *past*.

As the Economist points out, getting bigger sooner or later hits a point where it becomes counter-productive.

In the case of the Random Penguin the stated rationale for the merger bodes ill for consumers and authors but the people who should be most leery are the stockholders.
It is a complex subject. And as the scholarly kitchen says
Quote:
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.
Perhaps the rationale is to lower royalties. Perhaps it is to lower other costs or to cash in on the growing ebook market. Possibly a combination of these factors and others. A smaller market share than the total market share the two companies had could still increase the bottom line significantly if the market itself is growing and costs are lowered.

As you said this does not bode well for authors and worse for the many employees who will probably lose jobs. As to stockholders and consumers only time will tell.

Helen
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Old 11-09-2012, 02:37 AM   #8
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Why did the Big Publishing Houses get so big?
Big fishes eat little fishes. It's the natural order or something.
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Old 11-09-2012, 08:04 AM   #9
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Big fishes eat little fishes. It's the natural order or something.
Natural selection, yes.

Problem is, some of the little fishies evolve spines and poisonous skin so eating them isn't always wise.
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Old 11-09-2012, 08:19 AM   #10
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As you said this does not bode well for authors and worse for the many employees who will probably lose jobs. As to stockholders and consumers only time will tell.

Helen
The stated intent of using the market power of the combined entity to enforce better margins carries with it the hidden assumption that consumers will put up with the enforced higher prices (possible, even likely in some regions) and that authors and their agents will be forced to swallow the new rate structures.
That second assumption strikes me as a bit less likely, as witnessed by Mr Turow's gang suddenly remembering their club is called the Authors' Guild and not the Publishing Guild.
Given enough blowback on the traditionalist front and the ongoing evolution of medium/small publishers it isn't hard to envision that combined market power withering away in a couple of years. Right around the time the merger disruption settles down.

One other thing to consider about the merger: it is actually a two-phase divestiture. Pearson is looking to get rid of its stake in the merged company within a couple of years and the plan is for an IPO for the Random Penguin as a way to achieve this. So effectively the merger is a way for Bertelsmann and Pearson to get out of consumer publishing and cut the consolidated operation loose.
Smells like a "getting out while they still can" manuever, in which case it won't necessarily be consumers or authors who end up with the short end of the stick but the staff and the investors in the IPO.

Complicated indeed.
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Old 11-10-2012, 04:07 PM   #11
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As Amazon has been allowed to grow unchecked publishers need sufficient size to counterbalance Amazon. Random House Penguin will have such a market share that even Amazon cannot credibly threaten to delist their books.
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Old 11-10-2012, 04:33 PM   #12
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As Amazon has been allowed to grow unchecked publishers need sufficient size to counterbalance Amazon. Random House Penguin will have such a market share that even Amazon cannot credibly threaten to delist their books.
Amazon sells waaaaay more than books (any kind).
For every book type $ I spend there, I probably spend $50 on other stuff (that the big chains don't carry and the little guys that did, folded)
In many cases it is SELECTION. Price is not the prime reason, if you can't get it locally (or wait for a non-returnable 'Special order')
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Old 11-10-2012, 04:44 PM   #13
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As Amazon has been allowed to grow unchecked publishers need sufficient size to counterbalance Amazon. Random House Penguin will have such a market share that even Amazon cannot credibly threaten to delist their books.
I think the formulation "has been allowed to grow unchecked" is strange in this context, as it seems to suggest that someone should have stopped Amazon.
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Old 11-10-2012, 04:44 PM   #14
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The stated intent of using the market power of the combined entity to enforce better margins carries with it the hidden assumption that consumers will put up with the enforced higher prices (possible, even likely in some regions) and that authors and their agents will be forced to swallow the new rate structures.
That second assumption strikes me as a bit less likely, as witnessed by Mr Turow's gang suddenly remembering their club is called the Authors' Guild and not the Publishing Guild.
Given enough blowback on the traditionalist front and the ongoing evolution of medium/small publishers it isn't hard to envision that combined market power withering away in a couple of years. Right around the time the merger disruption settles down.



Complicated indeed.
Who has actually stated this as the intent? The scholarly kitchen has said that perhaps it is the rationale behind the merger, but did not quote anyone as saying this was the intent. If a Random house or Penguin person has actually stated that that is their intent as you seem to be saying, then I am wondering why this has received less media attention and mass protests from authors, consumers, courts etc. While not collusion, such a statement of intent would seem to be enough to squash any merger.

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Old 11-10-2012, 06:13 PM   #15
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As Amazon has been allowed to grow unchecked publishers need sufficient size to counterbalance Amazon. Random House Penguin will have such a market share that even Amazon cannot credibly threaten to delist their books.
So they think.

I'm wondering, though, if the Random Penguin wants to go thermonuclear on Amazon and stops selling through them... Who cries uncle first? The company that needs to find an outlet for 27% of the books sitting in their warehouses or the company losing 35% of their book-selling business which happens to be maybe 20% of their total sales? (Translation:7%)

For that matter, what if Amazon says; "Fine. We'll sell all your books at list price. No discounting, no promotion." How long before that 35% market share becomes 30%? 25%?


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