No automatic happy ending for publishers that merge

Marc Sidwell
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IT IS hard not to wince at the self-delusion of yesterday’s press release from Pearson and Bertelsmann. Describing the firms’ agreement to merge Penguin and Random House, Pearson’s outgoing chief executive Marjorie Scardino says: “Together the two publishers will be able to... be more adventurous in trying new models in this exciting, fast-moving world of digital books and digital readers”. Really?

If there’s one thing we know about innovation, it is that being bigger doesn’t make it easier. It is often hardest for established, successful firms to adjust to the disruptive technologies that give leaner, younger and hungrier rivals the chance to eat their lunch.

That is why a knockout success like Fifty Shades of Grey, now doing so well for Random House, came out of self-published Twilight fan fiction. Meanwhile Pearson’s interim management statement showed Penguin’s revenues still in decline – down two per cent after nine months of the year, better than the half year figures, down four per cent. Clayton Christensen of Harvard Business School published his classic The Innovator’s Dilemma 15 years ago. It still needs to be more widely read.

Much has been said about how this deal starts to make Penguin and Random House big enough to get more bargaining power with Amazon, as if Amazon were the giant in the room. But each is already big enough for significant influence. Random House had revenues in 2011 of €1.7bn (£1.4bn). Penguin had 2011 revenues of £1bn.

In any case, when it comes to the future of ebook pricing, it’s not Amazon the combined publisher needs to worry about so much as the US Department of Justice. Random House was the only big publisher to fall outside the DOJ’s price-fixing suit filed in April, that accuses firms of colluding with Apple to fix ebook prices artificially high. Penguin is one of the firms named. Three publishers, including Rupert Murdoch’s HarperCollins, settled. Penguin Group decided to fight.

A loss would be damaging, adding extra risk to this week’s deal. But whatever the rights and wrongs of the case, Penguin’s decision to battle not settle shows it ranging itself against the disrupted world of low-priced ebooks. It is not the sign of a firm predisposed to adventurous experiment with the form.

In the brave new world of publishing, big firms count for less and less. Big authors can tame Amazon all on their own: JK Rowling decided she wasn’t going to let Amazon distribute her ebooks, or her publishers publish them, and Amazon is still providing links to Pottermore to buy Harry Potter kindle editions. Celebrity authors remain the backbone of the big publishers – Penguin namedropped Tom Clancy and Pippa Middleton yesterday – but just as celebrities are learning to speak with their fans directly on social media, they may not continue to see the need to share book revenues with big publishers. The next Fifty Shades of Grey may not see the need to take a Random House deal after breaking out. That’s the painful possibility that a bigger firm won’t protect against.