When Elephants Mate: Thoughts on the Potential Penguin Random House

Tweet about this on Twitter37Share on Facebook49Share on LinkedIn35Share on Google+2Share on Reddit0Share on StumbleUpon1Buffer this pageEmail this to someone

Random House Plues Penguin Equals Question Mark

Why anybody thinks they will produce a gazelle by mating two dinosaurs is beyond me.

–Tom Peters, author of In Search of Excellence

For the title of this post, I opted to replace “dinosaur” in Peters’s quote because I don’t believe that either house is extinct or even approaching extinction. Like elephants, they’re just big and old and there is nothing wrong with that. Most of what I’ve seen of the media coverage of the potential merger implies that it is somehow a signal that Random, Penguin, and the industry are in decline or actually dying. From what I know, this is not the case.

I worked for Penguin from 1998 – 2005 and for Random House from 2005 – 2011. In both cases, my primary focus was the emerging digital aspects of the business. Lately, a lot of people have been asking my opinion on the possible Penguin Random House. The topic has been covered from many angles but, after some deliberation, I’ve decided to offer some of my thoughts and perspective.

Why did they decide to do this?

Interestingly and despite conventional wisdom, Random House and Penguin are actually managing the digital transition quite well. Yes, they are experiencing the inevitable bumps (and inherent criticisms) but they are also combining strategy and execution to control costs, preserve revenues and, for now, maintain margins. (Sure, they may have been a bit too aggressive with that whole pricing thing but the instinct is encouraging.) These companies are run by smart, effective executives and generally staffed with unimpeachable subject matter experts. The reality is that things are tough but actually going fairly well and for publishing, this is situation normal and has been for a long, long time.

No, the number one and number two trade publishers aren’t extinct, nor about to be. And I don’t believe that the folks who run the companies actually believe that extinction is nigh. However, I do know firsthand that an amorphous fear has swept trade publishing — from the rank and file to the C-Suites to the media who cover the industry. It has been growing since 1995 or so and has now reached the point where I think of it in title case: The Fear.

Amazon. Apple. Google. Self-publishers. Pirates. Libraries. Authors. Agents. Consumers. Boogeymen, all. Publishers don’t believe they’re going extinct…not quite. But they are absolutely certain that something really, really bad is about to happen. And, depending on where one sits, it is obvious that this bad thing will result in a) the cultural obsolescence of general trade houses and/or b) the shrinking or evaporation of profits. And, of course, the loss of one’s job, which is likely hard-won and beloved.

That’s The Fear.

Who decided to do it and how did they decide?

This merger is borne first of The Fear, secondly by attempts to quantify it via scenario planning and fiscal modeling, and lastly the decision to attempt to mitigate the consequences The Fear implies via a mega-merger.

In my experience, the organizational dynamics of these (relatively) large companies are fluid (eg. messy) with decisions coming out of sequence and with a peculiar mix of prolonged indecision/analysis/lack of focus followed by sudden, sweeping, large maneuvers. Mitt Romney is wrong that corporations are people. However, people do run them and that can never be overlooked or underestimated. (I won’t get into it in this post but the timing of the appointments and the rumored/actual futures of many of the senior executives involved may have played a greater role here than has been reported. But that’s just reading tea leaves…)

The Fear will have already had Random and Penguin (and every other major publisher) thinking about potential mergers. After all, they know that managing the continuing transition from print to digital requires cost control and market leverage, particularly vis-a-vis bogeyman #1: Amazon. Mergers are one answer. But it doesn’t feel to me like the operating company CEOs, nor their wise consiglieres, had much to do with initiating this one. The Fear reached Bertelsmann and Pearson, who suddenly saw it as acute and imminent. To anthropomorphize Romney-style, the parents decided something had to be done for and about the children. After all, the kids seemed to be developing inferiority complexes and heading toward financial collapse, probably at the hands of those big, clever bastards in Seattle. Pearson’s press release confirms from where the decision came:

In reviewing the long-term trends and considerable change affecting the consumer publishing industry, Pearson and Bertelsmann both concluded that the publishing and commercial success of Penguin and Random House can best be sustained and enhanced through a partnership with another major international publishing house.

If my theory holds, once The Fear reached Germany and the UK, sharp, distant, dispassionate, executives began looking at the probability of “problems” within the “portfolio” of “assets.” Bertelsmann and Pearson have historically viewed their trade publishing units as idiosyncratically staffed providers of unspectacular but consistent margins. The margins vary little year to year, though Random’s and Penguin’s are usually not the same (Penguin’s are generally a bit higher), despite both being right around 11% in 2011. Interestingly, this 11% is about the average margin I was seeing/hearing about at the big houses 15 years ago.

From their 20,000 foot vantage point, parent company finance executives, though, would see a probable future of decreasing profit margins due to downward price pressure, flat sales volume, and fewer opportunities for cost reductions. After all, that fits with The Fear, is the refrain of most news coverage, and conforms to the fates suffered by every other media conglomerate at the hands of the pesky transition to digital. Basically, predicting and planning for doom is the no-brainer. Predicting future growth is the risky play. They opted for potential doom and reached for the trusty tool of many finance-oriented, parent company executives — Mergers & Acquisitions.

Is it actually just about cost-cutting?

I’m pretty sure it will wind up that way, though I don’t think most of the people involved want it to. The PR departments and senior managers of both companies have been emphasizing growth-oriented reasons for the merger, citing creativity, innovation, diversification, greater resources to invest in content, market leverage, and similarly positive, uncontroversial reasons for merging. There is no Fear in the publicly stated reasons for merging. John Makinson’s eloquent letter to Penguin staff and Markus Dohle’s equally eloquent letter to Random House staff offer excellent examples of the stated aspirations. (I can say that a) I have worked with both CEOs and b) I believe they are absolutely sincere in what they write.)

That said, the parent companies’ shared priority in merging is to future-proof margins through cost cutting. It has to be. This is the conclusion the scenario planning would inevitably lead to, especially for those who have bought into The Fear. Revenues might grow. But costs can definitely be cut.

Speaking plainly: lay-offs will ensue, especially in middle and back office functional areas and within any area that touches physical product (including the likely shuddering shuttering of at least one warehouse). This will hurt but in the end I believe all involved will act as wisely, humanely, and with the goal of a stronger company as they can. In other words, professionally. It is all well and good, just business, and makes perfect sense on paper. We could just call it at that and move on.

Except we all know that while parents mean well, they are a little clueless sometimes – sometimes they ask the kids to do really, really difficult things.

Why have I decided the merger is a bad idea?

Well, I haven’t entirely but for the most part I have. Not because I think it is evil or in theory wrong. I just think it will be harder to pull off than it sounds (and it sounds hard to pull off in the first place!). I also believe quite strongly that the resources of both houses could be devoted to other initiatives that, in my opinion, would better serve them and the industry at large. Here is a summary of my current thinking on the merits of the merger along with some of the challenges it will entail.

  • Cost-cutting, yes. Leverage, not so much.
    I can’t recall the specific market shares of the two companies but I’d estimate they will combine to account for 30 – 40% of all units sold, depending on the year and what hits they have. That’s massive but I don’t think it will make much difference to Amazon who is simply too big, wealthy, customer-focused, and pre-occupied with its actual competitors: Apple, Google, Facebook, Microsoft, and other massive, publicly traded technology companies. By way of hypothetical example, Amazon could offset giving up a point of discount on eBooks to a new heavyweight publisher by simply increasing prices on other products by .5%. That’s a guess but it feels reasonable. Anyway, you see the point…
  • Focus will be diverted to cost-control and job justification.
    Once the merger is approved, the companies’ best and brightest minds are likely to be pre-occupied — if not completely consumed — with merging. They will also be pre-occupied with protecting and justifying their jobs — often to people who don’t know what they do. Their focus will turn internally (where, arguably it already is too much of the time) and away from adding value for authors or consumers, their two essential constituencies, and growing revenues.
  • The cultures/capabilities could complement each other. They could also mix like oil and water.
    In the US (which is what I know I best) Random House and Penguin are very, very different companies. Random is (and sees itself as) decentralized, relatively autonomous from its parent company, operationally and technically best-of-breed, and analytically-inclined. In my opinion, it is also a bit bloated staff- and cost-wise (thus lower margins than Penguin), though this has improved greatly under Dohle. Penguin is (and sees itself as) lean, scrappy, and intuitive with a strong Sales and Marketing culture (its US CEO, David Shanks, comes from a Sales background while its President, Susan Petersen Kennedy comes from the Marketing/Editorial side). Speaking broadly, it has weaker IT and business intelligence tools, operates on an aging operational infrastructure, and is constantly dealing with a meddling Pearson and its much bigger sister, Pearson Education. Historically, it has produced higher margins than Random, at least in the US. How the two mix will depend on many very strong personalities. It could go terrifically. It could also get ugly.
  • They actually have to merge many more companies than two.
    Random House is really six companies in the US alone: its five divisions and its corporate area. These disparate parts are somewhat more integrated than in the past but in many respects they might as well be separate companies. Both Random and Penguin also have the pervasive divide between the “corporate” and the “division/imprint.” It is interesting how all involved have taken great pains to emphasize that the editorial/imprint sides of the businesses will remain autonomous. It seems no one is quite bold enough to monkey with the black magic that occurs over there at this time.The extent to which Penguin and Putnam or BDD and Random every fully merged (especially culturally) is also debatable but that’s for another post.Then there are the international units, also fodder for another post.
  • Bertelsmann is historically hands off; Pearson hands on
    Being merged will feel strange to both Random and Penguin for different reasons. How they react is a total unknown and also critical to whether the merger succeeds.
  • Bertelsmann is German, Pearson is British.
    Being Irish-American myself, with only some experience dealing with the parent companies on their home turf, I have very little to offer on how the cultural differences will effect the merger efforts. I can say that it is difficult for me to imagine they’ll have no effect at all.
  • Tom Peters’ opinion of M&A plus a boatload of studies
    70-90% of mergers fail, often for the reasons I’ve cited above.

At the end of the day, what do I think?

The notion of a Penguin Random House has stirred up a lot of thoughts and emotions throughout the publishing. It has also caused me to think long and hard about the industry. When the two largest players in any industry merge it must mean something.

My current thinking, though, is that there is little more to this than what immediately meets the eye; that it is not a sign that publishing is dying nor that it will thrive through further consolidation. In many ways, it is business as usual. Media companies consolidate. It’s a straight-up business move; a calculated risk combined with a dash of hope.

For the record, I don’t think that predictions of a contracting market are necessarily wrong. Then again, I don’t think they are necessarily right either. It depends what publishers focus on, how well they innovate and execute, and a whole lot of circumstances beyond anyone’s control. I am also not against M&A. Merging might help. Then again, it might not. But the folks involved here are very good at what they do and, despite the obstacles I’ve cited, I actually believe they have a chance of pulling this off.

On balance, I find it to be a relatively unimaginative move and one that, in the end, is likely to add little if any value even if successfully executed. At the same time, it is one of the biggest, boldest moves publishing has seen in a long while.

For now I’ll remain of mixed opinion, politely skeptical, reserving the right to change my mind at any time. Simultaneously I will be rooting for all involved. I truly hope they can do it — that the beast they produce is that rare gazelle.

Tweet about this on Twitter37Share on Facebook49Share on LinkedIn35Share on Google+2Share on Reddit0Share on StumbleUpon1Buffer this pageEmail this to someone

Comments

  1. Dave Krajewski says

    Pete,

    I have always found your prose on publishing to be so direct and informing. You certainly are one of the folks who get this stuff much more than I have ever imagined. I too have had the fortune to work “with” one such called Elephant. So, I will rant a little too if you don’t mind since several of the folks I once led asked me the same. “What do you think about the merger?” So here goes….

    First, I have never visioned an Elephant to be nimble, agile or quick to strike. As such, the king of the jungle is the Lion which is what both Amazon and Apple are in today’s age of “digital distribution”, innovation and technology leadership companies.

    Second, I think the term “merger” implies something quite different when talking about two old monoliths. It means to combine two things into one. The resulting structure and business processes will eventually be a single entity. This ultimately means cuts, reductions, simplification and elimination from a business which is always a financial point of view. However, the problem I foresee is that many of their institutional systems and processes are so overtly complicated that the ending single entity still will not be as agile as the digital frontiers they are trying to complete. Thus, they probably will not ever be that rare gazelle you describe. Some questions that I have always had while being part of multiple mergers have been along the lines of “Do the best processes and people survive or is it a matter of spreadsheet calculations where only the least expensive win?” The focus of such exercise will not focus on the content or books but on the processes to create and distribute them. So, will better or more books come out of the merger? Well, given that authors create them and consumers read them. I doubt it. As, I once stated in a team meeting, “If I was still at P&G I would say books are like consumable items. They are often read once then sit on a shelf or in a book at a flea market. One and done. How do you make them consumable over and over …. that’s the goal of a Consumer package goods company why not a publisher?”

    Another example, both Amazon and Apple are focused on the “Consumer” not the customer. They are two discrete things and entities of which publishers really only know one. I will leave it to the reader to pick which one. Additionally, these two companies are also known as innovators, creators and technology leaders. They “add” value to the consumer experience. Ultimately, both Apple and Amazon are really the banks in the supply chain of consumer money. They take the orders, collect the cash and deliver the goods with extreme efficiency all while collection megabits of data and information about the consumer. Then the EXPLOIT the CONSUMER not the customer. In their digital supply chain model there is not really a customer.

    Since I am a realistic thinker and practitioner in a real world and since I have had the benefit of working with the music industry through its business “mergers”, here are my thoughts on the outcome and results:

    1. A much smaller company will emerge. It will still be full of the “old” process but with a lot less people. There will be less of everything and everyone not more. There will still be the same amount of books in back list and and new ones on the front list.

    2. They will always strive to be innovative but without the desired “profit margins” they will have less operating capital to invest in new ideas, books or processes to compete which companies that are truly digital pioneers. Less publishing people will be around as a result.

    3. Books as we know them over the next few years will continue to evolve into a magical realm of machines such as iPad, iPhone, Nooks, and Kindles. Technology is and will remain the driving force not necessarily the “marketer” or the “distributor” but the one who knows the CONSUMER the most. I have my experience at P&G to thank for my insights on this one. Both of the Elephants missed the proverbial Ark in this case many years ago. I think the challengers to Amazon and Apple are going to be Comcast and AT&T. They too are digital distributors with the ultimate end user device connection. BTW, I warned an Elephant once about the iPad before it was ever released and I was told to hush up. LOL ;) You probably remember.

    So, thanks for giving me a forum to vent or at least state what folks also ask me. What do you think will happen to “ME?” in this merger. The focus should always on the “me” as in people but that will be a measure I will watch to see. It ultimately will be the psychology of the people, the art of communication and the ability of leadership to get alignment, buy-in and action. The merger itself will be a simple process and accounting activity. Nothing more, nothing less…..

    DK and not in the NY but Balto!

    • Dave Krajewski says

      Almost forgot the most importing thing a publisher does, EDITORIAL. As you can see, I need it in my rant…. that is THE value they BRING…The ELEPHANT in the room is the EDITOR. Now, I get it… LOL :) So, how does the merger capitalize on that????? To be continued……

      • says

        :) So far the word is that editorial remains “autonomous,” which I read to mean to two things: 1) no one wants to mess with the “mystical” side of the business — seemingly too idiosyncratic, “touchy,” and hard to quantify and 2) controversial from an industry PR perspective, especially in terms of the author/agent community who want to know that there are still plenty of place to bring their books and that those places compete to buy the rights. There’s a certain detente that’s been established on point 2. I don;t see it going away without a huge battle, and they have enough of those on their hands right now. No need to open another flank.

    • says

      Great to hear from you, Dave! I am so pleased you find the blog useful. Thank you for comment — there’s a lot on there I agree with completely.

      Particularly, your point about the internal systems and processes being so complicated (and I would add peculiar to each company’s own way of dong business) that merging them may sound straight-forward but, in reality, not so much. For example, both companies run “SAP.” But, the instances of SAP are so different in terms of internal logic and modules that they are truly different systems that just happen to be written in the underlying code and supported/billed by the same company. The result of smashing the two together or choosing one over the other or throwing them both out and starting again (!) is unlikely to be increased agility, especially in the near-term.

      I also love the question you pose, as it is to me the fundamental one:

      “Do the best processes and people survive or is it a matter of spreadsheet calculations where only the least expensive win?”

      To this I would add, is there much of a point in taking two things that are essentially operating at about equal effectiveness and consolidating them, creating a situation where one or the other must win. This goes to my point of internal focus and to yours about a lack of attention to authors, books, and consumers. The competition becomes within the company and the results of people’s efforts are internal victories, not market ones. This view is a bit over the top as there are a lot of folks who will undoubtedly manage to keep their focus squarely on the books, authors, and consumers. But, merging just makes it much harder to do so.

      Agreed that a “smaller” company than the two added up as they exist now will emerge. I also agree that it will want to be innovative but will liekyl find itself stuck fixing the same old issues. Meanwhile, again, not focusing on authors or consumers in the way they might be able to if they weren’t busy merging.

      If the margins take a hit, the whole thing crumbles in the short term. But, look at Universal Music. They got creamed but are starting to grow again. And that was music, who basically open-sourced their IP via CD and lost all their business to piracy! Books are in much better shape. I, for one, don’t see the margins decreasing unless prices fall precipitously. All the costs are on the IP acquisition, operating, and marketing side of the business not on the physical “making books” side. So, the transition to digital should allow them to keep costs under control (especially as they cut via merger). I am bullish on sales in a tablet/eReader/mobile world. All evidence indicates that books do behave more like consumer goods in that space. Convenient and thus consumed more heavily by readers.

      I am less sure about Comcast and aTT&T but I do see your point. The window has probably passed though, right?

      Basically, I’m very optimistic about publishing’s future, which is why the notion fo consolidating strikes me as an overly defensive play by publishers when I think they should be playing offense.

      And, finally, you’re right: it is all about the people. They will determine the success or failure of this endeavor.

      Thanks for commenting. Great to hear from you.

      PM

  2. Florence Storm says

    Great post here. Thank you. Amazon must be smiling ear to ear, because unless these two immediately adopt a new posture toward Amazon (which I seriously doubt they have the balls for), it’ll be too late for everyone, and then the Random/Penguin failure would be a failure for all of publishing, and that would be unfortunate. What I don’t see in any of the discussion about the merger is mention of authors. The authors hold the keys to this future kingdom even through they might not consciously realize it yet (some do: see the blow up over agents at the recent NINC conference – there’s an angry bunch a brewin and stewin).

    If publishers want to protect themselves against all your so aptly aforementioned fears, they need to align themselves with authors, and if they want to be on the leading edge of where everything is going, Ebook authors, and that means self published Ebook authors. Yes, they must embrace multiple fears at once and turn threat into opportunity. To me, that means they should be directing their M&A attention not at the next biggest publisher where the greatest opportunity is cost-cutting, but instead should be looking at the companies poised to eat their lunch tomorrow, and that’s those connected to self published Ebook authors. Print is on the decline and becomes irrelevant. Authors have a freedom of choice today that they didn’t have a mere 5 years ago. Author Solutions is taken. There’s Smashwords (closely held, private, controlled by Mark Coker, ebook only, probably reluctant to M&A), Lulu (led by Bob Young, tried and failed at IPO a couple years ago, but still a force in self publishing, weak in ebooks stronger in p books, probably open to M&A) and the rest are inconsequential, have few authors, or are already owned by Amazon (Createspace). How long until these two are snapped up? If they’re not snapped up, how long until one or both of these enter the ranks of Big 6? 5 years? 10 years? 20 years? Publishers have a choice. Build now to embrace authors, or buy.

    In the meantime, consolidation and cost cutting will make bean counters and absent parent companies happy( is Pearson desperate to get out of trade publishing or what?), but they won’t help make the largest publishers more competitive against the threats they face tomorrow, and I’m hard pressed to understand how consolidation helps readers, publishers or authors in the long term.

    • says

      Thank you, Florence, for taking the time to read and for your very thoughtful and insightful comment.

      I couldn’t agree more that authors are critical. I would add consumers, as well. The two constants in the value chain. Any other players can be circumvented. It is hard to focus on both at the same time as both publishers and Amazon are proving right now by unsuccessfully entering the each other’s area of expertise.

      Agreed, too, that no publisher, no matter what their market share is, will fundamentally change their position vis-a-vis Amazon. Too likely to result in the publishing equivalent of “nuclear war.” Classic game theory; chicken where ultimately it’s a stand-off.

      Like you, I don’t see authors or consumers realizing much value as a result of the merger. But there might be a chance for authors if Penguin Random House invests the money it saves by merging. Two questions: 1) will they invest it or keep it as margin? 2) If they invest it, how? If they invest, authors could benefit. Hard one to call. I suspect there will be some minor benefits for authors, none for readers, and most for the parent companies.

      On the self-publishing side, I tend to agree, but must admit it isn’t my area of expertise. That said, the M&A opportunities you cite strike me as offering actual synergies and the potential for growth via scale, complementary capabilities, services, clients, etc. I think Penguin’s acquisition of Author Solutions is much more interesting and telling than the mega-merger.

      I’d add to self-publishers community sites along with providers of entirely new marketing platforms and business models. There are some interesting things happening that I feel could and should be the focus of the talented folks working at these houses. I suspect many of them would prefer to focus on these things, as well. I also suspect it will be hard to do so while merging and for some time after…

      Basically, merging isn’t a bad idea. It’s just not a great idea. And we need more of those!

      Thank you so much for your comments and for adding in the self-publishing thread. It is very important, indeed.

Leave a Reply

Your email address will not be published. Required fields are marked *

You may use these HTML tags and attributes: <a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <strike> <strong>