Is There Something Rotten in the State of Publishing?

 

In any other news week, it might have dominated the headlines.  But with the pope’s resignation, the merger of U.S. Airways and American Airlines, the contentious confirmation hearings of Chuck Hagel, the potential for new gun laws in the wake of the tragedy in Newtown, and so many other stories that have dominated the headlines this February, the proposed merger of Random House and Penguin seems to be slipping through without commentary.  It might be the biggest news story to barely merit a blip on most people’s radar.  A few news outlets have covered it, but the articles have been short and buried.  I wouldn’t even know about the proposed merger were it not for my Twitter feed, where I follow various bookish folks who actually have been keeping an eye on this story, unlike the rest of us.

The Backstory

Random House and Penguin are both subsidiary corporations owned by international concerns.  Random House is under the umbrella of Bertlesmann, a German corporation, and Penguin’s parent is Pearson, a British company.  The companies have been in talks and have proposed to merge the two subsidiaries together into an entity that tragically will not be called Random Penguin.  The new “Penguin Random House” will be controlled by Random House, which will have a 53% interest, with Penguin holding the remaining 47%.  That means that when it comes to setting company policy and strategy, Random House will be in charge.

In order for the proposed merger to go through, various government agencies have to sign off on the deal.  The U.S. antitrust laws date back to the Industrial Revolution and the Great Depression, when a backlash against robber barons and their “monopolies” spurred Congress to enact laws such as the Sherman Act and the Clayton Act, which undertook to preserve competition in industry, with mixed results.  Most of the big merger stories in recent years have been about airlines, and with another massive airline merger (U.S. Airways – American) having been announced just recently, the news that the U.S. Department of Justice approved the proposed merger between Random House and Penguin seems to have slipped through without much commentary.

What Happens Next

Penguin Random House isn’t a done deal yet.  The companies have cleared a significant hurdle in getting the DOJ’s approval, but since they’re both held by foreign corporations there are a few more hurdles to go before they get to ink the deal.  The merger has not yet been approved by either the European Union or the Canadian authorities, both of whom must sign off before the deal will become official.  According to the New York Times, analysts who have considered the matter expected the DOJ to sign off, but consider the EU the most likely to torpedo a deal.  Still, the publishers themselves are optimistic, saying they expect to close the deal in the second half of 2013.

Once the merger goes through, it’s anyone’s guess what the new company will look like.  Other than the fact that Random House will have the controlling interest in the new entity, we don’t know much about the company’s strategies or plans for its products going forward.  But the publishing industry and the book market will certainly look different in the future.  The new Penguin Random House will control more than 25% – some media outlets are even reporting more than 30% – of the English-language publishing market.  It’s going to be the biggest publishing house in the history of the industry, and it’s going to have some serious clout.

What Does This Mean For Readers?

I’ll admit, my first thought on hearing about the proposed merger was: “Does this mean that my Penguin Clothbound Classics going to get more expensive?”  And that’s probably in line with what most consumers will immediately wonder.  Anytime a merger is announced, and one company stands to gain massive amounts of power and market share, consumers jump to the most relevant question for them, which is whether they’re going to have to pay more for their favorite products.

Mergers don’t always mean that products will get more expensive – at least, not immediately.  True, if one company owns 100% of the market share for a particular product – a true monopoly – it can charge whatever it wants and consumers will either have to pay or do without.  That’s why we have antitrust laws – to prevent that situation from happening.  But lately the big conglomerates seem to be pushing the envelope in the other direction – toward loss-leader pricing, which is technically illegal.  The theory seems to be that if the company is big enough, it can survive a drive toward bargain basement prices, because it sells enough merchandise to make up for any hits it takes on the sticker and still come out ahead.  This is the Amazon method of doing business (and Amazon will come into this discussion in a minute; keep reading).  Like I said, loss-leader pricing is technically illegal, but that hasn’t stopped the big online booksellers from trying it – which is the root of the challenges that indie booksellers, who can’t afford to slash their prices and still stay in business, are now facing.  Amazon and other big online concerns profit from low overhead and massive inventory, leaving mom-and-pop booksellers panting as they struggle to keep up.  The groundswell of support for indie bookstores helps, but it’s not going to keep the small neighborhood bookshops in business forever, unless something fundamental changes in the bookselling and publishing industries.

Conspiracy Theory

Here’s where we get to to “something rotten” part.  When the merger was first announced, the publishing industry cheered.  Even the specter of a giant new competitor wasn’t enough to quell the outpourings of joy.  Finally, a publishing concern with enough size and clout to stand up to big, bad Amazon!  Penguin Random House was hailed as a potential savior of the traditional publishing industry.

But is it?

Dennis Johnson of Melville House Books, a small publishing concern, was one of the first to ask whether Penguin Random House was really going to take up the publishing industry’s standard and ride into battle against Amazon.  You see, Penguin was one of a group of publishers that banded together to sue Amazon over its loss-leader pricing… but Random House, which has always capitulated to Amazon, was not.  And with Random House now set to control Penguin’s corporate strategy, one of the very first things Penguin did was pull out of the lawsuit and settle with Amazon, presumably at Random House’s direction.  Far from leading the charge against Amazon, the massive new Penguin Random House looks to drive the final nail into the Amazon lawsuit’s coffin… setting Amazon up for years of industry dominance.

And some are wondering if that’s entirely the point.  The U.S. government has never really gone after Amazon, despite its dabbling in loss-leader pricing and other naughty selling tactics.  There are plenty of amateur (and maybe some professional) pundits who wonder if Amazon and the government have some kind of understanding.  And the conspiracy theorists are just asking more questions after the news broke that the Penguin – Random House merger went through the DOJ so easily, with so little fuss or fanfare.  Would the process have been quite so easy if Penguin Random House was going to lead a publishing industry charge against Amazon?  Or is this Random House’s reward for going along with Amazon, and Penguin’s price for capitulating?

Barnes & Noble Sinks To Its Knees

Another comparatively little-advertised side story: as Amazon’s power grows, its only remaining large-scale competitor, Barnes & Noble, is reeling.  Johnson recounts how an industry insider told him to expect the death of Barnes & Noble in two to three years… two years ago.  And now B&N is pulling out of almost 1,400 locations, leaving thousands of booksellers without jobs and too many communities without a bookstore.  Part of this is B&N’s own fault.  The Nook was widely hailed as the only dedicated e-reader that could really compete with the Kindle, and the hardware itself is great (as I know from personal experience; I have a Nook, and so do both of my parents), but B&N’s marketing is behind the curve and its servicing of its Nook models has disappointed many consumers (including my parents, who had battery problems with theirs and had a tough time getting them serviced).  As B&N pulls out of the brick-and-mortar bookselling business and throws its corporate strategy into e-books, it’s going to have to do a better job marketing the Nook if it wants to stay in business and avoid joining the late, great Borders in the graveyard of Amazon’s victims.

At first blush, the story of the Penguin Random House merger doesn’t seem to have anything much to do with Barnes & Noble’s troubles.  But the fact is, with Borders out of the picture, B&N was the only bookseller big enough to give Amazon a run for its money.  With Penguin Random House waving the white flag, Amazon can only benefit, and Amazon’s benefit is ultimately B&N’s detriment.  If B&N drops out of the picture, the indies will be left holding down the bookselling fort pretty much on their own against the mighty Rainforest.

Why I’m Worried

As a lawyer, I tend to take things to their logical extreme.  It’s part of what we do: we push an argument to its absolute outer limits, no matter how outrageous, to try to discover the precedential worst-case scenario if a particular point or argument becomes law.  When judges make law, this is what they do; they try to foresee every particular circumstance and outcome so they can decide whether they really want to codify a particular principle.  (Of course, no one can foresee every particular outcome.  But it’s the Supreme Court’s job to try.)

So my lawyerly tendency is to look at the most out-there scenario and ask, “What then?”  In this case, I’m asking myself… what’s Amazon’s end game?  Borders is history, and it looks like Barnes & Noble is on its way out, too.  Stores like Wal-Mart and Target are not big booksellers, so that will leave the indie bookselling community basically all alone, a true case of David and Goliath if I’ve ever seen one.  And once Amazon has driven almost everyone else out of the bookselling market… are they still going to be committed to selling books (and everything else) at bargain prices?  Or will prices begin to creep up, with no major competitor left to check them?  This isn’t a case of me being a hipster and hating on Amazon just because my black, chunky-framed librarian specs told me to.  This is me wondering: when no one is left but Amazon, who’s going to stop Amazon from having its way with all of us?

So, yeah.  I’m worried.  I’m really worried.

Not everyone believes the conspiracy theories, of course, that Amazon is going to profit from the potential new Penguin Random House and that B&N is headed for oblivion.  Some simply believe that Penguin and Random House each saw an opportunity to evolve their business as they wanted, and this has nothing to do with Amazon or Barnes & Noble.  And not everyone believes the outlook is as dismal as I’m afraid it may be.  I was chatting with a friend about these developments, and she said her outlook wasn’t as “doom and gloom” as mine.  She thinks that Barnes & Noble will pull through, or at the very least that Amazon will keep B&N around as a “straw man” so it appears to have at least one worthy competitor.  I personally don’t think one company has the power to “keep another around” and even if Amazon did, would a zombie straw man B&N, only in existence to provide the appearance that Amazon was still competing, really be much better than no B&N at all?

I hope that it won’t come to that.  I hope that consumers vote with their dollars to support their local indie bookstores and to keep Barnes & Noble around and healthy because, big company or not, we need them now.  I hope if B&N does lose the fight, that the government will step in to prevent Amazon from bleeding readers dry.  I hope that indies will continue to fight the good fight and that communities will pour their dollars into keeping the public library system healthy and strong, because we need options.  The U.S. is falling behind other industrialized countries when it comes to our education system – in fact, most of the damage is already done.  We need to keep books inexpensive (or free, in the case of libraries) so that low- and middle-income families can keep providing books for their kids, helping those kids to excel in school and secure their own futures and the future of our country.  We need competition so that one big company won’t walk all over the entire publishing industry, bleed authors dry, and use its power to drive prices up until only the wealthy can afford books.  (Oh, there’s great material for a dystopic novel here.)  Is this worst-case scenario likely to happen?  Maybe, maybe not – I don’t know.  I’m not an insider in the publishing or the bookselling industries, just a girl who happens to love the printed word.  And I’m a little nervous.

(By the way, in case this wasn’t obvious to you, this post represents my own opinion, which I’ve formed after reading news articles on the topic on my own time.  Since I have mentioned that I’m a lawyer, I feel compelled to state that nothing I’ve written here is the official position of my firm – which has nothing to do with this merger, anyway, and doesn’t even practice antitrust law – and nothing I have written here should be construed as legal advice.  Whew.  Now I feel a little better.)