Judge Florence Y. Pan ruled today that the acquisition of Simon & Schuster by Penguin Random House could not go forward. The ruling was explicitly to protect the “competition” for the “anticipated top-selling books”. In other words, the big books by big authors for which only the Big Five can compete regularly (with occasional bids coming in from a couple of other next-tier houses) will continue to have five well-funded suitors. The judge ruled that cutting that number from five to four would reduce the spend among that cohort of books, which is almost certainly true. (I comment on the fact of it; I have no idea about the law.)
What this decision says to me is:
1. None of the Big Five can merge with each other without triggering the same concern Judge Pan cited in making this decision. That will not be good news to Hachette and HarperCollins, both of which opposed the PRH-S&S merger but probably hoped they could pursue S&S if the publisher remained independent.
2. The five biggest publishers are probably at their high water mark for market share. The only way to expand a publishing house is to have a larger number of active titles. Publishing new titles profitably has become exceedingly difficult. But publishers can increasingly milk sales out of the long tail of backlist, thanks to the new digital marketing world we live in. So the biggest publishers have grown their title base by acquisition. This decision would appear to cut off that avenue, or at least cut publishers off from the biggest potential additions.
3. The biggest winner with today’s decision is Ingram. The list of titles distributed and managed under their auspices can continue to grow, because Ingram doesn’t buy the companies or own the titles under their umbrella. Instead, they provide services that require scale to publishers without the publisher needing to finance the overhead. They can pay “by the drink”. So Ingram’s steady growth in title count and sales volume can continue.
4. The expectation here had been that publishing would continue to consolidate until sometime later this decade PRH would be the only one left. Thanks to this decision, that won’t be. The Big Five will continue to operate as shrinking but very profitable entities for a long time. In fact, one would expect over time that they too, one by one, will give up maintaining overheads in favor of using Ingram themselves. So there won’t be One Big Publisher in ten years, but there very well might be One Big Distributor.
The one part of all that which probably requires more explanation is the second point, that publishers can’t reliably publish new titles profitably anymore.
When I (and most of today’s senior executives) were coming up in the business, almost all books sold were sold in bookstores. So only publishers with a selling relationship with the stores and the operations capability to deliver to them could play. There was a moat around their activity that prevented interlopers or amateurs (or “self-publishers”) from being truly competitive. For that reason, for many years, established publishers could reliably push out some thousands of copies of every title they issued and, in fact, achieved positive cash flow on a very high percentage of them. And then some stuck around to become longterm backlist.
In those halcyon days, three decades ago (or shortly before the arrival of Amazon and then ebooks), there were no more than 500,000 individual titles available in English in the world. So each new book from publishers competed against 500,000 existing books and was assured a minimal exposure through bookstores.
Today Ingram has nearly 20 million titles set up for printing on demand, which means they can ship a copy you order today to you tomorrow even if it isn’t printed at the moment. So each new title is competing against 40 times as many competitive titles as one did back then. And there is no assured distribution at all. Bookstores have shrunk in number and in size so that perhaps as little as 20-25 percent (or perhaps as much as 30-35 percent, but no more…) of print book sales are made at actual retail stores. All the rest of it, print and (of course) ebooks, is transacted online. There are advantages to being a big publisher in that context; you have more digital marketers on your staff and more digital tools and information to apply to selling what you have. And anything you have can be sold anytime. No need to get “inventory in place” in order to capitalize on a marketing break.
But the moat is gone. The inherently advantaged position of a title issued by an established publisher is diluted to near meaninglessness.
The big publishers have reacted to this change over the years it has taken place by getting smarter and smarter about tending to their backlist. Digital marketers look for opportunities, not just to push out what is new. But the new advantage to size is the number of titles you have to work with. More titles means more opportunities. And if you find it hard to get more titles by publishing new ones, acquisition is the obvious strategy.
Now growth through acquisition is an avenue that has been sharply curtailed. The Big Five could start trying harder to compete with Ingram for the distributed titles; one wonders how the judge would have reacted if PRH did a deal to distribute and provide scaled services to S&S, which is what Ingram could do. All the big publishers have distribution clients now. But serving dozens or hundreds of publisher clients is not a trivial undertaking. Ingram has spent years building the systems to do that.
Where things stand leave the Big Five in a currently profitable but increasingly difficult spot. For now, at least, the biggest authors who generate a pretty much assured level of sales can count on continuing advances. The fragmentation of the business, where perhaps a million titles a year are being put into play by self-publishers of various types, will continue. And Ingram, whose business model has always been about providing scaled services that enable all aspects of publishing, will continue to grow as they have for years.