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Threat from e-books behind Penguin and Random House merger?

Threat from e-books behind Penguin and Random House merger?

With e-books changing the dynamics of publishing, Penguin and Random House merge to protect their turf.

An e-book revolution is afoot, though it has not touched the borders of India yet. In 2011, online retailer Amazon sold 114 e-books for every 100 printed books, while e-book sales across all platforms rose 117 per cent over the previous year. It is this seminal change in the nature of the trade that is primarily responsible, analysts believe, for the recent decision of publishing giants Random House and Penguin to merge into a single mega-entity - Penguin Random House.

So far, in what is called the 'agency model', publishers decided the price of books, be they in print or digital form. Some digital platforms, such as Apple's iBooks, have no problem with that, as long as their commission is not reduced. But others, led by Amazon, prefer to buy books off publishers at a discount, and sell them at prices they choose. They have been pressing for bigger and bigger discounts, effectively taking away the publisher's price control.

"Amazon has been squeezing publishers and obviously Penguin and Random House felt coming together would give them more heft to counter Amazon," says the chief editor of a rival publishing house's Indian subsidiary.


A pointer to the intense battle currently raging is the antitrust suit filed by the US government in April this year against five of the top six global publishers, along with Apple - Penguin, Macmillan, Hachette, HarperCollins and Simon & Schuster - accusing them of colluding to fix e-book prices. While the others have settled Apple, Penguin and Macmillan are still contesting the case.

Penguin, however, strongly denies that Amazon's squeeze was the sole trigger for the merger. "The strategic rationale has more to do with looking five to 10 years out, and thinking about how we can create a publishing company for the future, one which will have more resources to invest in diverse content, new formats, channels and so forth," says Rebecca Sinclair, Communications Director, Penguin, UK.

Random House is currently the leading publisher in both the United States and the United Kingdom, while Penguin is in second place in the US and in third in the UK. (In emerging markets such as India though , Penguin is way ahead of Random House.)

Their merger, expected to be complete only in the second half of 2013, will produce a company with annual revenue of $4 billion, which will control about a quarter of the global book trade. Approval from the antitrust authorities is still awaited, but Penguin does not expect this to be a problem.

"We have taken advice and wouldn't have got to this point if we didn't think we have a good chance of success," says Sinclair. Random House's parent company, the Germany-based Bertelsmann SE & Co. will hold 53 per cent in the new entity, with Penguin owner Pearson Plc holding the rest.

How much does this matter to India? E-books have yet to take off here, but solely for lack of a platform from which they can be downloaded at rupee prices. With Penguin India having embarked on an e-book programme, and online retailers like Flipkart and Infibeam set to provide such a platform, the revolution may soon hit India too.