The big news in the world of publishing this week had nothing to do with Jordan Peterson. Penguin Random House, the world’s biggest publisher of consumer books, got bigger, buying Simon & Schuster for $2.1 billion in cash.
I have a few things to say about this but best to review the handwringing first.
There’s been a lot said about how the Big Five publishers, which includes the above two plus HarperCollins, Hachette, and Macmillan, are now a Big Four and that’s a disaster for all concerned. (In the interests of time, I’m mostly going to look at this deal in an American context.)
I’ll pick on Franklin Foer at the Atlantic, only because he was more comprehensive than most who wrote about the sale.
Foer says the deal “is deplorable and should be blocked. As book publishing consolidates, the author tends to lose—and, therefore, so does the life of the mind.”
He says competition to sign writers and the size of advances to writers will shrink, making it “harder for authors to justify the time required to produce a lengthy work.”
He expects publishing to become ever more corporate, more risk-averse, and lose its sense of a higher purpose. It will become like the movie world and gravitate to sequels and established stars.

As for publishing becoming more corporate and losing its sense of purpose, I’d rather have S&S owned by another publisher like Bertelsmann than ViacomCBS, which is a cable and television outfit. More on that later.

I don’t buy this either. The Independent Book Publishers Association of America has 3,600 members. That’s an army of independent publishers. And there are now close to two million self-published books released in the US annually. The discourse will be fine.
Robert Thomson, chief executive of News Corp, Rupert Murdoch’s firm, which owns HarperCollins, rang the antitrust alarm. He said the willingness of Penguin Random House to outbid his firm for S&S indicates that it wasn’t simply buying another publishing asset, it was “buying market dominance as a book behemoth.”

The one comment that rang true to me in all the complaints about the deal was made by the US Authors Guild which predicted editorial layoffs. That will almost certainly happen. More below.
I hope that relieves you of any fears that the world is ending. I don’t think the deal is great, but it’s not a disaster.
In fact, it may be worse for Penguin Random House than for readers, writers, booksellers, or other publishing companies.

ViacomCBS was no exception. It waited for the convergence magic through the aughts. None came. One imagines it had lost hope for Simon & Schuster sometime around the financial crisis of 2008-2009. All of its businesses were hit hard. Simon & Schuster’s profits were a slim 6% in ‘09. It scratched its way back to a respectable 11% by 2011 but its place in ViacomCBS was never the same.
Ever since, S&S has been operated just as you’d expect a book company to be operated by a publicly-owned cable and television conglomerate that no longer believes in magic.
The people at the top of cable and TV companies are cable and TV people. They don’t read. They’re insecure around literary types. They think print is dead. They’re sure as hell not going to invest in it. Instead, they squeeze the living shit out of it, demanding ever higher profits to fund things the cable and TV guys care about, i.e., cable & TV stuff.

In 2018 and 2019, with revenues still around $800 million, S&S booked profits of 19% and 18% respectively, which is almost unprecedented in book publishing. To give you some perspective, Knopf-Doubleday, a prestige imprint at Penguin Random House with a phenomenal backlist of timeless literature that sells itself year after year, no marketing required, budgets for an 18% profit margin, the highest in the PRH universe.
It’s extremely unlikely that S&S’s margins have ever been in the high teens before. And, again, it wasn’t because of higher sales. The company was fiendishly grinding costs, probably in an unsustainable manner. No one at ViacomCBS would have cared if the profits were unsustainable—that’s the buyer’s problem.
Industry observers, maybe talking to ViacomCBS, maybe talking to potential buyers, initially put a price tag of $1.2 billion on S&S. That was about eight times the company’s EBITDA of $145 million. An eight-times multiple is what you pay for a healthy business in a growing market. By comparison, a lot of newspapers were changing hands in the aughts, a time when the future began to look dicey, at four times. Given that book publishing isn’t a particularly fast-growing industry, one might consider eight times generous for S&S, especially given how it goosed its profits through vicious cost-cutting.
Along comes PRH. And pays $2.175 million cash. A multiple of fifteen. As though S&S is some high-octane tech startup.
Why?
Bertelsmann’s reasons for the purchase were almost identical to those it used to justify the Penguin acquisition eight years ago. Important to have size or scale when you’re dealing with megacorps like Apple and Amazon, and bookselling chains like Barnes & Noble. Being big makes it easier to develop direct-to-consumer book sales networks so the company is not as dependent on Amazon and Barnes & Noble.
Nonsense. PRH has all the size it needs to arm wrestle Barnes & Noble, and it will never be large enough to stand up to Amazon. As the New Republic noted this week, Amazon’s revenue is fifty times that of PRH, and its market capitalization is infinitely larger.
Adding S&S to PRH may so a little good here and there. Maybe a higher volume of direct-to-consumer sales. Maybe slightly better terms with Amazon. But nothing that would justify a $2.175 acquisition.
My best guess is that Bertelsmann bought and overpaid for Simon & Schuster out of fear.
Let’s look at what’s happened to Bertelsmann’s book business since it paid an even more ridiculous sum for Penguin.
Bertelsmann valued Penguin at $3.5 billion, which was about 25 times EBITDA. It bought 53% of the company in 2012, another 22% a few years later, and the rest early this year. To justify this price, Bertelsmann claimed that Penguin would bring the scale it needed to be more competitive and stand up to Amazon, etc. Also, it said that being bigger would attract better writing talent, more bestsellers, and allow it to develop new markets, offer new products, and find more efficiencies.
Did any of this happen?
Of course not. The first full year of a combined Penguin Random House was 2014. Revenues were €3.3 million (euros) and profits €452 million, for a healthy margin of 15%.
Revenues have been about €3.4 billion ever since except for a bump to €3.6 billion in 2019 on the strength of Michelle Obama’s memoir.

Not as far as I can see. The improved profitability appears to have been achieved in the least imaginative way possible: the number of employees has shrunk from 12,812 to 10,300. Penguin Random House is exactly the sum of its parts, minus 2500 workers, almost half the number acquired from Penguin.
Bertelsmann overpaid for Penguin and has little to show for the deal. Its publishing division is not in great shape.
As a publicly held company, Bertelsmann needs to grow, otherwise its shareholders will sell their stock and take their money elsewhere. Penguin Random House has to contribute to that growth, preferably by producing more revenue. If it’s not able to grow its revenue, which seems to be the case, it has to cut costs and improve its profitability, and there are limits to how far you can cut costs without pulling down your revenues and getting yourself in deeper trouble.
I imagine that when S&S came on the market last year, Bertelsmann wasn’t so much interested in acquiring the company as it was concerned that someone like HarperCollins would buy it. The combination of HarperCollins and S&S would make a new firm, HCS&S, almost the size of PRH. That would be a real competitive threat to PRH, making its inability to grow an even bigger concern.
HCS&S, if it had happened, would have bid up the prices for the blockbusters that PRH so desperately needs. PRH’s dominance on the bestseller lists would have been under threat (a publisher’s share of bestsellers is a crude but still useful metric of financial success).
Far better to overpay for S&S than let HarperCollins grab it, setting yourself up for regular bidding wars with Rupert Murdoch.

In my estimation, the whole of the book publishing industry is nevertheless quite dynamic and a lot could change over the next decade or two. It was only thirty years ago that S&S was the biggest publisher in America. Just because Bertelsmann owns a lot of imprints now doesn’t mean that it always will, or that it will succeed with what it has, especially now that it will be under enormous pressure to justify two major and hellishly expensive acquisitions in a single decade.
I’ve just written a book about General Motors which in the mid-1960s had half the domestic car market in the US and one of every six jobs in America was related to automobiles. It looked invulnerable. It wasn’t. No company ever is. Down the line, buying S&S may prove to have been riskier for Bertelsmann than letting Murdoch have it.
The Big Five is a Big Three in Canada: PRH, HarperCollins, and Simon & Schuster. So, we’ll be going from a Big Three to a Big Two with this deal. The Bertelsmann group will become by far the larger of the remaining two, maybe with more than half the Canadian market (I haven’t been able to find good data on this today).
As a practical matter, PRHS&S will be the only show in Canada if you’re looking to sell a book for a sizeable advance (HarperCollins Canada is not especially active). PRHS&S will also have a lot of weight to throw around with agents, printers, booksellers, and everyone else in the publishing food chain. That could be unhealthy.
There is more cause for the PRHS&S deal to get regulatory attention in Canada than in the US. Our official cultural policy supports Canadian ownership. Strictly speaking, it should not be possible for Bertlesmann to purchase Simon & Schuster Canada unless the business is in financial distress, and it isn’t. Whether that’s enough to roust our sleepy regulators is difficult to say. I wouldn’t bet on it, even with a Liberal government.
Finally, Simon & Schuster has a large book distribution business in Canada. So does Penguin Random House Canada. The combination of these two entities will make them more powerful in the distribution space than the combination of their publishing operations make them in the book trade. It should be of more interest to regulators than the book part of the deal.
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