Penguin House

11.09.12

Why Random and Penguin Must Merge—And When They Almost Did

Sixty years ago the founders of Penguin and Random House contemplated a merger, but now their successors are going forward with one. There’s no other choice against the might of Amazon and the huge changes of digital publishing writes Gayle Feldman.

The letter is headed “Notes for a possible basis whereby Random House could purchase Penguin Books for the American market.”

With news about a merger between Bertelsmann’s Random House and Pearson’s Penguin, you might think that letter was written recently. In fact, it was dated July 17, 1956, and the men doing the negotiating were Random House founders Bennett Cerf and Donald Klopfer and Penguin founder Allen Lane.

The romance between Random and Penguin may have started with their makers, but the digital revolution is forcing marriage on their descendants.

The book ecosystem as we’ve known it is being upended by Google, Apple, and especially Amazon: shuttering of stores; the rise of e-devices, e-books, e-tailing and self-publishing; the need for capital, creativity, and brand clout to enable publishers to build their own effective digital mechanisms for marketing and selling directly to readers, and to capture loyal social networks as well as dollars.

How did we get here? Where are we heading?

Penguin began in 1935; four years later, Lane authorized the opening of a New York office; post-war, he backed away from big dreams in favor of steady exports.

Cerf and Klopfer started in 1925. By the 1950s, they were eyeing Penguin’s U.S. operation with their own dreams, but so were others. Harper had a done deal, until Penguin pulled out at the last minute. (Its successor company’s boss, Rupert Murdoch, has also been disappointed when Penguin went with Random.)

As the 1950s progressed into the 1960s, Random House became the American publisher, with milestone after milestone: in 1959, Cerf and Klopfer took the company public then went on a shopping spree, buying Knopf, among other distinguished purchases. When Penguin Chairman and CEO John Makinson said a few days ago that he had always considered Random to be “far and away the best partner for Penguin,” he unknowingly echoed what Alfred Knopf said in 1960.

Until today, the biggest watershed occurred in 1966, when Random’s founders sold their baby to a then-giant corporation, RCA. Publishers had been bought and sold before (mainly, as in the Knopf deal, one family owner or partnership buying or merging with another), but now a starting gun was fired that everybody heard. The corporate era began. “Synergy” was in vogue. By the time Cerf died, in 1971, he realized to his regret that synergy was a siren that had swallowed him whole.

For RCA it didn’t last long. They sold to the Newhouse family, who sold to Bertelsmann in 1998.

Allen Lane died in 1970; Penguin was sold to Pearson that year. Pearson went on its own spree and gave its subsidiary a real American presence. Since then, both Penguin and Random have grown bigger—but it seems not big enough.

Marjorie Scardino, the American who oversees all of Pearson as its London CEO, understands that. Others in the company, seeing the trade business with questions over its future profits, wondered whether it fit their long-term plan. Scardino is leaving the company at year’s end and started talking with Bertelsmann five months ago. The merger, with Bertelsmann holding 53% and the possibility of Pearson selling out in three years, or an IPO in five, is the solution.

Oddly, as a journalist who has covered the book business for a quarter century, and has heard many sad tales about the toll mergers and acquisitions have taken on too many talented people, I do not look on this marriage unfavorably.

One cannot have an ecosystem with only “small fry” facing giants. Like it or not, some companies will need to function as a counterbalance if publishers are to survive as a species.

Just as the corporate couplings that began in the late ‘60s, egged on by the rise of shopping malls, then superstores, then big boxes, and the possibility of bigger and bigger bestsellers, led to the need for size and capital that produced the current “Big Six” publishers (Random House, Penguin, Simon & Schuster, HarperCollins, Hachette, Macmillan), the power of the new digital giants has made scaling up inevitable. The “Six” likely will be “Three,” as has happened with the music industry.

As an author, I know it will mean fewer places to sell a proposal and “economies of scale.” It will likely be an uncomfortable bumping together of corporate cultures. It will exacerbate the trend of publishers placing more resources on far fewer big bets. Yet resources will also be allocated to some new writers and even some smaller books—because they have to be. Without that, the whole operation withers and dies. However much the large houses might seem to ignore that basic rule, there are still editors within each one of them who understand it.

They also know that facing the new behemoths—companies who are not book natives or book-centric—they must have mass to be able, say, to counterbalance Amazon’s tendency to turn off buy buttons if a publisher does not toe Seattle’s line. The ambition, scope, and concentration of power that Amazon represents—it wants to be Sears, Walmart, a culture-shaper, and who knows what—is unprecedented in the book business.

At a recent talk, J.K. Rowling was asked why, despite setting up Pottermore, she chose to publish her latest novel with an established firm.

“I value so much what a traditional publishing house does—great editors, designers, all that talent. The romance of being part of a family of writers under one roof—I love that,” Rowling responded.

Not everyone has her clout—or her happy experience of traditional publishing. Yet I agree with her. One cannot have an ecosystem with only “small fry” facing giants. Like it or not, some companies will need to function as a counterbalance if publishers are to survive as a species. The digital world seems to be accomplishing what Penguin and Random House’s founders couldn’t. For them, it was a dream. Now, it’s a necessity.