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Emerging Markets are Key to Penguin Random House Merger

Random House is pervasive across Spanish-speaking Latin America, while Penguin is a growing power in China, India and Brazil.

By Edward Nawotka, Editor-in-chief

On the day that “Superstorm Sandy” hit New York, the world was also greeted with the news of the proposed mega-merger of two of the publishing world’s biggest players: Penguin and Random House. Together, the companies will combine to deliver some $3-4 billion in annual sales — a not insignificant chunk of the estimated $120 billion global book market. The “Big Six” had just become the “Big Five.”

Global. That is the key word in that previous sentence. For while the majority of attention surrounding this deal has looked at the impact on the US and UK — home turf for Penguin and Random House — the true merit of this deal is in creating synergies overseas.

Bertelsmann’s Chairman and CEO Thomas Rabe underscored this point in his official press release, writing: “Firstly, the combination of Random House and Penguin significantly strengthens the publication of books, one of our core businesses. Secondly, it leads to digital transformation for an even larger scale, and third, it increases our presence in the target markets for growth of Brazil, India and China.”

That Rabe would emphasize the synergies of the two book publishers first is no surprise: Random House and Penguin are primarily book publishers, unlike several of the remaining four large conglomerate publishers whose parent companies appear to have other priorities. That he would emphasize digital next is, well, most likely mere verbiage — neither company is falling behind in the race toward digital. But that he would then bring up the three key global emerging markets, markets where Random House is lagging behind and has limited on-the-ground resources and presence, now that is interesting.

Penguin, as it happens, has been developing serious publishing programs in Brazil, India and China for several years now and CEO John Makinson is one of the few major publishing executives to have first-hand experience in all three countries.

Of these, Brazil is perhaps the best short-term opportunity for both companies, as last year Penguin purchased 45% of the Brazilian publisher Companhia das Letras, while Random House is all but absent from the market. In India, both companies have ongoing operations, with Penguin having launched its first e-books earlier this year and plans to have all front list titles available digitally by the end of December. In China — which Bertelsmann pulled out of in 2008, closing its bookstores and book club after 13 years in business — Penguin has been been making strides, having established a foothold in 2005 and launching several successful joint ventures, including a partnership with Shanghai Readers 99 to publish Penguin Classics and a training program for translators.

It’s interesting to not ethat in the email sent (PDF) to all Penguin employees following the news of the merger Makinson took pains to point out that “new company will include all interests of Penguin and Random House in the languages English, Spanish and Portuguese.” In an interview with Publishing Perspectives just prior to the Frankfurt Book Fair, Makinson was candid about his view of the international market. While admitting that he was not feeling particularly sanguine about China, he was “more optimistic” than he had been in some time, in large part due to the impending change of political leadership, something which led him to believe “that [Penguin] will soon be able to publish in China under the same terms as they do in many emerging markets.” His preference, he said, was to work in Brazil. India and China “still feel like emerging book markets,” he said, while Brazil “was as sophisticated a book market as the United States or Britain.”

Makinson also lamented the fact that the company did not have any “exposure to the southern areas,” adding, “our business in Brazil is not a beachhead into Latin America, we have no Latin American or Spanish-language strategy,” he said at the time.

global partnershipsBut you know who is already a huge player in Latin America? Bertelsmann. Random House Mondadori is one of Spain’s “Big Three” and the company has significant marketshare across South and Central America, as well as Mexico. The merger will ultimately resolve Penguin’s lack of exposure to the southern sun, giving it access to some 450 million Spanish-speaking readers they never had before.

In any industry, consolidation seems only to lead—in hindsight—to more and more reckless endangerment. The AOL-TimeWarner mega-merger was an embarrassment. Airline mergers have only led to increasingly frustrated fliers. While bank consolidations gave us “Too Big to Fail” and exposed all of us to the moral hazard of the financial industry.

But, surprisingly, as much as authors and agents might lament the fact that this merger will give them fewer options where they can sell their books (no matter what the merger’s executives are telling the media) and redundant jobs will be lost in New York (yes, that will happen) — once you take in the big picture, the merger makes sense.

The United States and the UK are mature book markets, which have been flat or have see only fractional growth for many years now. The best opportunities are abroad and by combining forces — like any invading army — it is easier to compete.

No, we may not like the fact that we’re now down to the “Big Five,” but we can take some solace in knowing that, at the very least, the moniker is an honorific of sorts. In Africa (perhaps the one part of the world we haven’t mentioned yet), the “Big Five” refer to the elephant, the rhino, the lion, the leopard and the cape buffalo. They are the most dangerous and difficult animals to track and hunt.

They are also the hardest to kill.

— Carlo Carrenho of PublishNews Brazil contributed reporting to this article.

DISCUSS: Share Your Reaction to the Penguin Random House Merger

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6 Comments

  1. Posted November 1, 2012 at 3:58 am | Permalink

    Liked the way the author end the post and started it as well.
    This is definitely an exciting news and thanks for the article.

  2. Posted November 1, 2012 at 6:42 am | Permalink

    I wonder how the American Big Five publishers relate to to the African Big Five animals… Who would be who? Penguin Random House is definirei the lion, but who would be the rhino? And the elephant?

  3. Posted November 1, 2012 at 7:01 am | Permalink

    Enjoyed the article. The merger of RH and Penguin creates a ‘Big1′ and ‘NotAsBig4.’ RH and Penguin are separately much bigger than the others. Combined they dwarf the others.

  4. Sophia Seidner
    Posted November 1, 2012 at 12:41 pm | Permalink

    Carlo -thanks for this insightful article. Not surprising -isn’t this what we all predicted as electronic publishing grew–that book publishing would consolidate the way the music labels did with the advent of iTunes and digital music? The resultant company I think will have too much power-at least in the UK and US. And today we read that Barnes & Noble has closed another store in D.C’s Union Station. And Amazon’s profits are down. This merger may make sense but what makes sense for RH and Penguin is probably not good for authors.

  5. Richard McDonough
    Posted November 2, 2012 at 12:24 am | Permalink

    Bertelsmann, Brazil. Naturally. A certain historic affinity.

  6. Rojers P Joseph
    Posted November 5, 2012 at 9:16 am | Permalink

    The way the author unraveled the amazing synergistic possibilities of the deal for both the firms is the high point of the article. Pearson, Penguin’s parent company and the largest educational publisher, would also look to leverage this opportunity to widen its reach to the growing, but untapped educational book markets in Latin America.

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