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Book Business January/February 2013 : Page 23

in terms of unit sales. If you’re selling the same amount of product but for a lower price, decreased revenues is the conclu-sion one draws. The only way you can preserve margins is by cutting costs.” McCarthy sees one of the biggest challenges for the companies as they come together is a difference in culture. Random House, for instance, “is ex-tremely decentralized” while “Penguin is very much a centralized command and control kind of environment.” During his time at Random House, says McCarthy, “it was pretty rare to have a meeting at which you find peo-ple from different divisions. Generally speaking, I’d go to a Crown meeting and then a Knopf meeting and so forth.” At Penguin, says McCarthy, “most of the strategic decisions are made central-ly, but the culture is less corporate, more of a roll-up-our-sleeves culture. Leaner in general and much more scrappy.” He adds, “Often forgotten is when Putnam and Penguin merged, it was Putnam’s management that took over the com-pany. Putnam was not the sort of white-heeled shop that Penguin was. There are two cultures down at Penguin. People look at merging Random House with Penguin, a white-heeled publisher of classics. But it’s way more complicated than that. Six entities from the Random House side and two or three entities from the Penguin side.” While there are many risks inherent in a move of this size—from the per-ception of being seen as slow-footed and not innovative to lowered morale in back-office departments that are often targeted during consolidation—Mc-Carthy says the biggest risk is talent. “Suddenly your best people … are involved in merger activities, figuring out new partnerships, shifting their fo-cus,” he says. “It might not just be a year. It takes a lot of meetings to integrate two companies of this scale.” That said, McCarthy says he thinks the move makes perfect sense. “People are trying to read a lot into it … but I think any attempt to read this as an ex-treme change in the business is a misread. It’s consolidation, just like the publishing industry has experienced every year I’ve been in it.” The Skeptic Michael NorriS Senior Analyst Simba Information Some observers are more optimistic than others. Color Michael Norris less opti-mistic. “The only real innovative thing that may come out of this is the com-bined firm will have a lot more content to study, so they can better see what works and what doesn’t with print and digital distribution,” says Michael Norris, an astute observer of book buying trends in his role with Simba Information. “If they can combine easily and in a short time, that could be a good payoff.” Echoing Peter McCarthy’s thoughts on the effort it will take talented people to work on organizational issues, Norris sees this as a potential stumbling block for two publishers he regards as quite innovative in their own right. “I think this merger is high risk and low reward,” says Norris. “The two companies have been very innova-tive by themselves in the digital space and combining them won’t necessarily make them twice as innovative.” As with any move like this, there’s an opportunity cost among other risks. “The publishing business will continue to transform while Penguin Random House figures out who gets what title and who gets to lead,” says Norris. “Not only will they have to hold onto their talent with both hands during the tran-sition, but the industry may be differ-ent by the time they are fully integrated, and then they’ll be playing catch-up.” As to why this is happening, Norris thinks the move was not born of a stra-tegic need, but rather “because someone at either Pearson or Bertelsmann finally figured out that ebooks aren't going to step in and save the industry and wanted out of the consumer books business.” Norris emphasizes that he hopes the new entity will be successful, but quali-fies that he’ll be measuring that suc-cess against a different yardstick than shareholders will: “on the extent that they can get more people who don’t buy books to buy one book. Simba es-timates over 100 million adults didn’t buy a single, solitary book in the last 12 months, and everyone in the indus-try needs to start figuring out how to make content worth the wait instead of simply shortening the distance be-tween the voracious reader and the cash register.” The Pragmatist Michael cairNS Chief Revenue Officer Shared-Book According to industry vet Michael Cairns, there will, of course, be big op-erational challenges in maintaining the business momentum on both sides. “But most of the execs are going to know that,” says Cairns. “I suspect many have gone through something like this before.” Cairns, who was on hand for the merger that formed Price Waterhouse-Coopers in 1998, figures this deal will go down relatively smoothly. “Pearson and Ran-dom House have been talking about this for a while. They’ve been intellectualizing it for a lot longer than Simon & Schuster and HarperCollins [have] should they end up together,” says Cairns, referring to reported preliminary merger talks between two more of publishing’s titans. Why are mergers and acquisitions on everyone’s minds? “I think because they believe scale is going to be the only way that they can re-ally compete,” figures Cairns. “They need to extract more revenue out of their as-sets, and by combining operations, they’ll be able to push more content and more physical units through their operations.” Cairns cites physical properties, such as warehouses. “We know volumes in physical books are declining. They need to fill up that space with something, and it would be good if they could find oth-er books. They’ll be in a position where they’ll have much greater volume and get more value out of the assets that they already own. “My own view is that it’s going to happen without too much of a hiccup,” he says. “What happens next with other trade publishers is going to be | FEBRUARY 2013 ▲ 23

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