More on the Penguin/Random House Merger: A Historical Perspective on This Sort of Business Behavior

An interesting article was published this week by The New York Times that offers an analysis of what the Penguin/Random House merger might be leading to for the book business.

In "How Dead Is the Book Business?" journalist Adam Davidson says, "The entire book industry may eventually become an arm of an infotainment giant. Is that a bad thing?" This sets up his discussion of the merger from a historical perspective, comparing it to what happened around the turn of the 20th century when new technology created a new industrial paradigm in many businesses, from the steel industry to the envelope business. He says:

"There are two competing predictions about commerce in the digital age. One is that companies will get smaller and more disruptive as nimble entrepreneurs can take on giant corporations with little more than 3-D printers and Web sites. The other envisions a few massive companies — like Procter & Gamble, Apple and Nike — that design everything themselves, have it manufactured cheaply in Asia and use their e-commerce sites to gather information about their customers. Nearly the exact same conflict occurred more than a century ago in the decade that straddled 1900, which was also a period of rapid technological change. In just a few years, 1,800 small companies were swallowed up as the electrical-power, telephone, auto, steel and chemical industries grew from patchworks of tiny companies into conglomerates. In “The Great Merger Movement in American Business 1895-1904,” the Yale economist and historian Naomi Lamoreaux wrote that back then everyone worried about the same thing that authors, editors and book buyers worry about now: Are large companies good for the economy? Do they grow through efficiency and innovation or by abusing their leverage?" (emphasis added)

So which of those happened back then? According to Lamoreaux, both. 

U.S. Steel, on one end of the spectrum, stopped trying to innovate and instead bought up existing steel-related companies to create a behemoth that monopolized ownership of iron ore. This led to short-term success but long-term disaster.

On the other end of the spectrum was Sears & Roebuck, which "grew by solving market and technical problems" and innovated to stay ahead. Importantly, it didn't monopolize its industry—competition with the likes of Montgomery Ward and K-Mart kept the industry healthy.

So where does the book business fall? In the middle, according to the scholars. Consolidation, like that of the steel industry, has been going on for a long time and the Penguin/Random House merger pops as leading toward more and more consolidation to the point where "it’s possible that there would soon be only one or two publishers and that they might be folded into some larger infotainment company like Time Warner Penguin or maybe Random Viacom. There would still be books — just not large book companies."

But, Davidson points out, in a digital world where self-publishers and bloggers compete, too, monopoly is unlikely, Instead, "(e)ventually, it’s likely that book publishing will embody both conflicting visions of digital-age commerce — lots of small businesses and a few massive ones that handle big-ticket items."

Is this a dire situation? Whether we're comfortable with that scenario or not, it's functional. But, there is an underlying threat that isn't being recognized by our government or publicized by the industry right now. It harkens back to when U.S. Steel bought up all the iron ore so it didn't have to compete. There are laws now to prevent monopoly, but there is an iron-ore-monopoly type of element lurking in the book business: patents.  

According to Davidson,  "government issued patents . . .allow large corporations to buy up vaguely worded deeds that can be used to sue upstarts out of existence. This is the iron ore of the digital age and many large companies are gobbling up as many patents as they can. Reuters recently reported that Amazon (which somehow holds a patent for the "one-click shopping" button) was hiring several high-profile patent lawyers with the mandate to "identify and evaluate strategic I.P. acquisition and licensing opportunities.” The company has argued that it buys up patents to defend against the lawsuits of others. That may be partly true, but the worst fate for readers isn’t the merger of a few struggling companies in a diminishing business. It’s the threat of another U.S. Steel."

Check out the full article here for a more in-depth discussion of the arguments made.