On the Simon & Schuster Acquisition by Penguin Random House

No, this isn’t another post coming out against the Simon & Schuster and Penguin Random House mega-consolidation. 

Over the past 48 hours, we’ve seen interest groups ranging from authors to agents to booksellers all coming out against the merger, citing its to-come impact on author/agent leverage in negotiation, diversity (and breadth) of opinions being published, and the acceleration of the ongoing ‘blockbuster’-driven culture at publishing houses.

Yes, these are all valid concerns, having been deeply lived over the previous decade’s publishing industry consolidation–beginning with the original mega-merger of Penguin (previously owned by UK education conglomerate Pearson) and Random House (owned by German media conglomerate Bertelsmann) in 2011, followed by comparatively smaller acquisitions of Perseus Books by Hachette (owned by French media conglomerate Lagardere) and Harlequin by HarperCollins (owned by American media conglomerate News Corp), among others. I’m also not going to use this forum to support the broader trend of corporate consolidation and monopoly activity by the large tech companies.

However, I do want to offer a slightly different perspective on this deal, hopefully broaden the conversation on why this deal was inevitable, and where we may go from here.

Simon & Schuster is part of the American media conglomerate ViacomCBS (itself the result of a recent merger), the parent company of CBS, Showtime, Nickelodeon, MTV, Comedy Central, BET, Paramount Pictures, Pluto TV and up until yesterday, Simon & Schuster. National Amusements, a corporate vehicle held by the billionaire Redstone family, holds majority voting rights (70%!) in all strategic decisions made by the company. 

CBS and the Redstone family have been fending off distracting overtures for the past ten years due to the declining mental acuity of patriarch Sumner Redstone, and CBS’ lagging performance relative to its competitors. After numerous court battles and activist inquiries, Sumner Redstone was removed as Executive Chairman of CBS in 2016, and the succession-related maneuvering left his daughter, Shari Redstone, off the Board. From 2016 to 2019, Shari Redstone sought to regain her power within the company, publically pushing for a merger with Viacom. In 2019, the ViacomCBS was finalized, and Shari Redstone became the Executive Chairman of the newly-combined entity. 

One of the first actions taken following the successful execution of a large scale merger is a refocusing of the combined entity’s corporate strategy—a vision of how the sum-of-parts will collectively surpass the previously separate entities. Involved in this process is a reassessment of the assets held by each entity, and a reconciliation of these assets against this new corporate strategy and identity, oftentimes followed by the shedding of these ‘non-core’ assets. In the case of ViacomCBS, the executive team sought to mirror the strategy seen across the media and cable industries in the face of declining cable subscription revenue: a streaming subscription product marrying the company’s television and film libraries. 

Left on the outs in this process was Simon and Schuster: a comparatively small (~$800M p/y revenue), yet profitable (~15% operating profit margin) entity in a stable-to-declining industry that doesn’t inspire excitement from the public markets (unlike the sexy prospect of yet another streaming subscription). The decision to sell S&S and reinvest the proceeds in beefing up ViacomCBS’ direct-to-consumer product was a purely rational one, met with nearly-unanimous approval by the public markets and ViacomCBS’ shareholders. The intended sale was announced, and the stage was set for an auction by S&S’ suitors. 

At the risk of sounding non-creative, there were only ever two categories of buyers that ever made sense for S&S: financial buyers (i.e., private equity firms) or rival publishing companies (in pursuit of market share and synergies). A management buy-out, while technically possible, never seemed like a likely prospect, as trends in the publishing industry in the face of Amazon’s continued domination (yes, more on them later) is more consolidation and partnership, not more independence.

In the case of a private equity buyer, the investment playbook would be to find profit ‘efficiencies’ wherever possible (everything from free books to employee printing [editors print a lot] to paper quality in the books themselves), and then repackage the newly slimmed-down entity for sale (and a healthy return) a couple years down the line. While support functions like finance, distribution, and IT would be kept in this scenario, the new ‘S&S’ would be significantly hollowed out (goodbye employee perks), with no shortage of gripes by the notoriously vocal editorial and broader publishing community.

In contrast to a private equity buyer, a rival publishing house seems like a much more attractive home for S&S. Unlike the cost efficiencies that would be sought out by PE buyers, the publishing house merger looks a lot more like the ‘strategic’ merger/acquisition playbook, albeit with more leeway to preserve the ‘creative’ identity of the publishing house. Before you scoff, remember that the acquisition is predicated on the ability to maintain (and ideally grow) the sales of the company, while making the company more cost effective through consolidation of back office efforts and personnel (finance, IT, legal) and giving the combined publisher greater negotiating leverage against its suppliers (paper and printing companies) and retailers (namely Amazon). The intent in design is to avoid causing any disruption to the sales-side of the company — ensure that editors continue to place bets on a steady stream of books, and benefit from the downstream benefits. 

Given the potential upside of gaining scale by combining Simon & Schuster with another established publishing house, the incumbent publishers could justifiably assign a much higher bid value to the assets of S&S than a financial buyer. Unsurprisingly, this led to a bidding war between the non-S&S ‘Big 5’ publishing houses. As reported by the Financial Times, Bertelsmann-held Penguin Random House, the largest of the trade book publishers and the one with the most experience acquiring and integrating publishing companies (thereby justifying an even higher level of synergies) beat out French conglomerate Vivendi (partial shareholders of Hachette parent company Lagardere) and Murdoch’s News Corp (owners of HarperCollins) for the prized possession. Not only did PRH offer the highest price, but they also included a ‘break-up’ fee in the event of antitrust-related concerns, providing ViacomCBS financial assurance that they would be well compensated even in the worst of circumstances.

A third possible scenario would be an acquisition by Amazon itself, looking to beef up its own publishing arm, which it has been quietly expanding over time on all fronts (at least quiet in comparison to the rest of Amazon’s activity): building up editorial talent, acquiring the rights to mega-author Dean Koontz and others, and aggressively bidding on audiobook rights through its Audible arm. I won’t go further down the rabbit hole of this scenario, but you can imagine that the Amazon corporate development team at least kicked the tires on this, but opted against shelling out valuable deploy-able capital that could be spent on conquering the world in much larger markets. 

It’s hard to believe that I went this far into my writing without mentioning Amazon, who is very much central to this situation and the ongoing acquisition-driven thesis by Penguin Random House. In what’s become an obvious statement and an ongoing inevitability, Amazon continues to capture share of the retail book marketplace – both in physical books, where they’re able to price their books far below any indie or big box competitor (the most recent example being President Obama’s A Promised Land, the blockbuster book of the year, currently selling for $23.96 on Amazon despite retailing for $45), not to mention e-books, where the Kindle is the only viable e-reader aside from the iPad after B&N threw the towel in on the Nook, and audiobooks, where Audible has leveraged its ‘subscription’/credit model and free month enticement to own this space as well. 

Every few years, Amazon and the publishing companies undergo intense negotiations to renew their retailer agreements. In each agreement, Amazon seeks to retain a greater share of the retailer/publisher split, colloquially a 50/50 split for physical books but in recent negotiations a smaller and smaller share going to the publisher. Publishers have little recourse against Amazon’s weighty asks: as we’ve seen in recent negotiations, Amazon has proved willing to exert its weighty influence on the consumer in its negotiations, even pulling publisher inventory from its site, or slowing down its arrival to consumers to prove its point. While ultimately an accommodation is reached, and the publishing companies are able to tout Amazon’s ‘co-investment’ in improving its logistics or metadata infrastructure, the reality of each contract renewal is a ‘give’ on the split between publisher and Amazon, ideally tied to a longer-term (3+ year) agreement that prolongs the next painful renegotiation. 

While the publishing companies have managed to remain profitable in the wake of this ongoing margin squeeze, it has done so at the expense of the things being lamented in the wake of the PRH/S&S tie-up: a more staid, corporate culture and a paring back of creative risk-taking. In the publishing industry, this takes the shape of more obvious, ‘safer’ acquisitions (mega deals to celebrity-attached memoirs, established authors with existing audiences, and small bets elsewhere), and away from less non-obviously commercial projects or other ambitious projects unlikely to recoup their advance / financial investment (see my article on the parallels between venture capital and publishing).

Make no mistake: Amazon is the primary culprit of the recent squeeze seen in the publishing industry, and everything else is a symptom. The onslaught of criticism from publishing industry players in the wake of the S&S and PRH tie-up creates an enemy out of the publishers while distracting consumers away from the realities facing the industry, caused by Amazon. 

Penguin Random House’s acquisition of S&S is a rational course of action driven by both parties facing pressure to continue to identify growth and profit opportunities while facing significant pressure from industry trends and Amazon’s dominance. The tie-up will give PRH further muscle in future negotiations with Amazon, who will be increasingly hard-pressed to remove the combined entity’s publishing list (making up ~30-40% of all trade publishing, and an even larger proportion of bestsellers) from its site altogether, an action that would create backlash from consumers and invite scrutiny from antitrust officials and legislators alike, an unneeded distraction for a company focused on significantly bigger fish. 

For those concerned about the fusion’s impact on booksellers, keep in mind that acquisition or not, it continues to be in the publishers’ best interest to keep Barnes & Noble, Waterstones, and the independent bookstores thriving as a bulwark against Amazon’s bookselling might. Yes, it may result in more ‘co-op’ bestseller displays dominated by the books of the two publishers and less bookshelf space for independent publishers, but by no means should it be considered a death knell for booksellers. 

Another common concern associated with the acquisition is an expectation of the consolidation bringing on further silencing of controversial or contentious voices. In the book publishing industry, Simon & Schuster has become well-known for publishing popular American conservative voices including Sean Hannity, Glenn Beck, Tucker Carlson, Mark Levin, and most disastrously, the ill-fated book deal to Milo Yiannopoulos. During the Trump presidency, S&S became infamous for its willingness to publish Trump-related tell-alls of all stripes, including Bob Woodward’s Fear, John Bolton’s The Room Where it Happened, and Mary Trump’s Too Much and Never Enough. Comparatively, Penguin Random House mostly opted out of the bidding war for individuals in Trump’s orbit, leading some to presume that a S&S under PRH would be pressured to reduce its publication of controversial American conservative voices. 

However, Penguin Random House’s acquisition of S&S represents an admission of failure in strategy on their part to not pursue the Trump-related books. Any substantial shift in S&S’ strategy in the wake of a PRH acquisition would harm its value, and if anything and given the need for the imprints of combined entity to differentiate themselves, I’d expect even more controversial books to come from S&S’ conservative imprints (though I’d be hard pressed to see Trump opting to compete with Obama’s publisher, even if Random House was the 1987 publisher of his first ghostwritten memoir, The Art of the Deal.)

To reiterate and in conclusion, my goal here isn’t to bless this acquisition or dismiss much of the justified concern associated with the deal, but to add some nuance and context to landscape-shifting deal in an industry that I hold dear. In Washington Post book critic Ron Charles’ editorial ‘Penguin Random House buying Simon & Schuster. That’s bad for readers’, he cites the idea of publishers entering into collective bargaining against Amazon as an option, which is a promising idea. Another potential salvation for the publishers is antitrust action taken against the big tech companies, though Amazon seems like a less imminent culprit than Google or Facebook. 

Unless Amazon is curbed in some meaningful way or consumers en masse decide to change their book buying habits in favor of more expensive online retailers (Bookshop being a worthy cause) or in-person (which even pre-Covid, would reverse a decade+ trend of e-commerce buying), the book publishing industry will continue to face lagging growth and related pressures that drive consolidation such as the PRH / S&S deal. 

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