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Penguin Random House wins the financial prize

It is hard for most authors to get a book published, let alone to write a bestseller or gain a prestigious prize. So, when Damon Galgut, the South African writer, won the Booker Prize for his novel The Promise on Wednesday night, having been shortlisted twice for the award before, he triumphed over the odds.

The chances of Penguin Random House, the world’s biggest book publisher (and my own), winning the prize were far higher. The Promise was published in the UK by Chatto & Windus, one of its many imprints, and PRH published four of the other five shortlisted books in the UK or the US. It was unlikely to lose.

The publisher had a tougher time in Washington this week, with the US Department of Justice taking legal action to block its proposed $2.2bn merger with Simon & Schuster, the fourth-largest US publisher. Reducing the Big Five to four could “cause substantial harm” to bestselling writers, the DoJ said.

The argument that fewer books will be written if publishers do not have to hustle so hard for authors who command advances on royalties of $1m or more is novel, in the antitrust rather than literary sense. It is by no means sure to prevail in court, where the dispute will head next (the merger was cleared in the UK earlier this year).

The subtext is as interesting as the narrative. Not so long ago, it seemed quite plausible that Amazon would severely weaken publishers with its Kindle ereader, ebooks and the rise of self-publishing. Established authors faced greater existential uncertainties than the prospect of PRH or Simon & Schuster offering a few of them slightly lower seven-figure sums.

But the internet was the dog that barked, yet did not bite. Big publishers have not only increased their revenues but become more profitable since the first Kindle was launched in 2007. PRH’s earnings margin has doubled in the past decade to 18 per cent in the first half of this year: editors tend only to admit this quietly over lunch, but they have been doing very well.

Publishing avoided the fate of music, which fell into a financial chasm before being revived by Spotify and subscription streaming. It carried on going, especially at the top echelon. The merger of Penguin and Random House in 2013, which looked then like a last-ditch defence against Amazon’s editorial might, was a financial coup: no wonder it wants to bulk up again with S&S.

Books are not like CDs — people still want to read and shelve the physical object. Ebooks represented only 11.5 per cent of total consumer book sales in the US this July. Although book shops have been weakened by ecommerce, even Amazon sells more hardbacks and paperbacks than ebooks.

Ebooks have also been a boon for those publishers with the biggest back catalogues. It is now easy for readers to buy all of a writer’s works: in effect, they never go out of print. Owning a back catalogue is also highly profitable because all of the initial costs, such as the authors’ advances, are paid. It is little wonder that PRH’s margins have been increasing so smoothly.

As the DoJ points out in its complaint, this works in favour of large publishers when they bid in auctions to secure top-selling books, such as celebrity memoirs and the diaries of presidents. Backlists “are a critical source of revenue that enables the Big Five to pay more and higher advances”, it notes.

The internet and social media have turned out to offer other advantages to publishers in what was traditionally rather a hit and miss business. Instead of having to stake a lot to publish and develop first-time writers with no track records, they can scout for talented people with followings on Instagram or Facebook. This helps them to limit the financial risk.

A prime example is Charlie Mackesy, the British illustrator whose book The Boy, The Mole, The Fox and The Horse has sold 5m copies globally after an editor at Ebury, PRH’s non-fiction publishing house in the UK, discovered his drawings on Instagram. He had not written his book then, but the publisher helped him to develop it, knowing already that he had plenty of appeal.

This combination of print resilience, back catalogues and authors’ online platforms has made publishers both more profitable and more financially stable. What used to be a cottage industry has consolidated into a much sturdier business, forged by the threat of obsolescence a decade ago.

There is a surreal side to this week’s legal complaint. It gives an example of S&S offering $5m for the memoir of a Grammy award-winning singer and eventually having to shell out $8m because there was a counterbid by PRH. Most hearts would not bleed if celebrities had to get by with a few million dollars less; the average author earns a small fraction of that.

But it also tells a bigger story about the book industry’s balance of power. US publishers paid more than $1bn in advances to authors last year, and can hardly plead poverty as a reason to consolidate further. When PRH publishes so much of the Booker shortlist and makes such healthy profits, it looks strong enough to me.

john.gapper@ft.com

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