Expert publishing blog opinions are solely those of the blogger and not necessarily endorsed by DBW.
A company can grow organically (investing in new product, developing new channels to market, improving customer service, in other words innovating) or it can grow by mergers and acquisition (M&A).
The oil industry has a name for this — “drilling for oil on Wall Street” — as opposed to investing money into wild catting, which is drilling high-risk wells in frontier territory. When Wall Street values oil companies lowly, it is cheaper to add new reserves by buying smaller oil companies then it is finding new oil in the field. The publishing equivalent is growing ones catalog through acquisition rather than developing more authors. Wall Street loves growth and rewards companies that achieve growth at the lowest cost possible. Sometimes the lowest achievable cost of growth is by M&A, not organic growth.
I know a bit about how this works in both energy and publishing because I worked for five years at Royal Dutch Shell — three years in exploration & production (E&P) an two years in the Shell corporate venture capital group — before embarking on a 12 year career in tech start-ups, including the last seven years in digital publishing, which started with me joining one of the companies we had invested in.
Something similar to “drilling for oil on Wall Street” is currently happening in book publishing. The emphasis of the mega publisher is on buying other publishers instead of developing new authors themselves. Sometimes it also means “buying” authors that have proven themselves as indies first (see Hugh Howey, E.L. James and many others). This is the publishing industry’s equivalent of buying “wildcats,” indie exploration companies.
Off course there other motivations for growth other than pleasing Wall Street:
— “Bulking up” to improve one’s negotiation position with giant tech companies like Amazon, Apple, Google and others
— Growing and globalizing to better attract “big” authors and the agents who represent them
— Diversification of risk in the form of large advances
An environment that favors M&A, favors publishers with large balance sheets and easy access to credit; these are publishers with big corporate parents (Bertelsman, News Corp, Viacom, Holtzbrink, etc.). This would suggest that today’s “big five” might be the same “big five” in five or even 10 or 20 years out.
However, it might also reward publishers supported by private equity, suggesting that new companies might break into the “bulge bracket” (a term used to describe the largest investment banks in the world).
So what about publishers embracing and leveraging innovation to the fullest, companies like Sourcebooks, Nosy Crow, Open Road Media and others, whose growth has been mostly organic and based on innovation? Can they break into the big five? If it’s cheaper to “source” books on Wall Street, then no, they are more likely to be bought by the big five rather than become a member of the club through organic growth.
Ultimately it all hinges on whether the big five are superior at marketing given their size and promoting new books or if indie authors and indie publishers can outsmart the big five through their flexibility and willingness to innovate faster and embrace new trends and tools earlier. For evidence of the latter look to the digital publishing business, where new entrants are eating the incumbents lunch.
The future is still ahead of us.
Related: Learn more about the future of the publishing industry at Digital Book World 2015
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