Bertelsmann and Penguin Random House: A Strategy Based on Extremes

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by Zach Fuller

Having created a next-gen music publisher in BMG, German media giant Bertlesmann are applying a similar strategy to their publishing division. Consistent with BMG’s tactic of investing heavily in legacy music publishing assets as well as niche Indie labels, Bertlesmann are doubling down on their most valuable publishing asset by moving to acquire an increased stake in Penguin Random House.

Already owning 53% of the famed multi-national publishing company, Bertlesmann are expected to pay around $780 million to acquire an additional 22% of Penguin Random House. In a publishing landscape where the coalescence of adblocking and the controversy over Facebook and Google’s dominance of the content discovery process has concerned publishers, Bertlesmann’s acquisition could well set the future standard for the industry in how it balances digital and physical releases. Why Bertelsmann would choose to increase their focus on what many perceive as a declining business against digital growth oversimplifies the narrative of the company’s overall strategy: one where the higher margins of print (sales of physical books are significantly more profitable than e-books) balances the lower margin digital business which however  potentially has a wider  and growing audience facilitated by digital publishing. Indeed, Bertlesmann’s CEO Thomas Rabe, was quoted on the acquisition as stating, ‘It’s margins are high, and it contributes to the cash flows Bertlesmann needs to invest in new business with higher growth potential than book publishing’.

Despite Rabe’s position, unlike other print forms of revenue such as advertising, physical book revenue still performs strongly.  In the UK for example print-publishing industry grew to $6.3 bn in 2016, up 8% YoY and an increased growth rate from 1.3% 2014/2015. Additionally, Penguin Random House benefits from brand recognition and the superstar effect brought to content industries in the internet era. It has a 23.4% market share of the UK publishing market, far ahead of its nearest competitors Hatchette Livre and Harper Collins, and it can also expect significant future revenues from agreements in place for flagship releases such as Barack and Michelle Obama memoirs.

However, Rabe is right to hold scepticism on the long-term sustainability of this business, and he is not alone in banking on the short-term cash-cow nature of a powerhouse legacy asset. It is one of the more prudent strategies in modern content industries, with the same framework being applied to Disney’s acquisition of Marvel and Lucas Film to release revamped Superhero and Star Wars franchises. Sure-things are becoming increasingly rare and therefore, in basic economic terms, more valuable. With digital publishing’s data centricity and lower margins making for a trickier business model (of which few can claim to have mastered), Bertlesmann’s increased stake in Penguin Random House creates a bulwark against digital publishing’s volatile and as yet undetermined monetisation framework.

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