All six mega-publishers can merge, and they still won't win Amazon's game

By Sarah Lacy , written on November 21, 2012

From The News Desk

Say you're dining alone at a restaurant. You spot a hot girl also dining alone at the next table. You saunter over, leeringly lift your eyebrows, and utter the most cheesy pick up line known to womankind. She rebuffs you, obviously. The answer isn't doubling down with an even worse line. It's changing tactics.

This simple lesson, equally applicable to dating and business, is seemingly lost on the publishing world.

Still profitable, but under serious threat from Amazon and the shifting digital sands beneath their feet, publishers are opting to fight back by merely getting bigger. Random House and Penguin are tying up in a $2 to $3 billion deal, and the Wall Street Journal reports that HarperCollins and Simon & Schuster are mulling a deal as well. This would leave an industry already dominated by six big publishing oligarchs even cozier -- and significantly more lopsided with two big giants and two smaller companies.

As the Journal points out, there are new fears in the industry, given a recent Justice Department settlement that OK'd discounting on ebooks. There's real concern that Amazon is gaining even more leverage. Just look at the tom-catting that legendary self-promoter and best selling author Tim Ferriss is doing over his new book "The Four-Hour Chef."

Ferriss, true to form, dramatically calls it "a sniper shot directed at the heart of every member of the publishing oligarchy" revelling in the aggressive, variable discounts Amazon offers customers and the fact that traditional book chains are allegedly boycotting it. As the New York Times somewhat derisively wrote of the launch, "Everything will be a best seller, even if you have to give it away."

And while publishing purists may find Ferriss's approach grating, The NYT's sarcasm is pretty dead on when it comes to Amazon's strategy -- not only in publishing, but in most ways to gain market share and hobble rivals.

From a publishing insider (and one of our first stories on PandoDaily ever):

Publishers like to pretend that we make our money from discovering unknown talents for small advances  and selling millions of their books. That’s a very small part of our business. The bestselling books are all written by celebs, by people with huge platforms, by fiction writers with a long history of bestselling books, or by people who do a proposal that’s on its surface brilliant...

But in recent years, as book sales have declined, the advances for the biggest books have gone down proportionally, too. What used to be a $1 million book is now a $400,000 book...Enter Amazon’s print publishing arm.

I saw this [redacted] proposal a few weeks back. It was okay–[same redacted author] is an asshole but [redacted] has a certain following and it would probably be a bestseller. Bestseller now means selling 20,000 copies, so I was thinking of offering like [hundreds of thousand] for it. But Amazon had already bid $1 million for it. A similar thing happened with a [redacted] memoir a few months back. Traditional publishers are snickering, “Look at stupid Amazon–overpaying for books!”

But Amazon isn’t stupid. They’re overpaying intentionally to keep advances high (and high advances will bankrupt publishers). And they’re also taking away all the authors who actually move units. They gave Seth Godin really favorable terms on a deal. Only a matter of time before they snag a James Patterson or some other big genre fiction name.

We can’t pay $1 million for books anymore. Amazon could probably afford to lose $20 million/year in their publishing arm just to put the other publishers out of business. I think that’s what they’re trying to do–throw money around in an industry that doesn’t have any, until Amazon becomes not only the only place where you buy books, but the only place that publishes books, too. Given this reality, it's clear the publishers are trying to band together to give themselves even deeper pockets. Somewhere Jeff Bezos is doing his signature cackle that the publishers have been baited into trying to play his game. It's like bringing a knife to a gun fight, when the other guy has a semi-automatic gun that shoots crazy cash and distribution. Bezos knows what anyone with a basic grasp of math knows: They could all merge together and still not out-spend him. He can lose money on every big book deal; the publishers cannot. You think he's not crazy enough to keep losing money until he dominates an industry? Try him.

It's the exact same ill-thought plan that BestBuy came up with a few weeks ago when it, too, decided it could take on Amazon's discounting power to bolster this year's holiday shopping season. As we reported last week:

75 percent of the items offered by Best Buy are cheaper on Amazon, on average by 17 percent. Based on Best Buy’s Q4 2012 earnings statement and InvisibleHand’s internal price data, Best Buy’s price-match promise could, conservatively, cost it more than $400 million of gross profit this quarter with an EPS (earnings per share) impact likely to exceed -$1.12.
Nevermind the very different economic reality of the two companies: Amazon currently has more than $5.2 billion of cash and short term investments on hand, compared to Best Buy’s $680 million.

Here's what's so maddening about this, as an author and a reader. BestBuy may not have another option to compete with Amazon; they both sell the same electronics after all. But publishers absolutely do. They are just stubbornly refusing to take it. Because it involves retooling their force of editors, taking risk, and doing the real work that made each of these publishing oligarchs so successful to begin with.

The reason that publishers find themselves in a war of out-bidding for boneheaded celebrity books, eroding their own profit margins with every bid, is that they were the ones who opted to grow the easy way. The industry was built on discovering, developing, and painstakingly promoting young talent. As the firms have gotten bigger, those uncertain ROIs have been slashed in favor of what looks like a sure thing. Everything else is slashed. No author gets truly great editing out of publishing houses anymore, and most of the promotional work falls to the author once the book comes out -- even when a major house has paid a healthy six-figure advance.

Publishers can only be gutted by Amazon, because they put themselves in a position where cash advances and placement in bookstores were the only two things they brought to the table. And guess what? As Tim Ferriss's moonwalking-blog attests, if you have Amazon, you don't need either of those.