Good News? Bad News? You Make the Call

I know, it sounds like a game show hosted by Regis Philbin. But there are a couple of recent events in the publishing industry that could be seen as either good or bad news on first blush, but may actually be just the opposite. Let's start our game--

I. Random House/Penguin Merger finalized, a.k.a "Go Big or Go Extinct"

That's one of the advertising slogans from the recent movie "Pacific Rim." Judging from reviews and tickets sales, it sounds like that movie might have managed to do both.

It's been no secret in the publishing industry for decades now that some believed you could not be a "mid-sized" company and be successful. This, I suspect, contributed to some very big owners buying and selling publishing divisions like they were trading cards.

But these two companies were already pretty big before the merger, right? You've seen the stats-the new company will "control more than 25 percent of the book business, with more than 10,000 employees, 250 independent publishing imprints and about $3.9 billion in annual revenues." (http://www.nytimes.com/2013/07/02/business/media/merger-of-penguin-and-random-house-is-completed.html)

So why do it? Well, of course, the primary answer is probably Amazon...as it is the answer to so many things in publishing. A company this big, the thinking goes, creates a force big enough to stand up to Amazon. Even that idea is not that simple. Deutche Welle, for one, suggests that the self-publishing trend is a factor that " authors themselves present another threat: Self-publishing has long become a effective trend not only among hobby poets but also among future bestselling authors" (http://www.dw.de/penguin-random-house-mega-merger-alters-international-book-market/a-16925750) And this new company will help fight that trend by giving authors a company with more clout.

Forbes lists agency pricing, layoffs and the new logo as the things to watch (http://www.forbes.com/sites/jeremygreenfield/2013/07/01/penguin-random-house-merger-closed-three-things-to-watch-for/). For the moment let's skip the logo. As Forbes also points out, Penguin settled its lawsuit with the DOJ on ebook price-fixing. But what came out of that was "the new entity would be subjected to any new ebook retail agreements that Penguin signed". In other words: "When Penguin ended its agency pricing contracts with Amazon and others and then merged with Random House, the new company would also be off of agency pricing." This is no small matter; it gives the new behemoth more control of pricing in one of the largest growing areas of publishing.

As for layoffs, don't kid yourself; the layoffs are going to come. They always do in mergers. For the moment, the official story is that both companies have long leases remaining so they can't move to one building and so that will delay the layoffs. Perhaps. But a company this big has to look for efficiencies, has to look for redundancies, has to look to streamline an even bigger purchasing stream. Translation? Layoffs.

On first blush, though, good news, right? Finally a publisher big enough to push back against Amazon. This potentially changes the whole dynamic that currently exists. We now have our own giant robot to fight the giant and evil empire. A huge game-changer for a struggling industry.

Underneath that, maybe not so much, though. Fewer publishers means fewer outlets for authors. There WILL be layoffs, and fewer places for those laid off to go. Speculation always runs rampant that a big merger like this will trigger others-we've been there, we know the downside of that.

So is this merger good news or bad news? What do you think?

II. Cengage declares bankruptcy, a.k.a. "Remember, bankruptcy is not the end, it's a new beginning"

Once upon a time the knee-jerk reaction to "bankruptcy" was negative. But now, soothing words about a "new beginning" are delivered to us in a tv commercial from a slick-looking lawyer anxious to guide us through that "new beginning."

Cengage filed for bankruptcy on July 2 (http://dealbook.nytimes.com/2013/07/02/cengage-learning-files-for-bankruptcy/) hoping, no doubt, for that new beginning. Full disclosure, I worked for Cengage for two years as the VP of Content Production.

Cengage was spun off of Thomson Learning in 2007, when it was purchased by two private equity firms (Apax Partners and Omers Capital Partners) for $7.75 billion. Speculation at the time was that Thomson chose to make this deal so they could complete the merger with Reuters. As mentioned above, publishing divisions have been bought and sold like playing cards for a while.

Cengage was very aggressive right out of the gate, buying the college division of Houghton Mufflin Harcourt and the school publishing division of National Geographic. This cost hundreds of millions of dollars, and created a great deal of debt.

Then two things happened. One, Cengage's performance has not been as good as other large educational publishers. In November, 2012 Moody's downgraded its rating of Cenagage (https://www.moodys.com/research/Moodys-downgrades-Cengages-CFR-to-Caa3-from-Caa1-rating-outlook--PR_259759) .Two, you might remember that the economy collapsed.

In the bankruptcy announcement, the CFO blamed their problems on the move to digital from print, cuts in government spending, and piracy. (http://www.insidehighered.com/quicktakes/2013/07/03/cengage-files-bankruptcy-protection) Hmmm, I guess Cengage was the only educational publisher to face those issues, huh?

At the time of declaring bankruptcy, Cengage had debt of $5.8 billion. Those impacted also included authors. According to Bloomberg (http://www.bloomberg.com/news/2013-07-02/cengage-learning-files-for-chapter-11-bankruptcy.html) the bankruptcy filing indicates that a leading author, Greg Mankiw, is owed $1.6 million in royalties, according to the bankruptcy filing.

The chapter 11 declaration is expected to allow Cengage to lose $4 billion of debt (see NY Times article cited above). Employees will continue to receive salaries and benefits and the company has pledged timely payments to vendors.

So bankruptcy is a bad thing, right? Well, not if it allows you to lose two-thirds of your debt. So this is good news for Cengage, right? Well, shedding debt is one thing and making poor decisions in managing the business is another. My, perhaps biased, opinion is that Cengage will continue to struggle if it continues to lag behind other publishers in shifting to digital delivery, as one example of poor decision-making.

So what do you think-is bankruptcy a good thing or a bad thing for Cengage?

Back to you, Regis.