Penguin Random House: Penning the Future of Publishing
By: Maclaren Forrest & Logan Kieller
The Ivey Business Review is a student publication conceived, designed and managed by Honors Business Administration students at the Ivey Business School.
The Penguin in the Room
Through the early 2000s, most new books relied on publishing industry giants to be given the seal of approval and published. Today, the world of publishing is still highly consolidated, with the “Big 5” publishing houses accounting for the vast majority of book sales worldwide. Penguin Random House (PRH) is the result of a merger between Random House and Penguin Group, and has become the largest paper-back publisher globally. The company owns a number of subsidiaries that hold many different types of publications, with in-house content including novels, childrens’ books, textbooks, and non-fiction content. Each year, PRH produces approximately 275 imprints, 15,000 print titles, and 70,000 digital titles. Publishing houses like PRH screen authors and help share their works with the world, mainly focusing on distributing print books through brick-and-mortar stores. With the introduction of e-readers and other digital print formats, revenue through retail stores has decreased from around $15 billion to $9 billion in just ten years. Consequently, many authors now see self-publishing as a more lucrative option.
A Page-Turning Problem
Self-publishing platforms like Kindle Direct Publishing, B&N Press, Apple Books, and Kobo now offer authors a simpler and potentially more lucrative method of going to market. Authors can retain ownership of their work, earn direct royalties, and bypass the competitive process of meeting a publishing house’s standards. Self-publishing has grown consistently at 40 percent annually since 2010. In parallel, the retail industry has experienced a 25 percent decline between the years 2019 and 2020, serving as a prime illustration of the changing landscape in publishing.
Studies have shown that people are spending less time reading year-over-year, which has made it imperative for publishing houses to capture and retain the most engaging authors. However, when an author considers other options outside of major publishing houses, they see a huge appreciation in the potential profit margins for their books. By self-publishing, they would capture approximately 60 percent of the profits for a book, whereas going through a publisher like PRH would leave them with just 10.0 to 12.5 percent.
While the pandemic in 2020 has led to 35 percent of people reading more, publishing houses are still looking to expand their traditional value proposition beyond screening authors and distributing books. PRH’s current strategy has been to acquire adjacent publishing-focused companies, such as its Simon & Schuster acquisition in 2020. However, horizontal acquisitions fail to address the longer-term threat of self-publishing, and the Justice Department has sued PRH to block the deal over antitrust concerns.
Producing a New Chapter
In an effort to stave off competition and attract more authors, there has been a trend towards publishing houses becoming content management studios. This shift became evident with the emergence of movie and television production arms within publishing houses. In 2005, PRH developed their in-house production arm, Random House Studio, which is responsible for the production of movie and television content based on PRH books, as well as innovative forms of content such as video games, podcasts, and social media content. The success of the production arm is best illustrated through the 2011 release of the film “One Day”, which earned $59 million at box offices across the world.
Despite the newfound success, PRH decided against continuing solo production due to the high upfront investment required. With limited resources, PRH cannot capitalize on the benefits of solo movie production and provide more revenue streams and opportunities to the authors they work with. Even Wattpad, an adjacent player in the space, is focused on doing the same — incentivizing authors on the platform by opening up production to its user base. To accomplish this, Wattpad has launched Wattpad Studios, which co-produces content with other movie studios based on Wattpad stories. Independent authors who create on the Wattpad platform are able to quickly access industry-leading production for their IP if the stories gain enough traction on the platform; thus, despite the published stories being available for free to readers, authors have the opportunity to monetize through other forms of content.
Why Netflix Would Care About a Random House
The pipeline to IP in the streaming world is becoming more essential than ever. This process is being streamlined in many different companies through strategic acquisitions, internationalization strategies, and other means to create a strong brand image. Netflix has yet to refine this strategy, a shortcoming that is demonstrated through their unprecedented $17 billion spending plan. This spending has not resulted in the expected increase in subscribers for Netflix, with only 4 million new subscribers in the first quarter of 2021, compared to 16 million in the previous year. With stagnating returns on existing content and competitors like Disney+ and HBO continuing to strengthen their IP strategies, Netflix must find a sustainable strategy to acquire affordable and high-potential IP.
Looking towards a declining industry with existing audiences would allow Netflix to move beyond their ad hoc purchasing nature of licensing rights, and move towards creating sustainable content pipelines. Flagship IP costs Netflix large sums of money; for example, Netflix paid $500 million for the global rights to Seinfield. Unlike Disney+, Netflix has limited access to existing subscriber-enticing franchises with viewership prospects like Marvel or Star Wars. While Netflix experiences occasional breakout success in certain pieces of original content such as Squid Game, original content represents high risk with mixed success and inflated costs. Instead, securing existing IP from books is a significantly more attractive sourcing model. By building upon a strong existing framework to the decreased risks that come alongside producing industry-certified ideas, Netflix should look to capitalize on the relative ease and speed of production that would result from sourcing IP from books.
Sending a New Partnership to Print
PRH should launch a co-production studio to further itself as a leader in the content management space, and take advantage of streaming companies’ need for IP. Specifically, this new studio should create a long-term partnership with Netflix to co-create television and movie content, in return for providing Netflix the first rights to purchase IP. A longer-term partnership sets incentives between both parties to invest in the shared IP and would involve revenue sharing alongside fixed fee payments for both books and streaming content. Additionally, co-production enables authors to maintain control as they work with Netflix through PRH, ensuring that all content being created aligns well with the original IP and the author’s vision. For authors, co-production through PRH also adds an incentive to use the publishing house over self-publishing, since the publisher would act as a launchpad to other forms of content. Netflix, on the other hand, receives a consistent funnel of IP that has been pre-screened by PRH and hedges the risk that the content will lack a sufficient audience since the published book will already generate substantial interest.
For PRH, this opens up new revenue streams as they earn both the fixed, first-look access fees paid by Netflix and the shared revenues from streaming the content. First-look deals between publishers and production studios are lucrative and have been prevalent in the past; for instance, Universal Pictures, one of North America’s largest production houses, created a two-year first-look deal with PRH in 2014. Deals of this nature prove to be very attractive for publishers since they ensure the IP reaches audiences through broader media channels, generating higher revenue for the existing books, as well as the films or TV shows.
This newly printed partnership between PRH and Netflix helps each company accomplish critical goals: PRH differentiates its services to authors and is able to generate more topline growth through a new content medium, while Netflix can access and collaborate on high-potential media at an earlier stage with lower premiums. Through this partnership, both firms can transition from ad hoc deals to developing an ongoing content funnel.
Not All Books are Created Sequel
As PRH faces stagnating revenue and limited acquisition opportunities, they must expand across the content management value chain and co-produce meaningful television shows and movies with content-hungry streaming services. In the longer term, the partnership creates the potential for new avenues to develop IP into alternative forms of content, whether through video games, interactive media, or by releasing Netflix-exclusive chapters and short stories to subscribers. At its core, however, a longer-term partnership effectively aligns the incentives between a streaming service starved of high-potential IP, and a publishing house with troves of valuable stories waiting to be developed into new forms of content.