Random House-Penguin merger to squeeze Canadian publishers


The merger between Penguin and Random House comes at a time of extreme uncertainty in the industry worldwide as booksellers and publishers fight to weather the digital and economic storm. (STEFAN WERMUTH/REUTERS)

The page is turning on the Canadian bookselling industry, as a megamerger between the world's biggest publishers has industry insiders calling for a rewrite of the country's foreign investment rules to create more competition in an insulated sector.

While Random House and Penguin - which both have substantial Canadian operations - are merging in an effort to protect themselves from a host of online competitors that often force them to cut money-losing deals to get their books in front of readers, smaller Canadian publishers find themselves cut off from key sources of funding that could be the difference between profitability and bankruptcy.

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The merger comes at a time of extreme uncertainty in the industry as booksellers and publishers fight to weather the digital and economic storm. The difficulties were laid bare earlier this month, as Canadian publisher Douglas & McIntyre filed for bankruptcy protection as it raced to find an investor or buyer to save the business.

But like other failed Canadian publishers - Key Porter Books shut down in 2011 - its options are extremely limited. Federal rules state foreign investors can only put their money into Canadian-controlled joint ventures and are banned from complete ownership of a Canadian publisher unless they can demonstrate a net benefit to Canadians.

"If there are companies out there struggling, which would be interesting to a foreign investor, then maybe we need a way to do that," said Chris Bucci, a partner at Anne McDermid & Associates, an agency that represents some of the country's most successful writers.

"If you can have another publisher step in that is more viable, that gives authors more options and ensures employment for a whole group of people, it seems a natural time to see what we can do."

It's a similar argument to those being made by newspaper publisher Postmedia Network Inc., which has lobbied Ottawa to change rules that affect the newspaper industry in a similar way.

Publishing, like music and film before it, is an industry in flux: Digital technology, e-readers, and in particular the rise of Inc. have meant the notoriously slow-to-change sector is facing the need to replace a model that has existed for more than a century, as technological advances move faster than the most engrossing page-turner. The most recent data available from Statistics Canada show a relatively healthy 11-per-cent profit margin for Canadian book publishers, but the data end at 2010 before the industry shifted sharply toward digital products.

Those margins are under increasing pressure - industry experts suggest Amazon now accounts for as much as a quarter of all North American sales. But many of those sales come at the expense of the publishing companies that source and produce the content, because Amazon often demands volume discounts.

A combined Penguin-Random House would control an incredible amount of content, which could put pressure on Amazon to negotiate deals that are more favourable to publishers.

"The more powerful that Random House becomes, the more they're in a position to be a partner to what Amazon is doing, as opposed to a supplicant for favours," says Rowland Lorimer, director of the master of publishing program at Simon Fraser University.

"[If you're the new megacompany, you're] in a position to create terms of business that make it possible for us to work, as opposed to what Amazon is doing to everybody else, which is: This is the way the world is, and if you don't like it, lump it."

Canadian publishers face another challenge - they have relatively few channels in which to sell their products. Small bookstores have been pushed out of business by digital downloads and megastores such as Indigo, but even the big stores have cut back on the number of books they sell and stocked their shelves with stationery and stuffed toys in a bid to increase profits.

Indigo Books & Music Inc., which said it would not comment on the Penguin-Random House merger, posted a $5.4-million loss in its last quarter, as stronger sales at its Coles and IndigoSpirit stores couldn't make up for decreases at its large Chapters and Indigo stores.

"You don't need to stock 700 copies of each book any more," said Robert Gibson, head of research at Octagon Capital. "They keep all the hot copies in stock, so you have Fifty Shades [of Grey] and some vampire things, but they may only keep one copy of others. Everyone else goes online."