Monday, March 21, 2005

Size Matters--but How?

Fascinating to note that, in the days immediately following Hachette Livres' Tim Hely-Hutchinson and others at the London BookFair speculating that the trend toward global publishing conglomeration would likely continue until the landscape was dominated by "three or four" major players, Geraldine Fabrikant reported a strikingly opposite trend in a series of articles in the New York Times, March 16, March 17 & March 18.

"Viacom said yesterday [March 16] that it was weighing a plan to divide its businesses into two public companies, a move that would unravel years of empire building by the chief executive, Sumner M. Redstone."

Ms. Fabrikant noted that Viacom's announcement was the second in as many days

"by a media company preparing to split up assets. On Tuesday, Liberty Media announced that it would spin off the Discovery Holding Company. Those plans raise the question of whether, after a decade of building media conglomerates, companies will start breaking them up. Already there is a drumbeat among investment bankers to promote such splits....

Fabrikant supported her coup de grace--that "with the announcement that he is now considering a breakup of that empire, [Redstone] has admitted his acquisition strategy did not work"--with the comments of Richard Greenfield, a media analyst at Fulcrum Global Partners:

"It is a momentous event that Sumner is willing to admit he was wrong and get smaller...He is totally reversing everything that has occurred since 1995 and totally undoing all the size and scale that he hoped to create through acquisitions."

As fashionable as it is--at this blog and elsewhere--to bemoan the seemingly endless publishing merger-mania that has created an industry dominated by seven or eight behemoths, it would be naive and dishonest to compare the enormous complexity of the composition of businesses contained within a multi-component entity like Viacom with the relatively like-minded goals of the publishing imprints Viacom has gathered beneath the Simon & Schuster umbrella--S&S's Adult and Children's divisions, Scribner, Pocket Books, The Free Press, Fireside, Touchstone, Atria Books, Washington Square Press, MTV Books and several others; collectively they make up but a small portion of Viacom's overall "media portfolio."

It would likewise be dishonest to suggest that, from an institutional perspective at least, there are not immediate advantages to be seen in, for instance, the no-longer-so-recent merging of the "Little Random" imprint of Random House with Ballantine Books. In terms of its ability to attract and build certain kinds of big, commercial authors, Little Random's hard-cover publishing arm was always disadvantaged (as have been Knopf, Doubleday and Hyperion, to name just a few) by not having a dedicated and closely integrated mass market division. Damn the purists who say Little Random has been corrupted: from a strictly-operational perspective, merging RH with Ballantine made sense. They could now offer the same sort of "full-service" publishing operations--hardcover, trade paperback and mass market, all carefully coordinated (theoretically, anyway) by unified management--that are found at S&S, HarperCollins, Bantam Dell, the Time-Warner Book Group and the Penguin-Putnam Group.

AND YET.
And yet....

* * * * * * * *
Remember the Laffer Curve? The Laffer Curve was a crudely drawn illustration of a "theory" (I use quotation marks because, as far as I'm aware, it was utterly unsupported by data, but was nonetheless given credence by economists and policy makers in the early 1980s) documented (legend has it) on a martini napkin, whereupon one Arthur Laffer drew for a like-minded Milton-Friedmanite (of the sort who then dominated Ronald Reagan's inner circle) a bell-shaped curve. The outline of the bell represented represented a theory of the psychology of taxation and the relationship between tax rates and total tax income. The tax rate was charted along the horizontal axis (because, after all, this was a graph, not simply a drawing of one of the bourdon at the Cathedral of Notre Dame), while revenue was plotted along the vertical axis The principle was simple: as the tax rate (charted along the horizontal axis) increases, so does the income the government collects...
...until it reaches its apex, the very top of the bell...
[Now I need you to visualize the outline of our martini-napkin cathedral bell: it starts at the bottom left edge and flows upward with ballerina-like grace as it move from left to right--until it reaches its apex, at (roughly) the center of the napkin, and then, in a perfect mirror-image of its ascent, begins to fall.]

The principle that Laffer's curve so elegantly protrayed was that, once tax rates become too high (i.e. once the bell reaches its apex) investors will be so disincentivized to continuing investing, and wage earners to continuing producing--that all parties to the economy will be so demoralized by the intrusive effects of Big Government upon their wallets--that productivity will diminish. The natural consequence, of course, is that tax income will also fall--ultimately, to nothing, zero. Nada.

This simplistic (and no-doubt Max-imally mangled) explanation of Laffer's simplistic theory (upon which, for the record, Reagan's infamous "trickle down" theory of economics derived: cut taxes, and the money will come! Cut, especially, the tax rates of corporations and the wealthy, and they'll continuing striving, building, investing, ever upward, thereby expanding by virtually unimaginable proportions the tax base!) is, I acknowledge, wearisome. The point isn't really to discuss Laffer's laughable notion, but to discuss the principle (considerably better supported by documentary evidence, I might add) behind the principle, called

The Law of Diminishing Returns.
[As defined in The Columbia Encyclopedia, Sixth Edition. 2001]

"In economics, law stating that if one factor of production is increased while the others remain constant, the overall returns will relatively decrease after a certain point. Thus, for example, if more and more laborers are added to harvest a wheat field, at some point each additional laborer will add relatively less output than his predecessor did....The principle, first thought to apply only to agriculture, was later accepted as an economic law underlying all productive enterprise."

It's fair, by now, to ask where the hell I'm going with this ramble, given my concession that the organizational differences between publishers (even as currently, and inelegantly, configured), and the infinitely larger media conglomerates of which they are a part, is a bit like comparing grapefruits to grapevines. The answer is the question: have we, as an industry--as currently configured--reached the point of diminishing returns?

It cannot be insignificant that, within days of each other, Sumner M. Redstone and John C. Malone both concede that their respective plans for global market domination have not yielded the results promised to their shareholders? And, let's face it, there's only so much back-office compression/"redundancy reducing" that can be done before the workers themselves become overwhelmed to the point of, umm, diminishing returns.

Back to Geraldine Fabrikant in the New York Times. "'In large conglomerates, size and complexity is the enemy,' said Bruce Greenwald, professor of economics at the business school at Columbia University. 'Often, executives can't focus carefully on each of the businesses, so they don't run as well.'"

Is it not possible that our industry, too--pared to the bone as it is in terms of personnel, so as to deliver up the best short-term results possible to our share-holder--suffers, and increasingly so, from these very same disadvantages? Might there not be some wisdom to be gleaned from reconsidering Mr. Hely-Hutchinson's course and looking, instead, for ways to decentralize, to break down into smaller, more narrowly focused units?

16 comments:

jessica said...

Max, you’re brilliant and I hope you’re right.

In his book, Good To Great by Jim Collins (Harper Business), there’s a section “The Misguided Use of Acquisitions” (page 180), in which Collins talks about why certain acquisitions work and others fail. In talking about the ones that fail, he says: “often with their core business under siege, the comparison companies would dive into a big acquisition as a way to increase growth, diversify away their troubles, or make a CEO look good. Yet they never addressed the fundamental question: ‘What can we do better than any other company in the world that fits our economic denominator and that we have a passion for?’ They never learned the simple truth that, while you can buy your way to growth, you absolutely cannot buy your way to greatness. Two big mediocrities joined together never make one great company.”

Publishing companies joining together, who are conducting business the same, old inefficient way? --According to Collins' premise, does not more efficient make.

Anonymous said...

Another reason why I choose to remain anonymous on blogs ... I am a red voter in a blue state, and a republican in a sea of democrats within the publishing community. It is sad, but the fate I accept.

So notwithstanding the partial inaccurate portrayal of Reaganomics, I thought that this was an interesting perspective. I'll offer up the following: any company can succeed with the right people in the right positions, as long as they also offer a product that consumers want. Books are no different. The success of Random House-Ballantine is because they complete each other, and can really not even be compared with Viacom.

JMO.

s/anon suspense writer

Anonymous said...

I'm less convinced than you are. Companies, even in an age of mergers, have divested underperforming divisions or ones that don't turn out to be synergistic. And "Already there is a drumbeat among investment bankers to promote such splits..." makes me more wary. Bankers get paid whether they're advising a merger or a divestiture, and if the industry has reached the point where only a few companies are left to merge, then it's time to advise splitting to make this year's revenue quota.

Publishing industry margins are small. Managers constantly look for ways to improve them, whether by having a broader reach or a narrower focus. I think they'll fail, that publishing won't grow much faster than population, if that. I hope I'll be wrong.

thecheezewiz said...

It strikes me that the Law of Diminishing Returns could ALSO be applied to the number of books on the market.

"Thus, for example, if more and more laborers are added to harvest a wheat field, at some point each additional laborer will add relatively less output than his predecessor did...."

It could easily be translated to:

"Thus, for example, if more and more books were added to the market, at some point each additional book will add relatively less output than its predecessor did...."

Not that I'm an advocate of drastically reducing the number of books on the market, but it sure gave me food for thought and other clichés that like to run amuck at such moments of clarity and understanding.

OK, feel free to get back to the topic at hand.

Bookfraud said...

interesting stuff. i thought one factor driving the merger-mania in publishing was the monopoly known as barnes&noble. essentially at the mercy of b&n. but it seems to me that publishing mergers don't really get the economies of scale like you would by merging factories or banks. too many working parts.

also, i don't know what anon. poser meant by "partially innacurate" description of reagonomics. dr. laffer sketched it on a napkin for ronnie, saying that cutting taxes would increase federal revenues. ha ha. "voodo economics"-- george herbert walker bush. funny how w. doesn't make that argument with their tax cuts.

great site.

Anonymous said...

This is a suggestion for a topic. On a few writers' forums, authors have talked about getting bad reactions from their editors when they decide to change direction in their writing,ie. getting more serious, changing genre, etc. Some have said that their editors viewed it as almost an affront. What do editors really thing when writers try to spread their wings?

david thayer said...

Max,

It strikes me that we all throw the word comglomerate around without understanding what a conglomerate is. Tenneco leaps to mind...RA Hanson in the UK; these firms sought efficiencies across a spectrum of businesses to offset the Sixties and Seventies phenomonon called the 'business cycle.' This cycle was the result of wage push inflation which in economic terms is Gone, Baby, Gone.
Viacom is an Eighties style company marked by charismatic leadership and the dread 'vision' thing that so confounded GHW Bush. Publishing groups like Holtzbrinck and Pearson PLC have no natural defense against cyclical forces other than to spread risk through size. Size doesn't innoculate against poor judgment, nor does it float the boat when the hull is pierced; it simply extends the death thrall for a decade or two if the fundamentals dictate such. Publishing is better off then some industries since no one has figured out how to outsource reading to a call center in Hyderabad. We've read your book, sir and you loved it!

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A VOCATION OF UNHAPPINESS [Courtesy Georges Simenon (1903-1985)]

"Writing is considered a profession, and I don't think it is a profession. I think that everyone who does not need to be a writer, who thinks he can do something else, ought to do something else. Writing is not a profession but a vocation of unhappiness. I don't think an artist can ever be happy."


PRACTICAL MARKETING [Courtesy Zornhau, 2005]

"They should put the 1st couple of pages up in subway adverts. Having read them several times, you'd feel compelled to try the book - if it was any good."


PLATE OF SHRIMP [Courtesy Alex Cox’s REPO MAN, circa 1984]

"A lot of people don't realize what's really going on. They view life as a bunch of unconnected incidences and things. They don't realize that there's this like lattice of coincidence that lays on top of everything. I'll give you an example, show you what I mean. Suppose you're thinking about a plate of shrimp. Suddenly somebody will say like "plate" or "shrimp" or "plate of shrimp" out of the blue, no explanation. No point in looking for one either. It's all part of a cosmic unconsciousness."