The Land Of the Giants

After years of mergers, the landscape of the book publishing industry has never been so top heavy. In each of the three major publishing segments--trade, educational and professional--three companies dominate their respective categories and each has revenues that are well above their fourth-place competitors. The pending purchase of Harcourt General by Reed Elsevier accentuates this trend, as Harcourt had been the fourth-largest publisher in both the educational and professional segments. With Harcourt's sale, the gulf between the three major publishers and the rest of the companies in each segment will grow wider. The sale of Harcourt, as well as the recent approval of the AOL Time Warner merger, also reflects another longstanding trend: the largest companies are getting larger.

The result is that the publishing industry has evolved, in the words of merger maven Martin Levin, into a three-tier industry consisting of a small group of very large publishers; a tier of medium-sized houses; and lots of small publishers. Each of the three largest trade publishers in the United States has revenues that top $1 billion, and the same is true in the educational market. The three largest publishers in the professional market all have revenues that top $2 billion, a figure that includes all print and electronic materials.

Reed's purchase of Harcourt's Worldwide STM group, which had sales of $745 million in fiscal 2000, will push Reed's professional publishing revenues close to $5 billion, where it will rival the Thomson Corp. as the world's largest professional publisher. Wolters Kluwer, with professional publishing sales of more than $2.5 billion, is the third-largest professional publisher. The McGraw-Hill Cos., with revenues estimated at about $500 million, will inherit Harcourt's old fourth spot.

Things are a bit tighter in the education market, where Pearson Education and McGraw-Hill are fighting it out for the top spot. MHC's acquisition of Tribune Education will boost its educational sales over the $1.5 billion mark, while Pearson's purchase of National Computer Systems will give the company educational and testing revenues of more than $2 billion. Thomson's acquisition of Harcourt's higher education group from Reed will give Thomson Learning educational revenues of just over $1 billion--about $100 million more than fourth-place Houghton Mifflin.

For the most part, the largest educational and professional publishers are companies whose primary business is publishing, be it in print or electronic forms. The same is not true in the trade segment, where the country's five largest publishers are owned by media conglomerates that own a variety of businesses beyond book publishing.

The country's largest trade publisher, Random House, had estimated sales of $2 billion for the fiscal year ended June 30, 2000, approximately 12% of parent company Bertelsmann's total revenues. With subsidiaries located in most major English-speaking countries, PW estimates that approximately 20% of Random House's revenues are generated by its overseas subsidiaries. Bertelsmann is involved in a wide variety of content businesses, and is a major player in the printing and services market. Its music group, through BMG Entertainment, is its largest segment, representing about 29% of revenues. When book publishing is combined with its book club operations and the professional publishing division, Bertelsmann book-related revenues accounted for about 30% of total revenues. The company's magazine operations, which had sales of just under $3 billion in fiscal 2000, added Fast Company to its ranks in late December.

With its acquisition of Dorling Kindersley, the Penguin Group is now the country's second largest trade publisher. The combination of DK's worldwide sales of about $320 million with Penguin's own revenues should push total sales for the subsidiary of Pearson to more than $1.2 billion in 2000. For 1999, Penguin generated about 17.5% of Pearson's worldwide sales. The combination of Penguin with Pearson's education group represented 43% of Pearson's total sales last year, a ratio that will likely increase following Pearson's acquisitions of DK and National Computer Systems.

Outside of the book world, Pearson is partners with Bertelsmann in one of Europe's largest broadcast ventures, the RTL Group. The FT Group is home to one of Pearson's best-known properties, the Financial Times.

HarperCollins's total revenues for the fiscal year ended June 30, 2000, just topped the $1-billion mark, representing about 7% of parent company News Corp.'s total sales. The "old" electronic media--television and movies--represent more than 50% of the parent company's total sales. Among News Corp.'s best known holdings are the 20th Century Fox movie studio and the Fox Broadcasting Co.

HarperCollins holds a substantial lead over fourth-place Simon & Schuster, which had revenues of $611 million in 1999, a figure that represented slightly less than 5% of its parent company's total revenues. With the addition of CBS to the Viacom family, S&S's contribution will decline; for the nine-month period ended September 30, 2000, S&S represented about 3% of overall revenues.

As is the case with S&S, Time Warner Trade Publishing's contribution to its parent company will shrink when TW completes its merger with AOL. In 1999, the trade operation's estimated revenues of $350 million represented just over 1% of TW's revenues. TWTP president Larry Kirshbaum says that being such a small part of a giant company has its advantages. Not being on many people's radar "allows us to keep more of a family feeling. We don't operate like a large conglomerate," Kirshbaum tells PW. "I find there is strength in being a modest-size publisher; we have more versatility than some of our competitors," Kirshbaum says. Still, he is looking forward to working with AOL Time Warner. "The combination of content and technology will offer new opportunities for our authors," Kirshbaum says, adding that iPublish.com was designed specifically to work with the combined company. And on the print side, Kirshbaum says he sees numerous opportunities to use the narrowcasting capabilities of the Internet to target specific titles for individual readers. "This could be a real bonanza," Kirshbaum says. In the new AOL Time Warner, Kirshbaum will report to co“chief operating officer Richard Parsons.

Despite the large size and market share controlled by the major publishers in the different industry segments, Al Greco, associate professor at Fordham University's Graduate School of Business Administration, says there is little chance the government will block Reed's purchase of Harcourt (although some divestitures may be required before the deal g s through) and notes that the major players may acquire still more smaller companies. "As long as there are second-tier companies that can provide alternatives for consumers," the government d s not consider an industry to be overly concentrated, Greco explains. And Martin Levin says he expects the larger companies to keep looking for the few remaining "diamonds" that can round out their portfolios.

One final trend evident when looking at the major publishers is the high number owned by foreign giants. Bertelsmann, Reed, Wolters Kluwer, Thomson, Pearson and News Corp. are all based outside of the U.S. A major factor in the preponderance of foreign ownership in the book industry is that foreign media companies are not permitted to buy broadcasting companies in the U.S., forcing them to look for other ways to enter the world's largest media market. American content "has legs. It can be sold throughout the world," notes Greco, adding that European publishers have always been interested in acquiring companies that publish "must-have information." If American content is so valuable, why don't more U.S. companies get involved with publishing? "Sometimes our own companies are so close to the situation, they can't see its value," Greco speculates.