A combined Penguin-Random House, which would control a quarter of the global book market, is a conglomerate designed to take on another giant, though it’s not exactly a fair fight. Because the new entity will only have about a twelfth of Amazon’s annual sales, most observers expect that this is just the beginning of a series of mergers — like those in the music business — that will take the Big Six publishers down to the Big Three and perhaps one day even the Big One. As John Makinson, Penguin’s chief executive, told The Times, “We decided it was better to get in early rather than be a follower.” The question is whether this strategy will work.

There are two competing predictions about commerce in the digital age. One is that companies will get smaller and more disruptive as nimble entrepreneurs can take on giant corporations with little more than 3-D printers and Web sites. The other envisions a few massive companies — like Procter Gamble, Apple and Nike — that design everything themselves, have it manufactured cheaply in Asia and use their e-commerce sites to gather information about their customers. Nearly the exact same conflict occurred more than a century ago in the decade that straddled 1900, which was also a period of rapid technological change. In just a few years, 1,800 small companies were swallowed up as the electrical-power, telephone, auto, steel and chemical industries grew from patchworks of tiny companies into conglomerates. In “The Great Merger Movement in American Business 1895-1904,” the Yale economist and historian Naomi Lamoreaux wrote that back then everyone worried about the same thing that authors, editors and book buyers worry about now: Are large companies good for the economy? Do they grow through efficiency and innovation or by abusing their leverage?

Lamoreaux found that they did both, and many turn-of-the-century examples suggest what might happen to Penguin-Random and others. On one end of the spectrum, Lamoreaux told me, was U.S. Steel. Its predecessor companies competed by finding new ways of making steel at ever-lower prices. But after J. P. Morgan merged three companies into one behemoth, he discovered a better way to profit. Because all steel producers bought iron ore from the Mesabi Range in Minnesota, U.S. Steel bought most of the range and locked much of the rest of it in long-term contracts. As a result, the company hardly worried about competition; it had little need to innovate or compete on price, which made everything from cars to soda cans more expensive. Worse, it left a massive industry unprepared for the growth of innovative Asian companies during the 1970s and 1980s. By then, U.S. Steel all but collapsed, and a chunk of the U.S. economy went down with it.

Sears Roebuck, on the other end, “grew by solving market and technical problems,” Lamoreaux said, and, as it solved them, its market share increased. Unable to monopolize anything like iron ore, Sears needed to innovate to stay ahead. Through constant competition with Montgomery Ward and others, it adopted new strategies that ultimately benefited its customers. When the company got into trouble, closed stores and was bought in 2005 by a struggling competitor, Kmart, the retail industry was robust enough that the overall economy barely noticed.

The future of book publishing is somewhere between the two poles. Oddly enough, it seems to mirror what happened to the envelope business. In the early 1900s the envelope industry was large enough to support several big companies. Then the mergers started, and an industry of numerous small companies became two giants. Eventually, the envelope industry wasn’t large enough to sustain itself, and the companies became tiny divisions of larger conglomerates. U.S. Envelope still lives as a small part of the packaging manufacturer MeadWestvaco. American Envelope was bought by Cenveo, a business-stationery company whose chief executive, Robert G. Burton Sr., made clear that the century of mergers and buyouts is not over. “We’ve had people knocking on the door,” he told shareholders in August.

Article source: http://www.nytimes.com/2012/11/18/magazine/penguin-random-house-merger.html?partner=rss&emc=rss