THE GROWTH FALLACY
The New York publishing world is apparently buzzing about why Random House gave the NYT Magazine access to RH chief Peter Olson, resulting in a story that made him look mean. (It's conventional wisdom in the publishing biz that he's Darth Vader. The only question is why he let a reporter follow him around.)
I, however, was interested in the article's unconscious demonstration that publishing execs, both old school and new, are making a fundamental business error. Here are the relevant quotes. First, from the old school:
"When I started in publishing, in 1946," Roger Straus of Farrar, Straus & Giroux recalled, "it was a very different business. It was a profession for gentlemen, and they weren't running their businesses for large profits. They were interested in good literature. Now, the goal is to get larger. The easiest way to increase the look of your balance sheet is to buy another company."
Now, from the new:
"Books are a flat business," [Bertelsmann CEO and Olson's boss] Gunter Thielen says. "The only way you can grow is through acquisitions. And Peter is very interested in growth."
Boy this is dumb. Growth through acquisition is not growth, at least not in the sense of rising value. Growth through acquisition is merely exchanging one asset (cash or equity) for another (a company). The balance sheet effect is a classic financial flim-flam, as I learned as a lowly college sophomore taking accounting from the amazing Uwe Reinhardt. In publishing, the executives are apparently fooling not just their stockholders but themselves.
Growth through acquisition is not the same as internal growth. An acquisition may increase productivity if you can consolidate certain overheads or, as is the case sometimes when big tech companies buy tiny ones, bring on talented employees who can be more productive in a larger enterprise. But neither story seems to hold for book publishing.
Otherwise, the only way that acquisitions increase your company's real value is if you somehow buy things for less than they're worth. That's a hard trick to pull off, especially repeatedly, and book publishing doesn't seem like the place to find financial sharpies.