In Canada, publishing is burning

Canada’s government has said almost nothing about whether or not it is going to move against the Canadian portion of Penguin Random House’s acquisition of Simon & Schuster. The global deal is being investigated by regulators in the UK and US. Ours are said to be watching the file, meaning they’re hoping it somehow goes away or that Canadians won’t notice or won’t care that the absorption of S&S Canada into PRH Canada would leave half our book market controlled by one gigantic foreign firm, PRHS&SCanada, with only one serious competitor, HarperCollins (about 14% of the market).

In February, author and retired publisher Anna Porter noted in the Globe & Mail that the proposed deal makes a mockery of Canada’s stated policies encouraging Canadian ownership of our book publishing industry, and would leave the book sector dominated by a near-monopoly. Her article seems to have prompted the federal department of Canadian Heritage to reach out to a handful of independent publishers, with whom minister Stephen Guilbeault met last week.

The independent publishers did not present the minister with a plan. In fairness, it’s difficult to see what they might ask the Canadian government to do. The deal’s problems are obvious but solutions are not, largely because Simon & Schuster, in Canada, is a weird duck.

Originally, S&S, which is a hundred years old, didn’t have Canadian operations. It produced books in the US and shipped them over our border to any bookstores wanting to stock them. This was a good business. S&S didn’t have to make anything new for the Canadian market: it just had to run the US presses for another day or two, which cost almost nothing, in order to supply the books we needed.

About twenty years ago, S&S opened a small Canadian office to boost the marketing of its American S&S books in Canada. This made a good business even better.

And about eight years ago, S&S Canada, bored of just marketing US books, began commissioning original works for the Canadian market, including Prime Minister Stephen Harper’s history of professional hockey. This beggared Canadian policies stating that Canadian publishers need to be Canadian-owned (PRH and HarperCollins got here before the policies were set and are grandfathered), but Harper’s government sat on its hands and he got his book published.

The S&S Canada office says its Canadian publishing program is profitable. It now appears to produce about 50 Canadian books a year. I’d guess that its sales revenues from Canadian-authored books, minuscule next to its sales revenues from imported S&S titles, are in the same league as those of the larger Canadian independent houses, ECW or House of Anansi. S&S Canada does not operate like a Canadian independent, however. The independents have limited capital and pay authors small advances. The people at S&S Canada have access to their parent company’s deep pockets. They have been aggressive in our market, signing authors to big advances. Retired hockey star Mark Messier recently got a million dollars out of them.

So that’s S&S Canada. A weird duck.

If Ottawa were to stand aside and let the Canadian part of the PRH and S&S deal proceed, the likely outcome would be that the developments of the last twenty years at S&S would slowly unwind. American-authored S&S books would continue to be shipped into Canada from the S&S warehouse in Riverside, New Jersey, just across the Delaware River from Philadelphia, or maybe from another PRH warehouse in the US, and that’s all PRHS&S Global really cares about.

The S&S Canada marketing and editorial teams would be absorbed into PRH Canada’s marketing and editorial operations. Over the next several years, staff would be culled, and senior S&S people would be replaced with PRH people. The S&S Canada editorial program would be rationalized. At the moment, it competes with PRH Canada; once it enters the PRH fold, there’s no need for the same level of aggression and risk-taking. In fact, it would not be unreasonable to expect the S&S editorial program to disappear over the longer term, as happened when PRH acquired McClelland & Stewart, a similar-sized editorial operation and one of precious few Canadian publishing success stories. PRH Canada already has more imprints than I can count and, judging from all the juggling that goes on amongst them, at least as many as it can comfortably manage.

Before long, then, S&S would cease to be an active presence in Canada, just as it was 20 years ago. You’d still be able to buy S&S’s American books here, but that’s it. If Ottawa does nothing.

What if Ottawa listens to Anna Porter and declares the PRH and S&S combination unacceptable because it would leave one firm controlling more than half of the Canadian book market? Or because we supposedly have a policy that says any Canadian subsidiary of a foreign-owned publishing company that is purchased by another foreign-owned company needs to be sold to Canadian owners within two years. What would happen then?

PRH’s purchase of the larger S&S entity would proceed regardless. PRH, globally, wants S&S badly enough to overpay by a ridiculous amount. There is no way that Canada will wag the dog. Also, the S&S division of PRHS&S Global will continue to distribute its American books to Canada from Riverside, or some other warehouse in the US. That’s the lucrative part of its Canadian business and it doesn’t require S&S to have a Canadian presence to operate it.

What Ottawa is considering, then, is what should happen with the S&S Canada marketing and editorial operations.

PRHS&S Global could simply shutter the Canadian marketing operation. It’s not a lot of people. The consequences of its closure would be imperceptible to the PRHS&S Global bottom line.

Alternatively, the Canadian marketing operations could be pulled across the border and run out of New York instead of Toronto.

Or they could be closed until Ottawa loses interest in this file, which shouldn’t take long, and then quietly re-opened as part of the larger PRH Canada marketing operation? Sneaky, but doable.

The point here is that Ottawa has no leverage when it comes to the S&S Canadian marketing operations. They don’t mean enough to PRHS&S Global. There’s no deal to be had.

That leaves us with S&S’s Canadian publishing program. Here, too, PRHS&S Global would have several options if Ottawa were to get stroppy.

It could sell. I don’t see this happening because there’s not a lot to sell. Being new, S&S Canada hasn’t much of a backlist, which is often where the value of a publishing company lies. Its frontlist is reasonably strong, again, because S&S Canada has access to capital from S&S globally. That money would disappear if S&S Canada were sold. The new owner would have to replace it and, realistically, there are no Canadian buyers who would have the means or inclination to do so. If such a buyer did exist, he or she would probably be smarter to start a publishing company from scratch than buy a more-or-less empty vessel from PRHS&S.

If not a sale, PRHS&S could close the S&S Canada editorial operations. For almost a century, S&S was perfectly happy without a Canadian editorial operation. It would be no big deal to revert. The Canadian editorial operations may be profitable, but there’s no way their profits are fat enough to matter to PRHS&S Global. And PRH Canada would arguably be better off with S&S Canada out of the picture: one less competitor. PRH might get the next Messier book for half a million.

A third option, if PRH really wants the S&S Canadian editorial operations, or if PRH is worried about a reputational hit for being responsible for their demise, is to have someone from PRH fly from Toronto to Ottawa and negotiate. Promise to keep S&S Canada running for the “foreseeable future” as an independent office, same employees, same budgets, same spirit of competition.

This is undoubtedly the option that the people at S&S Canada would prefer. It’s better, too, for Canadian agents and authors, keeping another well-funded publishing program alive, at least for a while. It allows the government to save face, pretending that nothing has really changed in the Canadian market, although everyone would know that “the foreseeable future” might be short. There are few things more offensive to a big company than a division that plays by different rules than the whole. The first whiff of recession and PRH would declare that unforeseen circumstances have rendered S&S Canada’s money-losing editorial program untenable. (It would be easy as pie to make any S&S Canada profits disappear in advance of the declaration, if anyone in government were inclined to follow up). What does the government do then? Any increase in regulatory pressure would likely lead directly to the closure of S&S Canada.

It’s not great, this “independent operations” option, but it is probably the best we can hope for. The only difference between it and Ottawa letting the chips fall where they may is that the decline of S&S Canada will be somewhat slower.

That’s a long way of explaining why the independent publishers who met this week with Minister Guilbeault didn’t have a coherent plan to sell him. The options are few and unattractive. Ottawa has no leverage anywhere.

From what I’ve heard, Minister Guilbeault, a former environmental activist, best known for his arrest for hanging an anti-Bush II banner from a Toronto landmark, didn’t have a plan of his own to present to the independent publishers (ECW, Anansi, Greystone, & Goose Lane). He was poorly briefed and scarcely seemed to grasp that PRH was about to swallow S&S. He gave the publishers 22 minutes. There were hints that his department is considering some version of the “independent operations” option. He asked the publishers to come back with a list of undertakings PRH Canada could be required to make in return for approval of its acquisition of S&S Canada. These might be commitments to maintaining staffing levels or editorial budgets for the “foreseeable future.” Or perhaps the establishment of a new literary prize. Or a fund for indigent former publishing company employees. Who knows.

The one positive thing the independent publishers heard at the meeting was that Guilbeault is going to throw more money at the Canada book fund in his government’s forthcoming budget. At present, the book fund writes annual cheques to independent publishers based on a portion of their sales revenue (usually in the range 10% and 15%). The budget has since dropped, and there is indeed a promise of more money for publishing, although in what form and how much is not clear. Regardless, the promise alone should be sufficient to keep independent publishers from making a lot of noise about Simon & Schuster.

It’s an ugly situation all around. After many decades of blathering on about the need to tell Canadian stories to one another, writing torturously detailed protectionist policy briefs, expending valuable leverage in trade negotiations to protect Canadian culture, and pumping vast amounts of money into the Canadian publishing sector, we’re going to end up with a publishing sector that’s at least 80% foreign-owned, and mostly by a single firm.

It’s an abject failure. It’s as though we handed the whole of Canadian journalism to the New York Times, the Washington Post, and the Wall Street Journal, and then let the Post merge with the Times. What serious country behaves this way?

It’s true Canada has a couple of hundred independent publishers. Most of them, however, are tiny and irrelevant. Altogether, by one measure, the English Canadian independents represent 4% of English Canadian book sales (Quebec, thanks to the predominance of the French language, is better off). Canadian-owned publishers operating in English can’t compete with the multinationals because the multinationals have deep multinational pockets. They outspend by orders of magnitude, hoover up top writers, and don’t much care whether or not they make a return on their funds. The real reason they’re here is to sell their international books in the Canadian market. That’s where they get rich. Their Canadian editorial operations, from a financial perspective, are incidental.

And they are quietly letting those Canadian editorial operations shrink, at least relatively. One study I’ve seen indicates that the multinationals, since 2010, have published about 250 Canadian-authored titles a year; over that same span, the number of titles they’ve imported to Canada annually has increased by a factor of three to 16,230 a year. The multinationals are expanding their highly profitable import business while keeping their domestic programs just large enough to ensure the independents don’t amount to anything. Sales of Canadian-authored titles have apparently fallen from 27% of the market 15 years ago to 10% today. The multinationals have driven that, and they couldn’t be happier about it.

I said last year when the PRH acquisition of S&S was announced that the sale should be blocked and that we need a wholesale review of Canadian publishing policy. That was before I understand what a weird duck we have in S&S Canada. I no longer think much can be done about the sale, but I haven’t seen anything since that’s changed my mind on the need for a wholesale rethink of Canadian policy.

Ken Whyte is editor and publisher at Sutherland House Books. He is also the author of The Sack of Detroit: General Motors and The End of American Enterprise, coming in June from Knopf US.