In remarks made last week by Marjorie Scardino and Rona Fairhead, chief executive and CFO of Pearson, respectively, the two executives made clear that given the realities of sluggish growth in consumer publishing, they are willing to accept slow top-line increases in favor of improving operating margins.
To bring margins to 10%—Penguin's margin in 2005 was 7.5%, up from 6.6% in 2004—the company is planning to lessen its dependence on what Fairhead termed "low-margin, but high sales levels of the big-name, bestselling authors." Instead, Penguin will continue to invest in more first-time authors—the group published 230 new authors last year, including 160 by Penguin USA—and work to improve sales of backlist.
Penguin USA CEO David Shanks emphasized that Penguin "is not out of the big author business," but that the company "won't buy a book just to add dollars to the top line." (Penguin is rumored to be willing to pay big bucks for Alan Greenspan's book.) Shanks said Penguin is committed to keeping its own authors, but is not interested in luring authors from other houses with large advances. Shanks said he appreciated that Pearson executives recognized that consumer publishing is a mature industry and that the best way to improve profits is not always to chase sales. "We're not going to buy a book just to get over a certain number," he said.
To improve profits, Shanks said Penguin will continue to look for ways to reduce returns, while also continuing to increase high-margin backlist sales. Backlist sales increased 10% at Penguin last year and the company is planning a number of promotions to mark the 60th anniversary of Penguin Classics.
The need to boost profits is one reason Penguin has adopted a go-slow approach in the digital field. According to Shanks, the advent of digital publishing "is a once-in-a-lifetime opportunity to get a restart on developing a new publishing model." Noting that today's publishing executives weren't around when such policies as returns were developed, Shanks said that digital publishing, if done right, could increase a publisher's profitability. "We don't need to be first, but we want to do it right," Shanks said.
Both Shanks and Penguin Group chairman John Makinson said building a digital archive in the manner of HarperCollins was not a priority as long as the company is positioned to deliver the necessary files to its partners. "The source of the file is not a key issue," Makinson said. He said Penguin has been looking at various digital business models and said one option "is not dissimilar" to the 4-cents-per-page model developed by Random House. Makinson added that Penguin is reviewing business options on a "case-by-case, format-by-format basis."