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NOVEMBER 28, 2005
Random House: Digital Is Our Destiny Random House is moving beyond print to protect itself from the likes of Google The first sensation that hits as you enter Random House is Manhattan headquarters is a whiff of mustiness coming off the shelves of first editions lining the lobby and hallways. But don't let your nose fool you. The 80-year-old book publisher is pushing beyond the pulp-and-ink era into the digital age. Unwilling to let a Google (GOOG ), Yahoo! (YHOO ), or Microsoft (MSFT ) dictate terms in cyberspace, Random House Inc., the world's largest trade publisher, is taking the industry lead. In early November it outlined ways it would begin to offer its books directly to consumers on a page-per-view basis. Random House will get at least 4 cents a page and split that roughly in half with authors for fiction and narrative nonfiction titles. Other types of books, such as cookbooks, will have different pricing models. Random House is discouraging copying of the texts by delivering pages in low-resolution files. What's more, Random House says it will launch a movie division, in partnership with production outfit Focus Features, to parlay its books into films. Richard Sarnoff, president of Random House's corporate development unit, says the initiatives are all part of an attempt to assert itself in a fast-changing milieu. "We acknowledge that a generation is growing up that may not have the same visceral connection with the book format," says Sarnoff. "They have read as much on screens as they have on paper. We need vehicles to translate our books in different ways." These new announcements are consistent with a vision for new media that seems to be falling in place at Random House. Other recent deals negotiated by Sarnoff include making investments in Vocel, which delivers educational content to cell phones; Audible Inc. (ADBL ), a download and CD service; and American Reading Co., which promotes reading in schools by rotating mini-libraries from classroom to classroom. Book publishers might be expected to be nostalgic and lament the past, but the tumult they witnessed in the music world sounded the alarm, says Sarnoff, whose great-uncle was RCA Chairman David Sarnoff, a pioneer in the development of radio and TV. "The technology was adopted before there was a business model for legitimate sales," he says. "That created a fertile ground for piracy, and it became ingrained in consumer behavior." The urgency for a new business model in publishing was clear. Sarnoff figures that within 18 months, reading devices could be as easy to use for books as the Apple iPod is for music. "Screen technology is about to get much better very quickly," he says. Random House's digital model, whose per-page fees may be pricey for those accustomed to free views, has been in the works for about a year. Sarnoff and his team have taken the time to share their ideas with authors, booksellers, and other publishers. But aggressive moves by the likes of Google Inc. may be speeding things up. Taking a page from the music industry's legal crackdown against piracy, Random House says it supports a lawsuit filed in October by a group of other publishers (including BusinessWeek parent The McGraw-Hill Companies (MHP )), against Google, arguing that its plan to scan millions of library books for Internet viewing violates copyright laws. Google has said it is well within "fair use" exceptions in the law. The Authors Guild, with 8,000 members, filed a similar lawsuit against Google in September. "The elephant in the room for all of us is Google," says author James Gleick, whose book Isaac Newton, published by a Random House imprint in 2003, was a Pulitzer prize finalist. Yahoo! Inc. and Microsoft Corp. also plan to make books available online but with approval from publishers. Online retailer Amazon.com Inc. (AMZN ), too, has announced a pay-per-page offering. STAKING CLAIM Random House, a unit of German media conglomerate Bertelsmann, publishes 10,000 new titles worldwide and generates about $2 billion in revenue a year. It has often been derided for its top-down approach in a business that had been relatively decentralized among many imprints. But even some of its staunchest critics say that Random House's heft may be just what publishing needs to protect its interests. "It's important that Random House planted the stake," says Jane Friedman, CEO of HarperCollins Publishers, a unit of News Corp. (NWS ), adding that her company will soon be unveiling business models that may have direct tie-ins with some of Murdoch's new online acquisitions. "Everybody now wants to digitize all intellectual property," Friedman says. "That's good for publishers because we control [it]. Everything keeps changing, but this ultimately will be a healthy time for books. We just have to make sure [digital sales] get done right." It's too early to tell how disruptive this will be to traditional bookselling. For one thing, top retailer Barnes & Noble (BKS ) declined to comment on Random House's scheme. Just the same, digital sales won't resolve the biggest problem in the industry, "the one upsetting the whole ecosystem," says Paul Aiken, executive director of the Authors Guild. Authors and publishers are almost never compensated for used-book sales, which total about $2.2 billion a year. Still, Aiken is encouraged that at least one publisher is trying to keep that dynamic from being repeated online. By coming up with its own way to sell books digitally, says Aiken, Random House is declaring to the Googles and Yahoos "this is our job, not yours."
 By Tom Lowry
BW MALL
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