Random House, Penguin Talk Merger (PSO, AAPL, AMZN, GOOG, BKS)

Two of the world’s four largest publishing houses, Random House — owned by Germany’s Bertelsmann AG — and Penguin — owned by the U.K.’s Pearson plc (NYSE: PSO) — have been holding merger talks that would result in Bertelsmann owning a majority stake in the combined company. Neither Bertelsmann nor Pearson would comment on the report.

The publishing business has been rattled by the success of e-books and e-readers and has bristled at the extent of the control over the publishing business that is being exerted by the likes of Apple Inc. (NASDAQ: AAPL), Amazon.com Inc. (NASDAQ: AMZN) and Google Inc. (NASDAQ: GOOG). The big bricks-and-mortar retailers like Borders and Barnes & Noble Inc. (NYSE: BKS) are either going bankrupt because they can’t compete with the online sellers or their business has been so cramped that they are barely able to survive.

There’s no guarantee that such a deal will be reached or that it would gain approval from U.S. and European regulators. The U.S. Department of Justice sued Apple and five of the world’s largest publishers earlier this year, charging them with collusion on pricing of e-books. Penguin was among the five and still has not settled with the DoJ. At issue was the so-called “agency” model under which Apple would receive 30% of the price set by the publisher of an e-book. Amazon follows a so-called “wholesale” model, where the company buys the books at a price negotiated with the publisher and then resells the books at whatever price the online behemoth chooses.

Publishers have argued that the agency model must be allowed or they will all go broke selling through Amazon. The company also said it made its pricing decisions alone, with no collusion with other publishers. The agency model ends up raising the price to consumers, which is why the DoJ is trying to put a stop to it.

Whether or not bigger is better in the brave new world of publishing is not altogether clear. Like the movie business, the book business lives and dies on best-sellers. A much bigger company will need a lot more best-sellers to pay the bills and keep the profits rolling in.

Paul Ausick