As digital formats emerge and threaten to change the book publishing industry, I recommend Random House adopt a three-point strategy. First, Random House should embrace the emergence of e-books by creating an in-house Digital division, which will secure digital rights from best-seller authors and will make books available on any form factor, from smart phones to tablets. Second, Random House should vertically integrate and create its own e-reader aiming at competing with the Kindle, therefore decreasing the bargaining power from retailers like Amazon. Last, Random House should consolidate its position as the leader in the industry by providing a better print reading experience to its core readership.

Prior to the emergence of e-books, the trade book publishing industry could be characterized as a moderately profitable industry with slowing growth and low barriers to entry. Typically, over the past ten years, operating margins capped at 10% and revenue showed annual increase of 4% or less.
At one end of the spectrum, the retailers’ industry is highly concentrated –three major retailers represent 40% of the industry sales- with Amazon’s market share rapidly growing at the annual rate of 20% on average. So far, retailers have been sharing the smallest part of the pie -5% of the retail price for a book- which explains why retailers like Amazon, looking at increasing their profit margin, have been putting increasing pressure on publishing houses. At the other end of the spectrum, authors and agents are highly fragmented, very few authors are successful and, because the choice of a publishing house relies on an auction system, authors are highly versatile. This partly explains why authors have been sharing the largest part of the pie with profits equaling 15% of list price.

With the increasing demand for e-books and the development of e-reading platforms, Random House’s leadership faces serious threats for several reasons. First of all, from a...

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