Like the music and newspaper industries, book publishing is having to reinvent itself in the face of the threat posed by digitisation. Consumers are rapidly changing their buying habits and publishers and traditional bookshops are feeling the strain. Online retailers such as Amazon now have huge influence and are expanding their sphere of influence from selling to publishing itself. The whole publisher-author-reader nexus is changing, forever, and the implications for the Australian scene are likely to be significant. While the announcement and the identity of the parties caught people by surprise - the two companies immediately sent out placatory letters to staff, authors and agents - many were phlegmatic, seeing the move as a necessary bulking up in the face of the increasingly strong online retailers and the parlous, rapidly changing state of the industry. And plenty predicted more mergers between the remaining four big publishers - Simon & Schuster, HarperCollins, Pan Macmillan and Hachette. So when The Wall Street Journal reported last week that S & S and News Corp were in ''preliminary talks'', it elicited little comment. John Makinson, the chairman and chief executive of Penguin who will be chairman of the new Penguin Random House, has been on something of a world tour since New York, spruiking the deal in Toronto, London, Delhi and Auckland. He had already planned a sojourn at Penguin's stylish new Australian headquarters in a renovated railway shed in Docklands to coincide with the retirement party of former local chief executive Peter Field. A publishing boss who also owns a small ''bricks and mortar'' bookshop in Britain, Makinson says Penguin management had considered how the transformation of the industry from an analogue model of publishing to a digital one (from physical books to e-reading) changed questions of distribution on a global scale. And it also altered the relationship between the publisher and the customer, whether that customer was a reader or an author.

''We concluded that this consolidation was going to happen, that it was right for it to happen, that we would be able to serve readers, authors, retailers better with the resources - not just financial resources but the creative resources, the technological resources, the brand resources - that an enlarged organisation would have.'' Makinson says the major issues facing publishing are to do with how content is distributed and the challenges facing physical book stores. ''You've seen that already in this country through the collapse of Redgroup [which owned Angus & Robertson] and the impact this had on sales in the Australian market.'' The publishing industry estimate is that 20 per cent of trade sales were lost. According to the federal government's Book Industry Strategy Group, the value of physical and digital books sales in Australia in 2010 was $2.3 billion. After a plateau following the introduction of the GST in 2000, that value has increased 4.1 per cent each year on average. It reckons that 66.3 million trade books were sold by Australian-based booksellers, increasing by 6.4 per cent between 2004 and 2010. Sales of e-books are increasing - Penguin reckons these grew 33 per cent in the first six months of this year and now comprise 19 per cent of its revenues worldwide - and that puts increasing pressure on traditional bookshops. Digital distribution has changed the publishing world irrevocably. ''If you can press a button and [a book] can be available electronically, that has implications for the territorial-based publishing model,'' Makinson says. ''[It] gives some advantage to the publisher that … can take a global view on the relationships with digital intermediaries, such as Google and Apple and Amazon and others; that can monitor copyright infringement and piracy on a global basis; that can develop a brand identity - whether it's Penguin or Random House - on a global basis … and that can do its best to support physical retailers as well as online retailers in all the major markets.''

Makinson says the strength of Amazon as a retailer was one of the challenges ''but it was by no means the only and not the overwhelming issue either''. But other publishers are not sure. Hachette Australia's Sydney-based chief executive, Malcolm Edwards, says the merger is good for the industry because ''the balance has gone the wrong way in that we have an unbelievably dominant retailer, which is threatening the very fabric of creativity. ''If you believe in monopolies and totalitarian states then you probably wouldn't think it was a bad idea, but I think when you've got in the US and UK [a situation where] Amazon would have something like 80 per cent of the e-book market, that can't be good. On a business level, a lack of competition is not in the consumer's interest.'' Edwards says if you have the emergence of large and dominant retailers on a global level, the natural business response is for suppliers to get bigger and merge. He, too, is sure there are more mergers to come. ''Everything's for sale all the time and everybody is a buyer. It's a fact of life. We [Hachette] have been an acquisitive organisation, we continue to be one but we're not going to overpay.'' Most industry observers expect Penguin Random House to make significant economies in ''back office'' operations such as distribution. Random and Penguin have strong, separate distribution businesses in Australia that look after their own product and that of other publishers. Makinson says that at this stage, management is analysing the two companies to see where they overlap and where they sit comfortably alongside each other.

''We are asking ourselves … how many warehouses we are going to need in 20, 10 or five years' time in any case,'' Makinson says. ''This is now a conversation we will be having with our partners in Random House, but … it's not a new discussion.'' According to Text Publishing publisher Michael Heyward, the issue for all big companies that both publish and distribute is how they deal with the certainty that they're going to have fewer books in their warehouses than they did five years ago. And what about the editorial side of the business? Penguin has only been in its spanking new Melbourne home for a few months; Random is well established in north Sydney. There is some angst in Melbourne that the only multinational publisher in the UNESCO City of Literature could shift away. Makinson is adamant that won't happen. But surely there will be economies in the operation? ''The editorial organisation - by editorial I mean marketing and publicity as well as editorial - that activity will be unaffected by this combination. So we will have the same number of titles, the same number of editors, the same number of imprints. Agents will pick up the phone or email exactly the same people they were emailing before this transaction happened.''

While he does see some areas that might make sense to do together, travel for example - ''not author-driven publishing categories'' - he wants there to be rigorous competition between the two editorial arms. In the US and Britain, Random is the dominant partner, with greater market share. The situation in Australia is the reverse: Penguin's share has - at least until the advent of Fifty Shades of Grey - been larger than Random's. Last year, Penguin had 14 per cent compared with Random's 11 per cent. Now, according to Nielsen BookScan, they are both equal, although this week the top-three best-selling authors were from the Penguin stable - Jeff Kinney, Jamie Oliver and Bryce Courtenay - and Penguin believes it will regain its dominant position in the local market. Makinson sees this strength in markets outside the US and Britain as another of Penguin's attractions for Random, along with its strong position in emerging markets such as India and China. One thing that does have to change in this new, increasingly digital world is the way publishers approach consumers. ''The pressures to which we are responding rather urgently as an industry are about how … content is received by the reader,'' Makinson says, ''and we are trying to listen to the reader to understand how the reader wants to receive that content, what the reader is prepared to pay for it, what enhancements to that content the reader would like in a digital environment.'' Hachette's Edwards is blunt: ''We spent many years working out how to sell to bookshops. We now have to look about and work out what the consumer wants. We've always relied on bookshops to tell us that.''

Interestingly, neither the Australian Publishers Association nor the Australian Society of Authors has an official view on the merger. ASA chief executive Angelo Loukakis says authors want more players in publishing rather than fewer. And he sees the deal as simply another development in a fluid environment that is hard to keep up with: ''The problem is that online retailers now run publishing.'' APA president Louise Adler says the merger is a matter of commercial interest for two major publishers. However, when Adler has her publisher's hat on - she is chief executive of Melbourne University Publishing - she worries that the local industry is struggling. ''Sales are down and the gap between mass-market titles such as Fifty Shades of Grey or Bryce Courtenay and the rest is growing. The capacity to publish heartland Australian books is increasingly difficult. The space in which authors, readers and bookshops can flourish is narrowing. Those of us committed to new Australian writing will find the space is narrowing, but that's the state of the industry rather than anything to do with the merger.'' One literary agent said her concerns were whether writers would be paid fair royalties. ''The industry is contracting anyway. They always say that things will be the same but it usually isn't. A merger usually results in contraction.'' That might be the case, but Text's Heyward does see space and opportunities ahead.

''I think there is something in the ecology of book publishing which allows smaller players to make a valid contribution, and if you end up with a handful of really big companies, my prediction is that that will open the door for smaller companies to emerge.''