When the country’s largest publisher, Penguin Random House, completed a deal to acquire its competitor Simon & Schuster in the fall of 2020, publishing executives and antitrust experts predicted the merger would draw intense scrutiny from state regulators.
The merger would dramatically change the literary landscape, reducing the number of major publishers – known in the industry as the Big Five – to four. (Or, as one industry analyst put it, it could make the big one and the other three.)
Such a shift could sweep through the industry, potentially affecting smaller publishers, authors and ultimately the books that reach readers, novelist Stephen King, who has been asked by the government to testify at the trial, said in an email.
“As big publishers consolidate, it becomes harder for indie publishers to survive,” King said. “And that’s where the good writers just start and learn their skills.”
Last fall, the Biden administration sued to block the $2.18 billion sale as part of its new and more aggressive stance on corporate consolidation. The trial begins Monday with hearings in the US District Court for the District of Columbia, where Judge Florence Pan will preside.
The Justice Department and Penguin Random House’s parent company, Bertelsmann, called a parade of high-profile publishing executives to testify. Among them Markus Dohle, Managing Director of Penguin Random House, and Jonathan Karp, Managing Director of Simon & Schuster, as well as executives from other publishers, literary agents and a handful of authors.
Here’s what we know about the case and its impact on the book business.
Why is the government trying to block this deal?
The Justice Department says this merger would lead to over-consolidation in the publishing industry and create a so-called monopsony. A monopoly refers to a seller having too much power over consumers; A monopsony has too much power over suppliers. In this case, the government says, those suppliers are authors of books who are expected to be bestsellers, who buy publishers for advances of more than $250,000.
The Biden administration says that by reducing the number of big publishers — who have the budgets to compete for the biggest books most often — there would be less competition for those titles. This in turn would reduce the advances paid to authors. As a result, “fewer authors will be able to make a living from writing,” the Justice Department argued in a pretrial brief.
What are Penguin Random House’s arguments for the deal?
Bertelsmann, which owns Penguin Random House, argues that the acquisition would increase competition in the industry and benefit both authors and readers.
The transaction gives Simon & Schuster authors access to Penguin Random House’s supply chain and distribution networks, which are widely recognized as the best in the industry. The efficiencies achieved by combining the two companies will allow authors to be paid more, which would then encourage other publishers to expand their offerings to compete.
It is argued that the publishing industry is far more than just the Big Five; other publishers are Amazon and Disney as well as “countless” medium-sized and smaller publishers. She believes the government’s argument about competition and author compensation overstates the role of auctions in publishers’ purchases of manuscripts and exaggerates how often Penguin Random House and Simon & Schuster find themselves in head-to-head auctions.
Also, Bertelsmann claims that Simon & Schuster can bid against other Penguin Random House imprints for books, so authors will still have plenty of potential bidders.
What impact would the sale have on the publishing industry?
There is no question that a merger between two of the largest publishing companies in the United States would have a profound impact on the business and culture of publishing.
Like Hollywood, the book business is increasingly dependent on blockbusters for profit, and companies will spend enormous sums of money to buy books by well-known novelists such as John Grisham, EL James, Margaret Atwood and Nora Roberts, or by celebrities and public figures such as Barack and Michelle Obama (all published by Penguin Random House).
Penguin Random House is by far the largest publisher in the United States, has more than 90 imprints and publishes around 2,000 books a year. If the merger occurs, Simon & Schuster will receive more than 30 imprints and around 1,000 titles per year.
The combined company would produce a disproportionate percentage of top-selling books, industry analysts say. Last year, Penguin Random House titles accounted for 38 percent of the top 100 books in print, according to NPD BookScan, while Simon & Schuster books accounted for 11 percent.
Penguin Random House, which already has industry-leading printing, mailing and distribution capabilities, would also attract Simon & Schuster’s warehousing and distribution business to a network of smaller publishers.
The merger would leave three other major publishers — Hachette, Macmillan, and HarperCollins — and could spur further industry consolidation as other publishers gear up to compete with an even more massive competitor.
What happens if the court blocks the deal?
Failure of the deal would be expensive for Penguin Random House. Under the terms of the sale agreement, Penguin Random House will have to pay a fee of around $200 million to Paramount Global, the conglomerate that owns Simon & Schuster, if the deal doesn’t go through.
For Simon & Schuster, completing the sale would leave the company in limbo. According to court documents, evidence presented during the trial will show that Simon & Schuster will be divested “one way or another” by Paramount Global.
It’s unclear whether another major publisher like HarperCollins or Hachette would want to risk scrutiny from regulators with an offer. A private equity firm could buy the company, but publishing insiders fear it could result in massive staff cuts and fewer titles at Simon & Schuster.
What are the antitrust implications?
The lawsuit will examine whether the government can pursue further antitrust cases aimed at the impact of corporate concentration on how much workers – in this case authors of big books – are paid.
A group of progressive academics, lawyers and economists have argued that a declining number of employers has limited options for workers and negatively impacted their pay. The government’s case will show how such arguments fare in court.
They’re not the only lawyers trying: For years, a mixed martial artist group has been pursuing a class action lawsuit against the Ultimate Fighting Championship. They have argued that the UFC is so dominant in promoting the sport that it is able to keep wages low, which the UFC denies. A court ruled last year that the militants could pursue most of the case as a group, but the merits of the case have yet to be determined.
What does this case say about the Biden administration’s approach to antitrust enforcement?
This case is another example of the government’s aggressive approach to competition policy, which has been praised by the left.
President Biden signed an executive order in June 2021 aimed at increasing competition across the economy, in part by encouraging the Federal Trade Commission to focus on how concentration can harm workers. In the order, he urged the agency to consider new rules to limit non-competition clauses, which campaigners say make it harder for workers to take up better job offers and prevent employers from sharing wage information with each other to lower wages.
The FTC and Department of Justice have also attempted to test novel legal theories in court. The FTC on Wednesday sought an injunction to stop Meta, the company formerly known as Facebook, from buying a virtual reality studio, reflecting a new focus on how the tech giants buy startups. The Justice Department has also challenged United Health Group’s purchase of a health technology company, arguing that it would give the insurer access to sensitive data about its competitors. However, it remains to be seen how the courts will respond to these efforts.