Register now for FREE unlimited access to Reuters.com
02-Nov-2021 - The Department of Justice's (DOJ) Antitrust Division sued to block a merger between Penguin Random House and Simon & Schuster. The DOJ alleged that the merger would result in monopsony power, allowing, among other things, the merged firm to reduce the price paid to authors for their work, reduce the scope of services publishers offer authors, and harm consumers by reducing the quantity and variety of books published.
On November 2, 2021, the Department of Justice (DOJ) Antitrust Division sued to block Penguin Random House, LLC's acquisition of Simon & Schuster, Inc. Penguin is the largest book publisher in the world, and Simon & Schuster is the fourth largest in the US. According to the DOJ, the merged firm would have US revenues equal to twice that of the next rival. The acquisition was announced on November 25, 2020, and valued at approximately $2.175 billion.
According to the complaint, book publishing in the US is highly concentrated. There are generally considered to be five large publishers, known as the Big Five. Penguin and Simon & Schuster are two of those firms. The large publishers have a significant advantage over smaller firms because they can, for example:
Register now for FREE unlimited access to Reuters.com
Spread risk over a large number of books and authors.
Offer authors more extensive editorial, production, marketing, and publicity necessary for a top-selling book.
Pay higher advances.
Most authors hire an agent to solicit competing bids from publishers and to negotiate a license for publishing rights with the winning bidder. In addition to paying advances and royalties, publishers provide a suite of other services to authors to increase publicity and sales, and also to facilitate printing and distribution. According to the complaint, authors would be left with fewer competitive alternatives and would have less bargaining power post-merger. Ultimately, consumers would suffer from reduced book quantity and quality.
The complaint, which alleged that the merger would substantially lessen competition in violation of Section 7 of the Clayton Act, argued that the merger would:
Eliminate competition between the firms.
Facilitate coordination between the merged firm and the remaining Big Five publishers.
Reduce author income.
Reduce the quantity and quality of books published.
Reduce quality, service, choice, and innovation.
For more on legal standards under Section 7, see Practice Note, Section 7 of the Clayton Act: Overview.
The DOJ seeks to enjoin the merger and recover costs.
The complaint alleged two product markets:
Acquisition of US publishing rights to books from authors (content acquisition) (see US Publishing Rights from All Authors).
Acquisition of US publishing rights to anticipated top-selling books (see US Publishing Rights from Anticipated Top-Selling Books).
The complaint alleged that the relevant geographic market is global. The complaint noted that while publishers compete to acquire and publish books in the US, the authors may live anywhere in the world. Likewise, the publishers themselves may exist anywhere in the world.
The DOJ alleged that the merger would create a monopsony. According to the complaint, in both markets, if there was only one buyer of a product (a hypothetical monopsonist), that buyer could profitably impose a small but significant and non-transitory reduction in price (SSNRP) on at least one product purchased by the merging firms in the relevant market.
In each market, according to the complaint, authors would not be able to deter a hypothetical monopsonist by turning to alternative arrangements such as:
Content acquisition involves authors selling the rights to publish their content in the US, and in return, publishers agree to provide a number of services to authors, including editorial, design, printing, sales and distribution, marketing, and publicity. Different publishers can offer different services. In addition, advances, which are usually the primary source of income for authors, are individually negotiated. There is significant flexibility for publishers to bid higher or lower depending on the competition they face to obtain the rights to a particular book.
The acquisition of the rights to anticipated top-selling books is narrower than, and included in, the market for the acquisition of US publishing rights to books from authors. According to the complaint, these authors generally obtain higher advances than other authors, as the books are expected to sell more copies. According to the complaint, the publishing industry has certain characteristics that make it appropriate to define the market based on certain types of sellers, in this case, authors of anticipated top-selling books, including that:
Advances are individually negotiated.
Publishers have information that allows them to identify authors that have fewer competitive options.
According to the complaint, the relevant markets are highly concentrated and have become more so through consolidation in recent years. The merger would harm competition:
Through unilateral conduct by reducing head-to-head competition (see Reduction in Head-to-Head Competition).
Through coordinated conduct among the remaining large publishers (see Increased Coordination).
The complaint alleges that head-to-head competition would be reduced by the merger, resulting in:
Lower pay for authors.
Reduced quantity and quality of books published.
The complaint provides a number of examples where competition between the firms has resulted in significantly higher advances paid to authors. In many cases, the merging firms were the final two firms bidding for the publishing rights. The DOJ alleged that while smaller publishers can be competitive alternatives in some cases, many other authors consider Penguin and Simon & Schuster to be close substitutes and have benefitted from the competition between the firms.
If authors are paid less, according to the DOJ, fewer will be able to make a living writing books, which could result in fewer diverse books being published.
The DOJ alleged that the merger would facilitate increased coordination among the remaining major publishers. According to the complaint, a number of facets of the publishing industry make it vulnerable to coordination, including:
A few large players dominate the industry.
The merger would create a key leader for other firms to follow.
Information about rival publishers is readily available to competitors.
Communications between employees of rival publishers is common, making deviations from any industry agreement more easy to detect.
The industry has a history of collusion (see Legal Update, The DOJ Sues Apple and E-book Publishers for Conspiring to Raise the Price of E-books).
According to the complaint, entry barriers are high, and new entry or repositioning is unlikely to counteract the anticompetitive effects of the merger. Barriers to entry or expansion include a lack of:
Sufficient capital for a publisher to create an inventory of backlist titles, which are crucial to fund author advances for new books.
Name recognition and demonstrated track record to convince authors of anticipated top-selling books to switch publishers.
In addition, the DOJ discounted any claims that:
The merger would create sufficient synergies to outweigh anticipated anticompetitive effects.
The merged firm would provide a counterweight to Amazon's alleged buying power.
The complaint noted a number of internal communications undermining in particular the claims that the merger would serve as a counterweight to Amazon.
Finally, the DOJ also claimed that the firms' proposal to fix the deal was inadequate. The parties agreed to allow Penguin imprints and legacy Simon & Schuster imprints to continue bidding against one another up to an unspecified amount. The DOJ, however, noted that the proposal makes no economic sense, could be evaded or violated without detection, and is unenforceable.
For more on how the antitrust agencies analyze mergers, see Practice Note, How Antitrust Agencies Analyze M&A.