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From Publishers Weekly:

After months of anticipation, the government’s bid to block Penguin Random House’s acquisition of rival Big Five publisher Simon & Schuster got underway in Washington, D.C., on August 1. It wasn’t exactly an electrifying start.

In opening arguments, there were no surprises. The parties largely stuck to their pre-trial briefs, with the government asserting that a merger would harm authors and the defense insisting on the opposite. Then the government’s first witness, Hachette Book Group CEO Michael Pietsch, took the stand to offer a basic, foundational view of the current competitive landscape in the publishing world, with many a detour into the nuts and bolts of the business.

The result was a sort of meandering publishing 101. In halting, often clipped responses, Pietsch, a 45-year publishing veteran who estimated he has personally acquired between 300-400 titles over his career—and overseen many more acquisitions as an executive—attempted to explain to the court how basic things like book advances and rights auctions work, and how publishers manage their bidding strategies.

But the key points of his testimony involved the competition for book rights, in which Pietsch explained in no uncertain terms that when Hachette loses a book they’ve bid on, they “very seldom” lose it to a publisher outside the Big Five, and even more rarely when it comes books with advances over $250,000, the portion of the market the government is focusing its case on. In fact, Pietsch revealed that Hachette keeps a running list of the books the publisher loses out on over $500,000—called “The Ones That Got Away”—and of the 302 books on the list (at the time the list was entered into evidence) Pietsch told the court that Hachette lost the most to PRH (124), followed by their fellow Big Five publishers in order of size: HarperCollins, S&S, and Macmillan.

Under questioning from the government, Pietsch also outlined the significant advantages that the Big Five publishers hold over their smaller competitors, chief among them their large backlists, cobbled together over decades of acquiring other companies (HBG has made six acquisitions under Pietsch). A bigger backlist means more revenue, and importantly more profitable revenue—and more revenue means more resources, and a greater tolerance for taking risks on higher advances. Hachette derives roughly $300 million a year, roughly a third of its revenue, from backlist sales, Pietsch testified, noting that smaller publishers do not have such a cushion, and later adding that it is “not conceivable” that a new entrant in the publishing business could build a competitive backlist advantage “organically.”

Furthermore, Pietsch explained, the Big Five publishers enjoy other significant scale advantages over other publishers, including more media pull, review attention, as well as marketing and retail advantages. He noted that Amazon Publishing, despite its parent company’s size and influence in the book business, has not emerged as a competitor where book acquisitions are concerned—nor is the self-publishing industry Amazon helped forge. “Anyone can publish a book now, and that’s a wonderful thing,” Pietsch said—but those books and authors simply do not compete with the major publishers.

When finally asked for his take on how for a PRH/S&S merger would impact the industry, Pietsch expressed a litany of concerns. Advances would likely decline, he suggested, as one of “the major houses” would be subsumed, decreasing the number of bidders for a work. Title count would also likely go down, he surmised, as there is likely some redundancy between PRH’s and S&S’s publishing programs that would be eliminated. Pietsch also expressed concerns about the impact on the “variety” of books published and the risk of “homogenization.”

On cross-examination, defense counsel Daniel M. Petrocelli engaged in a few strained exchanges with Pietsch. These included a line of questioning about bidding strategies, which was intended to suggest that PRH would be unwise to pursue a strategy of offering lowering advances because other publishers—including Hachette—would simply step up and win the books, but instead left Pietsch questioning Petrocelli’s logic.

One of the punchier exchanges involved a discussion of the potential buyers for S&S should the merger be blocked—including Hachette, with Pietsch admitting that he would like to see parent company Hachette Livre bid on S&S even though the company did not do so in 2020.

“So you’re not concerned with a 5-4 merger,” Petrocelli remarked, to which Pietsch responded that he was never concerned with a merger taking the Big Five down to a Big Four, but with the creation of one “super dominant publisher” that is “so far out of scale” with the rest of the business, a view shared by many industry insiders. The problem isn’t so much that S&S is being acquired, Pietsch suggested, the problem is that Penguin Random House, already the largest Big Five publisher, was acquiring it.

Link to the rest at Publishers Weekly

2 thoughts on “DOJ v. PRH”

  1. Keep in mind, too, that S&S has certain baggage trailers full of questionable stuff being dragged behind it that make a “sale” to someone not already in the publishing industry — or at least the entertainment industry — somewhat… inordinately, rather… complex. And AFAIK it’s even worse in the non-trade portions of S&S.

    The key problem is that S&S is a single discrete, non-core line of business that can (at least in theory) be sold off to help service the debt Ms Redstone’s shenanigans imposed on the parent entities from about 2004 on. (At least some of which was “ordinarily prudent,”† but it was still debt.)

    † If anything in the entertainment industry qualifies as “ordinarily prudent,” that is. Which is rather unlikely in an industry whose rationality would be greatly increased by cloning Jack Torrance several times and installing him on the Board of Directors, which is all set to meet at the Overlook Hotel to consider the PRH merger proposal in detail.

  2. I wonder if the feds will offer up an explanation of what happens to S&S if the Penguin is blocked?
    Lagarde was smart enough not to bid on it in the first place. Is it really any better for “auth ors” with S&S going to the Murdocks? There will still be only four BPHs.
    If venture capitalists saw future value in S&S they would have bid on it. Amazon didn’t.

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