From The New York Times:
Penguin Random House, the largest book publisher in the United States, said in a court filing on Monday that its plan to buy a competitor, Simon & Schuster, would be a boon for the industry, benefiting authors, booksellers and readers.
The Justice Department has disagreed. Last month, it sued to stop the $2.18 billion acquisition, as the Biden administration takes a more skeptical view of corporate consolidation across industries.
In its complaint, the department attacked the deal on the grounds that it would harm best-selling authors, since they could potentially receive lower pay with one fewer publisher competing to acquire their books. It documented several bidding wars between Penguin Random House and Simon & Schuster that went into six and seven figures and argued that if the proposed merger goes through, those authors wouldn’t have received such lucrative advances.
By focusing on authors’ pay, the Justice Department signaled that it is taking a more sweeping view of antitrust law. For decades, it has been used to block deals on the grounds that consumers can be harmed when big companies with few competitors can raise their prices. But in its suit to block Penguin Random House, the government does not claim that the prices for books will rise for readers or for booksellers, but instead argues that if Penguin Random House gets even larger, it will have more leverage over authors.
In the joint response filed on Monday in the United States District Court for the District of Columbia, Penguin Random House and Simon & Schuster said the government’s argument misunderstands the way the publishing industry functions.
. . . .
“The government wants to block the merger under the misguided theory that it will diminish compensation to just the highest-paid authors,” said Daniel Petrocelli, a lawyer representing Penguin Random House and its parent company, Bertelsmann, in an interview on Monday. “That is legally, economically and factually wrong, and it ignores the vast majority of authors who will indisputably benefit from the transaction.”
Penguin Random House is defending its plan in part because it stands to lose millions if it does not go through. Acquisitions like these often come with termination fees that are owed to the prospective seller if the transaction doesn’t close. In this case, Penguin Random House would have to pay Simon & Schuster’s seller, ViacomCBS, about $200 million.
Monday’s filing described the book industry as more than just the “Big Five” that consists of Penguin Random House, Simon & Schuster, HarperCollins, Hachette and Macmillan. There are other major players like Disney, Amazon and Scholastic, along with hundreds of small and midsize publishing houses. On any given deal, Penguin Random House said, “at least one” smaller publisher will often compete, and some of the country’s highest-selling authors, including J.K. Rowling (“Harry Potter”) and Jeff Kinney (“Diary of a Wimpy Kid”), are published by companies outside the big five.
Penguin Random House criticized the government for focusing on the relatively small but influential group of authors who command the highest advances, calling it an “invented market.” Publishers do not “divide the market for book rights into distinct categories based on the author’s compensation,” it said in the response.
“This slender piece of the market does not exist,” Mr. Petrocelli said. “There is no objectively definable market for authors of anticipated top-selling books.”
Many writers outside that group, Penguin Random House said, would stand to make more money as a result of the deal. Authors now published by Simon & Schuster would be brought into the Penguin Random House supply chain, widely considered to be the best in the business, which would make their work more visible and available. The company’s supply chain and distribution network also helps neighborhood bookstores compete with Amazon, the response said.
There is little dispute that the proposed acquisition would reshape publishing, which has been transformed by increasing consolidation over the past decade.
The merger of Penguin and Random House in 2013 helped to accelerate an arms race among other publishers who felt they had to bulk up to compete with the enormous new company. Hachette Book Group has expanded its catalog by buying successful independent publishers, including Perseus Books in 2016 and Workman Publishing this year. HarperCollins has also made acquisitions central to its growth strategy, purchasing the romance publisher Harlequin in 2014, and earlier this year it acquired Houghton Mifflin Harcourt Books and Media, the trade publishing division of Houghton Mifflin Harcourt, for $349 million.
But in its court filing on Monday, Penguin Random House said that since 2013, competition in the industry has grown. More titles are published every year, it said, and more than half of the dollars spent on hardcover and paperback books in the United States now go to publishers outside the big five, a higher percentage than before the 2013 merger.
. . . .
Eleanor Fox, a professor at New York University School of Law who specializes in antitrust and competition policy, said the government’s argument was unusual in that it focused on top author earnings rather than harm to consumers or the market as a whole.
“It’s somewhat unique in this time to focus on the supply market and argue that the suppliers will be exploited,” she said. “They have a much weaker case about consumer pricing.”
Link to the rest at The New York Times (Sorry, but the Times thinks you should pay to visit their website and look at the ads you see there. You can sign up for a limited free subscription, however.)
“But in its court filing on Monday, Penguin Random House said that since 2013, competition in the industry has grown. More titles are published every year, it said, and more than half of the dollars spent on hardcover and paperback books in the United States now go to publishers outside the big five, a higher percentage than before the 2013 merger.”
Ah, so *now* they admit their consolidation is about survival and trying to keep up apperances of dominantion. 😀
Back in 2011 during the Agency conspiracy, the Big 5 controlled two thirds of all book sales on Amazon. Ten years and a horde of mergers later, they’ll admit to “less than 50%. Maybe if the suit progresses we’ll see some real numbers (32%, maybe). If the case lasts long enough they might lose their biggest talking point with dreamers.
The focus on “high advance authors” strikes me as amusing because S&S has long been the biggest purveyor of influence buying politician books. The randy Penguin? Not so much. So the feds are obviously responding to the IdiotPoliticians™ concerns of losing their sugar daddy. Because as the penguins correctly point out:
“Penguin Random House criticized the government for focusing on the relatively small but influential group of authors who command the highest advances, calling it an “invented market.” Publishers do not “divide the market for book rights into distinct categories based on the author’s compensation,” it said in the response.
“This slender piece of the market does not exist,” Mr. Petrocelli said. “There is no objectively definable market for authors of anticipated top-selling books.”
Penguin’s problem is that this kind of trumped up, artificially defined “relevant market” is the same kind of sleight of hand used to try to breakup Microsoft ages ago. Other than costing MS a few billion bucks (promptly recouped through retail price hikes) and distracting them from the rise of mobile, facilitating the rise of two more mega companies nothing was achieved beyond a few paydays for the execs that ran their rozdkill companies into the ground.
Expect the same here: ViacomCBS has no use for S&S, has no money to spare to waste on politician books guaranteed not to sell in tbe age of 24×7 talking heads, and will only spin it off to sink or swim on its own. Most likely it will sink and go the way of RKO Radio and United Artists.
And that is assuming they find another Penfield Jackson to act as a hanging judge. Considering how his career and reputation went afterwards they probably won’t find many volunters.
This is the wrong fight at the wrong time over the wrong deal. Which means it is being driven by the wrong interests. Nothing good will come of this. In fact, odds are nothing will come of it.
Felix, a better analogy from the recent past is MCA than either RKO Radio or United Artists (both of which had significant embezzlement problems).
The real “problem” with S&S is that its greatest valuation would lie not in breakup, but in not repeating past errors. That necessarily means that either entrenched management (both structurally and individually) has to admit to its past errors, demonstrate ability to learn and be flexible in going forward, and then actually do so… or has to be completely excised. The fun part is seeing which individuals really are of the “entrenched management” mindset, as opposed to having “gone along to get along” and get promoted to where they can make a difference.
I’ve seen this before. It was called “integrating women into the newfangled all-volunteer force.” And it’s not pretty; <sarcasm> you can’t put lipstick on that pig </sarcasm> (reflexiveness entirely intentional).
Unless and until the timeframe for analysis of financial results at S&S stretches from “next quarter” (as required for a publicly-traded company) to “next five years,” Not. Gonna. Happen. No matter who takes over from the present, exhausted management.
I’d suggest thd best fix for S&S is along the lines of the hoary old joke:
“Q: How do you teach an old physist new tricks?”
” A: You can’t. You can only take him out back, shoot him, and bring in a new physicist. ”
The Manhattan Mafia isn’t teachable. Just look at tbeir attempts to be diverse and woke.
The only fix is to fire everybody and bring in new folks. Hence my comparo to RKO. The IP is valuable. The staff, not so much.
Problem is we’re in a golden age of creative content distribution. There is no shortage of quality content to be found by kicking over rocks. Kinda devalues the S&S IP. Hence nobody but two other BPHs bid on S&S. Not even “vulture capitalists” want anything to do with that business.
Yet another case where the feds need to just let it go.
If they really want a precedent to challenge the Chicago school, go look for it elsewhere. There are antitrust cases to be made out there, cartels to be broken, but they go against tbe interests of the IdiotPoliticians’ “sponsors”.
Car dealership laws, anybody?
I tend to agree with Felix on this issue. I don’t think S&S can be fixed. (Ditto for any large New York publisher.)
CBS has far more valuable assets to worry about than S&S. Any bigger fool with a bit of extra money could own S&S overnight.
And in reality, I suppose I’m not actually disagreeing with Felix, because (as I mentioned) the preconditions for it being possible to “fix” S&S are Not. Gonna. Happen.
Leaving aside that they would require humility and acceptance of responsibility, the real problem is that “return to acceptable-to-securities-markets profitability” would be an uncertain time at least five years in the future makes it completely impossible absent a fundamental change in the commercial context. Whether it should happen is a different question entirely; my belief is that it won’t regardless.
Speaking of car dealerships:
https://finance.yahoo.com/news/cant-buy-tesla-states-161318245.html
I’ve been shrieking about “monopsony/oligopsony issues matter to antitrust enforcement, too” since before I was a lawyer. If you really want to see just how f*cked up things get when the “customer” is restricted in from whom it can buy based on consolidation among suppliers, consider the F–22 and F–35… and, even worse, parts therefore. (Those are just obvious, unclassified examples. Do not get me started on submarines and my utter contempt for USN acquisitions — a contempt generally shared by USN officers who’ve been forced to engage with it.) But because that didn’t have an immediate, discernable, unambiguous, and bad-math-while-ignoring -Markov-chains effect on “consumer price,”* the Chicago school of antitrust that arose in the 1960s and 1970s rejected it, became dominant in antitrust litigation, and… well, here we are.
The fundamental problem with this lawsuit is that it’s engaging with an aspect of the Sherman and Clayton Acts that has been buried for half a century, so nobody knows how to communicate about it effectively — not those trying to advocate, and certainly not those trying to make decisions (whether in the “designated decisionmaker” or “I’m a member of the affected public” sense). Both sides have blown it; I’m not claiming I — or anyone else — would necessarily have done better, but I can spot what the Warden in Cool Hand Luke called a “failyuah to communicate.”
* One should note that the definition of “consumer price” is itself extremely squirrely, but that’s for another time. And it involves a lot of qualitative, not quantitative, judgments and examples; not to mention the distinction between “raw price” and “purchase value” that are also rejected by the Chicago school. The literary market place cannot and should not be dominated by Velvet Jones… even at the low, low prices of those self-help books!
Have you seen Matt Stoller’s substack site, BIG?
https://mattstoller.substack.com/?no_cover=true
I’m all too familiar with him. And you owe me a new keyboard for making this comparison in this topic, thanks to a coffee-snort, Tony — care to guess who published Stoller’s book?
Exactly what is Chicago rejecting? The Chicago School recognizes that individual tastes and preferences drive individual valuation which drives the demand component of price.
The government is moving back to the roots of progressive economics that emerged in the early 1900s. One of those ideas is that consumers should be willing to pay more so suppliers can thrive. In books, Franklin Foer, Scott Turrow, and the guy who runs SmashWords have enthusiastically written in support of this notion.