Justice Department Sues To Block Penguin Random House Merger With Simon & Schuster

Merrick Garland (Photo by Lenin Nolly/NurPhoto via AP)

The Justice Department sued to block Penguin Random House’s proposed merger with Simon & Schuster, arguing that the transaction would create a behemoth publisher likely to drive down payments to authors and likely to “reduce quality, service, choice, and innovation.”

The lawsuit (read it here), filed in U.S. District Court in the District of Columbia on Tuesday, sets up another high-profile antitrust battle in the media sector.

“The merger would give Penguin Random House outsized influence over who and what is published, and how much authors are paid for their work,” the DOJ said in its complaint.

In the complaint, the government claimed that the merger is “presumptively unlawful,” leaning heavily on the fact that it would combine the largest book publisher, Penguin Random House, with the fourth in the marketplace, Simon & Schuster, creating a corporation with twice the revenues of its next closest competitor.

Attorney General Merrick Garland said in a statement, “If the world’s largest book publisher is permitted to acquire one of its biggest rivals, it will have unprecedented control over this important industry. American authors and consumers will pay the price of this anticompetitive merger – lower advances for authors and ultimately fewer books and less variety for consumers.”

Acting Assistant Attorney General Richard A. Powers said that the lawsuit “will prevent further consolidation in an industry that has a history of collusion.”

The lawsuit claims that Penguin Random House’s $2.175 billion purchase of Simon & Schuster, currently a unit of ViacomCBS, would give the new company close to half the market for the most anticipated books.

The DOJ said in announcing the lawsuit, “According to its own documents as described in the complaint, Penguin Random House views the U.S. publishing market as an ‘oligopoly’ and its acquisition of Simon & Schuster is intended to ‘cement’ its position as the dominant publisher in the United States.”

The lawsuit concentrates on the impact that the transaction would have on author payments, rather than on consumer prices, as it identifies a host of instances where the two publishers competed against each other for the U.S. rights to books.

“Penguin Random House and Simon & Schuster are frequently invited by agents to bid in auctions for the rights to these books, and they are often the final two bidders. Competition between Penguin Random House and Simon & Schuster has resulted in higher advances, better services, and more favorable contract terms for authors.”

The lawsuit also reflects promises of Joe Biden’s administration to take a more robust stance toward antitrust enforcement, even as the president’s nominee to take the reins of the Antitrust Division, Jonathan Kanter, has not yet been confirmed. Biden’s choice to lead the Federal Trade Commission, Lina Khan, also has argued for rigorous enforcement, particularly in the tech sector. The FTC is currently reviewing Amazon’s proposed acquisition of MGM.

Penguin Random House and Simon & Schuster issued a statement in which they said, “The publishing industry is, and following this transaction will remain, a vibrant and highly competitive environment. PRH and S&S compete with many other publishers including large trade publishers, newer entrants like Amazon, and a range of mid-size and smaller publishers all capable of competing for future titles from established and emerging authors.”

The publishers added, “Blocking the transaction would harm the very authors DOJ purports to protect. We will fight this lawsuit vigorously and look forward to PRH serving as the steward for this storied publishing house in the years to come.”

The publishers have retained Daniel Petrocelli of O’Melveny & Myers as their lead attorney. He represented AT&T when the Justice Department sued to block its merger with Time Warner. After a trial judge ruled in favor of AT&T-Time Warner, an a federal appeals court upheld the decision.

He gave a preview of his defense in the publishers’ case. In a statement, he argued that the Justice Department “has not found, nor does it allege, that the combination will reduce competition in the sale of books. The publishing industry is strong and vibrant and has seen strong growth at all levels. We are confident that the robust and competitive landscape that exists will ensure a decision that the acquisition will promote, not harm, competition.”

But unlike the AT&T-Time Warner transaction, the two publishers’ merger is a horizontal one, i.e. it would remove a direct competitor from the marketplace and reduce the “big five” publishers to four. Those horizontal transactions historically have traditionally been easier for the federal government to block.

The government also gave an indication of some of the evidence it would present in its case. In its complaint, it noted that when it was announced that Simon & Schuster would be put up for sale, “its current CEO wrote to one of its bestselling authors: ‘I’m pretty sure that the Department of Justice wouldn’t allow Penguin Random House to buy us, but that’s assuming we still have a Department of Justice.'”

The DOJ also noted that the chairman of Bertelsmann, Penguin Random House’s parent, “acknowledged that Penguin Random House posed greater ‘antitrust risks’ than any other potential buyer of Simon & Schuster. As a consequence of that risk, Bertelsmann understood that it would have to pay a significant premium over other bidders to acquire Simon & Schuster.”

The government also targeted one of the arguments for the merger, that it would be a counterweight to the buying power of Amazon. The DOJ claimed that internal documents show that the combined company “plans to embrace Amazon even more closely after the merger.”

“For example, in seeking approval from Bertelsmann’s Supervisory Board to pursue Simon & Schuster, Penguin Random House executives stated that the acquisition would advance their ‘[g]oal to be an ‘[e]xceptional partner for Amazon,'” the complaint stated.

The government defined two “relevant markets” in assessing the impact that the merger would have on competition: The acquisition of U.S. publishing rights to books from authors, and a narrow landscape of the acquisition of U.S. publishing rights to anticipated top selling books. In the complaint, the DOJ argued that “a hypothetical monopsonist of anticipated top-selling books would profitably reduce advances paid to authors of anticipated top-selling by a small but significant, non-transitory amount.”

The lawsuit’s focus on authors was greeted by public interest groups as a welcome development, given that so much of antitrust enforcement has emphasized the impact that mergers will have on consumers.  “While the harms this merger would cause to readers are real, too often, antitrust discussions leave out the harms to creators caused by consolidation,” said Alex Petros, policy counsel at Public Knowledge. The DOJ and the FTC are planning a workshop next month on competition in labor markets.

The publishers, however, noted that the Justice Department was not alleging that the combination would harm competition in the sale of books, making the case that the “market for selling books is unconcentrated and the combined shares are well below the levels of concern.”

“DOJ alleges that authors with a focus on those who tend to receive six-seven figure monetary advances are harmed by this deal, with the parties allegedly buying close to half of their books,” the publishers said. “Not only is this percentage overstated but also it ignores robust competition from numerous publishers that compete for advances at all levels including higher-level advances.”

Penguin Random House also said that it was not planning any reduction in the number of books acquired or amounts paid for authors work, and that it would continue to compete against Simon & Schuster for book rights, even as they would be under the same corporate umbrella.

This article was printed from https://deadline.com/2021/11/justice-department-sues-penguin-random-house-mergersimon-schuster-antitrust-1234866305/