When the largest publisher in the country, Penguin Random House, struck a deal in the fall of 2020 to acquire its rival Simon & Schuster, publishing executives and antitrust experts predicted that the merger would draw intense scrutiny from government regulators.
The merger would dramatically alter the literary landscape, shrinking the number of major publishing houses — known in the industry as the Big Five — to four. (Or, as one industry analyst put it, it could create the Big One and the other three.)
Such a shift could ripple through the industry, potentially impacting smaller publishers, authors, and ultimately, the books that reach readers, said in an email the novelist Stephen King, who was called by the government to testify in the trial.
“The more the big publishers consolidate, the harder it is for indie publishers to survive,” King said. “And that is where the good writers are currently starting out and learning their chops.”
Last fall, the Biden administration sued to block the $2.18 billion sale as part of its new and more aggressive stance against corporate consolidation. The trial will start on Monday, with oral arguments at the United States District Court for the District of Columbia, where Judge Florence Pan will preside.
The Justice Department and Bertelsmann, Penguin Random House’s parent company, called a parade of high-profile publishing executives as witnesses. They include Markus Dohle, the chief executive of Penguin Random House, and Jonathan Karp, the chief executive of Simon & Schuster, as well as executives from other publishing houses, literary agents and a handful of authors.
Here is what we know about the case and its implications for the book business.
Why is the government trying to block this deal?
The Justice Department says this merger would make for too much consolidation in the publishing industry, creating what’s called a monopsony. A monopoly refers to a seller that has 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 expected to be top sellers, which publishers buy for advances of more than $250,000.
The Biden administration says that by shrinking the number of big publishers — which have the budgets to most frequently compete for the biggest books — there would be less competition for those titles. That, in turn, would lower advances paid to their authors. As a result, “fewer authors will be able to earn a living from writing,” the Justice Department argued in a pretrial brief.
What is Penguin Random House’s argument for the deal?
Bertelsmann, which owns Penguin Random House, argues that the acquisition would increase competition in the industry, and that it would benefit both authors and readers.
It says the deal will give Simon & Schuster’s authors access to Penguin Random House’s supply chain and distribution networks, which are generally considered the best in the business. Efficiencies created by combining the two companies will allow it to pay authors more, which would then encourage other publishers to increase their offers in order to compete.
He argues that the publishing industry is far more than just the Big Five; other publishers include Amazon and Disney as well as “countless” midsize and smaller publishers. It believes the government’s argument about competition and author pay overstates the role auctions play when publishers are buying manuscripts, and exaggerates how often Penguin Random House and Simon & Schuster find themselves in head-to-head bidding.
Plus, Bertelsmann contends that Simon & Schuster will be able to 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’s no question that a merger between two of the biggest publishing companies in the United States would have a profound impact on the business and culture of publishing.
Like Hollywood, the book business has increasingly become reliant on blockbusters for profits, and companies will gamble enormous sums of money to buy books by brand-name novelists like John Grisham, EL James, Margaret Atwood and Nora Roberts, or from celebrities and public figures like Barack and Michelle Obama (all published by Penguin Random House).
By far the biggest publisher in the United States, Penguin Random House has more than 90 imprints and releases about 2,000 books a year. If the merger happens, it will gain Simon & Schuster’s 30-plus imprints and its roughly 1,000 titles a year.
The combined company would produce a disproportionate percentage of the top-selling books, industry analysts say. Last year, Penguin Random House titles accounted for 38 percent of the top 100 best-selling print books, according to NPD BookScan, while Simon & Schuster’s books made up 11 percent.
Penguin Random House, which already has the industry’s leading printing, shipping and distribution capabilities, would also gain Simon & Schuster’s warehouses and its distribution business for a network of smaller publishers.
The merger would leave three other big publishing companies remaining — Hachette, Macmillan and HarperCollins — and could drive further consolidation in the industry, as other publishers bulk up to compete with an even more massive rival.
What happens if the court blocks the deal?
For Penguin Random House, the collapse of the deal would be costly. Under the sale agreement, Penguin Random House will have to pay a fee of roughly $200 million to Paramount Global, the conglomerate that owns Simon & Schuster, if the deal doesn’t close.
For Simon & Schuster, the termination of the sale would leave the company in limbo. According to court filings, evidence presented at the trial will show that Simon & Schuster “will be divested one way or the other” from Paramount Global.
It’s unclear if another big publishing house, such as HarperCollins or Hachette, would want to risk the scrutiny from regulators by making a bid. A private equity firm could buy the company, but publishing insiders worry that could lead to huge cuts to staff and result in fewer titles at Simon & Schuster.
What are the antitrust implications?
The lawsuit will test whether the government can mount more antitrust cases targeting the effects of corporate concentration on how much workers — in this case, writers of major books — get paid.
A group of progressive academics, lawyers and economists have argued that a narrowing number of employers has limited options for workers and negatively affected their pay. The fortunes of the government’s case will show how such arguments fare in court.
They are not the only lawyers trying: For years, a group of mixed martial artists 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 down, which the UFC denies. A court ruled said in 2020 that the fighters could proceed as a group with most of the case, but the merits of the case have yet to be considered.
What does this case say about the Biden administration’s approach to antitrust enforcement?
This case is another example of the administration’s aggressive approach to competition policy, which has drawn praise from the left.
President Biden signed an executive order in June 2021 that aimed to increase competition across the economy, in part by encouraging the Federal Trade Commission to focus on the way that concentration can harm workers. In the order, he pushed the agency to look at new rules limiting noncompete agreements, which activists say make it hard for workers to take better job offers, and to stop employers from sharing pay information with one another in order to bring down wages.
The FTC and the Justice Department have also tried to test novel legal theories in court. The FTC on Wednesday filed for 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 start-ups. The Justice Department has also challenged United Health Group’s purchase of a health tech company, arguing it would give the insurer access to sensitive data about its competitors. But it remains to be seen how the courts will receive these efforts.