Judge Blocks Merger of Two Largest Publishers

From a New York Times story by Alexandra Alter and Elizabeth A. Harris headlined “Judge Blocks Merger of Penguin Random House and Simon & Schuster”:

A federal judge blocked on Monday a bid by Penguin Random House, the biggest book publisher in the United States, to buy one of its main rivals, Simon & Schuster, in a significant victory for the Biden administration, which is trying to expand the boundaries of antitrust enforcement.

The judge, Florence Y. Pan, who heard the case in the United States District Court for the District of Columbia, said that the Justice Department had demonstrated that the merger might “substantially” harm competition in the market for U.S. publishing rights to anticipated top-selling books.

The full order laying out Judge Pan’s reasoning is temporarily under seal because it contains confidential information, and will be released later after both parties file redactions.

Penguin Random House and its parent company, Bertelsmann, said they planned to appeal.

Penguin Random House called the decision “an unfortunate setback for readers and authors” and argued that “the Department of Justice’s focus on advances to the world’s best-paid authors instead of consumers or the intense competitiveness in the publishing sector runs contrary to its mission to ensure fair competition.”

The victory is a notable one for the Justice Department. Judges have ruled against several of its previous challenges to corporate deals, including UnitedHealth Group’s purchase of a technology company. In a statement on Monday, the Justice Department hailed the ruling as a win for authors and readers.

“The proposed merger would have reduced competition, decreased author compensation, diminished the breadth, depth, and diversity of our stories and ideas, and ultimately impoverished our democracy,” said Assistant Attorney General Jonathan Kanter of the department’s antitrust division.

The trial, which unfolded over three weeks in August in the U.S. District Court for the District of Columbia, was a test case for the government’s new, more aggressive approach to curbing consolidation. It was closely watched by the literary world for what it revealed about the inner workings of the industry and about the effects of consolidation on publishing, which has already been significantly reshaped by mergers in recent years.

Industry luminaries, among them powerful literary agents and best-selling authors, testified. Executives from Penguin Random House and Simon & Schuster spoke in support of the deal, arguing that the merger would benefit writers, because combining the publishing houses would lead to cost savings, allowing the company to spend more on books.

The government had a high-profile witness on its side with the author Stephen King, who testified that the merger would be especially harmful to writers who are just starting out, and took a contrary position to his own publisher, Scribner, which is part of Simon & Schuster.

“I came because I think that consolidation is bad for competition,” King said. The way the industry has evolved, he said, has made it “tougher and tougher for writers to find money to live on.”

Executives from other major publishing houses, among them the heads of Hachette and HarperCollins, also testified against the deal.

In seeking to block the merger, the government argued that the deal would leave authors with fewer options for getting their work published, lead to lower advances for writers and even cause a reduction in the number and diversity of titles published.

“One entity’s control of almost half of the nation’s anticipated top-selling books threatens competition in multiple ways,” the Justice Department wrote in a post-trial brief. “Authors’ advances would fall — advances that they use to pay their bills and that reflect compensation for their work.”

Penguin Random House has about 100 imprints that collectively publish more than 2,000 new titles a year. Through the merger, it would have gained roughly another 50 imprints from Simon & Schuster.

The Justice Department’s focus on author earnings, rather than harm to consumers, marked a shift in how the government applies antitrust law. Antitrust policy has largely been guided for decades by an effort to prevent large corporations from imposing higher costs on consumers, rather than focusing on the impact a monopoly might have on workers, suppliers or competitors. By zeroing in on the potential harm to authors, the Justice Department signaled that it’s taking a broader view of the possible impact of consolidation.

“The Biden administration wants to be aggressive to protect the overall market, and not necessarily to just protect consumers,” said Eleanor M. Fox, an antitrust expert at N.Y.U. School of Law.

The decision dealt a blow to Penguin Random House’s ambitions to expand, at a moment when it faces dwindling market share and a stagnant economy. While Penguin Random House remains far and away the biggest publisher in the United States, it has struggled to maintain its share of sales in recent years. Under the sale agreement, Penguin Random House is obligated to pay a fee of roughly $200 million to Paramount Global, the conglomerate that owns Simon & Schuster, if the deal doesn’t go through.

The government focused its case on a narrow slice of the market, arguing that authors of anticipated top-selling books, who receive advances of $250,000 and up, would see their earnings fall if fewer major publishers are competing for their books at auction. They identified deals where Simon & Schuster and Penguin Random House were the top two bidders, and drove up the advance.

In its defense, Penguin Random House tried to persuade the judge that the Justice Department fundamentally misunderstood the dynamics of the publishing industry. The company said that there was no separate market for authors who earn advances of at least $250,000 and it emphasized that head-to-head bidding wars between the two companies were rare.

Judge Pan was unswayed.

When the $2.175 billion deal was first announced in 2020, most of the publishing industry assumed it would go through following the regulatory review. Many were stunned when the government moved to block it. But over the course of the trial, Judge Pan’s skepticism of Penguin Random House’s position became increasingly apparent.

The result of the trial could have a profound impact on the industry, with repercussions that go beyond the two companies.

Over the past few decades, the publishing business has already gone through a number of mergers and acquisitions as big publishing houses bought up midsize companies and rivals, and the number of major publishing houses shrunk to five. When Penguin and Random House merged in 2013, the deal accelerated a race to bulk up. Rival companies like HarperCollins and Hachette also went on buying sprees, purchasing smaller companies to expand their catalogs and backlists.

But the Justice Department’s decision to block Penguin Random House from buying Simon & Schuster suggests that future mergers might also attract scrutiny from the government, particularly if it involves an attempt by one of the so-called Big Five publishing houses to buy a rival.

Some antitrust experts saw the ruling as a line in the sand that could curb further consolidation in the industry.

“The government’s argument was based on a narrow sliver of the book market, but the decision preserves competition more broadly by keeping two giant houses separate,” Erik Gordon, a professor of business at the University of Michigan, said in an email, calling the ruling “a big win for authors.”

Other experts say the outcome of the trial also raises questions about whether the government might decide to challenge another massive player in the book business: Amazon.

“The target immediately moves over to Amazon,” said Barry Lynn of the Open Markets Institute, an antitrust think tank. “Once you’ve come in and said that this kind of consolidation and these kinds of actions are bad for authors and for readers, then you look over at Amazon and see a corporation that has 80 percent market share, there’s only one conclusion.”

Alexandra Alter writes about publishing and the literary world. Before joining The Times in 2014, she covered books and culture for The Wall Street Journal. Prior to that, she reported on religion, and the occasional hurricane, for The Miami Herald.

Elizabeth A. Harris writes about books and publishing for The Times.

Speak Your Mind

*