Will America’s Biggest Publisher Get Even Bigger?

When the nation’s largest publisher, Penguin Random House, reached a deal in the fall of 2020 to acquire rival Simon & Schuster, publishing executives and antitrust experts predicted the merger would draw scrutiny from the from government regulators.

The merger would radically change the literary landscape, reducing 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 change could ripple through the industry, potentially affecting small publishers, authors and ultimately the books that reach readers, novelist Stephen King, who was called by the government to testify at trial.

“The more big publishers consolidate, the harder it is for independent publishers to survive,” King said. “And that’s where good writers actually start and learn their talents.”

Last fall, the Biden administration filed a lawsuit to block the $2.18 billion sale as part of its new, more aggressive stance against corporate consolidation. The trial will begin on Monday, with oral arguments in the United States District Court for the District of Columbia, where Judge Florence Pan will preside.

The Department of Justice and Bertelsmann, the parent company of Penguin Random House, called a parade of senior publishing executives as witnesses. Among them are Markus Dohle, managing director of Penguin Random House, and Jonathan Karp, managing director of Simon & Schuster, as well as executives from other publishing houses, literary agents and a handful of authors.

Here’s what we know about the case and its implications for the book industry.

The Department of Justice says this merger would lead to too much consolidation in the publishing industry, creating what is called monopsony. A monopoly refers to a seller who has too much power over consumers; a monopsony has too much power over suppliers. In this case, according to the government, these suppliers are the authors of supposedly best-selling books, which publishers buy for advances of more than $250,000.

The Biden administration says that by reducing the number of big publishers — which have the budgets to compete for the biggest books more often — there would be less competition for those titles. This, in turn, would reduce the advances paid to their authors. As a result, “fewer authors will be able to make a living from writing,” the Justice Department argued in a pretrial brief.

Bertelsmann, which owns Penguin Random House, says the acquisition would increase competition in the industry and benefit both authors and readers.

It says the deal will give Simon & Schuster authors access to Penguin Random House’s supply chain and distribution networks, which are generally considered the best in the industry. The efficiencies created by the merger of the two companies will allow it to pay authors more, which would then encourage other publishers to increase their offers to be competitive.

He argues that the publishing industry is much more than the big five; other publishers include Amazon and Disney as well as “countless” medium and smaller publishers. He believes the government’s argument about competition and author compensation overstates the role auctions play when publishers buy manuscripts, and overstates the frequency with which Penguin Random House and Simon & Schuster come face to face.

Additionally, Bertelsmann argues that Simon & Schuster will be able to bid against other Penguin Random House imprints for the books, so authors will still have plenty of potential bidders.

There is no doubt that a merger between two of the largest publishing houses in the United States would have a profound impact on business and publishing culture.

Like Hollywood, the book industry has become increasingly dependent on blockbusters to make a profit, and corporations will bet huge sums of money to buy books from marquee novelists like John Grisham, EL James, Margaret Atwood and Nora Roberts, or celebrities and public figures. like Barack and Michelle Obama (all published by Penguin Random House).

By far the largest publisher in the United States, Penguin Random House has over 90 editions and publishes approximately 2,000 books a year. If the merger takes place, it will gain more than 30 Simon & Schuster imprints and its approximately 1,000 titles per year.

The combined company would produce a disproportionate percentage of top-selling books, according to industry analysts. Last year, Penguin Random House titles made up 38% of the 100 best-selling books in print, according to NPD BookScan, while books from Simon & Schuster made up 11%.

Penguin Random House, which already has the industry’s best printing, shipping and distribution capabilities, would also gain Simon & Schuster’s warehouse and distribution business for a network of smaller publishers.

The merger would leave three other major publishing companies remaining – Hachette, Macmillan and HarperCollins – and could lead to further consolidation in the industry, as other publishers band together to compete with an even more massive rival.

For Penguin Random House, failure of the deal would be costly. Under the sale agreement, Penguin Random House will have to pay approximately $200 million in fees to Paramount Global, the conglomerate that owns Simon & Schuster, if the deal does not close.

For Simon & Schuster, the termination of the sale would leave the company in limbo. According to court filings, evidence presented at trial will show that Simon & Schuster “will be divested in some way” from Paramount Global.

It’s unclear whether another major publishing house, like HarperCollins or Hachette, would want to risk regulators’ scrutiny by making a bid. A private equity firm could buy the company, but publishing insiders fear that could lead to huge staff cuts and a decline in the number of titles at Simon & Schuster.

The lawsuit will test whether the government can mount more antitrust cases targeting the effects of corporate concentration on how much workers are paid – in this case, the authors of leading books.

A group of progressive academics, lawyers and economists have argued that fewer employers have limited options for workers and negatively impacted their wages. The fortunes of the government case will show how such arguments play out in court.

They’re not the only lawyers trying: For years, a group of mixed martial artists have 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 low, which the UFC denies. A court ruled in 2020 that fighters can proceed as a group in most cases, but the merits of the case have yet to be considered.

The case is another example of the administration’s aggressive approach to competition policy that has drawn praise from the left.

President Biden signed an executive order in June 2021 aimed at increasing competition across the economy, in part by encouraging the Federal Trade Commission to focus on how concentration can hurt workers. In the order, he pushed the agency to look at new rules limiting non-compete agreements, which activists say prevent workers from taking better job offers, and prevent employers from sharing wage information between them in order to drive down wages.

The FTC and the Justice Department have also attempted to test new legal theories in court. The FTC on Wednesday sought an injunction to stop Meta, the company formerly known as Facebook, from buying a virtual reality studio, reflecting a new focus on how tech giants buy startups. The Justice Department also challenged United Health Group’s purchase of a health technology company, arguing it would give the insurer access to sensitive data about its competitors. But it remains to be seen how the courts will welcome these efforts.