Penguin Random House, Simon & Schuster trial explained

The biggest antitrust lawsuit to hit the publishing industry in recent memory kicked off this week and today the king of horrors had his day in court.

On Monday, Penguin Random House, the country’s largest publisher, entered a Washington federal court to defend its deal to acquire Simon & Schuster, the fourth largest, against a Justice Department emboldened under President Biden to aggressively enforce antitrust laws.

If Judge Florence Y. Pan rules in favor of the publisher, the merger would drastically change the publishing world, reducing the number of major publishers known as the Big Five to four. The question Pan decides is whether, as the DOJ argues, this will limit competition and stifle book advances for high-earning authors.

Stephen King, one of the world’s most successful and prominent novelists, testified for the government on Tuesday. King, author of best-sellers such as The Shining and The Stand, has publicly criticized the deal, openly opposing the involvement of his longtime publisher Simon & Schuster.

How did this pass come about? It all started in November 2020 when Paramount Global (formerly known as ViacomCBS) announced that it had agreed to sell Simon & Schuster to Bertelsmann’s Penguin Random House for $2.18 billion. Last fall, the Justice Department sued to block the deal, citing too much consolidation as bad for the writers and ultimately for the readers.

Other witnesses in the trial, which is expected to last around three weeks and will be decided in November, are Jonathan Karp, CEO of Simon & Schuster, Markus Dohle, CEO of Penguin Random House, and other authors, agents and executives from other publishers.

Here’s what King said today and what you need to know about Publishing’s unprecedented antitrust lawsuit.

What did Stephen King have to say?

“I came because I think consolidation is bad for competition,” King said Tuesday before a packed courtroom (and an overflow room nearby). “That’s my understanding of the book business. The more companies there are, the better.”

During a 45-minute testimony, King laid out the changes he’s seen working with a number of different publishers over a half-century of his career. He described how independent publishers were increasingly being “squeezed” by corporations. “The reason they’re being squeezed is they’re not getting the shelf space they used to have because the majors are taking up a lot of that shelf space.”

Describing his early years at indie publishing as the glory days, he recalled his phone ringing non-stop during auctions as his agent solicited bids from smaller publishers. But eventually he migrated to what has now become the Big Five because of their broader distribution networks and deeper pockets.

A sign that reads "Bertelsmann."

Bertelsmann’s Penguin Random House wants to buy Simon & Schuster, but the Justice Department is trying to block the deal.

(Michael Sohn/Associated Press)

“I was able to pay the mortgage and put money aside for my kids’ education,” King said. “I didn’t have to finance the car. As far as I was concerned, I was living the dream: I was writing full-time. I enjoyed what I was doing. That was a big deal… There comes a point where, if you are very, very lucky, you can stop following your bank account and start following your heart. And I did. It was wonderful and it was great.”

But most writers today aren’t so lucky. The average author makes only about $20,300, which is below the poverty line, King said, citing a 2018 Authors Guild opinion poll. He blamed the shrinking progress squarely on industry consolidation.

“There were literally hundreds of imprints, and some of them were run by people who had extremely idiosyncratic tastes,” he added. “One by one, these companies were either subsumed by other publishers or they went out of business.”

The dynamic, he argued, had reversed; Big business isn’t going to help Stephen King’s next generation. “I think it’s getting harder and harder for writers to raise enough money to live on.”

Why is the merger such a big deal?

New York’s Simon & Schuster and Penguin Random House are among the country’s largest publishing houses, known in the publishing world as the Big Five. (The other three are Hachette, HarperCollins and Macmillan).

Penguin Random House is the result of another mega-merger between Random House and Penguin in 2013 (at which point the Big Six became the Big Five). Penguin’s list of blockbuster writers who generate massive sales from “backlist” titles includes John Grisham, Toni Morrison, Dan Brown and former White House residents Bill Clinton, as well as Barack and Michelle Obama – all of whom have sold millions of copies worldwide.

Simon & Schuster has drawn to major non-fiction and heavyweight authors such as published in recent years Bob Woodward and Hillary Clinton. If the merger happens, the Big Five would shrink to the Big Four – one of them significantly larger than the others.

Why is the Biden administration fighting it?

The government argues that the merger would reduce competition in the market and ultimately harm writers. If the deal goes through, the combined company would control nearly 50% of the bestseller market, which the DOJ said would ultimately result in authors receiving lower advances and poorer deals. “[F]Fewer authors will be able to write for a living,” the DOJ argued in a pretrial brief.

According to the government court filing, the Big Five collectively account for 90% of the US best-selling market.

“The proposed merger would further drive consolidation in this concentrated industry, make the largest player even larger, and likely increase coordination in an industry with a history of coordination among the major publishers,” the filing reads.

The DOJ also argues that readers are inevitably harmed. “[B]Reducing authors’ compensation will also reduce the quantity and variety of books published… Reducing authors’ compensation will likely reduce the production of the books published and limit consumer choice by restricting the stories readers hear.”

How are the publishers defending the deal?

On the contrary, Penguin and Simon & Schuster say the merger would increase competition in the publishing industry and allow them to pay authors better. “[B]By making the combined company a stronger competitor in the book trade, the merger will spur other publishers to compete even harder for consumers’ attention,” the publishers said in their pre-trial briefing.

This argument draws on logic common in publishing — that Amazon’s growing dominance in the book trade makes it even more necessary for publishers to consolidate to better deal with the online retail giant from a position of strength.

They also claim that a larger, more efficient company would lower book prices, ultimately benefiting readers, booksellers, and authors.

Publishers have criticized the government’s focus on expected bestsellers – the 1,200 or so books that are purchased each year for author advances of at least $250,000. At 2%, they make up a tiny fraction of all books published by commercial companies.

In addition, publishers say they are still allowed to operate independently and bid against each other for books to maintain competition among imprints within the conglomerate.

On Tuesday, Karp, CEO of Simon & Schuster, contested the government’s emphasis on auctions between his company and Penguin Random House, which had secured advances, pointing to the many auctions he had lost to other publishers as well.

When asked if the Big Five had an insurmountable marketing advantage, Karp said, “I think that’s a prevailing piece of conventional wisdom, and I won’t disagree,” before adding, “I think a lot of us believe that a.” good editor, a good publicist and a sales representative will do.”

Jonathan Karp, President and CEO of Simon & Schuster, Inc.

Jonathan Karp, President and CEO of Simon & Schuster, Inc. testified Tuesday in defense of the merger between his company and Penguin Random House.

(Michael Benabib / Simon & Schuster / AP)

What’s at stake, such a lawyer

Many market observers see this process as a test of the Biden administration’s resolve against corporate consolidation.

“There has been a lot of criticism over the years that the government is too willing to settle merger cases and not stop mergers entirely,” said Harry First, a law professor at New York University.

“It’s one thing to make speeches about politics, it’s another thing to go to court and actually litigate and win cases,” he added.

The government’s focus here on the labor market, rather than consumers, is also interesting, he said — one that aligns with the Biden administration’s emphasis on improving conditions for workers.

“[A]Antitrust enforcement is one aspect of that,” said First. “This isn’t quite the first test of that, but it is the first test in a merger environment for this administration, which also makes this an important case to watch.”

So what’s at stake for publishers? A lot of money. When the deal was announced in 2020, Simon & Schuster owner ViacomCBS told the Times that German conglomerate Bertelsmann, which owns Penguin, had agreed to pay a termination fee if the deal was blocked but would not disclose its size . If the merger fails, Simon & Schuster will have to find a replacement buyer.

How unusual is the lawsuit?

Although the publishing industry has steadily consolidated over the years, the trend has accelerated in recent years. There was the merger of Penguin and Random House in 2013, and just in the last year two publishers have made big acquisitions: According to a court filing, HarperCollins bought Houghton Mifflin Harcourt’s commercial books division for $349 million and Hachette Book Group Workman Publishing for $240 million.

Previous large mergers have sailed past regulators with relatively little resistance. A change in weather in the DOJ suggests a landscape where consolidation isn’t always a given.

Dorany Pineda reported from Los Angeles. Freddy Brewster from Washington DC Penguin Random House, Simon & Schuster trial explained

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