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Three weeks ago, book publishers argued they had no idea what they were doing in court

on Aug 26, 2022

Oral arguments in the Justice Department's antitrust trial to prevent Penguin Random House from combining with rival Simon & Schuster concluded on August 22. The trial's outcome, which is due later this fall, will have a huge impact on both the multibillion-dollar book publishing sector and how the government handles corporate mergers in the future. Perhaps fittingly for a case with such high stakes, the trial was marked by deception and outright misinformation for virtually the entire duration.

Penguin Random House and Simon & Schuster are two of the publishing industry's "Big Five," with HarperCollins, Hachette, and Macmillan filling the other three places. Penguin Random House, with a market share of 25% in 2020, is the largest of the Big Five, controlling roughly 80% of the trade market for books in the United States. Penguin Random House is the result of numerous mergers, with one independent publishing imprint after another merging to establish a giant conglomerate, culminating in the 2013 merger of Penguin and Random House, which reduced the then-Big Six to the Big Five.

When ViacomCBS put Simon & Schuster up for sale in 2020, the smart money was on another major publisher buying the house and the Big Five becoming the Big Four. PRH and HarperCollins were the auction's last bidders, and PRH won the day with a reported bid of $2.2 billion.

It was clear that a new publishing house formed by Penguin Random House and Simon & Schuster would dominate the industry in unprecedented ways, but few in the industry seemed to believe that then-President Trump's ostensibly pro-business Justice Department would care enough about the proposed merger to intervene.

"I'm very confident the Department of Justice would not allow Penguin Random House to buy us," Simon & Schuster CEO Jonathan Karp joked in an email to an author.

The DOJ filed suit against Penguin Random House and Simon & Schuster, as well as parent firms Bertelsmann and ViacomCBS, a year later, under the new Biden administration. “Authors are the lifeblood of book publishing,” the suit argued. "The planned acquisition of Simon & Schuster by Penguin Random House will do significant harm to authors, particularly authors of predicted best-selling books."

Most of us are familiar with the concept of a monopsony and how such a selling market may drive up consumer prices, but in this instance, the DOJ argued that PRHS&S would constitute a monopoly — an unfair buying market that would drive down author pay. Such situations have previously been uncommon. If the DOJ is successful here, it will create a significant precedent for how the US prosecutes corporate titans.

It will also put an end to one of the largest publishing firms that American publishing has ever seen. Nonetheless, despite the very real threat of Penguin Random House and Simon & Schuster merging to become a behemoth of a firm, both publishers have consistently depicted themselves as scrappy underdogs doing their best to ride out a harsh market. When the proposed merger of PRH and S&S was first announced in 2020, the prevalent narrative was that a combined PRHS&S would provide hapless publishers with the clout they needed to counter Amazon's overwhelming force.

However, the DOJ's initial lawsuit turned up internal emails in which PRH's CEO Markus Dohle acknowledges that he "never, never bought into that argument," and that one of the "objective" of the post-merger PRHS&S would be to become a "outstanding partner" to Amazon.

Throughout the trial, publishers would maintain their existing public image as hapless incompetents at the mercy of larger corporations and an irrational market. Meanwhile, the government maintained that the publishers were astute businessmen who knew exactly what they were doing with their multibillion-dollar enterprises.

Monopsony 101

A monopsony is the inverse of a monopoly and is also known as a buyer's monopoly. A monopsony is a market with only one buyer who can establish their own price, as opposed to a market with just one seller who can charge whatever they want. It is still a case in which the laws of supply and demand have been twisted to unfairly benefit one side over the other.

A mining town where the mining corporation is the sole major employer and hence has the ability to set low wages is an example of a monopsony. The Justice Department claimed that the merger of Penguin Random House and Simon & Schuster would result in the creation of another company.

If PRH and S&S merged, they would publish one-third of all books in the United States each year, according to the Wall Street Journal. The model used by the government is more explicit. It creates a market for "expected top-sellers": books for which publishers pay an advance of $250,000 or more, presumably expecting them to sell well when they visit bookstores. The government believes that a merged PRHS&S would have a 50% market share in such a market. HarperCollins, the next largest publisher, would have less than half that.

According to the government, with this combined market share, the projected PRHS&S would be able to buy books from authors with little competition.

Meanwhile, Penguin Random House and Simon & Schuster also claimed that the combination would not affect competition. Because of the publishing imprint paradigm, editors from the same publishing business always compete for the same book. Publishers maintained that they would continue to do so even if Penguin Random House and Simon & Schuster merged – and that because the combination would make both publishers more efficient, they would be able to offer larger advances than before.

Because there isn't much case law to cite here, it's difficult to foresee how Judge Florence Pan will rule on this matter later this fall. Historically, the United States has not prosecuted monopsony very often. Instead, it has tended to view antitrust regulation as a tool of safeguarding consumers rather than labourers.

However, under the last two Democratic presidents, monopsony theory has gradually gained traction. In 2016, President Obama's Council of Economic Advisers issued an issue brief arguing that industry consolidation could lead to monopsonistic labour markets with low worker salaries. The Competition and Antitrust Legislation Enforcement Reform Act, presented in Congress in 2021, would update existing antitrust laws to specifically prohibit monopsonies. President Joe Biden signed an executive order in July promising to use antitrust laws to battle "the detrimental impacts of monopoly and monopsony," emphasising that his government will be "particularly" concerned with how these issues influence labour markets.

Some antitrust analysts regard this trial as a sort of test balloon. If the government wins, we may be entering an age in which monopsonies in many other industries (such as Hollywood and Big Tech) face considerably more aggressive regulatory scrutiny than previously. Power might be shifted from large corporations to the independent employees they employ. Meanwhile, if the publishers prevail, the government will have to reconsider its strategy.

The bulk of the trial, however, was not devoted to these abstruse matters of economic policy. For the most part, the trial focused on publishing jargon, with high-powered authors, literary agents, and CEOs from big publishing houses testifying to explain terms like "backlist titles" (books older than a year) and "midlist authors" (authors who aren't best-sellers but nevertheless sell a little). During their testimony, these industry giants spoke with extraordinary clarity about aspects of the publishing sector that are typically concealed from public view.

“Everything is random in publishing”

One of the early ironies of this trial was that "the government's case rests in part on making publishers look unusually sophisticated about the market in which they operate, in addition to profiting from their enormous scale," according to the industry journal Publishers Weekly. To counter that argument, publishers had to portray themselves as essentially inept gamblers, putting the company's money at risk in a sector no one could foresee, all for the sake of literature.

During his testimony, Penguin Random House CEO Markus Dohle told the court, "Everything in publishing is random." "Success happens at random." Bestsellers happen at random. That's why we're called Random House!" He went on to call PRH's editors and publishers "angel investors in our authors' ambitions, their stories."

Throughout the trial, publishers painted the industry as a foggy and wonderful place where publishers habitually gave out big sums of money for outstanding works of literature, unable to forecast or care whether they would ever get their money back. Within this context, publishers claimed, the government's concentration on a limited slice of publishing - novels with advances of $250,000 or more — was worthless. They claimed that there was no true association between the publications for which they paid large advances and the actual sales figures for such books. As a result, high-paid CEOs took the stand one by one, claiming that they had no idea what they were doing with all their money.

In presenting that case, they occasionally stepped very up to the boundary of credibility. "You have to work just as hard on every book because you never know which one will break out," Simon & Schuster CEO Jonathan Karp testified.

Judge Pan appeared to be doubtful of that remark. "If you spend a lot for a book — like one of these million-dollar books — are you going to sell that book harder... than your everyday books?" she wondered. Karp acknowledged that a greater advance would put more pressure on a publisher to increase sales, but he remained committed to his broader point.

It's important emphasising here that Pan was correct about how publishers choose the budget for each book. When editors acquire a new book, they create a profit and loss statement, or P&L, in which they calculate how much money they intend to spend and how much money they expect to make on that book. While the profit and loss statement is simply a rough indication (it's "very false," Pan decided later in the trial), it's where publishers set expectations for a new book. Traditionally, publishers match the marketing and publicity budget to the advance in order to achieve a P&L balance. The larger the advance, the more money they intend to spend on marketing the book.

On the other side, P&Ls are regularly tossed out the window as publishers' objectives shift. That's why Pan called profit and loss statements "false." Everything in publishing changes on the fly, and sometimes for no apparent reason.

As Publishers Weekly noted, both images of publishing on exhibit at this trial had an element of reality. The book market is notoriously unpredictable, and book publishers are rather adept at manipulating that market to ensure their own profits. That is how publishing CEOs have typically justified their exorbitant pay packages: they are supposed to be the individuals who understand how to generate money in an irrational industry.

The publishers on the stand throughout the trial, on the other hand, sounded like anyone could perform their jobs. "All it takes is a publisher with a vision and a couple of good editors," Karp claimed during his testimony, to compete with industry heavyweight Penguin Random House. "It's really a talent investment."

It is convenient for publishers to characterise their sector as illogical, eccentric, or romantic. Such a portrayal of publishing legitimises the status quo, as the industry is 76 percent white and 95 percent of novels released between 1950 and 2018 were written by white people. If publishing isn't truly a business, but rather an investment in people's dreams, then there are no structural disparities to be concerned about that might have led to this situation. And, because those structural inequities do not exist, future industry consolidation cannot increase them.

"Consolidation is bad for competition," said Stephen King, who testified for the government at the trial. In his introduction as a freelance writer, King highlighted a publishing scene that has evolved considerably in his 50 years in the profession.

"When I first got into this business, there were literally hundreds of imprints, and some of them were controlled by people with quite peculiar preferences," King explained. "Those companies were either absorbed one by one or went out of business." I believe it is becoming increasingly difficult for writers to obtain enough money to survive on."

The story of American publishing over the last 100 years is one of a business solidifying itself and fostering homogeneity, blandness, and the safest publishing judgments conceivable. It remains to be seen if this consolidation will continue after the trial, or whether this case will serve as a precedent to slow consolidation in other areas.