Justice Dept. Sues Penguin Random House Over Simon & Schuster Deal
The Biden administration’s rejection of the proposed $2.18 billion publishing merger reflects a changing atmosphere in Washington toward consolidation.,
In one of its first major antitrust lawsuits, the Biden administration on Tuesday sued to stop Penguin Random House, the largest publisher in the United States, from acquiring its rival Simon & Schuster, a sign that it may take a different view of corporate consolidation than the one that has prevailed for decades in Washington.
In a publishing landscape dominated by a handful of mega corporations, Penguin Random House towers over the others. It operates more than 300 imprints worldwide and has 15,000 new releases a year, far more than the other four major U.S. publishers. With its $2.18 billion proposed acquisition of Simon & Schuster, Penguin Random House stood to become substantially larger.
The deal was challenged amid a shifting atmosphere in Washington, where there has been increased scrutiny on competition and the power wielded by big companies like Amazon and Facebook. Earlier this year, President Biden signed an executive order focused on spurring competition across the economy. He appointed Lina Khan, an outspoken Amazon critic, to lead the Federal Trade Commission. Tim Wu, a legal scholar who argues for more aggressive rules for big tech and telecom companies, serves in a White House policy role. And Mr. Biden has nominated a lawyer who represented critics of the tech giants, Jonathan Kanter, to lead the Justice Department’s antitrust division.
Tuesday’s lawsuit, filed in the United States District Court for the District of Columbia, provides a window into how the administration may be willing to file more aggressive cases against corporate giants. Part of its argument is that the acquisition, because it would merge two publishers that are often the final bidders on the same books, would be detrimental to authors and lower their pay.
“If consummated, this merger would likely result in substantial harm to authors of anticipated top-selling books and ultimately, consumers,” the Justice Department said in its lawsuit. “Post-merger, the two largest publishers would collectively control more than two-thirds of this market, leaving hundreds of authors with fewer alternatives and less leverage.”
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Penguin Random House said it planned to fight the challenge and hired Daniel Petrocelli as its trial lawyer. Mr. Petrocelli successfully defended AT&T and Time Warner against the Justice Department when it tried to block their $100 billion merger.
In response to the Justice Department’s decision, Penguin Random House and Simon & Schuster issued a joint statement noting that the department “has not alleged that the acquisition would harm competition in the sale of books” and that the company had not planned “any reduction in the number of books acquired or in amounts paid for those acquisitions.” The rationale for bringing the companies together, they said, was to find efficiencies that would save money on the back end, and that it had no plans to reduce the number of books it acquires or the amounts it pays for them.
“Blocking the transaction would harm the very authors D.O.J. purports to protect,” the companies added. “We will fight this lawsuit vigorously and look forward to PRH serving as the steward for this storied publishing house in the years to come.”
Many of the most sought-after books sell at auction, with multiple publishing houses bidding against one another. But some publishers don’t allow different imprints within the same company to compete at an auction. The rules at Penguin Random House have allowed for some internal competition, but only if there was also an outside party involved — say, Knopf and Riverhead, both owned by Penguin Random House, could compete as long as there was another publishing house in the game.
In September, Markus Dohle, Penguin Random House’s chief executive, held a virtual meeting with literary agents in an effort to address these concerns, with books by Barack and Michelle Obama — some of the most enormous blockbusters of recent years — visible behind him. He said that imprints at Penguin Random House and Simon & Schuster would still be able to bid against one another if they became part of the same company. In its statement on Tuesday, Penguin Random House said this would hold true “up to an advance level well in excess of $1 million.”
Some in publishing consider these internal bidding rules to be cold comfort given the scale Penguin Random House has already achieved and how much more of the market it would gain if the two companies combine.
“It’s basically closing the barn door after the horse has bolted,” said Ayesha Pande, founder of the Ayesha Pande Literary agency.
Penguin Random House has said that it and Simon & Schuster together would account for less than 20 percent of the United States’ general-interest publishing revenue. That data is drawn from the Association of American Publishers, a trade association, which looks at the complete book market in the United States. NPD BookScan, which tracks printed books sold through most U.S. retailers, said that the market share of the two publishers was significantly higher, at about 27 percent of books that sold in the first nine months of this year.
Both companies also have substantial distribution businesses, and Penguin Random House has by far the most sophisticated printing, warehouse and shipping operations, which has helped it weather the supply-chain crisis better than some of its rivals. Penguin Random House said that bringing the two companies together would be a boost to authors because its distribution services would be available to what are now Simon & Schuster books, “making it easier to discover new titles and less likely that books will be out of stock, particularly at local retailers.”
Together, they publish roughly half of the new best-selling printed books in recent years. In 2019, Penguin Random House and Simon & Schuster had a combined 49.3 percent of hardcover best sellers, according to an analysis done by Publishers Weekly.
Antitrust prosecutors said that private statements from executives at the two companies undercut their own arguments for the deal. The companies have hinted that they saw the merger as a way to combat the power of Amazon, according to the lawsuit, but a Penguin Random House executive said that he had “never, never bought into that argument” and that a goal of the deal was for the combined companies to be a great “partner” to the online retail giant.
“I’m pretty sure that the Department of Justice wouldn’t allow Penguin Random House to buy us, but that’s assuming we still have a Department of Justice,” a Simon & Schuster executive wrote to an author when the company was put up for sale in March 2020, according to the complaint. The sale to Penguin Random House was announced in November.
Several prominent groups in the publishing industry have expressed concern about the deal and how it would affect authors, booksellers and readers. In January, the Authors Guild and six other writers’ associations, along with the Open Markets Institute, sent a letter calling on the Justice Department to block the deal, arguing that it would give the combined companies too much power over “the purchasing decisions of America’s readers, the livelihood and liberty of expression of America’s authors.”
Barry C. Lynn, the executive director of the Open Markets Institute, a research and advocacy group focused on antitrust issues, said that growing consolidation in the industry should be reined in because of publishers’ power to shape public discourse.
Mr. Lynn celebrated the Justice Department’s decision on Tuesday, calling it “a huge win for authors, readers, editors, publishers and American people as a whole.”
Regardless of what happens in this case, ViacomCBS, the current owner of Simon & Schuster, still plans to sell, and it’s not clear who would buy it — perhaps another publisher, or a party from outside the industry, like private equity. Some Simon & Schuster authors have expressed concern about where their books might end up, and what it could mean for their livelihoods.