Late last year, we learned that the Department of Justice is attempting to intercede in a $2.2 billion publishing industry merger.
Penguin Random House is seeking to acquire Simon & Schuster, meaning two of the “big five” publishing houses would be combined if the transaction goes through. The government alleges that this deal is anticompetitive, and that it would result in lower advances for authors.
In early November, I wrote about the DOJ’s allegations, and was fairly glowing about the government workers behind them. I don’t disavow anything I said about the difficulties involved in government work and the credit people willing to do that sort of thing deserve.
That being said, after having a discussion with Dan Petrocelli of O’Melveny, who is the lead attorney for Penguin Random House and its parent company Bertelsmann, it’s hard not to question whether this is actually the right case for the first major antitrust action of the Biden administration.
On December 13, Penguin Random House filed its answer to the DOJ’s complaint. On December 17, Mr. Petrocelli and I sat down for an interview about Penguin Random House’s proposed acquisition of Simon & Schuster.
Here are a few takeaways from our discussion.
Penguin Random House, according to Mr. Petrocelli, believes that far from being harmed, authors, and readers, would actually benefit from this deal:
It is our position in this case that all authors will be benefited.
Given that ViacomCBS wants to sell their imprints and exit the business, there is no better home for them than Penguin Random House. Penguin Random House has a superior supply chain, a superior sales force, and a superior back office. Bringing the Simon & Schuster imprints into this structure will produce significant efficiencies that can lead to opportunities to sell more books, pass savings down to consumers, and increase compensation to authors. There are many kinds of benefits because of the greater efficiencies.
The government does have the burden of proof in stopping this transaction. And Penguin Random House believes it is a burden the government cannot meet. As Mr. Petrocelli said:
The essential issue in antitrust cases over the last half century is whether consumers will be harmed, typically in having to pay higher prices. Here, the government is not alleging that readers will pay higher prices for books. There is a very tiny sliver of the market that the government is focused on in this case, which is on the buy side, the buying of book rights from authors. They’re saying not all authors, not the vast majority of authors, but only the highly paid authors will receive less compensation as a result of the merger.
But think about that for a moment: the more successful, the more highly paid the author, the more bargaining power, the more negotiating leverage that author has. Such an author is typically represented by a highly experienced agent who is going to make sure that author gets the value the work deserves. Under the government’s strange view of the world, if post-merger Penguin Random House tried to offer highly paid authors less money, it would take these authors about five minutes to go to one of the other publishers. There are scores of publishers, big, small, and medium. Authors have plenty of alternatives.
Of course, every deal of this size is somewhat unique. But as Mr. Petrocelli pointed out, there is some relevant precedent.
We have a natural experiment of sorts. One of the areas where the judge will receive and evaluate evidence is what happened when Penguin and Random House combined in 2013. The very evils the government predicts will happen in this merger ought to have happened then, but I think the government already understands they will not be able to prove there were adverse impacts as a result of that transaction, let alone the diminution of compensation to certain authors that they allege would occur here.
Lesser-known authors are near and dear to me for a number of probably obvious reasons, so I had to ask about whether the proposed acquisition would affect them. Mr. Petrocelli said:
This merger certainly does not make it harder for unknown authors, and that’s not even what the government’s case is about. The government is not saying the lesser paid authors will receive even less compensation for their books. It’s also important to understand that the case is not an autopsy of the publishing business or a referendum on how it can be improved or who might be struggling and who might not. It’s about whether the merger will substantially lessen competition in a legally recognized market, and here the government can’t even define the market.
Well, fair enough.
I suppose this would have been a better question for someone at the DOJ, but I had to close things by asking if Mr. Petrocelli had any inclination as to why this publishing industry enforcement action was commenced instead of, say, some sort of antitrust suit within the tech industry where the public is actually clamoring for regulation. Any idea why this? Why now?
“None,” was his succinct reply. He also mentioned that he thinks I should ask them.
Well, I will certainly do that if and when the opportunity presents itself. In the meantime, Penguin Random House intends to proceed to a trial on the merits as soon as possible. The parties are anxious to get their deal done, get it closed, and move on.
Jonathan Wolf is a civil litigator and author of Your Debt-Free JD (affiliate link). He has taught legal writing, written for a wide variety of publications, and made it both his business and his pleasure to be financially and scientifically literate. Any views he expresses are probably pure gold, but are nonetheless solely his own and should not be attributed to any organization with which he is affiliated. He wouldn’t want to share the credit anyway. He can be reached at email@example.com.