Justice Department sues Penguin Random House over Simon & Schuster case

The Biden administration sued Tuesday to prevent Penguin Random House, the largest publisher in the United States, from acquiring rival Simon & Schuster, as part of a new campaign in Washington against corporate consolidation.

In an editorial landscape dominated by a handful of mega-corporations, Penguin Random House towers above the rest. It operates more than 300 editions worldwide and has 15,000 new versions per year, far more than the other four major American publishers. With its proposed acquisition of Simon & Schuster for $ 2.18 billion, Penguin Random House was to become considerably larger.

The deal, announced a year ago, has been under scrutiny by the government, which is increasingly scrutinizing the power wielded by big companies like Amazon and Facebook.

Earlier this year, President Biden signed an executive order aimed at boosting competition in the economy. He named the business concentration skeptics to the Federal Trade Commission and its economic policy team. Its candidate for head of the Justice Department’s antitrust division, Jonathan Kanter, is a lawyer who has represented critics of tech giants.

And the federal government has taken the courts to block a series of corporate deals this year, including a merger between insurance brokers and deals to consolidate American Airlines and JetBlue operations in the Northeast. .

Tuesday’s antitrust lawsuit, filed in the U.S. District Court for the District of Columbia, is a sign the administration is ready to take more aggressive cases against the corporate giants to court. It argues that the acquisition, because it would merge two publishers who are often the last bidders on the same books, would be detrimental to the authors and lead to lower advances.

The lawsuit focuses much of its attention on the rights market for books that publishers believe to be the best sellers, and documents several bidding wars between Penguin Random House and Simon & Schuster that have reached six and seven figures.

“If the world’s largest book publisher is allowed to acquire one of its biggest rivals, it will have unprecedented control over this important industry,” Attorney General Merrick B. Garland said in a statement accompanying the lawsuit. . “American authors and consumers will pay the price for this anti-competitive merger – less progress for authors and ultimately less books and less variety for consumers. “

Penguin Random House said it plans to take on the challenge and hired Daniel Petrocelli as attorney at the trial. 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 ruling, Penguin Random House and Simon & Schuster issued a joint statement noting that Penguin Random House had planned “no reduction in the number of books acquired or the amounts paid for such acquisitions.” The rationale for bringing the companies together, they said, was to find efficiencies that would save money downstream, and that it did not intend to reduce the number of books that ‘she acquires or the amounts she pays for them.

“The government should only challenge mergers when it can prove that as a result of the combination consumers will be harmed, usually in the form of higher prices. And here there is no such evidence, ”Petrocelli said in a telephone interview.

“The government claims consumers will have fewer books, but it’s completely speculative through a tense chain of logic. They won’t be able to prove it in the end, ”he added.

The department’s focus on advances to authors – rather than what a consumer pays for a book – signals a significant change. For decades, courts have largely ruled mergers on whether or not they would result in higher prices for customers. But a growing number of lawmakers, activists and academics say the focus is too narrow. Instead, they say prosecutors should consider the damage to competitors, workers and suppliers.

Many of the most sought-after books are auctioned off, with several publishers bidding against each other. But some publishers do not allow different brands within the same company to participate in an auction.

The Penguin Random House rules allowed for some internal competition, but only if there was an outside party involved as well – say, Knopf and Riverhead, both owned by Penguin Random House, could compete as long as there was another. in-game publishing house.

In September, Markus Dohle, CEO of Penguin Random House, held a virtual meeting with literary agents in an effort to address these concerns, featuring books by Barack and Michelle Obama – some of the biggest blockbusters of recent years – visible behind him.

He said the Penguin Random House and Simon & Schuster footprints would still be able to bid against each other if they were part of the same company. In its statement on Tuesday, Penguin Random House said that would be true “up to a level of advance well over $ 1 million”.

Some in publishing see these internal bidding rules as cold comfort considering the scale Penguin Random House has already reached and the market share it would gain if the two companies combine.

“It’s basically closing the barn door after the horse has locked itself,” said Ayesha Pande, founder of the Ayesha Pande literary agency.

Penguin Random House, which is owned by German media conglomerate Bertelsmann, said Simon & Schuster and Simon & Schuster together would account for less than 20% of U.S. general interest publishing revenue.

This data is taken from the Association of American Publishers, a trade association that examines the entire book market in the United States. NPD BookScan, which tracks print books sold by most U.S. retailers, said the two publishers’ market share was significantly higher, at around 27% of books sold in the first nine months of this year.

Antitrust prosecutors said private statements by executives of both companies undermined their own arguments for the deal. The companies have hinted that they see the merger as a way to fight Amazon’s power, according to the lawsuit, but a Penguin Random House executive said he “never, ever accepted that argument” and that a goal of the deal was for the combined companies to be a great “partner” for the online retail giant.

“I’m pretty sure the Justice Department wouldn’t allow Penguin Random House to buy us out, but that assumes we still have a Justice Department,” a Simon & Schuster executive wrote to one author when the company was set up for sale in March 2020, according to the complaint. The sale at Penguin Random House was announced in November.

The reaction among industry groups was mixed on Tuesday. The American Booksellers Association, which represents independent bookstores, applauded the Biden administration’s approach.

“PRH is a valuable partner of independent bookstores in many ways,” said Allison K Hill, Group Managing Director, “but the continued consolidation of publishing power that this sale could represent threatens to undermine competition in the industry. of the book, harming the interests of American consumers and putting bookstores and authors at risk.

The Authors Guild, on the other hand, was more measured, calling the move “unexpected” and instead focusing on broader issues of consolidation and Amazon’s dominance in book sales. “We look forward to working with the Biden administration on antitrust reform that addresses the root of the industry’s problems, when the proposed merger was only a symptom,” he said.

One of the side effects of increasing consolidation could be a decrease in the number of publishers who exploit their own imprints according to their tastes and, ultimately, a less varied literary landscape.

“There is less diversity of thought within the industry to generate exciting new ideas,” said Matt Keliher, director and book buyer at SubText Bookstore in St. Paul, Minn. “You can see it when you walk into the shop and the whole book covers look the same. Everything flattens out.

Regardless of what happens in this case, ViacomCBS, the current owner of Simon & Schuster, is still considering selling, and it’s unclear who would buy it. The move came as a shock to people in the industry who were confident the deal would be done.

In a note to the employees of Simon & Schuster, Jonathan Karp, its managing director, sought to reassure his employees.

“For all of us, this is disturbing news: no one likes working in an atmosphere of uncertainty,” he wrote. “We will continue to be the creative and industrious gem of the publishing industry that has made us attractive to buyers in the first place. “


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