Will the Next Chapter in DOJ’s Showdown With Book Publishers Rewrite the Book on Antitrust Merger Enforcement?
, Yo W. Shiina
Federal antitrust enforcers hope to write a new chapter on merger enforcement this year as they face off against leading publishers.
One of the major antitrust developments last year was the United States Department of Justice’s (DOJ) challenge of the merger of Penguin Random House and Simon & Schuster, alleging that the large publishers’ combined monopsony power would harm competition in the publishing industry and should be blocked. On December 13, 2021, the two publishers, along with their parents Bertelsmann SE & CO. KGaA and ViacomCBS (the “Publishers”), filed their answer to DOJ’s complaint. The answer foreshadows interesting debates in antitrust law, and a multitude of contested facts, leading to a potential trial in 2022.
The Publishers argue that (1) DOJ is alleging a fictional market artificially limited to top royalty-advance earning authors, and that such high-dollar deals are “controlled by the author’s agent”; (2) the proposed merger benefits authors, by providing greater income, booksellers, by providing better supply solutions, and consumers by offering more choices; and (3) the merger’s procompetitive effects are supported by precedent.
Market Definition Challenges
As this blog previously discussed, DOJ is alleging two relevant buyer-side markets: the first is “the acquisition of U.S. publishing rights to books from authors,” and the second is “the acquisition of U.S. publishing rights to anticipated top-selling books.”
The Publishers begin by attacking market definition. The Publishers assert that the only legitimate market is “a market for rights in all proposed books” and DOJ does not allege competitive harm in that market or a reduction in authors’ pay for book rights.
They attack the DOJ’s definition of the second proposed market, for “anticipated top-selling books,” which they call a “made-for-litigation market” that lacks market-defining prices for royalty advances. The Publishers claim that the publishing industry does not divide the market for book rights “into distinct categories based on the author’s compensation for the book or whether it is anticipated to be a top seller. . .There is no identifiable advance level above which only certain publishers compete for book rights.” DOJ’s complaint does provide colorful details about the bidding war between Penguin Random House and Simon & Schuster for anticipated top-sellers, quoting bid amounts between $700,000 and $8 million.
The Publishers also argue that “the concept of a distinct market for ‘premium’ goods defined solely by price has been rejected by multiple courts.” However, DOJ is likely to counter this argument by pointing out that the alleged market is not defined solely by price, and that determination of a relevant market hinges on the degree of cross-elasticity of demand, with courts having found submarkets defined, for example, by price, as well as by “image, prestige, and status.” See U.S. v. Gillette Co., 828 F.Supp. 78, 82 (D.D.C., 1993). A book by a Grammy Award-winning celebrity or a book on a politically-charged topic, such as the Mueller investigation, would not be easily interchangeable with a book on an esoteric topic by an unknown first-time author.
Merger Efficiency Arguments
The Publishers cite the creation of highly efficient supply chain capabilities as one of the primary benefits of the merger, which they claim will make books more “discoverable, visible and available,” and enable neighborhood bookstores to compete with Amazon.
The Publishers also argue that the merger’s procompetitive effects are supported by precedent, citing the 2013 merger between Penguin and Random House. After that merger, the “Big Five” publishers’ share of annual dollar sales in the overall book market decreased from 55.9% in 2014 to 51.3% in 2020. This data alone, however, does not show how the increase in aggregate dollar sales of non-“Big Five” publishers’ books was caused by the 2013 merger.
The Publishers claim that the merger is necessary to compete against Amazon, which they label as both large bookseller and “the largest company facilitating self-publishing.” However, the Publishers are vague on how the proposed merger would help brick-and-motor booksellers to compete with Amazon’s delivery capabilities, let alone how the merger can also be expected to offer “greater choice” to readers. It may be true that Penguin Random House has a “highly efficient supply chain,” but it is also true for Simon & Schuster pre-merger.
The Publishers also depict the book-rights market as being “controlled by” authors’ agents, and assert that “what matters is that in bidding for any given book, at least one smaller publisher often competes.” (Emphasis in the original.) It is unclear how often those smaller publishers win that bidding war. The Publishers argue that when it comes to bidding for the most coveted books (“high-end bidding”), there are publishers “outside the Big Five,” such as Disney, Amazon, Scholastic, Norton, Abrams and Zando, that could increase their bidding following the merger. However, whether this argument is factually accurate is likely to be an issue at trial.
The trial is scheduled to begin as early as August 1, 2022, as the parties have agreed to forego both dispositive motions and any resort to alternative dispute resolution.
Regardless of whether you find the Publishers’ initial response to be a compelling narrative, the story is still being written and we eagerly await the next chapter.
Edited by Gary J. Malone