After a flurry of last-minute filings and orders, the U.S. Department of Justice’s bid to block Penguin Random House’s acquisition of rival Big Five publisher Simon & Schuster is ready for court. Oral arguments are set to begin on August 1 before Judge Florence Pan at the E. Barrett Prettyman U.S. Courthouse in Washington, D.C., with the trial expected to run nearly three weeks.

According to recent filings, 72 total hours have been allotted for arguments—38 hours for the government, and 34 hours for the defense. The witness lists include a few boldface names, including many of the Big Five CEOs, some major literary agents, and bestselling author Stephen King, who is listed as a witness for the government.

The closely watched case holds major implications for a publishing industry that has been grappling with consolidation for years. It also looms as a key test for the government amid growing calls for more vigilant antitrust enforcement, and in the wake of a stinging defeat in 2018 in its bid to block the massive $85 billion merger between AT&T and Time Warner.

“Despite what some observers have said, I think the government’s case is a pretty standard horizontal merger case,” observed Christopher T. Sagers, Cleveland-Marshall College of Law professor and author of the 2019 book United States v. Apple: Competition in America. “If the evidence supports its allegations, and if they can avoid getting sucked down some of the rabbit holes that will make up the defense’s rebuttal, the government has a reasonable chance of winning.”

Those are big ifs, however. Thus far, most of the evidence in the case has been filed under seal, so what exactly it shows is publicly unknown. Furthermore, Sagers acknowledged, there are “deeper, conceptual questions” facing the government’s case—largely because the case is focused on the potential harm the proposed deal poses to author payments rather than on any alleged harm to consumers.

The case

On its face, the government’s case appears to revolve around size. If allowed to acquire S&S, PRH would be “by far, the largest book publisher in the United States, towering over its rivals,” with revenues “more than double its next closest competitor,” the government complaint states. And with that kind of scale, DOJ attorneys allege, the publisher would wield “outsized influence over who and what is published, and how much authors are paid for their work,” in violation of Section 7 of the Clayton Act, the antitrust law first enacted in 1914.

As filed, the government’s case focuses on author advance payments—an allegation of monopsony as opposed to monopoly. A monopoly occurs when one firm becomes the dominant, often sole supplier of a good or service in a market. Monopsony, on the other hand, occurs when one firm becomes the sole or dominant buyer of goods or services. Monopoly cases alleging consumer harm are more common, but monopsony cases are not uncommon. And publishing leaders are already quite familiar with the anticompetitive impacts of monopsony—after all, monopsony is what critics accuse Amazon of in the e-book market, and what led to five of the then Big Six publishers to coordinate with Apple in 2010 to move the e-book market to the agency model.

Specifically, the government alleges that allowing PRH—already the largest U.S. trade publisher by a wide margin—to swallow up one of its major rivals for book rights would lead to fewer bidders for rights, causing author advances to suffer. While the government alleges that author advances at all levels would likely be impacted, they especially home in on the advances of a very small subset of authors earning advances over $250,000, defined by the government as “anticipated top-selling books.” Such a reduction in author compensation would lead to “fewer authors being able to make a living from writing,” the government states, and ultimately “fewer and less diverse books being published.”

Allowing one player to tower over its closest competitors in an already concentrated industry raises other concerns, too, the DOJ argues. “With fewer players and an obvious leader, the Big Four would likely find it easier to reach and sustain a consensus that harms authors through coordination,” the complaint states. And, almost as an afterthought, the complaint notes that PRH and S&S have substantial distribution businesses to consider.

While this kind of monopsony case may be less common, it’s hardly exotic. And Sagers said the government’s opposition to the proposed deal and its theory of the case make sense. “This is a heavily consolidating horizontal merger in an already concentrated market,” he said, adding that the government could be featuring the harm to authors because the sector’s market power may already have pushed retail prices to the brink.

What is “nominally unusual,” however, is that in recent history regulators have generally not sought to block deals that have left more than three major firms in a relevant market, Sagers said, and this deal would still leave publishing with a Big Four. That is, until you consider the scale of a post-merger PRH, which would look more like a Big One in relation to the remaining three Big Four houses.

“Courts and agencies don’t measure the legality of mergers by counting up the raw number of firms, they measure concentration,” he explained. “And they use a particular measure of concentration called the Hirschmann-Herfindahl Index, or HHI, which gives extra weight to firms that are substantially larger than their competitors.”

No question, a post-merger PRH/S&S would be substantially larger than its competitors and would register a large HHI number, Sagers said. In some cases, a large HHI number could be enough to block a merger. But despite the optics of PRH towering over its competitors, it is unclear how this kind of concentration argument might play at trial with the government’s case focused so squarely on author advances.

The defense

In court filings, Penguin Random House attorneys go straight at the government’s monopsony claims. With no solid proof suggesting there will be any meaningful reduction in competition for book rights or any consumer injury, PRH lawyers accuse the DOJ of inventing a market for “rights to anticipated top-selling books,” which has no basis in “the real world” or in “accepted market-definition analysis.”

In short, PRH lawyers argue that the government’s case “misunderstands the most basic elements of the book rights market.” Like books themselves, book deals are “individualized” and winning bids are subject to “myriad factors,” all closely managed by an author’s agent, a “sophisticated” player in the market.

“Penguin Random House has no ability to influence overall advances or compensation,” PRH claims in its answer to the DOJ complaint. “A Penguin Random House imprint is not invited to bid for every book, and even when one or more Penguin Random House imprints do bid, they lose far more auctions than they win. The same is true for Simon & Schuster. After the merger, the market dynamic will be just the same, and post-merger Penguin Random House’s pricing influence will be just as nonexistent as it is today.”

Post-merger, authors will still have a wide array of buyers to bid on their work, PRH lawyers insist, including the other three Big Four publishers (Hachette Book Group, HarperCollins, and Macmillan); “media heavyweights” like Amazon, Disney, and Scholastic; “brand-name publishing imprints,” like Abrams and Norton; as well as “new entrants” like Zando. And for good measure, PRH CEO Markus Dohle has pledged that PRH and S&S editors will still be permitted to bid against each other—an overture the DOJ has rejected as self-serving and unenforceable.

In fact, PRH attorneys say the available evidence suggests the company’s acquisition of S&S would actually promote competition and could increase author advances. After the 2013 merger between Penguin and Random House, PRH lawyers argue, the U.S. trade book market “expanded substantially,” competition for book rights “intensified,” and smaller publishers “gained retail market share from the Big Five.”

Given the narrow market definition put forth by the government and the speculative nature of its claims, Sagers believes the case presents a host of novel questions (no pun intended) for the court. And despite the challenge of the merged company’s size, those questions give PRH attorneys—led by Daniel Petrocelli, the lawyer who defeated the government’s bid to block the AT&T/Time Warner merger in 2018—plenty of room to maneuver.

“If the government intends to show that bestselling authors are likely to lose income in a way that other authors won’t, that could present some really challenging problems of proof,” Sagers said. “Aren’t there lots of hard-to-predict changes in consumer sentiment and adjacent entertainment markets that could affect the sales of bestselling authors? And all of these empirical questions are inherently, irremediably speculative. This would all be guesswork about how the merger will affect authors in the future. Courts don’t like doing that, don’t think they’re good at it, and they tend to resolve their doubts against the government.”

Even if the government can show some kind of potential injury to “top-selling” authors, that still leaves the question of whether that would count as a legally relevant injury under antitrust law. “A court might very well balk at the idea that harm to a small segment of the supply market for books will constitute an antitrust injury,” Sagers explained. “If the government ends up having to argue that consumers are ultimately injured because there might be fewer books by Danielle Steel and James Patterson, that’s going to be a hard case to win.”

The stakes

Within the publishing ecosystem, PRH’s bid to acquire S&S has been criticized by many industry players. After the announcement of PRH’s nearly $2.2 billion winning bid, Robert Thomson, CEO of HarperCollins’s parent News Corp. (believed to be the underbidder for S&S) lashed out. “There is clearly no market logic to a bid of that size, only anti-market logic,” Thomson said, adding that PRH was buying “market dominance as a book behemoth.”

In registering its opposition, the Authors Guild, among the most vocal critics of the deal (and of industry consolidation in general), also went after what it called the industry’s true monopsony: Amazon. “Amazon’s grip on our industry is the ultimate cause of the recent drive toward further consolidation,” Authors Guild officials charged, adding that without antitrust reform and the political will to take on Amazon, “quashing the proposed PRH/S&S merger will prove to be too little, too late.”

Meanwhile, a cold realization has also set in among many industry players as the trial approaches: someone is going to buy Simon & Schuster. Of all the identifiable options at this point, many in the industry have suggested, on background, that PRH may well be the most preferable landing spot. But this tacit acceptance of one large publishing firm towering over its competitors is less an endorsement of PRH, Sagers suggests, as it is a comment on how badly antitrust enforcement has been allowed to atrophy.

“Basically, every litigated merger challenge today involves a merger that would not even have been attempted not very long ago,” Sagers said. “But when these cases are litigated now, they are uphill climbs for the government and the government loses them fairly often.”