After months of anticipation, the government’s bid to block Penguin Random House’s acquisition of rival Big Five publisher Simon & Schuster got underway in Washington, D.C., on August 1. It wasn’t exactly an electrifying start.
In opening arguments, there were no surprises. The parties largely stuck to their pre-trial briefs, with the government asserting that a merger would harm authors and the defense insisting on the opposite. Then the government’s first witness, Hachette Book Group CEO Michael Pietsch, took the stand to offer a basic, foundational view of the current competitive landscape in the publishing world, with many a detour into the nuts and bolts of the business.
The result was a sort of meandering publishing 101. In halting, often clipped responses, Pietsch, a 45-year publishing veteran who estimated he has personally acquired between 300-400 titles over his career—and overseen many more acquisitions as an executive—attempted to explain to the court how basic things like book advances and rights auctions work, and how publishers manage their bidding strategies.
But the key points of his testimony involved the competition for book rights, in which Pietsch explained in no uncertain terms that when Hachette loses a book they’ve bid on, they “very seldom” lose it to a publisher outside the Big Five, and even more rarely when it comes books with advances over $250,000, the portion of the market the government is focusing its case on. In fact, Pietsch revealed that Hachette keeps a running list of the books the publisher loses out on over $500,000—called “The Ones That Got Away”—and of the 302 books on the list (at the time the list was entered into evidence) Pietsch told the court that Hachette lost the most to PRH (124), followed by their fellow Big Five publishers in order of size: HarperCollins, S&S, and Macmillan.
Under questioning from the government, Pietsch also outlined the significant advantages that the Big Five publishers hold over their smaller competitors, chief among them their large backlists, cobbled together over decades of acquiring other companies (HBG has made six acquisitions under Pietsch). A bigger backlist means more revenue, and importantly more profitable revenue—and more revenue means more resources, and a greater tolerance for taking risks on higher advances. Hachette derives roughly $300 million a year, roughly a third of its revenue, from backlist sales, Pietsch testified, noting that smaller publishers do not have such a cushion, and later adding that it is “not conceivable” that a new entrant in the publishing business could build a competitive backlist advantage "organically."
Furthermore, Pietsch explained, the Big Five publishers enjoy other significant scale advantages over other publishers, including more media pull, review attention, as well as marketing and retail advantages. He noted that Amazon Publishing, despite its parent company's size and influence in the book business, has not emerged as a competitor where book acquisitions are concerned—nor is the self-publishing industry Amazon helped forge. “Anyone can publish a book now, and that’s a wonderful thing,” Pietsch said—but those books and authors simply do not compete with the major publishers.
When finally asked for his take on how for a PRH/S&S merger would impact the industry, Pietsch expressed a litany of concerns. Advances would likely decline, he suggested, as one of “the major houses” would be subsumed, decreasing the number of bidders for a work. Title count would also likely go down, he surmised, as there is likely some redundancy between PRH’s and S&S’s publishing programs that would be eliminated. Pietsch also expressed concerns about the impact on the “variety” of books published and the risk of “homogenization.”
On cross-examination, defense counsel Daniel M. Petrocelli engaged in a few strained exchanges with Pietsch. These included a line of questioning about bidding strategies, which was intended to suggest that PRH would be unwise to pursue a strategy of offering lowering advances because other publishers—including Hachette—would simply step up and win the books, but instead left Pietsch questioning Petrocelli’s logic.
One of the punchier exchanges involved a discussion of the potential buyers for S&S should the merger be blocked—including Hachette, with Pietsch admitting that he would like to see parent company Hachette Livre bid on S&S even though the company did not do so in 2020.
“So you’re not concerned with a 5-4 merger,” Petrocelli remarked, to which Pietsch responded that he was never concerned with a merger taking the Big Five down to a Big Four, but with the creation of one "super dominant publisher” that is “so far out of scale” with the rest of the business, a view shared by many industry insiders. The problem isn't so much that S&S is being acquired, Pietsch suggested, the problem is that Penguin Random House, already the largest Big Five publisher, was acquiring it.
Indeed, the government's opposition to Penguin Random House's acquisition of Simon & Schuster is largely based on size. “Penguin Random House’s proposed acquisition of Simon & Schuster would further entrench the largest publishing giant in the United States (and the world) and give the merged company control of nearly half of the market to acquire anticipated top-selling books from authors,” the DOJ’s pre-trial brief states, adding that if allowed to proceed, “the proposed transaction would eliminate competition between two of the last remaining major publishers” likely resulting in "authors being paid less for their efforts and fewer authors being able to earn a living from writing.”
In his hour-long opening argument, DOJ lead attorney John Read hammered that point home. “This merger must be stopped,” Read began, noting that the combined firm would "own nearly half the market,” and pointing out that "no new publishers have cracked the inside circle of the Big Five in nearly three decades.”
Read told the court the government only had to show "what may occur" to prevail in the case, arguing that the Clayton Act was designed to stop anti-competitive conduct "in its incipiency" before "a lessening of competition" may occur. And he defended the government's focus on authors, and specifically on a subset of authors of so-called anticipated top-selling books, accusing the defense of attempting to minimize the impact of the merger on this part of the market. But these top selling books are "the bread and butter" of the publishing business, and for the authors "competition matters."
Read said the government's expert witness, Nicholas Hill, will show a significant negative impact on author payments if the merger is allowed, and that the evidence will show there are "high barriers" to becoming a publisher capable of competing with the Big Five in auctions for books at $250K or higher. A combined PRH/S&S will "dominate," Read argued, claiming that that the post-merger market for anticipated top selling book rights, measured using the Herfindahl-Hirschman Index (HHI), a key tool for measuring market concentration, shows an 891-point increase in the HHI and a post-merger HHI of 3,113, making the merger presumptively illegal. An increase of more than 200 points in HHI and a post-merger HHI of 2500 is the threshold to trigger a presumption of illegality.
In his opening argument, which also ran about an hour, PRH lead attorney Daniel Petrocelli countered that the government had to show "a substantial lessening of competition" to prevail, and insisted the government would fall far short of that mark. He called the government's action "the great shrinking case," accusing DOJ lawyers of narrowing the case down to a small, ill-defined section of authors in an effort to show market harm because there is no harm to consumers and no harm to competition more broadly.
"The government has created an artificial market to create artificial concentration to create artificial harm," Petrocelli said, noting that presumption of harm, when the HHI is calculated for the entire market and not just the $250K advance market, the deal does not hit the HHI threshold and the deal is not presumptively illegal.
Following the script laid out in their pre-trial brief, Petrocelli said government’s theory of the case—that author advances, especially advances over $250,000 will be harmed—is fatally flawed.
“The government tries to erase 98% of the market, shriveling it down to the small segment of books that are acquired for advances of at least $250,000. But that price segment is just that—a price segment, not a cognizable ‘market,’” PRH attorneys argue in their brief, a point Petrocelli emphasized in his opening argument.
“The government’s proposed product market is entirely wrong,” he said, emphasizing that prior to this case there was no defined market in the book business for "anticipated top selling books," or for advances over $250K, quipping that “every book starts off as an anticipated top seller, as a gleam in an editor’s eye.”
Petrocelli said the evidence will show that competition for book rights would continue to be robust and that author advances post-merger "are not going to go down. They are going to go up.”
Today's proceeding will begin with literary agent Ayesha Pande, who took the stand late yesterday, offering an exposition of the agenting business. S&S author Stephen King is also expected to be called as a government witness, adding some star power to the proceedings.