Closing arguments for the Department of Justice’s antitrust case aiming to block Penguin Random House’s purchase of Simon & Schuster were offered on Friday in Washington D.C. First up was the Department of Justice’s John Read who reiterated many of the same points that have been made over the previous three weeks.
Read summarized his agenda up top: "This merger will end that competition which benefits authors, and authors will earn less money for what they write." He added, “We brought this case because the best protection for authors is robust competition. This is not about the passion of publishers for books and authors, this is about the largest publisher, Penguin Random House, cementing its position at the top of the market.”
Underscoring that this was not a trial about publishing per se, he launched his first fusilade. “We have been told that this is an industry where the normal rules of economics and antitrust do not apply," he said, before, in pointed terms criticizing PRH's various arguments: “It's almost like they're claiming that the value of books isn't about expected sales, but alchemy.” He also dismissed, as immaterial, PRH’s assertion that it would be a good custodian for S&S: "The good intentions of the defendants don't save this merger, and they don't save this industry from a duopoly."
Read then went on to defend the DOJ’s decision to focus on the authors who earn book advances over $250,000 – a point that has been continuously criticized by the defense as arbitrary. “Those authors at the very high end have different needs and opportunities than those at the very low end,” he said, noting that higher advances were typically tied to an anticipation of higher sales – a point made by S&S CEO Jonathan Karp and PRH US CEO Madeline McIntosh at various points during the trial. Furthermore, he defended the use of a single figure – in this case $250,000 – by pointing to prior antitrust cases involving Staples and Whole Foods, where a single sum was agreed upon as a placeholder to differentiate the most valuable aspects of the business.
Read added that the figure wasn’t arbitrary because it was noted that it was at that level where Karp used it for his “level of approval", and it was between $250,000 and $500,000 where PRH’s Markus Dohle felt books could “meaningfully change PRH’s market share.” He also referenced author Andrew Solomon’s assertion earlier that higher advances correlated to larger print runs and higher sales.
Read went on to discuss the fact that though the “anticipated top selling authors” are only 2% of the market, they remain significant. (During the trial, the figure was floated that they may represent as much as 70% of sales). He dismissed PRH’s arguments that there were viable competitors who might suddenly emerge, such as Amazon Publishing or new companies like Spiegel & Grau, of which Read said: “A publisher that re-founded itself a few years ago and published a handful of books, that Penguin Random House closed the imprint and retained its backlist -- it’s improbable to find publishers they didn’t want to keep are now competitive with them.”
He went on noting that, “no publisher has entered the market in the past 30 years and become as strong as the Big Five.”
Read also rejected the idea that “sophisticated agents” hold enough power to be a viable form of constraint for PRH’s relative potential market power, contending that they are slipping in influence, citing the fact that advance payments are now being paid in quarters, rather than thirds, and certain rights are no longer negotiable.
One particular area Read focused on was on PRH’s pledge not to curtail imprints in a merged company from bidding against each other. “It’s not enforceable, but it is revocable. They can close, merge, refocus imprints; they can admonish editors not to take risks, they can deny them money for advances. All this can be done internally without violating the law.”
He reiterated that there appeared to be no dispute that post-merger Penguin Random House will be will be more dominant than it already is and remarked that even the board of directors of Bertelsmann recognized “publishing in the U.S. market is an oligopoly.” Quoting the DOJ’s expert witness, economist Nathan Hill, Read said a combined PRH/S&S will have 49% market share of anticipated top-sellers, while the Big Five will have more than 95% of the market. Hill also anticipated reduced advances by $45,000 per book and Random house and Simon & Schuster's advances reduced by $105,000 per book.
Anticipating criticism from Dan Petrocelli, PRH’s attorney, in his subsequent close Read said, “Dr. Hill acknowledges [his economic model] isn’t a perfect fit. But it is consistent with other economic experts in courts in this district. …Though there have been arguments about the poor fit of the model, [PRH] failed to provide any other model that proved a better fit.”
In closing, Read underscored that for the government to win, it need “only prove a reasonable probability of harm.” And, said Read, “the harm is substantial.” He continued: “Stephen King. He flew here voluntarily because he understood the impact on younger authors, he understood the consolidation would make it tougher for them.”
Read suggested the merger and lower advances would curtail the diversity of books published, speculating that some books would not be researched as accurately or never get written. He said a merged PRH/S&S would have unprecedented influence over the trade market providing the potential for retribution to a publisher that competes with PRH. “It would be easily implemented and enforced,” Read claimed, “when PRH has half the market, they can easily poach or counter poach authors or delay printing of their books.” Agents and authors too would be vulnerable, “We could see standardization of the royalty at 15% and non-negotiability of audio rights,” Read said. “This is all something that could be done.”
In conclusion, he said, “Let’s end where we started. Whether it’s [an advance] of $75,000, $140,000, or $800,000. This is compensation for real work. This means something to people who work hard to generate books.”
PRH's closing argument
A short break followed Read’s testimony, with Penguin Random House’s attorney Bill Petrocelli then taking the stand – offering his opposing view of the facts. Petrocelli got in the most memorable quip of the day, when he reference the DOJ calling Stephen King to the stand. “I enjoyed listening to Stephen King," he said. “But no one is disputing his earnings. There are writers in this market who are billionaires. I mean Stephen King could buy Simon & Schuster.” Petrocelli also observed that books that earn $250,000 to $1 million advances are actually more risky acquisitions than has been presumed throughout the trial. “We might call them 'unanticipated top sellers.'"
Petrocelli went on to attack what he saw as the government’s use of the movie industry and others as having a false equivalency with the book business. He reiterated PRH’s position that $250,000 is a “false market” and the belief that $50,000 is a much more appropriate level as “there are many more buyers there, and added, it was also the level below which “enhanced services” – i.e. marketing -- from publishers fall off. Queried further by Judge Pan on this point, Petrocelli said the government didn’t want to use the $50,000 figure as a cut off because it would have “undermined the $250,000 level,” and later, “The only reason we are here is because the government has created artificial concentration to create artificial harm.” The defense has noted that the government provided no evidence the merger would lead to consumer harm, the typical standard in an antitrust case.
He explained further why the government’s premise that the worth of a book – and by extension the author – is not fully quantified by a profit and loss statement. “Actual marketing spend is not based on what is in the P&L. As Madeline McIntosh said, ‘What a publisher spends on a book is based on feedback from retailers, salespeople, and others.’ Marketing only has a loose correlation to the advance.”
When it comes to the impotence of other publishers to compete and agents to exert influence, Petrocelli dismissed the DOJ’s position by stating that power in publishing was determined on a case-by-case basis and because of the volume of titles available, quite diffuse. “Sixty-percent of [manuscript] sales are bi-lateral negotiations, 20% are best bid auctions, the remainder are round-robin auctions,” he said. He later returned to the testimony of both Edward Snyder, PRH’s expert economist, the Nathan Hill, the expert for DOJ. “When it comes to winning bids on anticipated top selling titles, Snyder said PRH or S&S won 6% of the time and Hill said they won 12%. So 90% of the time, neither of these companies are number one or number two.”
When it comes to the competitive nature of publishing, Petrocelli asserted that market shares are not good indicators, as there was a great deal of competition within publishing companies among imprints. In a rare moment of acquiescence to PRH’s arguments, Judge Pan asked Petrocelli, “Does imprint competition undermine the government’s arguments about market share?” Petrocelli replied, “It doesn’t give any credit to internal competition. Agents are provoking competition among dozens and dozens of publishers. Market share doesn’t reflect that reality.”
S&S's closing argument
In his close, Stephen Fishbein, the attorney Simon & Schuster and its parent ViacomCBS, (recently rebranded as Paramount Global) said that his company agreed to sell to Bertelsmann because “Bertelsmann offered the best price. We also believe that the deal will benefit S&S authors.” He addressed the concern that it would create too much market concentration. “Market share…is not static,” said Fishbein, asserting that “you will have competitors emerge for any gap in the market that emerges.” He cited Scholastic and Disney as large publishers that are not considered “Big Five” – “If we included them, it would change the landscape.”
After resolving a disagreement with Judge Pan about the nature and relevance of Christian and romance books to calculation of market share (a reference to the claim that if you exclude HarperCollins' religion and Harlequin businesses PRH is three time larger than HC's trade operation), Fishbein focused on advances, arguing, “the DOJ says they will fall by $100,000, but that doesn’t make sense. Books are not commodities.”
He then went on to rebuke the much derided term “farm team,” which had been bandied about after it was entered into evidence – out of context – from a memo by late S&S CEO Carolyn Reidy. “Other publishers are not ‘farm teams.’ Many bestselling authors stay at small and medium-sized publishers. They are real competitors. They are a real force.”
He continued later, “My clients want this merger because it is a cultural fit,” said Fishbein, “Penguin Random House is fully committed to books.” Other publishers “felt disadvantaged” because the new entity would do a better job at buying, marketing and selling books. “Even their criticism shows this is better” for authors.