On November 7, Judge Florence Pan released her memorandum opinion blocking Penguin Random House from acquiring rival Big Five publisher Simon & Schuster—and in the final analysis, after a year of legal wrangling and a three-week trial that captivated the publishing industry, it wasn’t a close case for her at all. In an economical 80-page decision, Pan found the U.S. Department of Justice showed the proposed merger would likely “lessen competition” in the market for book rights in violation of Section 7 of the Clayton Act.
“The government has presented a compelling case that predicts substantial harm to competition as a result of the proposed merger of PRH and S&S,” Pan concluded. DoJ attorneys properly defined a relevant market—“anticipated top selling books” with advances over $250,000—which, she noted, accounts for 70% of the advance monies paid to authors. The post-merger entity would have had a “concerningly high” 49% market share, more than twice that of its closest competitor in an already concentrated market in which “the two top competitors would hold 74% of the market and the top four market participants would control 91%.” And, citing the publishers’ previous actions a decade ago in the Apple price-fixing case, Pan found “strong evidence” of “likely unilateral and coordinated” effects that would further harm competition.
At the same time, Pan shredded each of PRH/S&S’s defenses. In a key blow, she swiftly dispatched with the defense’s central argument that the government’s focus on books with advances over $250,000 was incorrect on both the facts and the law. She was "unpersuaded" by PRH/S&S arguments that new and existing competitors (including smaller indie publishers and upstarts like Zando and Astra) would preserve competition. She rejected the idea that literary agents would keep the merged firm in check. And she dismissed the argument that “internal competition” among PRH and S&S editors would keep competition robust, finding that PRH CEO’s Markus Dohle’s “extraordinary pledge” to allow internal bidding reflected his “awareness of how threatening the combined entity would be to authors and agents.”
The full opinion comes a week after Pan released her final order blocking the merger, delaying the release of the opinion to allow for a few minor redactions of confidential information.
Few were surprised by the court’s decision last week, given that Pan appeared clearly skeptical of the proposed merger at trial. But before trial, the unfamiliar “monopsony” claims at the heart of the case had left observers unsure of how the case might play out. In the end, however, Pan found the DoJ’s approach to be highly effective, and, in a crucial blow to the defense, found the government's “use of high advances as a proxy for anticipated book sales” to be “logical and supported by market realities.”
On the other hand, the judge was not persuaded by the publisher defendants' efforts to portray the $250,000 advance market as an invented, arbitrary “price segment” rather than a legally cognizable submarket. And after displaying a firm grasp of publishing industry practices in the opening 22 pages of the opinion, Pan rejected the publishers’ attempts at trial to “insist that all books are the same in the market” or that it is impossible to predict which books would be “top sellers,” calling those arguments “unsupportable”
“The court has no trouble recognizing that anticipated top-selling books are distinct from the vast majority of books that do not carry the same expectations for success,” Pan wrote. “The fact that the Big Five publish 91% of anticipated top sellers supports a finding that authors of such books have unique needs and preferences. Although smaller publishers can sometimes put out an anticipated top selling book, it is the Big Five who have the backlists and the marketing, publicity, and sales advantages necessary to consistently provide the high advances and unique services that top selling authors need. It is precisely those specialized needs that make the authors of anticipated top selling books vulnerable to targeting for price reductions. Publishers of anticipated top selling books know that such authors are not able to find adequate substitutes for publishing their books because of their unique needs and preferences.”
With the submarket established, Pan easily found a prima facie case existed to block the deal, citing the dominant position of a merged PRH/S&S in an already heavily concentrated publishing industry (as calculated by the government’s expert witness, Dr. Nicholas Hill, and using a prime antitrust metric called the Herfindahl Hirschman Index).
“The 49% share that the post-merger PRH would hold is far above the levels deemed too high in other cases,” Pan held. “Moreover, the high concentration must be considered in the high context of an undeniable trend in consolidation in the publishing industry.”
And in a strong rebuke, Pan, citing the recent history of collusion and price-fixing in the 2012 Apple e-book case, cited the risk of “coordinated effects” should the merger be approved.
“As an initial matter, a history of collusion or attempted collusion is highly probative of likely harm from a merger,” Pan wrote, calling the Apple case “significant” and “a backdrop for trends in the industry that appear to demonstrate that the Big Five are already engaging in tacit collusion or parallel accommodating conduct.”
“Recent years have seen the industry-wide standardization of certain contract terms—involving payment structure, audio rights, and e-book royalties—in ways that favor publishers over authors, suggesting that the top publishers have engaged in coordinated conduct,” Pan wrote, in a particularly blistering section of the opinion. “Advances used to be paid in two installments before publishers uniformly moved to paying them in three installments and then four installments, thereby delaying authors compensation. After audiobooks became a significant source of revenue in the industry, publishers uniformly refused to acquire books without audio rights included thereby limiting authors’ ability to maximize their compensation and preventing authors from diversifying their sources of income.”
Pan cited an “illustrative” example from the evidence, in which S&S refused to bid on a highly sought after book because the agent attempted to withhold audio rights. An S&S editor noted that the other Big Five publishers also had “no audio, no deal” rules, and questioned whether one of the other Big Five houses would join the auction. Ultimately, Pan noted, the agent was forced to restart the auction with audio rights included.
“It is significant that in a market already prone to collusion, where coordinated conduct already appears to be rampant, PRH’s acquisition of S&S would reinforce the market’s oligopsonistic structure,” Pan concluded, “and create a behemoth industry leader that other market participants could easily follow.”
Meanwhile, Pan devoted less than 19 pages to the Defendants’ rebuttal, quickly dispatching with PRH/S&S’s arguments that indie publishers, new entrants, strong literary agents, and “internal” competition would keep competition for book rights robust. And in a final passage, she rejected as “not relevant to the court’s analysis” the idea that (as some industry observers have suggested) PRH would be the best home for S&S vs. a potential private-equity acquisition.
“The focus of the court’s inquiry is harm to competition in the relevant market,” Pan wrote, calling concerns about a private equity acquisition highly speculative. “Other potential buyers in the publishing industry have shown interest in acquiring S&S and it is just as likely that another publishing company will prevail in a future sale. Nor is the court moved by the desire of S&S and its employees to be acquired by PRH. It comes as no surprise that S&S would like to benefit from the extraordinary market power and other advantages that the combined entity would enjoy. The court however must focus on harm to competition in the relevant market.”
A potential appeal now looms. "As we demonstrated throughout the trial, the Department of Justice’s focus on advances to the world’s best-paid authors instead of consumers or the intense competitiveness in the publishing sector runs contrary to its mission to ensure fair competition," PRH officials said last week, in a statement. "We believe this merger will be pro-competitive, and we will continue to work closely with Paramount and Simon & Schuster on next steps."
In comments made at the Sharjah International Book Fair, PRH CEO Markus Dohle doubled down, saying the decision was "utterly wrong" and suggesting the ruling was "political" in nature.
"We would have been able to sell more Simon & Schuster titles than they would have been able to sell on their own,” Dohle said, adding that the combined companies would have represented less than 20% of the overall book market, where “Amazon represents more than 50% of the retail market.”