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Why a US court blocked Penguin Random House and Simon & Schuster merger

A US court Monday (October 31) blocked the proposed purchase of publishing house Simon & Schuster by Penguin Random House (PRH), on the grounds that it would “lessen competition” for top-selling books.

The US government’s Department of Justice had gone to court to block the merger of the two publishing behemoths, which together would have controlled 49 per cent of the market for blockbuster books. The government’s star witness was author Stephen King, published by Simon & Schuster.

Looming large over the proposed deal and the trial was e-commerce giant Amazon, against whom traditional book publishers are waging an uphill battle.

Penguin has announced that it will appeal the federal court decision.

Here are the key issues in the trial, what the government argued, what the publishers claimed, and what King and other authors have said.

Key issues

The US publishing industry is dominated by the Big Five – Penguin Random House, Simon & Schuster, HarperCollins, Hachette, and Macmillan, which make up 90 per cent of the market for top-selling books. Penguin is owned by German media group Bertelsmann while US firm Paramount Global owns Simon & Schuster.

The merger of PRH and Simon & Schuster would have put them in a position where they could corner the most lucrative deals while paying a smaller amount to authors, the US government and author bodies had argued.
PRH publishes novelists like Zadie Smith, Danielle Steele, Barack and Michelle Obama, Bill Clinton, Toni Morrison, John Grisham, Dan Brown, etc., while Simon & Schuster has Stephen King, Bob Woodward, Colleen Hoover, Jennifer Weiner, Hillary Clinton, among others.

On the other side were arguments that publishers need to merge, to cut costs and pool resources, if they are to have a chance against Amazon.

On part of the government, the Joe Biden administration has been favouring more competition and a reduced footprint of behemoths in the market. In fact, this victory comes after two court losses against other proposed mergers – manufacturer US sugar taking over rival refiner Imperial Sugar Co.; and insurer UnitedHealth Group acquiring healthcare technology firm Change Healthcare.

What the US govt argued

While most merger battles are about what the consumer will pay, in this case, the government focused on authors’ incomes.

The Justice department’s basic argument was that the merged company would dominate the market for books with author advances of $250,000 and higher so completely that the amount authors are paid, as well as the number of titles released, would fall. For this, it cited blockbusters for which the two companies had bid as rivals, and claimed that the bidding war drove up the author’s eventual advance.

After the verdict, Assistant Attorney General Jonathan Kanter of the Justice Department’s Antitrust Division was quoted by AP as saying that it “protects vital competition for books and is a victory for authors, readers, and the free exchange of ideas. The proposed merger would have reduced competition, decreased author compensation, diminished the breadth, depth, and diversity of our stories and ideas, and ultimately impoverished our democracy.”

What the publishers argued

As reported by The Guardian, PRH and Simon & Schuster claimed that their merger would increase what authors are paid, as they would be able to save more and thus spend more on books. The publishers also said that the bidding wars the government had talked about were not common between them. PRH, the bigger house, said it would not reduce the number of titles acquired or the amounts paid for book deals after the merger.

PRH’s CEO Markus Dohle said that the imprints of Penguin Random House and Simon & Schuster would still be permitted to bid against each other. However, under oath during the trial, he said this guarantee was not legally binding, reported AP.

After Monday’s verdict, Penguin spokesperson Alexandra Hill was quoted as saying by Politico, “We strongly disagree with today’s decision, which is an unfortunate setback for readers and authors, and we will immediately request an expedited appeal. 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.”

What authors said

Among the authors and agents who testified was Stephen King. During the trial, he said “consolidation is bad for competition.” “You might as well say you’re going to have a husband and wife bidding against each other for the same house. It’s kind of ridiculous,” the bestselling author told the court.

Other authors had also opposed the merger. In the US, associations like the Authors Guild and the National Writers Union, along with the nonprofit Open Markets Institute, had urged the government in January to block the deal. Soon after, the Authors’ Guild’s UK equivalent, the Society of Authors, said the deal could have “a generally anti-competitive effect on prices for consumers and significantly adverse contractual terms for authors”, The Guardian reported.

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