A New Era in Antitrust Law? Take-Aways from the Blocked Penguin Random House and Simon & Schuster Merger
If you’ve walked into a bookstore at some point in the last few decades, you’ve probably seen the friendly penguin bedecking the spine of countless books. From popular fiction to classical Greek philosophy texts, the distinctive orange logo immediately apprises the reader that the book in front of them has been published by none other than Penguin Random House (or just Penguin, as it was known until 2013).
Despite the deceptively friendly penguin at its symbolic helm, Penguin Random House came under fire for its attempt to merge with rival publishing company Simon & Schuster in 2022. The proposed merger, which would give Penguin Random House control of “close to half of the market for the acquisition of publishing rights to anticipated topselling books”, generated significant buzz in the literary world.
The merger also attracted the attention of the U.S. Department of Justice (DOJ) which, citing concerns over the implications for competition, officially blocked the proposed merger between Penguin Random House and rival Simon & Schuster on October 31, 2022. The move by the DOJ to block the merger is part of an unprecedented era of enforcement in the DOJ’s antitrust division, and is expected to have significant implications for antitrust law as a whole.
This post outlines the timeline of events leading up to the DOJ’s judgment, as well as the key reasons in the decision. While the implications of this decision have yet to fully reveal themselves, this pivotal event gives us some indication of what can be expected in the future of U.S. antitrust law.
A Peek Inside the Publishing World
Penguin Random House and Simon & Schuster, owned by German media group Bertelsmann SE and Paramount Global respectively, are two members of the “Big Five” of publishing. Along with HarperCollins, Hachette, and Macmillan, the Big Five control roughly 80 percent of the market for books in the US.
Following several smaller mergers–and a historic 2013 merger with Random House that brought the then-Big Six down to the Big Five–Penguin Random House became the biggest of the Big Five, with a market share of over 25 percent in 2020.
When Simon & Schuster was listed for sale in 2020, it was anticipated that one of the Big Five would acquire it. Penguin Random House and HarperCollins, the country’s second largest trade publisher, were the final bidders in the auction.
Shortly after, Bertelsmann announced it had reached an agreement to buy S&S for $2.175 billion. Subject to regulatory approval, the sale would combine the country’s largest and third largest trade publishers, for projected revenues of close to $3 billion.
The outcome, while not entirely unexpected, at the time spurred much attention from the publishing and literary community. Parent company Bertelsmann and Penguin Random House were both highly optimistic about the forthcoming merger. Penguin Random House CEO Markus Dohle remarked that the merger of Penguin and Random House met little regulatory resistance, and the deal was closed in about eight months. While Dohle would not put a timetable on when the S&S deal would be completed, he reportedly expressed that he did not expect any antitrust issues to arise.
Vox reported, “It was clear that a new publishing house made of Penguin Random House and Simon & Schuster would dominate the industry in a way no one had seen before, but few in the industry appeared to believe that then-President Trump’s apparently corporate-friendly Justice Department would actually care enough about the proposed merger to try to interfere.”
The New Era in Antitrust: The DOJ Suit against PRH, S&S, Bertelsmann, and ViacomCBS
Looking back, things did not go as planned. On November 2, 2021, under the new Biden administration, the Department of Justice (DOJ) filed suit against both Penguin Random House and Simon & Schuster, as well as parent companies Bertelsmann and ViacomCBS.
Among other things, the DOJ argued that the proposed acquisition “would likely harm competition in the publishing industry”, and result in substantial harm to authors, particularly authors of anticipated top-selling books. If approved, Penguin Random House’s “next largest competitor would be less than half its size.”
The suit included a chart illustrating that, “when measured by total advances paid to authors for rights to anticipated top-selling books, the combined Penguin Random House-Simon & Schuster (shown in dark blue and orange) would far outstrip the remaining Big Five publishers and the largest independent publishers (shown in lighter blue), and enjoy substantial market power in its negotiations with authors.”
The suit also noted that by effectively reducing author compensation, the acquisition would also harm consumers. By reducing author pay, “[f]ewer authors will be able to make a living from writing” which, in turn, “will have an impact on the output,” leading to an overall reduction in the quantity and variety of books published.
In an op-ed for Vox, Constance Grady aptly observed that while there are known implications for antitrust from monopolies, which drive up consumer prices, here the DOJ argued that in acquiring Simon & Schuster, Penguin Random House “would form a monopsony — an unfair buying market that would drive down the money paid to authors.”
Compared with a monopoly, where there is only one seller that can charge whatever they like, in a monopsony, there is only one buyer who can set their price at whatever they like. While monopsony is “historically rare”, it has become increasingly mainstream, as detailed in the cover story of the American Bar Association's Antitrust magazine of Spring 2019.
David and Goliath Go To Trial
While Penguin Random House was already a powerhouse in publishing, and the acquisition of Simon & Schuster would provide them with even more leverage, observers were quick to note that “both publishers continually presented themselves as scrappy underdogs doing their best to ride out a tough market.” Early on, the two companies pushed a narrative that “a combined PRHS&S would give helpless publishers the leverage they needed to push back against the almighty force of Amazon.”
Penguin Random House’s lawyer Daniel Petrocelli argued during trial that the deal would have “enormous benefits” for readers and authors alike since the imprints, or brands, owned by the two giants would continue to compete against each other.
However, experts were skeptical. Chris Sagers, law professor at Cleveland State University, claimed the book industry already is overcharging readers and underpaying authors, and that both Amazon and book publishers have been permitted to grow too large and powerful. His sentiment was shared by several top-selling authors and literary agents who testified on behalf of the government, including Stephen King.
Writing The Final Chapter: A Win for Antitrust?
On Monday October 31, 2022 the Department of Justice succeeded in blocking the proposed merger between Penguin Random House and Simon & Schuster.
Writing for the U.S. District Court for the District of Columbia, Judge Florence Pan said she found the Justice Department had shown the deal may substantially lessen competition "in the market for the U.S. publishing rights to anticipated top-selling books."
While Judge Pan’s decision was not surprising to those who had been following the trial, the outcome is nonetheless notable both for its impact on the multibillion-dollar book publishing industry and on the future of antitrust law. Indeed, the decision represents a “dramatic departure from recent history in the book world and beyond”, especially as the publishing industry has been consolidating for years with little interference from the government.
Only three weeks later, the DOJ shifted its antitrust scrutiny to Ticketmaster and parent company, Live Nation Entertainment. While the DOJ has been careful to emphasize that there is no imminent legal action being taken against either company, the recent outcome of the Penguin merger is but one reason to expect that stricter antitrust measures may soon become the norm.
Another indication of this comes from reports that the DOJ’s antitrust division hired an unprecedented number of trial attorneys from Big Law firms in 2021. While this hiring boom partly reflects the higher volume of merger notifications the DOJ received in 2021, a number of these hires have been slotted in the antitrust division’s new litigation unit. This division is a surefire sign of the DOJ’s heightened readiness to litigate on antitrust issues.
Some have been too quick to attribute the change in federal antitrust enforcement strategy to politics alone. To be sure, President Joe Biden ordered, by way of a July 2021 executive order, stricter antitrust enforcement. However, others have attributed these stricter measures to broader changes in the market. In her 2021 book, Antitrust, Amy Klobuchar observed that “The effects of monopoly power can be felt everywhere, raising all sorts of questions for the American economy.” Op-ed writer Krista Brown likewise noted that the monopolistic power held by Live Nation is “emblematic of where we are in terms of corporate power having far too much influence in our economies, our society, and our ability to make choices as citizens and consumers.”
In short, the Biden administration’s stricter stance on antitrust may be a natural reaction to the growing reach of corporate power and consolidation over recent years. If this is the case, the big question is whether the blocked Penguin Random House merger may usher in a new era for antitrust not only in the United States, but in all advanced capitalist societies with similar experiences of expanding monopoly power.