Book Publishing Mega-Merger BLOCKED
Judge Florence Pan ruled for the government, blocking publishing giant Penguin Random House's takeover of Simon & Schuster. This win is just the latest victory for the Antitrust Division.
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It’s been a VERY good week for the Antitrust Division at the Department of Justice. After a high-profile merger trial in the summer, enforcers won a key victory yesterday, as Judge Florence Pan blocked the combination of dominant publisher Penguin Random House and Simon & Schuster.
The Division also went after the core business model of private equity, and got the first criminal guilty plea for monopolization in 45 years. The government has been on a losing streak of late, but that just turned around in a very big way.
All Bark and No Bite?
A few weeks ago, I got an invitation to speak at an upcoming American Bar Association panel, which I enjoy doing because the ABA is the center of antitrust establishment thinking. Though many members do not agree with my view of how to address monopolization, I tend to like chatting with antitrust lawyers and learn a lot when I do so. In this case, the panel has a title that indicates how some establishment feel about the Biden regime. It’s called ‘All Bark, No Bite? Antitrust Under Biden.’
I’m looking forward to it, because the wryness of the title speaks to the basic ideological discomfort involved in changing political economy regimes, an emotionally driven veering from panic to fear to contempt. For the first year of the Biden administration, the antitrust bar and their allies in Silicon Valley and Wall Street were a bit terrified, since Biden picked aggressive enforcers, Lina Khan and Jonathan Kanter, to run the agencies. But over the past year, they have watched the air seep out of the Biden balloon. Then the government lost antitrust cases involving Altria-Juul, U.S. Sugar, Booz Allen, and UnitedHealth Group. And so the forces of the status quo concluded that, well, there won’t be big changes, it’s business as usual.
They may well be right, but seeing the world in such stark terms was always a bit dangerous, because changes in the law take time. As I noted back in June, Kanter and Khan have put a bunch of torpedos in the water, and there’s a lag time after the launch of a torpedo and before it rams the hull. It’s easy to think nothing’s happening on the placid surface even as something is churning underneath.
Well, one of those torpedos just exploded, in the form of Judge Florence Pan ruling against the merger of two large publishing houses, Penguin Random House and Simon & Schuster, in a case that will reverberate in important ways across the economy. This ruling was front page news in the Wall Street Journal, the New York Times, and the Financial Times, as well as publishing trade publications. Even seemingly unconnected groups, like the Writer’s Guild West of TV and movie writers, chimed in approvingly.
To understand the importance of this case, it helps to start with the details. In 2020, Penguin Random House, the biggest of the ‘Big Five’ publishers that control the market for most commercial books, sought to buy a rival, Simon & Schuster. For decades, the publishing business had consolidated with no reaction from the government, and there was no reason to think this merger would be any different.
And yet, this time, the Antitrust Division brought an antitrust claim under the Clayton Act, and took Penguin to trial over the summer. I profiled the case back in August during the trial, predicting the government would win. Here’s the gist of the case.
The Antitrust Division made two essential claims in its lawsuit against Penguin Random House. First, Penguin Random House, which is already the largest book publisher in the world, would, if it is able to buy Simon & Schuster, be able to choose which books are published in the U.S. In addition, the firm could determine how much writers get paid for their work.
Writers sell their book proposals to publishers via an auction process.
Having four major bidders, instead of five, would seem to lower the amounts that a buyer must pay to win in an auction. The consolidation of publishers has already hit writers in their pocketbooks. The Author’s Guild, for instance, has found that the average author is now struggling and makes $20,000 a year, which is lower than poverty wages.
It’s always impossible to know the outcome of a trial, but so far I think the government has put up a stronger case.
This case matters for a number of reasons. In most antitrust cases, the plaintiff will claim that the consumer price of a product would go up. In this case, however, the government did not claim book prices would go up for consumers, but that publishers could exert their buying power against authors by lowering the amount writers get paid for their work. In other words, it’s the first merger challenge based on a labor claim. Additionally, the government argued that free expression can be an element of antitrust analysis, since the diversity of book topics would go down if the market consolidated further. It’s also the first fully litigated winning merger challenge for the Antitrust Division since 2017, so that’s nice.
The reaction in the publishing world, which was terrified of more market power control of their livelihoods, was joyful.
For instance, Stephen King, who testified at trial, tweeted support for the decision.
The whole industry was watching the case, and most writers, editors, and agents did not expect that the government would either challenge the merger, or prevail. Thousands of writers took to Twitter to talk up what happened, and it was fascinating to see the sense of hopelessness and lack of faith in democratic government fade, just for a moment.
Many of the jokes were costume-related, since the decision came out at 7:30pm on Halloween. For instance:
So what’s next? Penguin Random House says it will appeal, which means that the D.C. Circuit Court will review the decision for any misreadings of antitrust law by the judge. Judge Pan is a well-respected liberal, and immediately after the trial got promoted to the U.S. Appeals Court for the D.C. Circuit. Pan became a bit of a star among authors during the trial, who they saw was attentive and asked good questions to learn things about their industry that in some cases even they didn’t know.
What’s interesting is that the case, on appeal, will go to the D.C. Circuit, where she now sits. She won’t hear it, but it will be reviewed by her new colleagues. I imagine it’ll be hard for them to overturn her decision, but not impossible. Typically appeals courts have to find an error of interpretation of law to overturn a decision, and it would be difficult to change this ruling without butchering a pretty straightforward application of the Clayton Act. It’s not to say no panel of judges would do that, but it would be unusual if they did.
The politics here are also fascinating. While the publishing world is *very* Democratic, they do align with conservatives in disliking consolidation in their industry, even if they don’t realize it. For instance, Supreme Court Justice Amy Coney Barrett just signed a $2 million book deal with Penguin Random House, and hundreds of Penguin’s left-leaning staffers protested and sought to have the deal canceled. This hostility to conservatives is routine in left-leaning spaces, which conservative legal elites have noticed. Were Penguin to buy up Simon & Schuster, it would further consolidate power that could be used against them. And so while Trump judges tend to dislike antitrust law, some of them also realize that there is a problem with consolidation and free expression.
So why, if it’s a tough appeal, is Penguin going forward with the case? My guess is they are fending off rivals. If the Circuit Court overturns the decision, they get to buy Simon & Schuster. But if the court upholds Pan’s reasoning, then Penguin has cemented a precedent that the Big Five publishers can’t merge with one another. In the trial, it came out that both HarperCollins and Hachette wanted to buy Simon & Schuster, and would make a bid if Penguin’s fell through. With a D.C. Appeals Court precedent, it would mean no one in the industry gets to buy Simon & Schuster. Basically, Penguin is saying “If I can’t have Simon & Schuster, no one can.”
In terms of precedent, this kind of merger challenge will make it harder to consolidate in Hollywood, because the studios would have to face the same buying monopoly claim that Penguin lost on. Publishing and streaming are very similar markets.
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The Rest of the Week
The ideal scenario is that Simon & Schuster remains a significant force in publishing, either spun off on its own or owned as it is now by Viacom. But it is possible Viacom simply chooses to sell the corporation to a private equity firm, which could try and find ways of exploiting its back catalogue of books and ending investment in new books. That would be the nightmare scenario, considering Simon & Schuster is a well-run publisher. But this scenario will always exist as long as we allow a business model based on financiers engaging in various forms of arson-for-profit. And that brings me to the rest of the week for the Antitrust Division.
A few days ago, I wrote up how Jonathan Kanter brought back Section 8 of the Clayton Act, the one used by Louis Brandeis to take on ‘the money trust’ by barring ‘interlocking directorates’ and repurposed it to address private equity. Multiple board members sitting on the boards of competing companies had to resign in response to DOJ investigations. Now the broader consequences are becoming clear. Here’s D.C. tip sheet Axios, on Justice Department letters that went out to “industry giants” Apollo, Blackstone and KKR. (I bolded the relevant words.)
Why it matters: Were overlapping board seats to violate U.S. antitrust law, then the same argument could apply to overlapping investments. That would blow a huge hole in the core investment strategies of many industry-focused PE firms. Plus of more diversified firms with robust industry practices.
Basically, no more monopolization for private equity.
Oh, and if that’s not enough, here’s another thing that just happened. Antitrust enforcers put handcuffs on someone for monopolization, for the first time in 45 years.
As I wrote back in March, the Division put handcuffs on the table, shocking the antitrust establishment by reminding them that the Sherman Antitrust Act is a criminal statute.
And now they actually put handcuffs on a construction company executive trying to monopolize the market for highway crack-sealing services in Montana and Wyoming. More importantly, they established a key precedent, which can be used in other cases.
All bark no bite indeed.
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P.S. As BIG readers know, I’ve been tracking the special dividend of that Albertsons may pay out to its private equity owners as part of the merger deal with Kroger. Antitrust enforcers asked the supermarket chain to delay the payout, and Albertsons responded by saying “No,” claiming the dividend has nothing to do with the merger, was planned before the deal, and that delaying it would cause serious legal liability. And while I hate using jargon, the special term of art to describe this legal rationale is ‘bullshit.’ Sorry for using overly technical language.
Senators Patty Murray and Maria Cantwell are now also concerned. We’ll see what, if anything, comes next.