Penguin Random House-Simon & Schuster Merger Won’t Drive Down Author Advances And They Will “Continue To Go Up,” Publisher’s Attorney Says At Opening Of Antitrust Trial — Update

Ted Johnson
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UPDATE: Penguin Random House’s proposed merger with Simon & Schuster will not drive down author advances and they will “continue to go up,” the attorney for the publisher said in opening arguments on Monday.

Dan Petrocelli, representing Penguin Random House, attacked the entire premise of the government’s case, arguing that it was relying on a definition of the marketplace for top selling books that “does not exist.” He argued that the DOJ “shrunk their case down to a tiny corner of the market,” while avoiding the impact that the merger would have on competition in the sale of books or even in the number of books that are published each year.

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“The government has created an artificial market to create artificial concentration to create artificial harm,” Petrocelli said.

He said that the DOJ’s focus on the market for anticipated best sellers is not grounded in how the business works. “Every book starts out as an anticipated best seller in the gleam or an authors or an editors eye,” he said.

He also indicated that in presenting the publishers’ case, they would pick apart the methodology used by the government’s key witness to assess the transaction’s competitive harm. Representing AT&T and Time Warner in the defense of their 2018 merger, Petrocelli deployed a similar tactic to try to undermine the government’s case.

Petrocelli also said that they will show that the publishers who pay advances of $250,000 or more is not confined to the big five publishers, but that more than 30 publishers of varying sizes compete. He said that non-big five publishers come in second in 23% of the auctions.

“You cannot define an antitrust market on the idea that you think a book is going to be a top seller,” he said.

He also challenged that publishers are in the driver’s seat when it comes to competition for the most prized titles. Should a combined Penguin Random House and Simon & Schuster be “foolish enough” to drive down their advances, other publishers will “jump in” to grab the most prized titles, he said.

“There is a saying that you know that the [author] agents have the power because the publishers always pay for lunch,” he said.

He defended the promise that Penguin Random House imprints would still compete internally against each other for titles. He said that if the publisher were to “just pull the plug on that,” it would “destroy all the trust and credibility” that the company has with authors and their agents.

Stephen Fishbein, representing ViacomCBS (now Paramount Global), parent company of Simon & Schuster “will be sold to somebody” and that it was “likely to be another book publisher because other publishers can get highest efficiencies.” He noted that when Simon & Schuster was put up for sale, HarperCollins and Hachette sought to acquire Simon & Schuster, but now are planning to testify in opposition to the transaction.

He also challenged the government’s argument that the big five publishers should be treated as a unit and that the smaller publishers were merely a “farm team.” “I think the government is swinging for tthe fences” in making that case, he said.

The government called its first witness late in the morning: Michael Pietsch, CEO of Hachette Book Group.

PREVIOUSLY: Attorneys for the Justice Department and Penguin Random House squared off on Monday in the first day of an antitrust trial, as the government challenges the publishing giant’s proposed $2.2 billion acquisition of Simon & Schuster.

“This proposed merger must be stopped,” John Read, the Justice Department’s attorney, said in opening arguments, as he outlined a case that will rely heavily on testimony of rival CEOs, book agents and authors, including Stephen King.

The trial. at U.S. District Court in Washington, D.C., is being closely watched by authors and writers, as well as content creators generally, as the government’s case hinges on the premise that the merger will diminish advances for high profile titles, or anticipated best selling books. King is expected to testify in the case this week, perhaps on Tuesday.

The case is not just a test of the Biden administration’s effort to more strictly scrutinize proposed mergers, but to challenge them for their impact on the workforce. Many past high profile antitrust trials have focused on consumer harm, such as the government’s 2012 case against Apple and major book publishers that centered on price fixing for ebooks.

The DOJ claims that the Penguin Random House-Simon & Schuster transaction will create a publishing behemoth that commands 49 percent of the market for best sellers. The DOJ’s case is focused on the impact of the merger on author advances of $250,000 or more for the most anticipated titles.

Penguin Random House and Simon & Schuster challenge the way that the Justice Department is measuring competition in the marketplace, arguing that is doesn’t reflect the real way deals are done, Read told Judge Florence Pan that only the five major publishers have the wherewithal to compete for high-profile titles and six-figure-plus advances. He said that the 2% of best selling books command $1 billion of the five major publishers’ annual spending.

As an example, Read ran through the bidding process for an undisclosed author’s memoir, in which Penguin Random House and Simon & Schuster emerged as the top bidders, with the former winning at $825,000. Hachette dropped out at $650,000. His point was to show that “competition results in authors being paid more.” He said that a DOJ expert witness, Nicholas Hill, will testify to his analysis that the merged company will result in an average of $40,000 less in advances for Penguin Random House authors and $100,000 less for Simon & Schuster writers. In 85% of the cases, Read said, the advances are all that the authors of anticipated books get for their works, as they use the money to take sabbaticals from regular jobs and to pay for such things as travel expenses.

Read also argued that one of Penguin Random House’s promises, to have its subsidiaries compete against each other in the bidding process, was a “pubic relations promise” and unenforceable. During his opening argument, he played video from the deposition of Markus Dohle, the Penguin Random House CEO. Asked whether the merger would “cement’ Penguin Random House’s market dominance, Dohle said, “That is correct.”

“I believe that is an author’s income is significantly diminished, it will have an impact on the diversity of stories that are published,” Dohle said in one excerpt of his deposition.

Read also cited a memo written in 2019 by Carolyn Reidy, who was then the CEO of Simon & Schuster, in which she wrote that the big five publishers were one another’s biggest competitors, while smaller publishers were “farm teams” for authors who want to move to the big leagues. Even Amazon has had to “retrench” in the publishing business and is still considered small compared to the big five, Reid said.

Read said that reducing the number of big publishers from five to four increases the likelihood of “tacit” coordination between the rivals.

Dan Petrocelli, representing Penguin Random House, will deliver opening arguments later on Monday. Petrocelli represented AT&T and Time Warner in their successful defense of their merger against a DOJ lawsuit in 2018. That transaction was unwound this year, after the combination of Discovery with WarnerMedia was completed in April.

ViacomCBS, now Paramount Global, announced its sale to Bertelsmann’s Penguin Random House in 2020. The Justice Department sued to block the deal in November. The CEOs of the publishing companies were present in the courtroom on Monday, as was Jonathan Kanter, the chief of the Justice Department’s antitrust division. All participants and attendees wore masks and were socially distanced due to Covid.

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