On August 22, oral arguments ended in the Justice Department’s antitrust trial to block the book publisher Penguin Random House from merging with rival Simon & Schuster. The result of the trial, which is expected to be decided later this fall, will have a massive impact on both the multibillion-dollar book publishing industry and on how the government handles corporate consolidation going forward. Perhaps fittingly for a case with such high stakes, the trial was characterized by obfuscation and downright disinformation nearly the whole way through.
Penguin Random House and Simon & Schuster are two members of what’s called the “Big Five” of publishing, with the other three slots filled by HarperCollins, Hachette, and Macmillan. The Big Five control roughly 80 percent of the trade market for books in the US, and Penguin Random House, with a market share of 25 percent in 2020, is the biggest one of all. Penguin Random House is itself the product of many mergers, with one independent publishing imprint after another joining together to form a massive conglomerate, culminating in the merger of Penguin and Random House in 2013 that brought the then-Big Six down to the Big Five.
When parent company ViacomCBS put Simon & Schuster up for sale in 2020, the smart money was on another one of the major publishers acquiring the house, and the Big Five becoming the Big Four. PRH and HarperCollins were indeed the final bidders in the auction, and PRH won the day with a reported bid of $2.2 billion.
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.
“I’m pretty sure the Department of Justice wouldn’t allow Penguin Random House to buy us, but that’s assuming we still have a Department of Justice,” joked Simon & Schuster CEO Jonathan Karp in an email with an author.
One year later, under the new Biden administration, the DOJ filed suit against both Penguin Random House and Simon & Schuster, as well as parent companies Bertelsmann and ViacomCBS. “Authors are the lifeblood of book publishing,” the suit argued. “Penguin Random House’s proposed acquisition of Simon & Schuster would result in substantial harm to authors, particularly authors of anticipated top-selling books.”
Most of us are familiar with the idea of a monopoly and how such a selling market can drive up consumer prices, but with this case, the DOJ was arguing that PRHS&S would form a monopsony — an unfair buying market that would drive down the money paid to authors. Such cases are historically rare. If the DOJ succeeds here, it will be setting a major precedent for the way the US prosecutes corporate giants.
It will also be putting a stop to one of the biggest publishing houses American publishing would ever be likely to see. Yet despite the very real possibility that Penguin Random House and Simon & Schuster could combine to form a monster of a corporation, both publishers have continually presented themselves as scrappy underdogs doing their best to ride out a tough market. When the proposed merger between PRH and S&S was first announced in 2020, the prevailing narrative was that a combined PRHS&S would give helpless publishers the leverage they needed to push back against the almighty force of Amazon.
In an early sign that this trial would scar publishing’s romantic image, however, the DOJ’s initial lawsuit turned up internal emails in which PRH’s CEO Markus Dohle admits that he “never, never bought into that argument,” and that one of the “goals” of the post-merger PRHS&S would be to become an “exceptional partner” to Amazon.
Over the course of the trial that ensued, publishers would continue to insist on their existing public image as helpless incompetents at the whims of larger companies and an irrational market. The government, meanwhile, stuck to the narrative that the publishers were savvy operators who knew exactly what they were doing with their billion-dollar companies. The question of which story was most convincing will help decide the future of American antitrust law.
A monopsony is the mirror image of a monopoly, and is sometimes called a buyer’s monopoly. Instead of a market with only one seller who can charge whatever they like, a monopsony is a market with only one buyer, who can set their price however they like. It’s still a case where the laws of supply and demand have been skewed to favor one party unfairly over the other.
A mining town where the mining company is the only major employer, and as such can set wages low, would be one example of a monopsony. The Justice Department’s argument was that the merger of Penguin Random House and Simon & Schuster would create another.
Should PRH and S&S combine forces, they would be publishing what the Wall Street Journal estimated to be one-third of all the books in the US every year. The government’s model is more specific. It sets a market of what it’s calling “anticipated top-sellers”: books for which publishers pay an advance of $250,000 or more, which they presumably expect will sell very well when they hit bookstores. The government estimates that in such a market, a combined PRHS&S would have a 50 percent market share. The next largest publisher, HarperCollins, would have less than half that.
The government argues that with this combined market share, the proposed PRHS&S would be able to buy books from authors with minimal competition. It would be able to offer lower and lower advances, and authors would have no choice but to accept these lower offers.
Meanwhile, Penguin Random House and Simon & Schuster both argued that the merger wouldn’t lead to any change in competition. Because of publishing’s imprint model, editors who work at the same publishing house bid against one another for the same book all the time. They would continue to do so, publishers argued, even if Penguin Random House and Simon & Schuster became one entity — and because the merger would make both publishers more efficient, they would actually be able to offer larger advances than before.
It’s hard to predict how Judge Florence Pan is likely to rule on this case later in the fall, because there simply isn’t much case law to cite here. Historically, the US hasn’t prosecuted monopsony often. Instead, it has tended to treat antitrust law as a means of protecting consumers, not a means of protecting laborers.
Under the most recent two Democratic presidents, though, monopsony theory has slowly become more mainstream. In 2016, President Obama’s Council of Economic Advisers released an issues brief arguing that consolidation across industries could lead to monopsonistic labor markets that depressed worker wages. In 2021, Congress introduced the Competition and Antitrust Law Enforcement Reform Act, which would amend existing antitrust law to explicitly preclude monopsonies. Just this past July, President Joe Biden signed an executive order promising to use antitrust laws to combat “the harmful effects of monopoly and monopsony,” noting that his administration would be “especially” focused on the way these issues affect labor markets.
Some antitrust experts have been thinking of this trial as a kind of test balloon. If the government wins, we could be entering an era in which monopsonies in many other industries (Hollywood, for instance, as well as Big Tech) could face much more aggressive government scrutiny than before. Power could be redistributed away from giant corporations and back toward the independent workers they employ. If the publishers win, meanwhile, the government will have to rethink its strategy.
These esoteric questions about economic policy were not what the bulk of the trial was focused on, however. For the most part, the trial centered on the minutiae of publishing, with high-powered authors, literary agents, and CEOs from major publishing houses taking the stand to explain bits of industry jargon like “backlist titles” (books more than a year old) and “midlist authors” (authors who aren’t best-sellers but still sell a little). In the process of testifying, these industry luminaries spoke with unusual clarity about the parts of the publishing world that tend to be hidden from public view.
“Everything is random in publishing”
One of the ironies of this trial, industry magazine Publishers Weekly noted early on, was that “the government’s case relies in part on making publishers look extraordinarily savvy about the market in which they operate, in addition to benefiting from their sheer size.” For publishers to rebut that case, they in turn had to present themselves as essentially incompetent gamblers, risking the company’s money in an industry no one could predict, all for the sheer love of literature.
“Everything is random in publishing,” Penguin Random House CEO Markus Dohle told the court during his testimony. “Success is random. Bestsellers are random. That is why we are the Random House!” He went on to describe the editors and publishers of PRH as “angel investors in our authors and their dreams, their stories.”
Throughout the trial, publishers depicted the industry as one of chaos and romance in equal measure, a hazy and lovely space in which publishers routinely hand out large sums of money for great works of literature, unable to either predict or care whether they would ever make their money back. Within this space, publishers argued, the narrow slice of publishing that the government was focused on — books with an advance of $250,000 and above — was meaningless. There was no true correlation, they said, between the books that they paid high advances for and the actual sales figures of those books. And so one by one, highly paid CEOs took the stand to argue that they had no idea what they were doing with all their money.
Occasionally, they walked right up to the line of credibility in making that case. “You have to work just as hard on every book, because you have no idea which one is going to break out,” said Simon & Schuster CEO Jonathan Karp during his testimony.
Judge Pan was apparently skeptical of that statement. “If you pay a lot for a book — like one of these million-dollar books — you’re not going to market that book harder … than your run-of-the-mill books?” she asked. Karp allowed that a higher advance would mean more pressure on a publisher to try to get more sales, but he remained committed to his larger argument.
It’s worth noting here that Pan was correct in her understanding of how publishers figure out the budget for each book. Upon acquiring a new book, editors run a profit and loss statement, or P&L, in which they work out how much money they expect to spend on a given book and how much they expect to make. While the P&L is only a rough guide (it’s “really fake,” Pan concluded later in the trial), it’s where publishers set the expectations for a new book. And to make a P&L balance, publishers traditionally match the marketing and publicity budget to the advance. The bigger the advance, the more money they plan to spend on actually selling the book.
On the other hand, it’s also true that P&Ls frequently get thrown out the window as publishers’ priorities change. That’s why Pan declared P&Ls “fake.” Everything in publishing changes on the fly, frequently for no clear reason.
Both depictions of publishing on display at this trial, as Publishers Weekly acknowledged, have an element of truth. The book market really is notoriously unpredictable, and book publishers really are fairly savvy about manipulating that market in order to insure their own profits. That’s how publishing CEOs traditionally justify their enormous salaries: They are supposed to be the people who understand how to make money out of an irrational business.
To hear the publishers on the stand during the trial, though, it sounded like anyone could do their jobs. To compete with industry giant Penguin Random House, “all it takes is a publisher with a vision and a couple of good editors,” Karp declared during his testimony. “It’s basically an investment in talent.”
In reality, as DOJ attorney John Read repeatedly emphasized, no new publisher has been able to successfully break into the ranks of the Big Five in over 30 years. The big publishers are now so big, with such extensive backlists and such deep pockets, that it’s nearly impossible to compete with them at scale. Regardless of their claims, they wield enormous power in the industry.
It suits publishers to describe their industry as illogical, quirky, or romantic. Such a depiction of publishing gives cover to the status quo, in which the industry is 76 percent white and 95 percent of books published between 1950 and 2018 were written by white people. If publishing isn’t really a business, but an investment in people’s dreams, then there are no structural inequalities that publishers have to worry about that might have led to this state of affairs. And since those structural inequalities don’t exist, they can’t possibly be exacerbated by further industry consolidation.
“Consolidation is bad for competition,” opined Stephen King, when he appeared at the trial to testify for the government. King, who introduced himself as a freelance writer, described a publishing landscape that’s changed dramatically over his 50 years in the industry.
“When I started in this business, there were literally hundreds of imprints, and some of them were run by people with extremely idiosyncratic tastes, one might say,” King said. “Those businesses were either subsumed one by one or they ran out of business. I think it becomes tougher and tougher for writers to find enough money to live on.”
The story of American publishing over the past 100 years is the story of an industry consolidating itself, and of that consolidation encouraging homogeneity, blandness, and the safest possible publishing decisions. It remains to be seen whether that consolidation will continue as this trial ends — or whether this case will provide the precedent to slow consolidation in more industries than this one.