The U.S. Justice Department’s trial to block Penguin Random House’s $2.175 billion acquisition of Simon & Schuster got underway last week in Washington DC and is expected to continue for about two weeks. U.S. District Judge Florence Pan is presiding.  A highlight of the hearings came Tuesday, August 2 with iconic author Stephen King testifying in person against the merger.

According to the Associated Press, King said, “I came because I think that consolidation is bad for competition.” The way the industry has evolved, he said, “it becomes tougher and tougher for writers to find money to live on.”

King expressed skepticism toward the two publishers’ commitment to continue to bid for books separately and competitively after a merger.

“You might as well say you’re going to have a husband and wife bidding against each other for the same house,” he quipped. “It would be sort of very gentlemanly and sort of, ‘After you’ and ‘After you,’” he said, gesturing with a polite sweep of the arm.

“The more the publishers consolidate, the harder it is for indie publishers to survive,” King tweeted last year.

“Penguin Random House’s proposed acquisition of Simon & Schuster would further entrench the largest publishing giant in the United States (and the world) and give the merged company control of nearly half of the market to acquire anticipated top-selling books from authors,” according to a pre-trial brief by Justice Department attorney John R. Read.

PRH and S&S are two of what the industry calls the “Big Five” U.S. publishers, a group which includes HarperCollins Publishers, Hachette Book Group, and Macmillan Publishing Group, LLC. The post-merger of the two powerhouses would mean it would share control of the relevant market with the three remaining companies. The Big Five dominate U.S. book publishing and account for over 90% of the market for the acquisition of publishing rights to anticipated top-selling books.

Together, the Big Five publishers are one another’s biggest competitors.  They are the most likely to come up with high advance payments required and are known for their strong editorial and publishing skills.

The Justice Department argues that the proposed merger would likely result in authors of anticipated top-selling books receiving smaller advances, meaning authors who labor for years over their manuscripts will be paid less for their efforts and fewer authors will be able to earn a living from writing.

“The Proposed Transaction Will Cede Nearly Fifty Percent of the Market for Anticipated Top-Selling Books to the Combined Firm, Which Will Harm Competition by Lowering Author Advances and Diminishing Output, Creativity, and Diversity,” the legal brief asserts. The move would eliminate significant head-to-head competition between two firms who are already members of the Big Five, the DOJ argues.

Penguin Random House (“PRH”) is the largest trade book publisher worldwide and in the United States.5 Headquartered in New York, New York, PRH is owned by Bertelsmann SE & Co. KgaA (“Bertelsmann”), an international media and services company headquartered in Germany.

PRH has more than ninety U.S. publishing imprints (a trade or brand name for a specific editorial group such as Viking, Riverhead, and Crown) across six publishing divisions. PRH publishes over 2,000 new titles every year in the U.S. Its 2020 U.S. net sales surpassed $2.6 billion.

Simon & Schuster (“S&S”), also headquartered in New York, New York, is the fourth largest book publisher in the United States as measured by total sales. S&S is owned by international media and entertainment company Paramount Global (formerly known as ViacomCBS). S&S has over thirty U.S. imprints across three publishing groups and publishes over 1,000 new titles annually in the U.S. Bertelsmann executives described S&S as “one of the last high-quality scaled assets in the US.”

The Big Five have existed for decades, some dating back to the early 1900s, and have grown mostly through acquisitions of smaller competitors. Defendants’ internal documents acknowledge there have been “no successful startups in the last decade,” in part due to high barriers to entry.

Measure of market concentration:

According to an Expert Report to the DOJ by Nicholas Hill, PRH currently controls 37% of the market for anticipated top-sellers and S&S controls approximately 12%. If this merger is permitted to proceed, the combination of PRH and S&S would result in a dominant publisher that controls roughly half the market with a combined 49% share—significantly higher than the 30% the Supreme Court found concerning in a precedent-setting banking-legal case sited by the DOJ.

“The newly minted combined firm would also enjoy twice the market share of its next largest competitor, HarperCollins, which has a 24% market share. The merged firm would also have more than five times the market share of all publishers outside the Big Five combined, whose collective market share is only 9% with no single publisher outside the Big Five having more than 2% market share,” the Justice Department defense claims.

Industry participants anticipate that the merger is likely to lead to lower advances for authors. The Court will hear testimony from several authors and literary agents to that effect. For example, literary agent Christy Fletcher testified that “with fewer bidders, it’s harder to drive the advances up. “Executives from the remaining Big Five publishers will testify that the combined firm will be so dominant that it will be able to employ exclusionary tactics such as restricting printing capacity or access to distribution networks to make it more difficult for the remaining Big Five publishers to compete against the combined firm.

Defendants bear the burden of demonstrating the ability of other distributors to ‘fill the competitive void’ that will result from the proposed merger. Here, there are high barriers to economically meaningful entry or repositioning in the anticipated top-seller market.

An example of the difficulty is in the failure of even Amazon—which has a wealth of resources—to expand materially in the market. Today, more than a decade after launching its publishing business, Amazon rarely succeeds in acquiring anticipated top-sellers. The legal brief quotes these figures: “Although it has the second largest market share of any non-Big Five publisher, its share is still only 1%. Publishers outside the Big Five are limited competitors for anticipated top-sellers. Non Big Five publishers collectively account for only about 9% of anticipated top-seller acquisitions, with no single small publisher having more than 2% market share.129 Further, from 2019 to 2021, the non-Big Five’s market share of anticipated top-sellers has increased by only 0.1%, and Amazon’s market share has declined over this period.”

Experts for the DOJ are expected to testify that the merged firm will bid less aggressively than the companies would bid pre-merger because its probability of winning has increased due to the elimination of S&S as an independent rival. Defendants and the other Big Five are likely able to distribute their books more cost-effectively than publishers that pay for third-party distribution services.

Read the Justice Department pre-trial brief.