The news this week that the Biden administration is headed to court to stop Penguin Random House from acquiring Simon & Schuster added a new ripple of drama to the already feverish climate of media M&A. Biden’s Department of Justice, which is taking a more aggressive approach to corporate consolidation, says that the proposed $2.18 billion merger would give Penguin Random House, the world’s largest publisher, “unprecedented control” over the book-publishing industry, and that it would result in “lower advances for authors and ultimately fewer books and less variety for consumers.” PRH and S&S argue that the merger would not reduce “the number of books acquired” or the “amounts paid for those acquisitions,” and that the two publishing houses, both members of the so-called “Big Five,” would still be permitted to bid against each other in auctions “up to an advance level well in excess of $1 million.” PRH has its boxing gloves on: The company has retained Daniel Petrocelli, the same man who litigated AT&T and Time Warner’s successful battle with the Trump administration in 2018. (Pass the popcorn.)
As for the general reaction among publishing insiders, the sense I get is that a lot of them—perhaps with the exception of executives at PRH and S&S—think DOJ is doing the right thing. There’s one segment of the industry in particular that is unsurprisingly pleased. “Obviously every agent is thrilled that the wheels might be grinding to a halt on this,” a well-connected agent told me. A big-league editor echoed that sentiment: “I don’t know anyone who would think this is a great thing to happen. It’s hard to make the case that it’s a good thing for the industry. You could certainly make the case that it’s a good thing for Simon & Schuster”—which is owned by ViacomCBS, the result of a 2019 merger between Viacom and CBS Corporation—“because what else are they gonna do in the short term?” (Penguin Random House is owned by the German conglomerate Bertelsmann.)
Another editor agreed but added a dash of skepticism, considering that the merger apparently won’t restrict competitive bidding except at the uppermost echelons of the market, where the big million-dollar-plus auctions come into play. “If they’re worried about the little author losing leverage or getting smaller advances, I don’t see how that would happen,” the editor said. “The editors I know at Penguin Random House”—which formed from the 2013 merger of Penguin and Random House, and encompasses a wide array of imprints—“are really competitive with one another. Also, I still don’t understand this obsession with advances”—the lump sum an author is guaranteed regardless of how a book sells—“because the real money is in royalties. When’s the last time Stephen King didn’t earn out an advance? I’d really like to know.” (For his part, King, one of Simon & Schuster’s biggest authors, told The Wall Street Journal that he was “delighted” by the DOJ’s challenge.)
The dark view of the merger, as my sources explained it to me, is that it would create another mega behemoth when the industry has already been upended by Amazon. The lawsuit, filed in U.S. District Court for the District of Columbia, notes that the defendants “have publicly suggested that the merger is necessary to create a stronger counterweight to Amazon.” But the suit alleges that Penguin Random House CEO Markus Dohle has privately acknowledged that he “never, never bought into that argument,” and that one “[g]oal” is to become an “[e]xceptional partner” to Amazon, which wields immense power over book sales (and is generally not regarded as a good partner for authors and publishers). “I think some of the consequences of the merger could be years down the road,” one of my sources said. “When Amazon first came on the scene, we couldn’t have predicted what it would become…. You could see the merger as two giants coming together to take a stand against Amazon, but in a way, it’s too late to stand up against Amazon.”
In a prepared statement distributed after the complaint was filed, Dohle said, “Our goal is for the new combined company to be truly greater than the sum of its parts, and our focus is to grow our community of distinct imprints that will operate independently and autonomously and will continue to compete vigorously among themselves and with outside competitors.” Simon & Schuster CEO Jonathan Karp separately sent an email to the company’s authors: “The DOJ contends that PRH’s acquisition of S&S will reduce competition for the acquisition of titles. Notably, DOJ has not alleged that the acquisition would harm competition in the sale of books. Simon & Schuster and Penguin Random House strongly disagree with the DOJ that this transaction will harm competition.” The publishers jointly stated, “Competition to acquire new titles is intense, including Hachette, HarperCollins and Macmillan, as well as dozens of mid-size and smaller publishers. PRH has a demonstrated commitment to allowing competitive bidding among all its imprints. PRH and S&S imprints will continue to compete against one another for new books, even after the transaction closes.”
In addition to capturing the attention of the literary world, the lawsuit is further evidence of the Biden administration’s promise to toughen up on antitrust enforcement. Over the summer, it scuttled a $30 billion insurance-industry merger. In September, it filed suit to block the combination of American Airlines and JetBlue. Over the past several years, the media industry has been a hotbed of merger activity as it grapples with tectonic shifts in consumer habits, and there’s every expectation that further consolidation is in store. The next major tie-up in the pipeline is that of WarnerMedia and Discovery, a $43 billion deal that was announced in May and is currently making its way through the regulatory gauntlet. On Discovery’s earnings call this week, CEO David Zaslav said, “We are well on track for a mid-2022 close.” Inside Discovery and WarnerMedia, the DOJ suit surely raised eyebrows, but I’m told there aren’t any alarm bells ringing, given the nature of the film and television landscape. “It’s a very competitive market,” one source said. “There are just so many options for consumers, creators, and talent.”
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