Penguin Random House wants to move ahead with their acquisition of Simon and Shuster. The one hurdle that is blocking it,  is the US Justice Department that is citing anti-trust concerns. The publisher as just filed their pre-trial brief and there is some key takeaways. The most notable is this is a pro-consumer acquisition that will allow Simon & Schuster and its editors and authors to become part of PRH with its industry-leading supply chain, giving readers and book sellers across the world greater access to their books. It will also enhance competition by enabling the combined company to offer increased advances and marketing support to authors. Competition will increase — not decrease — as a result. You can download the full document here.

Key Takeaways:

The DOJ does not allege that the acquisition will reduce the number or diversity of books being sold to readers. Nor does the DOJ allege that the acquisition will cause harm to the vast majority of authors. All evidence indicates the opposite. The DOJ instead focuses on a very tiny and arbitrary sliver of the market, certain authors who receive $250,000 or more in advances for their book titles. The DOJ seeks to block this transaction to protect the highest paid authors even though these authors have the most bargaining power against publishers, making them least likely to be targeted for a price decrease

The DOJ deeply misunderstands competition within the book publishing industry. Authors currently have numerous publishing options. By focusing only on the “big five” publishing houses, the DOJ is willfully ignoring countless mid-sized and smaller publishing organizations’ influence throughout the marketplace. These publishers routinely acquire books from prominent authors like JK Rowling, Michael Lewis, Dolly Parton, Paul Krugman, and others.

The DOJ also misunderstands how book rights are actually acquired by publishing houses. The vast majority of acquisitions are structured either as exclusive submissions, where there is no bidding competition at all, or “best bid” formats, where a publisher does not know the amount of other bids. In both these formats, the publisher bids as if it is competing against the entire collection of unknown rivals that could submit bids.

S&S is not going to remain a subsidiary of ViacomCBS— it will be sold one way or the other. PRH will be the best steward of S&S’s legacy and assets as none of these other entities can claim Bertelsmann’s centuries-long history in the publishing industry.

Recent history shows that the DOJ’s allegations of author advances going down are without merit. When Random House and Penguin merged, they were the first and second largest publishers respectively, with a combined market share in trade-book sales similar to that of PRH and S&S today. Yet advances trended upwards, not down, in the years after the merger. There is no reason to think that won’t be the same here.

In short, the DOJ asks this Court to stop a merger that will benefit readers, booksellers and the vast majority of book authors, because of a hypothetical impact on the small set of authors who command the most lucrative book contracts and are represented by the most sophisticated agents.

Select Excerpts from Pre-Trial Brief:

“S&S is a storied publishing house with an attractive list of authors, skilled and experienced editors, and a strong backlist of popular titles, but it lacks access to PRH’s larger, industry-leading distribution structure and administrative systems. PRH recognized that if it combined S&S’s high-quality assets with PRH’s premier logistics, PRH could expand distribution of S&S titles to the benefit of authors and consumers alike, while also improving PRH’s ability to compete against its many bookselling rivals” – Pages 1-2

“Unsurprisingly, after investigating the merger, the government found no evidence that combining PRH and S&S would diminish competition in any consumer market. If anything, by making the combined entity a stronger bookselling competitor, the merger will incentivize other publishers to compete even harder for consumer attention. The government will not even attempt to prove otherwise at trial.” – Page 2

“While its complaint initially alleged that the merger would harm competition in the market to acquire U.S. book rights, its expert has abandoned that claim—he admits that the market will remain unconcentrated, and he conducted no analysis purporting to establish harm to that market. The government instead has narrowed its focus down to one very small segment of the market to acquire U.S. book rights: the set of about 1200 books acquired annually for advances of at least $250,000, or about 2% of all books published by commercial publishers.” – Page 2

“[The government’s] model assumes that in all acquisitions, the winning bid amount was constrained by the runner-up bid, which in turns leads to the critical inference that if the runner-up bid were removed, the winning bidder would make a lower bid and still prevail. In the real world, however, agents structure the vast majority of book acquisitions as either a one-on one negotiation or a single-round “best bid” auction, neither of which involves a constraining runner-up bid. A model need not “fit” the real world perfectly, but it must at least represent the real world in a meaningful way. The government’s auction model here comes nowhere close.” – Page 5

“…acquisitions are about more than just the advance. Authors (through agents) negotiate other terms, such as the scope of the rights (allowing the author to profit elsewhere from excluded rights), higher royalty rates, accelerated payments, and other financial perks. Authors also may bet on themselves and forgo an advance in favor of a profit-sharing arrangement that might provide higher upside payments. And monetary terms are only one part of the story. Authors also care about the relationship with the editor: they seek an editor who shares the author’s vision for the book and often an editor who will be a good partner for a long-term writing career. Because authors highly value the editor herself and their connection, it is not uncommon for an author to choose a publisher that has not offered the highest advance.” – Page 8

“PRH has publicly assured agents that after the merger, it will not only apply its independent bidding policy to S&S imprints, but will go further and allow S&S imprints to bid against PRH imprints even absent an outside bidder.” – Page 10

“[The government] focuses narrowly on a price segment that is only about 2% of the overall book-acquisition market, while ignoring the merger’s effects on the remaining 98% of the market, and completely ignoring its effects on 100% of consumers. This merger instead should be evaluated on the much larger scale in which PRH and S&S actually compete, i.e., the market for the acquisition of all U.S. book rights. And the government will not even attempt to show harm to competition in that market.” – Page 25

“In short, the merger at most reduces the number of publishers that pose a meaningful competitive threat in any given acquisition from “very many” to “still very many, but one fewer.” Even viewed strictly through the government’s structural lens, the merger changes the effective number of potential acquirors for any given book from six (the five largest plus all others in aggregate) to five.” – Page 33

“The government’s anecdotal stories about some acquisitions where PRH and S&S were the top two bidders reflect only a minuscule percentage of actual acquisitions…The government’s anecdotes are also flawed even on their own terms. Some are simply incorrect and do not represent acquisitions where PRH and S&S were runners up to each other. Many appear to involve best-bid or better-best formats, where the runner up bid is unknown and thus poses no competitive constraint.” – Page 34

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