22 V I D E O A G E October 2022 On August 22, oral arguments ended in the U.S. Justice Department’s antitrust trial (U.S. v. Bertelsmann SE, 21-cv-02886, U.S. District Court, District of Columbia) to block the book publisher from merging with rival ViacomCBS’ Simon & Schuster. The result of the trial, which is expected to be decided later this fall, will have a massive impact on how the government handles corporate consolidation going forward. Some antitrust experts have been thinking of this trial as a kind of test balloon. If the government loses, we could be entering an era of monopsonies — an unfair buying market that would drive down themoney paid to authors. If, on the other hand, the government wins, other industries 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. When the proposed merger between Penguin Random House and Simon & Schuster was first announced in2020, theprevailingnarrativewas that the combined entity would give helpless publishers the leverage they needed to push back against the almighty force of Amazon. However, subsequent discovery of internal emails indicated that that was a publicity cover. In those emails, Penguin Random House’s CEO Markus Dohle admits that he “never, never bought into that argument”, and that one of the “goals” of the post-merger would be to become an “exceptional partner” to Amazon. The government stuck to the narrative that the publishers were savvy operators who knew exactly what they were doing with their billiondollar companies to help decide the future of American antitrust law. U.S. District Judge Florence Pan, a President Barack Obama appointee, oversaw the threeweek nonjury trial in Washington. She hasn’t said when she will rule on whether the publishing merger, valued at more than $2 billion, should proceed. Simplyput, ifPenguinRandomHouseacquires Simon & Schuster, the two publishers will stop competing against each other, a practice that is not uncommon within the vertically-owned television and film production industries. 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 U.S., and Penguin Random House, with a market share of 25 percent in 2020, is the biggest one of all. U.S. courts have long recognized that the antitrust laws are designed to protect both buyers and sellers of products and services. According to theU.S. Department of Justice, this merger will cause harm to American workers… through consolidation among buyers — a fact pattern referred to as “monopsony.” Such cases are historically rare. If the DOJ succeeds here, it will be setting a major precedent for the way the U.S. prosecutes corporate giants. Many market-watchers are looking at this trial as a test of President Joe Biden’s administration’s resolve against corporate consolidation, since previous major mergers have sailed past regulators with relatively little resistance. “There has been a lot of criticism over the years about the government being too willing to take settlements in merger cases and not stopping mergers fully”, said Harry First, a law professor at New York University. “It’s one thing to give speeches about policies, it’s another thing to go into court and actually litigate and win cases”, he added. “In stopping Penguin Random House from extending its control of the U.S. publishing market, this lawsuit will prevent further consolidation in an industry that has a history of collusion”, said Acting Assistant Attorney General Richard A. Powers of the Justice Department’s Antitrust Division. German media company Bertelsmann SE, which owns Penguin Random House, agreed in November 2020 to buy Simon & Schuster from ViacomCBS, now called Paramount Global. The Department of Justice has claimed that Penguin Random House’s $2.2 billion merger with Simon & Schuster will create a duopoly and damage competition in the U.S. Presentinghis closingargument, Department of Justice attorney John Read said: “We brought this case because the best protection for authors is robust competition. This is not about the passion of publishers for books and authors, this is about the largest publisher, Penguin Random House, cementing its position at the top of the market.” That highmarket sharemakes the deal illegal under U.S. antitrust law unless the defense shows evidence to demonstrate new firms are likely to enter the market or the deal’s cost-savings outweigh the potential harm, according to Read. “In the past 30 years, no publisher has entered the market and become as strong as the Big Five, including Amazon. com Inc., which now publishes books itself in addition to selling them”, he said. The government’s expert witness, economist Nathan Hill, estimated that the merged company would control 49 percent of the market for “anticipated top-selling books” and that the Big Five will have more than 95 percent of the market. Lawyers for Penguin Random House and Simon & Schuster defended the merger, arguing it would actually increase competition and claiming the U.S. government had not proved it would create significant harm. Judge Pan will make a final verdict later this year on whether the merger should be blocked. In 2006, with the separation of Viacom and CBS into separate publicly traded companies, Simon & Schuster became a part of the CBS Corporation. Penguin Random House, the lar-gest book publisher in the United States, is owned by the German media conglomerate Bertelsmann. For Simon & Schuster’s owner, ViacomCBS, the all-cash deal will help the company pay down its $21 billion debt load and keep up dividend payments to shareholders. The sale of Simon & Schuster is part of a great unwinding taking place across the media industry. ViacomCBS, which also owns Paramount Studios and Nickelodeon, has bet its future on streaming, and books won’t play a big role in that strategy. ViacomCBS received more than half a dozen inquiries from interested buyers, including financial firms and the French media giant Vivendi, which holds a minority stake in Hachette through the publisher Lagardère. The top three contenders were Bertelsmann, Rupert Murdoch’s News Corp (which owns HarperCollins), and Vivendi. The sale could also have a ripple effect throughout the literary ecosystem just as consolidation has done with both the television and motion picture industry. The biggest houses are better equipped to negotiate favorable terms with major retailers like Amazon, Barnes & Noble, and the big box stores, and are also able to develop direct-toconsumer marketing and sales networks so that they are not as dependent on retailers, again, echoing what has taken place in both broadcasting and theatrical releases in terms of OTT and streaming. * Steven M. Schiffman is a lawyer currently based in New York City and Las Vegas. Mega Mergers Being Challenged With An Eye TowardMonopoly Legal Eagle By Steven M. Schiffman*
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