US begins court battle against publishing giants' merger

WASHINGTON (AP) — The government and publishing titan Penguin Random House exchanged opening salvos in a federal antitrust trial Monday as the U.S. seeks to block the biggest U.S. book publisher from absorbing rival Simon & Schuster. The case comes as a key test of the Biden administration's antitrust policy.

The Justice Department has sued to block the $2.2 billion merger, which would reduce the Big Five U.S. publishers to four.

The government's star witness, bestselling author Stephen King, is expected to testify at Tuesday's session of the weekslong trial in U.S. District Court in Washington, D.C. King's works are published by Simon & Schuster, but he has expressed unease with the merger.

At Monday's opening session, attorneys for the two sides presented their cases before U.S. District Judge Florence Pan.

Justice Department attorneys charged that the merger would shrink competition and, inevitably, the vital public discourse that books help spark. Penguin Random House countered that the new company would enhance competition because the combined company could turn out books more efficiently.

The DOJ and the publisher are jousting over a central part of the government's case: whether the merger will lower advances for the most popular authors, those receiving advances of $250,000 or more. Government attorney John Read said "competition results in authors being paid more" and outlined in depth how joining the two largest publishers would lead to fewer bidders for high-profile books.

But Penguin Random House attorney Daniel Petrocelli, who in 2018 successfully represented Time Warner and AT&T when the government attempted to block their merger, responded that the $250,000 benchmark was an artificial standard that does not reflect how the industry works. The publisher contends that the merger will have at worst a minimal downward effect on advances, for a tiny percentage of book deals.

"The government created an artificial market to create artificial concentration to create artificial harm," Petrocelli said.

The government contends that it would hurt authors and, ultimately, readers if German media titan Bertelsmann, of which Penguin Random House is a division, is allowed to buy Simon & Schuster, the fourth-largest publisher, from U.S. media and entertainment company Paramount Global. It says the deal would thwart competition and give Penguin Random House gigantic influence over which books are published in the U.S., not just how much authors are paid, but giving consumers fewer books to choose from.

The publishers counter that the merger would strengthen competition among publishers to find and sell the hottest books, by enabling the combined company to offer bigger advance payments and marketing support to authors. It would benefit readers, booksellers and authors, they say.

The merger of Penguin Random House and Simon & Schuster would form by far the biggest publisher in U.S. and reduce by one publishing's so-called Big Five, which includes HarperCollins Publishing, Hachette Book Group and Macmillan.

Hachette CEO Michael Pietsch was called by the government as its first witness. He expressed concern about the consequences of a "super dominant" publisher, one that could control half the overall market, with outcomes including the shutting down of imprints the new company deems redundant and outsize advantages in the terms it could offer booksellers.

At the same time, Pietsch acknowledged that he had hoped his parent company, the French publisher Hachette Livre, had bid for Simon & Schuster and would welcome acquiring it should the deal with Penguin Random House fall through.

"It is my belief that they (Hachette Livre) would" be open to buying Simon & Schuster, he said.

Penguin Random House and Simon & Schuster already have two of publishing's most impressive lists of blockbuster authors. Penguin Random House's includes Barack and Michelle Obama, whose package deal for their memoirs totaled an estimated $65 million; Bill Clinton, who received $15 million for his memoir; the late Nobel laureate Toni Morrison; John Grisham; and Dan Brown.

Simon & Schuster counts Hillary Clinton, who received $8 million for her memoir, Bob Woodward and Walter Isaacson. And King.

Bruce Springsteen splits the difference: His "Renegades: Born in the USA," with Barack Obama, was published by Penguin Random House; his memoir, by Simon & Schuster.

The Justice Department contends that as things now stand, No. 1 Penguin Random House and No. 4 Simon & Schuster, by total sales, compete fiercely to acquire the rights to publish the anticipated hottest-selling books. If they are allowed to merge, the combined company would control nearly 50% of the market for those books, it says, hurting competition by reducing advances paid to authors and diminishing output, creativity and diversity.

The Big Five are the dominant presence in U.S. publishing, always on top of agents' minds when submitting proposed works. They make up 90% of the market for anticipated top-selling books, the government says.

The Biden administration is staking out new ground on business concentration and competition, and the government's case against the publishers' merger is an important test.

President Joe Biden has made competition a pillar of his economic policy, denouncing what he calls the outsized market power of an array of industries and stressing the importance of robust competition to the economy, workers, consumers and small businesses. Biden, a Democrat, has called on federal regulators, notably the Justice Department and the Federal Trade Commission, to give greater scrutiny to big business combinations.