Will the PRH–S&S Combination Be Too Big?

It seemed impossible that the acquisition of Simon & Schuster by Penguin Random House the day before Thanksgiving could be overshadowed by a bigger industry event, but that is what happened when book publishing’s long-running trade show and convention, most recently known as BookExpo, was canceled. As the buzz about the end of BookExpo has cooled down, industry members continue to digest the news of PRH’s pending purchase of S&S, the nation’s largest and third-largest trade book publishers, respectively.

When the acquisition was announced, the Authors Guild, the American Booksellers Association, and the Association of American Literary Agents (formerly the AAR) all issued statements that were critical of the deal. While each organization had a particular take, all shared one thing in common: they were concerned about the increasing consolidation within trade publishing.

The Authors Guild, which called the 2012 Random House–Penguin merger “unsettling,” took a tougher stance in PRH’s S&S purchase, saying that, for authors, the reduction of the Big Five to Big Four would leave “fewer competing bidders for their manuscripts, which would inevitably drive down advances offered.” In addition, “less competition would make it even more difficult for agents and authors to negotiate for better deals, or for the Authors Guild to help secure changes to standard publishing contracts.”

In the ABA’s November 25 BTW newsletter, CEO Allison Hill noted that on November 17 she had written to the Federal Trade Commission to express ABA’s concern about the antitrust implications of a potential acquisition of S&S by Ingram, Amazon, or any of the Big Five publishers. When PRH made the winning offer, the ABA called the news “alarming,” noting that PRH’s purchase of another Big Five publisher will mean too much power over authors and readers in the hands of a single corporation. Both the guild and the ABA called for the government to review the acquisition and, in the words of Hill, “challenge this deal” and “ensure that no further consolidation of power be allowed in the U.S. book publishing industry.”

The AALA statement did not call for a government inquiry, and after saying the association has “great respect for both PRH and S&S,” it noted that “we have grave concerns that the continued consolidation of the industry into fewer corporate hands may narrow the choices open to authors, harm their ability to sell their work, and diminish the diversity of viewpoints and the vibrancy so essential to the future of books.”

A number of industry members wrote articles for various publications that have expressed similar concerns. But in an industry where accurate data can be difficult to come by, the different parties have used different examples to illustrate the market power of the PRH-S&S combination. Some pointed to the publishers’ command of the bestseller list. And the guild acknowledged that a market share statistic it had used in its statement was incorrect.

When the announcement of the deal was made, PRH worldwide CEO Markus Dohle put PRH’s market share at 14.2% and S&S’s at 4.2%. PRH executives stood by those statistics when pressed by PW, explaining that the figures are based on industry sources and the AAP and include print books, e-books, and audiobooks from traditional publishers and self-published authors. Executives also said the publishing industry remains highly fragmented and that, in fact, PRH has been losing market share to smaller and midsize companies. “The market is vibrant and ripe with opportunity for new entrants,” the executives said. They also stated that advances have gone up since the Penguin–Random House merger.

While some industry organizations are calling on the government to stop or at least condition the deal, antitrust experts PW spoke with say it is not a sure thing that U.S. regulators will do so. “There is definitely a chance this gets stopped or conditioned by regulators,” said Cleveland-Marshall College of Law professor Chris Sagers, author of the 2019 book United States v. Apple: Competition in America. He added that chances of “an outright suit to block the deal or any other really serious challenge” are maybe 50/50 at best.

“As a practical matter, regulatory agencies during the past few decades have rarely brought serious challenges to deals less concentrating than four to three,” Sagers said. “That is, so long as a deal leaves at least four major firms in a market, the agencies are unlikely to sue and at most will ask for concessions as a condition to approving a deal.”

But size does matter, Sagers noted. And even though this deal would leave four major publishers at the top of the market, because PRH was already the #1 trade publisher prior to its acquisition of S&S, the metrics used to calculate market concentration for the deal could draw some scrutiny.

“The thinking is that there is more to fear from a market in which one or a few very large firms face only small competitors, because not one of the smaller firms can hurt the big firm that much by charging lower prices,” Sagers explained. By contrast, in a market where all the major firms are closer in size, like during the Big Six era, “it is harder for one firm to make the others do anything,” and “if the firms try to form a cartel, it will be a lot easier for one of them to just cut prices and steal the business.”

PRH firmly believes its purchase of S&S is in the long-term best interests of book publishing. PRH’s parent company Bertelsmann has long had an interest in the book business and has spent billions growing its presence in the U.S. The $2.2 billion Bertelsmann is paying for S&S is the German company’s biggest bet yet on the U.S. book market.

PRH execs argue that once ViacomCBS put S&S up for sale in the spring, the odds were good that the trade publishing industry was in for another round of consolidation, and that PRH is the best positioned to implement a smooth transition. In interviews following the purchase announcement, Dohle pointed to the merger of Penguin and Random House as the model it will follow in adding S&S—namely that S&S will maintain is editorial independence and that S&S editors will be able to bid competitively on projects against PRH editors. In addition, current S&S CEO Jonathan Karp and Dennis Ealau, COO, will make the move to PRH.

Even in the teeth of the e-book threat 10 years ago (which had helped spur the Penguin–Random House merger), Dohle was convinced print books would remain fundamental to the book business, and he has backed that up with heavy investments in infrastructure. Since the Penguin–Random House merger, PRH said it has invested $100 million “to directly serve and provide financial benefits to booksellers through extensive sales support, faster delivery, lower inventory, and reduced return rates.”

As a result of these investments, there is little disagreement that PRH has the most efficient distribution and back-office systems in the business, and executives said they will apply that capability to S&S titles. But even as they bring S&S into the PRH fold, executives maintained they will continue to employ a decentralized structure that will enable the combined company “to publish a diversity of voices, stories, and ideas.”

The Random House–Penguin merger agreement was signed Oct. 29, 2012, and the deal was officially completed July 1, 2013. If the PRH-S&S approval process follows this path, come late summer the industry may very well watch as the PRH-S&S integration begins.