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The “Big Five” are Still Big and Still Five

Although this blog has studiously and steadfastly refrained from veering into anything pertaining to the law, a recent legal ruling out of the D.C. District Court merits some mention, if only because it shed some really interesting light on the publishing industry. The case is United States v. Bertelsmann SE & Co., et al., but it's more widely known in the media and the writing industry as the blocked merger of two giants in the publishing industry. 


I'll preface this post by repeating the caveat of this blog: nothing in this post should be construed as legal advice, nor as any kind of indication as to how any judicial officer on my court or any other might view a particular case.

The case itself arose from an antitrust challenge to a proposed merger between Penguin Random House and Simon & Schuster, two of the so-called "Big Five" publishing conglomerates (the other three being, HarperCollins, Hachette Book Group, and MacMillan Publishing Group). The government opposed the merger. Its case turned on a monopsony theory. Unlike the more familiar term monopoly (which, besides being a beloved board game, is the word economists use when they focus on how many sellers there are in a market), a monopsony occurs when there are too few market buyers (here, the buyers being the Big 5 as purchasers of book manuscripts). The trial lasted 12 days, after which the district judge (who now sits on the D.C. Court of Appeals) entered her ruling. It spans 80 pages. It's a bit of a dense read, but there were several points of interest to those who write for a living or for a hobby. I'll hit on a few of them.

First and foremost, it seems that the Big Five publishers' curation of potential manuscripts for profitable books is not so much an exercise of discerning quality, but a crap shoot. Actually, a game of dice in a casino would probably give better odds than what the Big Five churn out. Despite hundreds of imprints and all the resources the Big Five employ, "only 35 out of 100 books turn a profit … [and] the top 4 percent of profitable titles generate 60 percent of profitability." Indeed, the CEO of Penguin Random House likened publishers to "angel investors" who invest in thousands of books, knowing only a few will make it to the top. As such, the advance (that is, the upfront non-refundable advance payment of anticipated royalties to the author) is "the single most important term" in a Big 5 publishing contract—because most Big Five authors won't earn it out. In fact, the largest segment of Penguin Random House's revenues comes from their back list, not their new titles. As for smaller presses (of which, I can attest, there are many), the testimony before the court was that they merely serve as a "farm team" or "minor league" to the Big Five publishers; self-publishing was discarded as an insignificant factor in the industry.

The court's legal analysis is, as one would expect, comprehensive. I won't get too far into the weeds (first, because this isn't a legal blog, and second, because it has been many years since I've even had to think about antitrust law). But here's a rough summary. As the district court observed, Section 7 of the Clayton Act prohibits mergers and acquisitions when the concentration "may … substantially lessen" competition in a relevant market. The question before the court, then, was whether the proposed merger between Penguin Random House and Simon & Schuster would have an anti-competitive effect on acquiring manuscripts from authors. But what market of manuscripts was pertinent? The district court answered that question by employing a relatively narrow definition of the book acquisition market. The legal case was not so much about the state of the market for book acquisitions in general or even within the Big Five. The monopsony the court honed in on in this case was the market for "anticipated top-selling books," which, as noted earlier, turns out to be a pretty small sliver of book manuscripts. In fact, the market the court chose to address was the market for manuscripts that garner a $250K advance or greater. That market, the district court concluded, has only five buyers, and since those five vigorously compete for those titles, reducing the number from five to four—with the merged companies accounting for 49% of the acquisition market—would indeed result in reduced competition for top-selling manuscripts to such a degree that the proposed merger violated antitrust law.

Although this case has generated a considerable amount of discussion within the writing community at large, the set of writers the court was really considering—those whose manuscripts can fetch a quarter million dollar advance—was actually pretty small. I suspect the number of professional authors who fit that description could have all fit within the courtroom with some seats to spare. But the effects of blocking the merger will surely have broader impacts on writers (if not on the books the get published). I'll leave it to others to ponder what those might be.

Like I said, this really seemed to be a case about big publishing and big authors. The district court's relegation of independent publishers (whether small presses or self-published authors) to the outskirts of publishing significance has been discussed and decried by some folks. As a small press author, it did give me a chuckle to be informed that apparently I'm in the "farm system" for big league conglomerates in New York City. All I'll say is that courts have to work with the evidence they are given. I've not done an exhaustive review of the witness list in this case, but it appears that the government and the defendants' witnesses were largely drawn from the Big Five industry (whether publishing company officers, literary agents, editors, or major authors). And given the definition of the relevant market the court ultimately adopted, the court's remarks about independent publishing makes sense. Put it this way: it would have been somewhat awkward for the court to have made a factual finding that the fastest growing segment of book releases comes from independent publishers, but the market for the smallest sliver of the Big Five's releases needs antitrust enforcement.

At the end of the day, I suspect this decision won't have much of an impact for the majority of writers (or, at least, I don't think it will affect me). That's because most writers these days aren't working under a Big Five contract—and certainly not contracts with quarter million dollar advances. They'll keep doing what they do, and the book-buying market will keep responding to the books that they like—whether those books come from Simon & Schuster, or Kensington, or Ellysian, or Kick Starter. But the court's ruling does provide an illuminating peek behind the curtain of an industry in transition.


If you're interested in reading the court's 80-page ruling (and, I mean, who wouldn't be), you can find it here:Judge Pan's ruling

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