Last year was a good time to buy a company. Thanks to cheap financing and a buoyant stock market, global M&A volume exceeded $5 trillion for the first time in 2021. This was more than a post-Covid rebound: it was the high-water mark of a long decade of corporate consolidation. From media conglomerates to semiconductor manufacturers, a few large global players increasingly dominate certain sectors. Big technology companies have grown the most, partly by purchasing competitors but also by virtue of their unique market position as gatekeepers to services that are now impossible to avoid.
None of this is news, least of all to regulators. The European Commission hasn’t been shy about challenging major players, even if identifying suitable remedies has proved considerably more complex. But a headline-grabbing antitrust trial in Washington DC this summer has given observers insight into what increased M&A scrutiny will look like on the other side of the Atlantic. And it’s in a sector that, while not as high-profile as Silicon Valley, makes for a fascinating case study in the changing landscape of competition law.
Background: Publishing Market Share and Mergers
Trade publishing- books published for a general audience- is an industry effectively controlled by five large companies. The “Big Five”, as they’re known, own roughly 80 percent of the trade book market in the US and a similar share in the UK and EU. The largest of them all is Penguin Random House (PRH), itself the product of a merger between Penguin and Random House in 2013. In 2020, PRH announced a huge deal: a merger with Simon & Schuster (S&S), another, albeit smaller, member of the Big Five. PRH is already the dominant player in global trade publishing, and their cash-rich parent company, Bertelsmann, was willing to pay $2.2 billion to bring S&S into the fold.
In the UK, the acquisition was scrutinised by the Competition & Markets Authority (CMA), but their approval, when it came, wasn’t entirely unexpected. As noted in their report, S&S is a minor part of the UK market compared to PRH, and their combined supply of trade books would be unlikely to result in a substantial lessening of competition in any consumer segment.
It has been a different story in Washington. A year after the deal was announced, the US Department of Justice sued to block the deal, and this summer oral arguments began in a courtroom that, at times, featured high-profile agents and authors from across the industry.
The DOJ took a very different approach to the CMA. The starting point for analysing a merger is to define the relevant market. But while S&S has a much larger sales presence in the US, government lawyers didn’t focus on supply, that is, the direct effect on consumers. Instead, they built a case around acquisitions.
The Department of Justice’s Case Against Merging
For publishers to sell a book, they need to buy the rights first. Usually, this constitutes an “advance” against the potential earnings of the published book. The vast majority of the time, advances are very small. But big publishers are occasionally willing to pay very large amounts indeed to secure a potential bestseller. The DOJ’s pre-trial brief alleged that the combined, post-merger entity would control approximately half the market for these “anticipated top-selling books”, books they argued are usually acquired for advances of at least $250,000. This is an important step in the “hypothetical monopsonist” test: whether a firm that was the only buyer of a product could profitably impose a “small but significant and non-transitory reduction in price” (an SSNRP).
The challenge for the DOJ was in proving not only that the merger would reduce prices in this segment, but that any such market exists in practice. Naturally, attorneys acting for PRH and S&S disagreed, arguing that these anticipated bestsellers are “a price segment, not a cognisable ‘market’”. Books with advances of this size make up only the top two percent of titles published in the US, and although the trial featured some notable testimony against the deal from high-profile authors like Stephen King, lawyers for the publishers were unsparing in their criticism of what they called, “an arbitrary price line with no practical, competitive, or legal significance”.
Oral argument wrapped up at the end of August; the judge’s decision is expected at some point this autumn. But the case is significant, both for how far antitrust has come and where it may still go. One of Biden’s key appointments in 2021 was a new head of the Federal Trade Commission (FTC), Lina Khan. She has become one of the most important figures of the “New Brandeis School”, a small group of US scholars, activists, and lawyers that have sought to break from the consumer welfare standard established by the Chicago School in the 1970s and 80s.
The scope of this movement is greater than the space of this article allows. But a crucial element of their analysis is an emphasis on the structures and processes of competition, not just the end price for consumers. It is a self-conscious return to a broader view of the harms caused by undue market power, those borne by workers, suppliers, and publishers.
Anti-Monopsony Policies in the United States
This emphasis on countering monopsonies, sometimes referred to as a “buyer’s monopoly”, is now a stated priority of the Biden administration. This year, a bill was introduced in the U.S. Senate that would modify an important antitrust standard, Section 7 of the Clayton Act, to clarify that antitrust laws are concerned with monopsony power as much as monopoly power.
It’s not that courts in the U.S. haven’t previously recognised the danger of monopsonies. In Weyerhaeuser Co. v. Ross-Simmons Hardwood Lumber Co., Inc., (2007), Justice Thomas wrote that “[t]he kinship between monopoly and monopsony suggests that similar legal standards should apply to claims of monopolisation and to claims of monopsonisation”. But Scott Sherman and Sofia Arguello, in an overview of antitrust, pointed out that, until recently, “there [were] limited examples of lower courts considering the monopsonistic impact of mergers between horizontal competitors”.
Depending on the results of this case, that could change. And it points squarely at the book trade elephant in the room: Amazon. Khan, writing in the Yale Law Journal in 2017, framed publishing consolidation as the downstream consequence of Amazon’s stranglehold over e-commerce:
“Since Amazon’s rise, the major publishers have merged further—thinning down to five, with rumors of more consolidation to come… In a recent letter to DOJ, a group of authors noted…that publishers have responded to Amazon’s fees by both publishing fewer titles and focusing largely on books by celebrities and bestselling authors.”
This narrative is not uncontested. The current wave of publisher consolidation began in the 1990s, long before Amazon took total control of online bookselling. But it would be a cruel irony for publishers to be caught out once again by the kind of regulatory scrutiny that Amazon has so deftly avoided and for a relentless focus on bestselling authors to be driven, in part, by fees paid to the very same company.
Future Problems Posed by New Metaverse Markets
Ultimately, the dominance of companies like Amazon and Alphabet is more than a problem of monopsonies. These are vast digital ecosystems that baffle industry veterans, let alone competition regulators. They are operating in markets that didn’t exist a decade ago or, in the case of the Metaverse, may not exist for another decade to come.
The FTC faced exactly this problem in a recent attempt to block Meta Platforms’ acquisition of virtual reality fitness app maker Within. It’s a familiar playbook: an established giant capturing a promising new start-up. But because Meta is acquiring the company precisely because they don’t compete directly, the agency has had to focus on the hypothetical future competition Meta would pose if it was forced to develop its own fitness products. It’s a tricky case to make, and one that illustrates the difficulty regulators have in applying substantive tests to these kinds of digital mergers. Although the DOJ’s supply-side approach to the PRH and S&S merger is less common, it’s based on the same analytical methods that have formed the basis of antitrust enforcement for decades.
If authorities do want to take a more aggressive stance, they may need a more radical approach. At the end of her piece, Khan argues that, in lieu of meaningful competitors, dominant online platforms could be regulated like public utilities. Recent General Court judgements in the EU, most notably in 2017’s Google and Alphabet v Commission, have suggested that dominant private firms may have similar obligations of equal treatment to those traditionally imposed on state-owned monopolies, effectively bringing Article 106 TFEU doctrines into the application of Articles 101 and 102.
The age of blockbuster M&As may already be over, at least while interest rates are high and a major global recession looms on the horizon. But these issues aren’t going away. Hollywood celebrities with spare time and an unfinished memoir, may need to sign on with a publisher before it’s too late.
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