December 1, 2021

Let's talk Systemic Market Failures: What the Penguin Random House/Simon & Schuster Merger Means for Libraries

Last month, the Department of Justice filed a lawsuit against Penguin Random House and Simon & Schuster over the proposed merger of the two major publishing houses. In the lawsuit, the DOJ makes clear that this merger would hurt authors and the public, particularly focusing on best selling authors.

If this merger goes through, Penguin Random House would control more than half of the U.S. book market for acquisitions and their next closest competitor would be less than half their size. Collectively, the two companies would control more than two thirds of the entire market, creating an anticompetitive landscape that, in the words of the DOJ, “would give Penguin Random House outsized influence over who and what is published, and how much authors are paid for their work.” A lack of competition and diversity in determining who and what is published is obviously bad for authors (who would suffer from a pay cut if they are lucky enough to get published), but just as bad for a public denied the opportunity to read the fruits of their labor.

The DOJ focuses on a few violations: high barrier to entry into the market, no market efficiencies will be created to outstrip potential harms, lack of counterweight to “Amazon’s alleged buying power,” and anticompetitive behavior that is not compatible within the terms of the merger.

To begin with the justification for the merger related to Amazon, it’s simply not the case that this was part of the calculus for the merger. It’s not a point that can be dismissed on its face. But given the allegations made in the complaint, it appears to be a stalking horse. From the complaint:

Although Defendants have publicly suggested that the merger is necessary to create a stronger counterweight to Amazon, Penguin Random House’s Global CEO privately admitted that he “never, never bought into that argument” and that one “[g]oal” after the merger is to become an “[e]xceptional partner” to Amazon. 

This private admission is almost comical. But it makes sense: Amazon’s dominance in online retail makes it essential for publishers to have a cozy relationship with them. This is especially true when considering Amazon’s power in the ebook market. A larger publishing house would have, in theory, more ability to compete with Amazon and exercise more leverage when negotiating with them. But the former can be achieved without the merger. And with respect to negotiating power, there’s simply no guarantee that the benefits of publishers’ stronger bargaining power would be a boon for authors. It may lead to a more equitable distribution of the economic rents from book sales between the publisher and Amazon, but there is simply no guarantee that this arrangement would lead to greater rent-sharing between Amazon, the publishers, and authors. Any negotiation between Amazon and Penguin Random House is just as separate from an author trying to work with Penguin Random House as any negotiation between Penguin Random House and another author.

Making money as a publisher is different from making money as, say, a restaurant. Both of them make money by providing a good or service to a consumer by bringing certain forms of labor or products into production. Publishers will pay authors an advance in exchange for their labor, edit and format them to be published in print or as an ebook, and then advertise to be sold to retailers or consumers. Restaurants will hire waiters and cooks, take raw food and prepare it, and, depending on the establishment, provide an environment to eat the food. 

Though this is a simplification, what we see are two businesses making money by bringing things which did not exist in their final form (books and meals) into production. But unlike restaurants, publishers have another way to make money via an extensive back catalogue. A restaurant may own the equipment in their building, the building itself, and even the land underneath the building. Some of those assets may appreciate in value, but they also come with costs, like property taxes or maintenance. In other words, a restaurant makes most of its money through production and can’t rely merely on owning assets to stay afloat.

Publishers, on the other hand, may have some physical assets, by far their largest assets are the copyrights to the books they publish. These have the advantage of existing for almost a century and not being taxed. So publishers don’t just make money by producing their products, they also collect a significant amount of money merely by owning things. There is value in a business model based on having a large portfolio of assets to collect passive income from. A steady stream of income from a collection of bestsellers makes it possible to take risks and pay an advance on a potential flop.

But the downside to this dynamic is that it also creates an incentive to not ruin a good thing by paying an advance to a relative unknown, let alone the costs of advertising and promotion. Madeline McIntosh, CEO of Penguin Random House U.S. put it, “We might be focused on the book we published 20 years ago instead of the book we’ll publish next week...When the outside world is very chaotic, you want the tried and true.”

Whether or not a steady stream of income leads to further reinvestment or stagnation is a case-by-case question, but one thing is clear: a business model which depends just as much (if not more) on owning things rather than making things creates incentives to accumulate, and thus gain significant power relative to competitors. As the DOJ’s complaint notes:

Smaller publishers lack the resources and capabilities of the Big Five publishers, and thus they are limited in their ability to compete for the publishing rights to anticipated top-selling books. Smaller publishers typically have smaller “backlists” (i.e., inventories of older titles that continue to generate sales) than the Big Five, which are a critical source of revenue that allow the Big Five to pay more and higher advances to authors. Smaller publishers also lack scale in book sales.

This tendency to accumulate more and more works into a “backlist” creates a vicious cycle. While there may be some benefits along the way in the form of higher advances to attract authors away from smaller publishers that can’t compete with larger firms, this is more a silver lining to a dark cloud than something to be celebrated in isolation. Looking at the chart in the filing, reproduced below, it is clear that Penguin Random House and Simon and Schuster combined far outstrip their closest competitors in terms of advances. Their control of the market means that authors and the public have less choice in what they read, and who is able to make a living from their work.

Chart of total advances for top selling books with PRH, S&S at 550 million and other publishers about half or less than that.

Even pre-merger, Penguin Random House controls a significant portion of the trade publishing market, accounting for nearly half of all best sellers in 2020. From the perspective of libraries and the public interest, this merger could hold grave consequences for the public as well.

While total library spending on materials remains obscured by the publishing industry, as of 2016, public libraries alone accounted for at least $1.5 billion in consumer spending for content, according to IMLS data.This number does not include non-public academic, special, or corporate libraries. Still, the role of libraries in society is often sidelined by the very same publishers who profit from them. Industry research shows that library users are often the most extensive book purchasers, but still publishing CEOs sideline or undermine libraries, ignoring data that makes their role in a balanced publishing ecosystem clear.

Publishers depend on library preorders, reader’s advisory services, author events, and community campaigns to publicize their books. What’s more, many publishers recognize the role of librarians in the market and sometimes even support full time librarians to sell their products as evidenced by vendor-heavy library conferences and a stated commitment to a common mission of increasing readership.

With the majority of U.S. trade publications under the control of one mega-corporation, libraries will have even less bargaining power to negotiate favorable terms of their purchases, despite representing a major percentage of the book market. (While there are many big libraries, there is no “Big Library” with market power to use as leverage in negotiations). In the case of ebooks, publishers have utilized a form of regulatory arbitrage, where they are able to use the lack of clarity in regulation of the digital market as a way to boost prices and exploit public institutions with unfair pricing and licensing terms that are often in conflict with library values of access, accessibility, and privacy.

What can be done to stop this? As Takash has written, it is “better… to undo or clarify regulations which make the worst abuses of market dominance possible,” which is the role of flexible copyright reform.

Litigation of this kind is a necessary last resort. Even if it’s unsuccessful, the threat of litigation can induce good behavior. But such litigation, almost by definition, only comes about when the structural features of the market either result in abuses or have high potential for abuse. What structural regulatory reforms can be made to prevent it from happening in the first place?

One solution would be to address the laws which make it difficult to own ebooks like one can a physical copy. While there are definitely advantages to licensing (rather than owning) ebooks for consumers or purchasers, rights holders benefit far more from the fact that ebook ownership can be restricted. The lack of an ability to purchase and own outright a book only available in electronic format leaves open the possibility for high licensing fees and limits on the number of times a book can be lent before a license must be renewed. First edition hardcovers may be expensive compared to paperbacks that will be released down the road, but in these cases libraries can be sure that their expenses are capped.

Another solution would be to close the technological gap between the market for physical books and ebooks. Here, we have a case of regulatory arbitrage where substantially similar products (ebooks and physical books) operate on very different rules. When the only way to access a book online is subject to licensing agreements that can be altered, leaving licensees to pray it isn’t altered further, a robust regime of controlled digital lending would make it possible for physical books to span the digital divide. An option like this would allow readers and libraries to enjoy the fruits of digitization but maintain the same balance that existed in the publishing market before the widespread adoption of ebooks.

We believe that the issue of digital first sale and the library’s role in its future is one of the most important consumer protection issues of our time. As these mega-corporations report record sales, modern American publishing is trapped in a “winners take all” situation in which only the very few can prosper. Libraries must play a central role in this policy debate, advocating for better terms and laws collectively, supporting small presses and publishers, as well as uplifting the work of mid-list authors who may not meet the threshold set by the DOJ’s lawsuit. Rather than accepting or upholding a system in which only a few authors can find readership for their work, libraries should be vocal participants in the market and opponents of the business practices that make mergers like this possible.

Library Futures opposes this merger, and we also hope that a continued focus on the systemic market failures of the publishing industry can begin to be rectified through smart policy focusing on digital ownership and copyright reform that uplifts, rather than challenges, library rights under copyright.

Thank you to Meredith Rose of Public Knowledge for her valuable input!

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