I finally got around to the full text of Judge Florence Pan’s decision on the proposed Penguin Random House/Simon & Schuster merger. As you’ve heard, she blocked it.

She accepted the department of justice’s argument that the deal would lessen competition for that tiny percentage of books that receive advances of $250,000 or more, i.e., anticipated top-sellers. The salient facts to Judge Pan’s mind were that PRH and S&S combined would have had almost 50% of the market for anticipated top-sellers, more than twice the next largest competitor; and that the long-standing competitive dynamic between PRH and S&S would be wiped out as publishing’s Big Five shrunk to a Big Four.

I put off reading the decision on hearing that it ran to eighty pages—most judges are a hard slog at four pages. It turned out to be well-written and rewarding. Here are five observations, including a significant piece of news bearing on the future of Simon & Schuster.

The decision makes clear that Judge Pan is thoroughly onside with the Biden administration’s efforts to impose a new doctrine of antitrust.

The old doctrine, dating from the seventies, held that mergers were unobjectionable if there was no evident harm to consumers (i.e., buyers). Walmart could eat the whole of the retail sector as long as it delivered low prices to shoppers.

Team Biden believes that consumer welfare is too narrow a lens for antitrust. Low prices are fine but not if they’re achieved by gouging suppliers and abusing workers, i.e., sellers.

Judge Pan dismissed the claim by PRH lawyers that the merger would improve the firm’s efficiencies and benefit buyers and accepted the DOJ’s assertion that the critical issue in the PRH deal was how the merger would affect sellers (in this case, a subsection of big-time authors flogging manuscripts). Welcome to the new theory of harm.

While everyone in the publishing world seems fine with the outcome, the US antitrust world is stunned, not least because the Biden DOJ has been losing on antitrust in every other American court but Judge Pan’s. The experts at Lexology call her decision “novel” and “unprecedented.” They are bracing for “a winter of antitrust discontent.”

By this reading, PRH had the misfortune to pull the wrong judge. I might have had more luck on appeal but PRH couldn’t convince Paramount, owners of Simon & Schuster, to stick around and file one. Paramount has put S&S back on the block.

Judge Pan does not trust big-time publishers. She thinks they’re a bunch of lying liars and cheating cheaters. She all but called them evil.

Antitrust law is concerned with coordinated effects. These are when businesses in the same field, either by overt collusion or implicit understanding, agree not to compete. Maybe they all somehow keep their prices at the same level (see wireless plans); maybe they all agree not to poach one another’s employees (see the tech industry). Whatever the game, they’re coordinating their behavior to screw customers and/or suppliers.

It is well established in law, notes Judge Pan, that when businesses in an industry have colluded in the past, they are more likely to collude in the future. Which leads her to United States vs. Apple, Inc., big-time publishing’s original sin.

In that case, a handful of leading publishers (including Penguin and Simon & Schuster but not Random House) were found to have engaged in a conspiracy with Apple to raise e-book prices between 2009 and 2019. A New York court found there was “constant communication” among the publishers as they negotiated with Apple and Amazon on e-book pricing. They were brazen about it. Collusion in most industries involves subtle winks and nudges. Publishers were calling one another on the phone.

The industry, says Judge Pan, is “prone to collusion.”

“Rampant” with collusion.

And it goes far beyond the Apple case. There’s the industry-wide standardization of contract terms: all publishers suddenly and in lockstep insisted on acquiring audio and e-book rights along with conventional book rights; advances, which used to be paid in two installments, moved uniformly across the industry to three installments and then to four installments, delaying author compensation. In a competitive industry, one might expect one publisher to steal a march on rival publishers by foregoing audio rights or paying the whole advance upfront. Not in publishing. “This phenomenon,” writes Pan, “bespeaks a tacit agreement among the publishers to compete only on the basis of advance level because it collectively benefits them not to yield on other contract terms.”

Were PRH to buy S&S and publishing to become still more concentrated, says the judge, anti-competitive behavior would intensify. It is also well established in law that the more concentrated the market, the easier it becomes for businesses to collude. If PRH and S&S were to combine, leaving the industry with one behemoth of a market leader, the other participants would know exactly who to coordinate with.

Their own histories, as much as any economic analysis of the deal, sunk PRH and S&S.

Lawyers for PRH and S&S as well as the publishing CEOs who graced Judge Pan’s courtroom swore that they would compete unto death with one another whatever the outcome of the trial.

Markus Dohle, the CEO of PRH, further promised that unfettered competition between his firm and S&S would continue even if they wound up under the same corporate roof.

Judge Pan called bullshit on all of it.

She gave the publishers credit for knowing their economic interests and being able to figure out that they wouldn’t have to fight as hard to beat three opponents as they do to beat four.

Dohle’s promise that S&S and PRH would continue to compete if jointly owned struck Pan as preposterous and evidence of his guilty mind. He only made that “extraordinary pledge” because he was “aware of how threatening the combined entity would be to authors and agents.”

PRH and S&S would not continue to compete if combined, she said, because they would have every economic incentive not to. She pointed to abundant evidence presented at trial that the big publishers, and especially PRH, already have controls in place to keep their various divisions or imprints from bidding against one another for books and driving up prices.

Judge Pan appears quite comfortable deciding the fate of the largest and third-largest firms in publishing on the basis of how the merger would affect the least vulnerable people in the industry—high-value authors. This sits uneasily with the critique of old-school antitrust law.

Team Biden’s complaint with the old theory is that it is blinkered, seeing consumers as the only parties affected by mergers. The case decided by Judge Pan is also blinkered, just in a different way. She acknowledges that her court is only concerned with the merger’s consequences to high-value authors. Questions about what might happen to the vast majority of authors, not to mention publishing company employees, if the merger fails are “not relevant to the Court’s analysis of the government’s claim.”

If S&S lands with a good owner and Penguin Random House manages to regain its feet and grow in the future, we’ll all look back on this decision positively.

If S&S gets bought by a private equity fund that loads it with debt and guts the workforce, and if Penguin Random House continues to lose ground, as it’s done since acquired by Bertelsmann at the end of the last century (see “Random House of the Living Dead,” SHuSH 160), we may see author advances and employment opportunities decline precipitously in US publishing and wonder why we cared so much that Stephen King is making $14 million for his next book instead of $12.5 million (all numbers pulled from thin air)

I’m sure she’s right on the law, but Judge Pan’s incuriosity about the consequences of her decision to the rest of the industry is disturbing from a publishing perspective.

After stating that it’s not her problem if S&S gets destroyed by a private equity firm, Judge Pan declares concerns about such an outcome “highly speculative.”

Speculative, sure, but “highly?” There were private equity bidders for S&S back in 2020 when the PRH deal was struck, and the ways of private equity are well-known to even casual business observers. A private equity outcome would seem a distinct possibility, especially with industry watchers worrying that the same antitrust concerns that tripped up PRH might prohibit another big publisher from taking a run at S&S.

But here’s the news (or at least an important unreported dimension of the decision). Judge Pan goes on to say that potential buyers from the publishing industry have shown interest in acquiring S&S “and it is just as likely that another publishing company will prevail in a future sale.”

Two companies testified to their interest in buying S&S should it come back on the market: HarperCollins (the #2 firm) and Hachette (#4). Judge Pan couldn’t have made it clearer that she’s fine with a Big Five firm other than PRH acquiring S&S.

That goes some ways toward explaining her insouciance toward S&S’s future. She thinks Paramount has options: if it chooses a bad one, it’s not on her.

Paramount hasn’t given any clues as to where S&S will land but it’s safe to assume that its senior executives have something lined up. You don’t walk on PRH’s rich deal (with PRH offering you more cash to stick around for an appeal) without having another buyer in the bag. Shouldn’t be long.

Follow up on Indigo

I received two streams of correspondence in response to last week’s newsletter (“Who Will Sell the Books?” SHuSH 174) on Indigo’s steady retreat from bookselling.

The first was from people who wondered if it wasn’t a great time to open an independent bookstore. Maybe it is. Just beware that your friends at the Toronto Public Library are doing everything they can to put you out of business. From last week:

The second stream of correspondence was from existing independent booksellers. Three of them separately sent me this update on the federal government’s new funding program for Canadian bookstores. Of a promised $32 million, $12 million has been dispersed with the lion’s share, $3.5 million, going to Indigo.

The independents think the money should be going to independent booksellers committed to selling books rather than a housewares chain abandoning books.

If I were an independent, I’d also be furious that 54 percent of the funds went to Quebec, which has 23 percent of Canada’s population.

Alberta, Saskatchewan, and Manitoba, which have 19.3% of the population, received 2 percent of the available funds. You’ll seldom find better evidence of how federal grants support ~~artistic endeavor~~ the Liberal vote.

A final note on Indigo. Independent of last week’s SHuSH, our friend and Sutherland Quarterly contributor Paul Wells wandered into the chain’s new Ottawa location last week and had a remarkably similar response: “If you’re looking for tea, you’re in luck.”

Our advice to the holiday book buyer: use the map of Canadian independent booksellers below, choose Indigo over Amazon, or consider a novel, delightful gift that keeps giving throughout the year:

Give a thoughtful gift

Three weeks ago, Sutherland House announced the launch of the Sutherland Quarterly, a new series of captivating essays on current affairs by some of Canada’s best writers. Each essay will be published as a stand-alone book and sold at retail in the usual manner; the essays will also be available (at a preferred price) by annual subscription.

These short books will be timely, topical, and highly readable. They will not come from one particular worldview or represent one style of writing. After the inaugural edition, each will contain responses to the previous essay to create a sort of rolling conversation from book to book.

We’re calling them essays but the degree to which each relies on argumentation, investigation, or story-telling will depend on the writer and the subject. While our first two authors are established journalists, we will also be publishing new voices, some of them journalists, others not. We are open to submissions.

The inaugural edition of SQ is Funeral for a Queen: Twelve Days in London, by former Globe & Mail correspondent John Fraser, who is also the founding president of the Institute for the Study of the Crown in Canada. It will be released early next moth. From the promotional copy:

On September 8, 2022, an announcement was posted on the gates of Balmoral Castle in Scotland and Buckingham Palace in London that Queen Elizabeth II, the longest serving monarch in British history, had died. That set in motion a remarkable ten days of official mourning and ceremony unlike anything seen in any nation for decades. Members of the royal family gathered—the new King Charles III and his Queen Consort Camilla; the newly-minted Prince of Wales, William and his princess, Kate; Harry the Bolter and his celebrity wife Meghan—along with hundreds of royals and heads of states from around the world. Hordes of people, many from overseas, spent long hours lining up in the rain to pay tribute to the beloved monarch, a presence in their lives for seventy years. On the scene for these events, renowned journalist John Fraser takes the reader from inside St. James Palace where the new King was proclaimed to Queen Elizabeth’s final resting place at St. George’s Chapel in Windsor Castle, from deeply moving scenes to the occasional hilarious screw-up, capturing the magic of the occasion with trenchant observations and witty commentary informed by a lifetime’s experience and curiosity about all things monarchical and his own encounters with the royals.

The second edition of SQ, coming in March, will be An Emergency in Ottawa: The Story of the Convoy Commission, by former National Post and Maclean’s columnist Paul Wells, who has recently relaunched himself as a one-man media machine.

Single copies will sell for $22.95 (plus HST); the subscription price is $74.99 (including HST). I hope you’ll consider subscribing. Also, the holidays are approaching: give a thoughtful gift!