Federal antitrust enforcement has typically been viewed through the lens of consumers. The logic is that if a mega-merger results in lower prices and more choice, then that’s good for competition and good for the economy. Conversely, if it leads to higher prices and less choice, then it’s bad for competition and bad for the economy. Most deals approved by the government have been approved under this antitrust view. However, that sole focus on consumer welfare is beginning to change, which could be worrying news for Hollywood executives eyeing big deals.
In November, the Justice Department filed a lawsuit to prevent ViacomCBS from selling its Simon & Schuster publishing company to Penguin Random House, with a trial scheduled to begin August 1. The $2.18 billion deal would combine the world’s largest book publisher into Penguin and the fourth-largest US book publisher into Simon & Schuster. The Justice Department lawsuit, led by prosecutor John Read, alleges consumer harm — the standard claim the government has made in antitrust cases for decades — in the form of less variety and fewer books. But that wasn’t prosecutors’ main theory for the case. They argue that the deal will hurt workers by giving the newly merged entity “outrageous influence over who and what gets published and how much authors get paid for their work.” It is an attempt to tackle what is known as monopsony, a dynamic in which a single buyer dominates, allowing him to buy labor below market value. “After the merger, the two largest publishers would together control more than two-thirds of this market, leaving hundreds of authors with fewer choices and less leverage,” the complaint reads.
Antitrust authorities under the Biden administration are signaling that they are looking beyond consumer welfare to consider labor exploitation, acquisition history and even supply chain resilience when investigating potentially anticompetitive behavior. The renewed focus on restricting mergers from historically lenient antitrust authorities amid a mass consolidation of various industries by a handful of giants should unsettle entertainment companies that have yet to get the green light on upcoming deals. Microsoft’s $68.7 billion bid for video game developer Activision Blizzard tops mergers that could be reversed if the Federal Trade Commission tries to block the purchase.
“There’s a higher risk for companies across the board because of the areas that the government says they will investigate and the basis that the government says they will contest deals [on] expanded,” said Benjamin Sirota, a former prosecutor in the Justice Department’s Antitrust Division.
The DOJ’s lawsuit to block the deal between Penguin Random House and Simon & Schuster depends on how the merger will affect negotiations between authors and publishers. Authors are usually paid in advance. In a healthy, competitive market with a robust supply of editors across multiple publishers, authors can generate higher bids by having publishers bid against each other. But mergers mean layoffs, and layoffs mean there will be fewer editors for writers to sell to. In this constrained market, authors will have limited opportunities to get their work published and will see lower bids for their books, according to the Justice Department.
The defendant publishers criticize the government’s sophistication in bringing a monopsony case. They argue that antitrust laws are designed to protect consumers – not the highest-paid authors who rake in six figures at bookstores. “Specifically, the Justice Department is not alleging that the merger will reduce competition in the market for book sales or increase prices for consumers,” their attorneys write in a filing responding to prosecutors’ allegations. “The DOJ is committed to a different cause: It wants to protect the most successful authors, those with sophisticated agents and the most lucrative book deals.” To address competition concerns, Penguin, led by CEO Markus Dohle, announced that it will split its units and Simon & Schuster will be allowed to continue to compete against each other.
However, the government was not convinced by the offer. One reason for this is, in part, a linchpin by the government on how it will approach antitrust enforcement under the Biden administration. In January, Jonathan Kanter, assistant attorney general for antitrust, said regulators will block mergers they say violate antitrust laws, rather than seeking complex settlements that “suffer from serious flaws” and “too often miss the mark.” The government’s job isn’t to monitor companies, he said, but rather to enforce competition laws, even if that means blocking deals that have been approved with specific promises in the past.
In a further move that forecasts tighter enforcement, the Justice Department and the FTC launched a joint public inquiry in January to gather public comments on how to “modernize” merger policies. Among the questions they asked was whether there was too much emphasis on “quantifying price effects” and noted that they were particularly interested in aspects of competition that the guidelines neglect, such as “labor market effects and non-price elements of competition such as innovation, quality, potential competition, or concentration tendencies.” The message was clear: Labor markets have endured decades of overly permissive antitrust enforcement because of the focus on consumer welfare, which is reflected in prices.
According to Sirota, the government is shifting from “full compliance with consumer welfare standards” to an antitrust theory that “considers competitive harms felt by workers.”
If the DOJ wins its lawsuit against the Penguin Random House-Simon & Schuster deal, it could prevent the consolidation. “Every block will be a win, but especially this one. I see the Justice Department taking this to the next few parties trying to merge and saying, ‘We blocked this merger solely because of the impact on workers,'” said Steve Cernak, a partner at antitrust law firm Bona Law. “It’s a precedent they can use.”
A version of this story appeared in the July 27 issue of The Hollywood Reporter magazine. Click here to login.