Penguin CEO Defends Schuster Deal in Market Shaped by Amazon

(Bloomberg) – Markus Dohle, CEO of the largest publisher, Penguin Random House, lamented his company’s declining market share in book sales as he testified in favor of a $2.18 billion merger dollars with Simon & Schuster.

Dohle told the judge in an antitrust trial in federal court in Washington that about half of the books sold in the United States last year came from publishers outside the Big Five. He testified Thursday that the shift to e-commerce platforms such as Amazon has “leveled the playing field” between big and small players.

His comments came after being questioned by Justice Department lawyer John Read, who posted an internal company document that described the five largest publishers as an “oligopoly” structure.

The document was prepared for a board meeting that Dohle attended, during which a possible purchase of Simon & Schuster was discussed. Dohle testified that he disagreed with the characterization of oligopoly and did not recall if it was discussed. “It was a very short board meeting,” he said.

The trial, which is expected to last three weeks, comes as the Biden administration tries to crack down on consolidation across industries. The United States says Penguin’s purchase of Simon & Schuster, the nation’s fourth-largest publisher, will squeeze guaranteed payments to authors, known as advances, reducing consumer choice.

The DOJ alleged that the combination will concentrate power between four publishing houses instead of five. Publishers have argued that the merger will instead increase competition and payments to authors.

The government focused its argument on how the biggest publishers have cornered the market for buying author books and argued that the merger would give the combined company almost half of the market for buying best-selling books. The defense focused Thursday on Penguin’s smaller share of the book sales market.

Daniel Petrocelli, attorney for Penguin and its parent company, referenced a December 2019 presentation that showed Penguin’s share of retail book sales fell from 25% to 21% since the 2013 merger between Penguin and Random House.

In his testimony, Dohle expressed frustration with Penguin’s inability to keep up with industry growth and said the merger would help the company recoup its share. He testified that e-commerce platforms level the playing field because they rely on algorithms that decide which books are “discoverable.”

Read more: Penguin Rival backs US in antitrust lawsuit to block Schuster purchase

Asked by Read, Dohle said his company hires data scientists and pays Amazon to improve placement.

Read also asked what types of books were included in Penguin’s market share calculation. Data included bibles, magic trick books, coloring books, calendars, diaries, dictionaries, encyclopedias, puzzles, sudoko, journals, and study aids. Dohle said Penguin publishes books in some of those categories.

Read asked if Penguin had ever considered lowering retail prices to stem its declining share. Dohle replied that he didn’t think that would ever solve the problem.

The government lawyer also asked if Dohle thought Penguin didn’t grow because the book business was mismanaged. He sent text messages from Dohle to his subordinates in which he said the company had “messed up” on the product side after the merger between Penguin and Random House.

Dohle explained that these text messages showed his frustration with the development of the business and that his advice had not been heeded on how to organize the business. He agreed that the business consisted of too many layers of management in acquiring books.

“We haven’t been able to acquire and publish enough books that readers want to buy,” Dohle said. He said he thinks the company could become more aggressive and agile on the content side.

During his cross-examination, Dohle described subscription models for books as the biggest threat to the publishing world. He said if consumers could access all books in digital format by paying $9.99 per month, it would have a “tectonic” impact on industry revenue as well as author compensation.

At one point, Dohle was asked about his commitment that Penguin and Simon & Schuster would continue to compete after the merger, even if they were the last bidders. The CEO testified that he made the promise in response to concerns from the agent community about the deal.

Petrocelli asked what would happen if Dohle waived.

“I think it would hurt our business,” he said. “Agents and perpetrators would resent it and feel betrayed.”

U.S. District Judge Florence Pan said she doesn’t think officers would stop working with Penguin if he quits because he’s a higher bidder.

The trial, which began on Monday, has already prompted testimony from bestselling horror author Stephen King and Jonathan Karp, CEO of Simon & Schuster.

King, known for many bestsellers such as “IT” and “Carrie,” spoke out against consolidation and warned of the impact it could have on authors’ livelihoods. Karp argued that Penguin and Simon & Schuster rarely clash – in response to a government lawyer’s reference to examples of two companies offering to win books.

Pan, who was nominated this year by President Joe Biden to the Washington Court of Appeals, is hearing the case without a jury.

©2022 Bloomberg LP

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