Federal antitrust enforcement has typically been considered through the lens of consumers. The logic goes, if a megamerger leads to lower prices and more choices, then it’s good for competition and good for the economy. Conversely, if it leads to higher prices and fewer choices, then it’s bad for competition and bad for the economy. Most deals authorized by the government have been approved under this view of antitrust law. However, that sole focus on consumer welfare is starting to change, which could be worrying news for Hollywood executives eyeing major deals.
In November, the Department of Justice sued to block ViacomCBS from selling its Simon & Schuster publishing unit to Penguin Random House, with a trial scheduled to start Aug. 1. The $2.18 billion deal would combine the world’s largest book publisher in Penguin and the fourth-largest US book publisher in Simon & Schuster. The DOJ lawsuit, led by prosecutor John Read, alleges harm to consumers — the standard claim that the government has been making for decades in antitrust cases — in the form of less variety and fewer books. But that wasn’t prosecutors’ main theory of the case. They press arguments that the deal will harm workers by giving the newly merged entity “outsized influence over who and what is published and how many authors are paid for their work.” It’s a bid to crack down against a so-called monopsony, a dynamic in which a single buyer dominates, allowing it to purchase labor under market value. “Post-merger, the two largest publishers would collectively control more than two-thirds of this market, leaving hundreds of authors with fewer alternatives and less leverage,” reads the complaint.
Antitrust regulators under the Biden administration are signaling that they’re looking beyond consumer welfare and taking into consideration labor exploitation, acquisition history and even supply chain resilience when investigating potentially anticompetitive behavior. The renewed focus on restricting mergers from historically lenient antitrust enforcers amid mass consolidation of various industries by a handful of giants should unnerve companies in the entertainment industry that have yet to get the green light for pending deals. Microsoft’s $68.7 billion bid for video game developer Activision Blizzard stands at the forefront of mergers that might be unwound if the Federal Trade Commission seeks to block the purchase.
“There’s more risk for companies across the board, because the areas that the government says they’ll look into and the basis the government says they’ll challenge deals [on] have expanded,” says Benjamin Sirota, a former prosecutor at the Justice Department’s antitrust division.
The DOJ suit to block the Penguin Random House/Simon & Schuster deal rests on how the merger will impact negotiations between authors and publishers. Authors mostly get paid through advances. In a healthy, competitive market with a robust supply of publishers across several publishing houses, authors can generate higher offers by having publishers bid against one another. But mergers mean layoffs, and layoffs mean there will be fewer publishers to whom authors can sell. In this constrained market, authors will have limited opportunities to publish their works and will generate lower offers for their books, according to the Justice Department.
The publishers take issue with the rarefied nature of the government bringing a monopsony case. They argue that antitrust laws are meant to protect consumers — not the highest-paid authors raking in upward of six figures in book deals. “Notably, the Department of Justice does not allege that the merger will reduce competition in the market for book sales or raise for consumers,” their attorneys write prices in a motion responding to prosecutors’ allegations. “The DOJ professes a different concern: It wants to protect the most successful authors, those with sophisticated agents and the most profitable book contracts.” To alleviate competition concerns, Penguin, led by CEO Markus Dohle, announced that it would allow its units and Simon & Schuster to continue competing against each other.
The government, however, was unconvinced by the offer. Part of the reason is a pivot from the government on how it will approach antitrust enforcement under the Biden administration. In January, Jonathan Kanter, assistant attorney general for antitrust, said that regulators will move to block mergers they find to violate antitrust laws instead of seeking complex settlements that “suffer from significant deficiencies” and “too often miss the mark.” The government is not in the business of policing companies, he said, but rather enforcing competition laws, even if that means blocking deals that have historically been approved with certain promises.
In another step forecasting stricter enforcement, the Justice Department and FTC launched a joint public inquiry in January seeking public comment on how they can “modernize” merger guidelines. Among those questions they asked was whether there’s been too much emphasis on the “quantification of price effects,” noting that they’re particularly interested in aspects of competition the guidelines neglect such as “labor market effects and non-price elements of competition like innovation , quality, potential competition, or any trend toward concentration.” The message was clear: labor markets have hardened decades of overly permissive antitrust enforcement due to a hyperfocus on consumer welfare reflected through prices.
Sirota says the government is pivoting from a “complete adherence to the consumer welfare standard” to embracing a theory of antitrust law that accounts for “competitive harms felt by labor.”
If the DOJ prevails in its suit to block the Penguin Random House/Simon & Schuster deal, it could restrain consolidation. “Any block is going to be a win, but especially this one. I can see the Justice Department spinning this to the next couple of parties who are trying to merge, saying, ‘We blocked this merger just because of effects on labor,’ ” says Steve Cernak, a partner at the antitrust firm Bona Law. “That’s precedent they can use.”
A version of this story appeared in the July 27 issue of The Hollywood Reporter magazine. Click here to subscribe.