Datos y preguntas claves del juicio del Departamento de Justicia (EUA) vs Penguin Random House (Bertelsmann Group)

Datos y preguntas claves del juicio del Departamento de Justicia (EUA) vs Penguin Random House (Bertelsmann Group)

31-08-2022 / https://hotsheetpub.com/ Newsletter

While the case hinges on how the merger may affect a mere 1,200 authors earning advances over $250K, information presented during testimony offers rare insights for all authors

Fuente original: DOJ vs PRH: The Key Questions of the Trial

When we sent our last update on the trial in mid-August, there was more than a full week of testimony left to go. A good deal of it was number crunching by two economists—Dr. Nicholas Hill, hired by the government, and Dr. Edward Snyder, hired by the defense. This is where the rubber was supposed to hit the road in terms of proving/disproving harm to authors and arguing the legal merits of the case. As you can imagine, the two economists disagreed with one another on just about everything. And it was not all that easy to follow the numbers. Even the judge admitted she didn’t understand the economic modeling all that well. But at a high level, here are the key questions that the numbers were supposed to answer.

Do different advance levels represent different markets? The government had to prove during the trial that anticipated top-selling books are treated differently by publishers and that market harm will occur to authors of such books should PRH buy Simon & Schuster. The defense tried to prove this is an artificial designation and ultimately meaningless to market competition. However, as the trial unfolded, the idea that there are different categories of books with different sales expectations and publisher support only seemed to be reinforced. In fact, it seemed that differing business models emerged for the author and publisher alike when evaluating these deals.

  • $250K advances and above (“anticipated top-selling books”): This is where the government has focused its attention and has tried to argue harm to authors. For advances exceeding this amount, the advance isn’t expected to earn out; agents consider an advance that didn’t earn out as a sign they negotiated well. Unless the book tanks, the publisher can still earn a profit. If it is a gigantic hit, then gigantic profits ensue. PRH’s CEO in the US, Madeline McIntosh, said in her testimony, “We can feel that we’re [in] comfortable, profitable territory at around 70 percent of [advance] earnout for most books.” In a set of deals evaluated at the trial, more than 15 publishers were bidding against PRH and S&S for books in this category. However, 75 percent of non–Big Five publishers never won a book for more than $175K, and only one won a book above $225K. Overall, non–Big Five publishers capture less than 10 percent of these big deals. (That said, elsewhere in the trial it was mentioned that 20 different publishers have paid advances of $1 million or more at least once.)

  • Between $50K and $250K: The trial indicated that Big Five publishers and those they compete against commonly pay this amount for books they have good feelings about—what we might call an “opportunity” book if early readers and/or the publisher start to rally around it. If such a book becomes a bestseller, it becomes very profitable for the publisher (and helps keep them in business), and the author is likely to earn out the advance. On the next deal, the author/agent presumably has leverage to negotiate a much higher advance. (Of the non–Big Five publishers, most are bidding at the lower end of a $100K–$250K range.)

  • Below $50K: This is where most of the non–Big Five deals happen. The defense (the publishers) admitted this is the level at which “enhanced services” (marketing) fall off. During the trial, a couple of depressing statistics were shared: of the 58,000 trade titles published per year, fully half of those titles “sell fewer than one dozen books.” (Not a typo, that’s one dozen.) More broadly, 90 percent of titles sell fewer than 2,000 units. Even a small advance of a few thousand dollars would not earn out at standard royalty rates.

During closing arguments, the defense argued there is a very high end of the market of “repeat franchise authors with a track record of success [allowing one to] predict with a high degree of probability that those books are likely to succeed,” as well as celebrity authors with platforms. But advances paid for such books are in the multi-million-dollar range, not in the hundreds of thousands. PRH’s lawyer, Daniel Petrocelli, said, “I enjoyed listening to Stephen King, but no one is challenging his compensation. … I think Stephen King could buy Simon & Schuster.” Petrocelli also suggested, “The government is trying to land their definition in this $250,000 to $1 million range. That’s where there’s the most uncertainty. Those would be unanticipated top sellers. That’s where risk and gambles are being taken that you heard so much about.”

Do authors who receive a high advance also receive more marketing support? This is another way for the government to argue that authors receiving $250K and higher represent a different market. The publishers have argued they don’t know what will succeed and that they put money behind titles that get good feedback from the market (from retailers, booksellers, early reviewers, and so on). PRH’s Madeline McIntosh testified, “If we’re doing something and it is seemingly having no [sales] results, then we’re going to stop throwing good money after bad. So we’re adapting in real time based on the results.” At another point, she said, “Marketing only has a loose correlation to the advance” and that marketing spend is not based on what is in the P&L. But publishing execs had to concede they market books aggressively when they’ve paid a very high advance.

A notable statistic that came out of the trial: PRH said their total marketing spend comprises 2 percent of revenues. That’s roughly a $55 million marketing spend on annual sales of about $2.7 billion.

Would a combined PRH and S&S lower author advances? This is where you get into the economists’ models and all those jokes you may have heard about guppies (the GUPPI model, or Gross Upward Pricing Pressure Index). Dr. Snyder argued that there’s no evidence to support the claim that there will be lower advances in the future and that the publishers themselves don’t know if they will cut their advances. He believes, ultimately, one can’t accurately model the publishing industry, and that the GUPPI model presented by Dr. Hill, showing market harm, is not useful.

“The problem is, [PRH and S&S] have so many rivals there, [lowering advances] would not make sense as an across-the-board pricing strategy.” In fact, he argued that lowering advances would lead to business mistakes and revenue loss. Later, during closing, the defense argued that competitors will take advantage of any softening they see, and that the GUPPI model doesn’t account for that. Snyder also said, “One of the real problems in modeling this industry is the role of agents in selecting among the mix of acquisitions; I couldn’t figure out how to do that. … I stopped thinking about it in an active way because my empirical analysis didn’t indicate that there would be harm.”

He also believes that any author who can command a $250K+ advance has leverage and will be bound to attract competition. However, he conceded that authors have more of a “comfort level” with the Big Five because of their reputation for, well, publishing bestsellers. Authors tend to believe the Big Five can do things that the non–Big Five cannot.

Most notable of all: Testimony indicated that authors receiving lower advances aren’t likely to be harmed by a merger and could benefit. The defense argued that the government didn’t want to use a lower advance figure of $50,000 as a cutoff because it would have undermined their argument for market harm: There are no negative effects at that advance level, at least based on the economic modeling presented at trial. Dr. Hill’s model found that, as a result of the merger between Penguin and Random House in 2013, advances for anticipated top-selling books decreased by about $100,000, while for all other books, advances stayed flat or moved up a bit. While Dr. Snyder doesn’t like the idea of segmenting the market by advance level, he thinks the lower amounts are a better market to study because that advance level has more active competitors.

For her part, Judge Florence Pan said during trial she doesn’t think there needs to be a conscious decision by publishers to lower advances—the DOJ needs to show only that auctions can be won at lower levels because there is less competition. She also seems convinced by the government’s case that there is a distinct market for books commanding $250K+ advances. A decision is expected this fall.

Other notes:

  • An interesting statistic about fiction market share: The trial revealed that from 2015–2019, PRH had a 42–44 percent market share of the top end of the fiction market (authors selling more than 500,000 copies a year), while non–Big Five publishers had about 5–6 percent market share. PRH had a share of 31 percent of authors outside of that top-selling category, compared to the non–Big Five share of 27 percent.

  • PRH changed their mass-market paperback strategy. McIntosh said, “We were acquiring hundreds of books for very little advance. We were investing no marketing money to support them. We were putting covers on them that were very, very old-fashioned … while we were printing these and in some cases shipping a couple of hundred, we were getting most of them back.” McIntosh decided PRH would abandon that approach, especially in romance. PRH’s Berkley imprint in particular is now a home to “contemporary-feeling romance stories” in trade paperback, with title counts increasing.

  • The judge threw out PRH testimony related to “efficiencies” created by a merger. The defense wanted to argue that decreased costs and increased sales as a result of the merger would lead to better profit margins and increased royalties, with more money to spend on advances. But for reasons we won’t get into here, the judge will not factor this into her decision. (It may be grounds for an appeal by PRH/S&S if they lose the case.)

  • Confidential Amazon documents discussed at trial indicate they’re facing challenges expanding their trade publishing program and have considered reducing title count. Their share of anticipated top-selling books has dropped in recent years.

Bottom line: Michael Cader, writing in Publishers Lunch, has perhaps the best summary of where we are (subscription required): “Antitrust trials are technical and complicated and have little to do with the nuances of the businesses involved. They are about market definition, market concentration, and market constraints, and about pricing power and econometric models. … The government brought a very focused case about the small set of authors and deals that win contracts of $250,000 or more every year (or about 1,200 projects a year, as we learned). It was the DOJ, not anyone in publishing, that had no regard—in an antitrust case—for the other tens of thousands of authors and books brought to market every year.”

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