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A Trial Put Publishing’s Inner Workings on Display. What Did We Learn?

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Lawyers for the Department of Justice and for Penguin Random House delivered their closing argument on Friday in a case that can determine whether the publisher, the country’s largest, should buy certainly one of its rivals, Simon & Schuster.

The case, which will probably be decided in the autumn by Judge Florence Y. Pan, focused on the results of consolidation on publishing, an industry that has already been dramatically reshaped by mergers in recent times.

The federal government sued to stop the deal on antitrust grounds, saying it could diminish competition amongst the most important houses and push down advances for some authors. Bertelsmann, the parent company of Penguin Random House, argued the deal would bring its supply chain and distribution muscle to an extended list of authors, to their profit, and that the industry is large and varied, made up of many vital players beyond the most important firms. Judge Pan expressed skepticism of several of Penguin Random House’s essential arguments.

Beyond the legal debate, the three-week trial offered an unusual glimpse into the world of publishing, offering observers a parade of high-profile publishing executives, agents and authors speaking frankly and on the record about how books are made.

Here is a few of what we learned.

Nobody — not even the highest executives in publishing — has discovered the combo of things that may guarantee a best seller.

Markus Dohle, the top of Penguin Random House, said the whole lot within the book business is “random.” The judge described the industry as certainly one of “risk-taking” and said every book was “a bet.” The publisher of a significant imprint called the business “fickle.”

The issue of predicting success was a consistent theme through the trial. It sets the publishing world other than many industries, which might use the past sales of comparable products — like a sort of washer or cereal — to predict future sales. But every book is exclusive, so while educated guesses may be made, especially concerning established authors, no one really knows what the longer term holds for any given project.

“Every part is random in publishing,” Mr. Dohle said on the stand, recounting the corporate’s origin story. “That’s why we have now that name. So the founder thought: Every part is random. Success is random. Best sellers are random. In order that’s why we’re the Random House.”

How much a publishing house offers an writer for his or her book is often a closely guarded secret — a number based roughly on sales expectations, competition for a project and really subjective elements like how badly editors want it.

Through the trial, several of those payments, that are called advances, were discussed with unusual candor.

Jennifer Bergstrom, the publisher of the Simon & Schuster imprint Gallery, said they paid “hundreds of thousands” more for a book by the comedian Amy Schumer than the sales estimates would have dictated.

Just a few authors, just like the actor Jamie Foxx and Jiayang Fan, a author for The Recent Yorker, were discussed on the trial by name — each of them were offered seven figures. Other writers were discussed in code to preserve confidentiality.

“Creator A is a reality TV star,” Ms. Bergstrom said. “She’s a housewife on Broadway — excuse me, Broadway? She wishes. Bravo.”

She continued: “Creator B is the — was the star, he’s now in prison, of a significant Netflix show. We paid 175 for that.”

Penguin Random House executives testified that the approval of Madeline McIntosh, the chief executive of Penguin Random House U.S., is required for advances of $1 million or higher, and Mr. Dohle’s for payments above $2 million. For advances of $75 million or more, Mr. Dohle needs approval from executives at Bertelsmann — but he’s never had occasion to ask, he said.

By most measures, publishing is prospering. In any given 12 months, tons of of publishers in the USA release around 60,000 books. From 2012 to 2019, print book sales grew by greater than 20 percent, from nine billion to 11 billion, Mr. Dohle testified. And book sales were strong through the pandemic, rising by one other 20 percent from 2019 to 2021, he said.

However the trial highlighted a surprising fact: A minuscule percentage of books generate the overwhelming majority of profits.

During their testimony, Penguin Random House executives said that just 35 percent of books the corporate publishes are profitable. Among the many titles that generate profits, a really small sliver — just 4 percent — account for 60 percent of those profits.

“That’s how dangerous our business is,” Mr. Dohle said. “It’s the books that you just don’t pay quite a bit for and turn into runaway best sellers.”

The trial offered examples of books that publishers paid a comparatively small amount for, and that turned out to be an incredible hit. Sally Kim, the publisher of the Penguin Random House imprint Putnam, said they acquired “Where the Crawdads Sing” for “mid-six figures.” That book has gone on to sell around 15 million copies worldwide.

The problem is industrywide, and has been exacerbated by the rise of online retail, which tends to strengthen the visibility of best sellers. In 2021, fewer than one percent of the three.2 million titles that BookScan tracked sold greater than 5,000 copies.

The publishing industry has been transformed by consolidation in recent times. Big media conglomerates have devoured up smaller corporations, giving them huge catalogs and a competitive advantage over small and midsize publishers, who’re typically shut out of auctions for blockbuster books by brand-name authors.

The repercussions of those changes were hotly debated through the trial.

The Justice Department’s argument emphasized the growing influence of the so-called Big Five publishing houses: Macmillan, HarperCollins, Penguin Random House, Hachette and Simon & Schuster. In a pretrial transient, the Justice Department stated that the Big Five make up 90 percent of the marketplace for “anticipated top-selling books.”

“They’re the one firms with the capital, reputations, editorial capability, marketing, publicity, sales, and distribution resources to commonly acquire anticipated top-selling books,” lawyers for the Justice Department wrote.

Bertelsmann’s attorneys presented a really different portrait, emphasizing that some midsize and independent publishers have been thriving and increasing their market share. During his testimony, Mr. Dohle noted that in 2021, roughly half of the books sold in the USA were from publishers outside of the Big Five.

Penguin Random House also made the case that reducing the variety of major publishers wouldn’t lead to authors losing money, since the remaining houses will probably be forced to compete much more aggressively for potential best-sellers and can offer larger advances to counter the combined heft of Penguin Random House and Simon & Schuster. In addition they claimed in a pretrial transient that savings resulting from the merger will lead to more cash to spend on books, enabling the corporate to “offer higher advances” and “bid on more books from more authors.”

Judge Pan questioned those assertions. On Wednesday, she ruled that a big piece of Penguin Random House’s argument — its evidence that combining the 2 corporations would result in cost savings and efficiencies that might ultimately profit authors — was inadmissible since it had not been independently verified.

In an prolonged backwards and forwards, Judge Pan also seemed skeptical of assertions by Penguin Random House’s economic expert witness, Dr. Edward Snyder, a professor at Yale, that reducing the variety of major publishers wouldn’t lead to lower advances. She said the publisher wouldn’t have to make an affirmative decision to lower advances, but that it could occur anyway because there can be less competition.

“I don’t see that there’s going to be a lessening of competition,” Mr. Snyder said.

Judge Pan replied: “That’s the final word query.”

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