NEW YORK—The Justice Department’s effort to block the merger of Penguin Random House and Simon & Schuster isn’t just a showcase for the Biden administration’s tougher approach to corporate consolidation, it’s a rare moment for the publishing industry itself to be placed in the dock .
Through the first week of an expected two- to three-week trial in US District Court in Washington, top publishing executives at Penguin Random House, Simon & Schuster and elsewhere, along with agents and such authors as Stephen King, have shared opinions, relived disappointments and revealed financial figures they otherwise would have preferred to discuss privately or confide on background with reporters.
“I apologize for the passionate language,” Penguin Random House CEO Markus Dohle testified about correspondence exhibited in court that reflected tensions between him and other Penguin Random House executives. “These are private text messages to my closest collaborators in the company.”
The government is trying to demonstrate that the merger will lead to less competition for bestselling authors, lowering their advances and reducing the number of books. The Justice Department contends that the top publishers, which also include Hachette, HarperCollins Publishers and Macmillan, already dominate the market for popular books and writers and have effectively made it near-impossible for any smaller publisher to break through.
Penguin Random House and others argue that the market is dynamic and unpredictable, with competitors from university presses to Amazon.com capable of turning out bestsellers.
Like any other self-contained community, book industry professionals speak in a kind of shorthand and follow customs that are instinctive to them and at times unclear to outsiders. For US District Court Judge Florence Y. Pan and for lawyers on each side, the trial has been part of a translation project.
It has also been a chance to hear some of the industry’s leaders under oath.
William Morrow Group’s president and publisher, Liate Stehlik, confided that she only made a limited effort to acquire fiction by Dean Koontz, who has published with Amazon.com, because his sales have been declining.
Award-winning author Andrew Solomon explained that he chose to publish his acclaimed “Noonday Demon” with Scribner, a Simon & Schuster imprint, in part because Scribner has the kind of sales and marketing resources that smaller companies lack.
The president and publisher of Penguin Books, Brian Tart, agreed with the judge’s suggestion that profit and loss assessments for possible book acquisitions are “really fake” and do not reflect current costs. Tart also testified that he passed on bidding for Marie Kondo’s million-selling “The Life-Changing Magic of Tidying Up” because he “didn’t know what to make of it.”
Simon & Schuster CEO Jonathan Karp acknowledged that a popular industry term, “mid-list writer,” long associated with a broad and intrepid corps of noncommercial authors, a kind of publishing middle class, is essentially fictitious and a polite way of not labeling anyone a “low-list” writer.
Questioned by the judge, Karp also said that while publishers value all the books they acquire, books obtained for an excessive advance — money guaranteed to the author no matter how the book sells — do require special attention.
“If you really love the book, you have to jump through hoops,” he said.
At times, a glossary might have been needed to follow some common industry terms:
—Earning out. This is when a book sells enough to recoup the advance paid and the author can start collecting royalties, although some books can make a profit for the publisher even when not earning out. (Most new books, executives acknowledged, do not earn out.)
—Backlist. This refers to older books, an invaluable resource for publishers, who rely on them as steady sources of revenue.
—Beauty contest. This is when two or more publishers are offering similar advances and nonfinancial terms such as marketing skills or the appeal of working with a particular publisher to determine who wins.
-10% topping. This refers to when an agent asks the publisher not just to match the highest competing offer, but add 10% more.
—All access books: As defined by Dohle, these are books so inexpensive, such as those Amazon.com offers through its e-book subscription service Kindle Unlimited, that they damage the industry overall by forcing down prices and, inevitably, author advances.
Witnesses from Dohle to Hachette Book Group CEO Michael Pietsch spoke at length of their love for the business and of what they said was the higher mission of bringing ideas and stories to the public. But publishing is a profit-making business and even the most idealistic of authors and executives are alert to the bottom line.
Through internal emails, depositions, and both live and videotaped testimony, the trial has bared internal rules and strategies about the acquisition of books and the letdowns when a desired book goes elsewhere.
At Simon & Schuster, editors must submit “justification” reports to senior management to gain approval for deals worth $200,000 to $250,000 or more. At the William Morrow Group, a HarperCollins division, the number is $350,000. Tart also requires approval for deals $250,000 and higher, while Dohle testified that he must sign off on deals of $2 million or higher.
Publishers love to share stories of favorite acquisitions. Pietsch’s range from David Foster Wallace to Keith Richards. Karp’s includes the late Sen. Edward Kennedy, D-Mass., and Bruce Springsteen.
But the trial has highlighted disappointments and missed chances — a source of “gallows humor,” as Tart called it. He not only passed on Kondo’s book but on Delia Owens’ blockbuster “Where the Crawdads Sing.” At Hachette, they keep a list of “The Ones That Got Away,” deals for which the publisher bid $500,000 or more but still lost.
Karp testified that Simon & Schuster was outbid by Hachette on a new book by Ben Carson, the famous neurosurgeon who was former President Donald Trump’s housing secretary. At one point, the Justice Department cited internal emails to point out that Simon & Schuster had lost three bidding competitions to Penguin Random House in a single week.
Karp also spoke of a book he did acquire, an anticipated work by a spiritual leader with a substantial following.
“Unfortunately, his followers didn’t follow him to the bookstore,” Karp said.
Sign up for the Fortune Features email list so you don’t miss our biggest features, exclusive interviews, and investigations.