7 DOJ Invokes Flawed Market Definition To Block Print Deal
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DOJ Invokes Flawed Market Definition To Block Print Deal

Authored by Derek Dahlgren for Law360

July 25, 2019PDF

Quad/Graphics Inc.[1] and LSC Communications Inc.[2] recently announced the termination of their $1.5 billion deal that would have seen Quad acquire LSC. The companies made this decision after the U.S. Department of Justice filed a lawsuit claiming the acquisition would violate Section 7 of the Clayton Act by reducing competition in the print industry.

In their announcement, both Quad[3] and LSC[4] criticized the DOJ’s market definition that formed the basis for the lawsuit. That definition was based on a blinkered view that fails to take into account the competitive forces at play in the print industry. While the DOJ’s flawed market definition is unlikely to be subjected to the scrutiny of litigation, it nevertheless warrants some discussion because it is so out of touch with reality.

In essence, the DOJ’s lawsuit defined the relevant markets as printing services for magazines, catalogs and books, books including educational textbooks and one-color trade books (e.g., your favorite fiction novel or nonfiction biography).[5] There are a host of problems with the DOJ’s market definition. For example, it fails to account for the full breadth of companies operating in the market and their capabilities.

Indeed, there are hundreds of other companies with printing presses,[6] and those presses can readily be adapted to print magazines, catalogs or books, which calls into question the DOJ’s attempt to define separate markets for books, magazines, and catalogs. But perhaps more egregious, the DOJ’s market definition excluded digital alternatives. That is, the DOJ asserted that digital formats were not effective substitutes for print.[7]

That assertion — which goes to the core of the DOJ’s complaint — is simply wrong. And it should have been clearly apparent to the DOJ prior to filing suit. One need only look at the state of the market today to see the fundamental flaw in the DOJ’s definition.

Educational textbooks provide a glaring example of the disconnect between the DOJ’s definition and reality. Recently Cengage Learning Inc. and McGraw-Hill Education announced that they are merging to form the second largest U.S. textbook publisher in the United States. At the same time, they also announced that they will focus on digital platforms.[8]

This is in addition to Pearson Education, the largest textbook publisher, also taking a “digital first approach” in which it will use print only as an add-on or rental service.[9] The DOJ’s position that print and digital versions of educational books are not substitutable flies in the face of the business strategies of the two largest textbook publishers — publishers the DOJ is purporting to protect.

Similarly, with respect to other books, the DOJ’s assertion that digital books are not substitutes for print is also directly contrary to actions taken by publishers. The DOJ should know this well as it sued Apple Inc. for fixing prices with a group of major book publishers and prevailed.[10] In the lawsuit, it came to light that the publishers repeatedly tried to keep e-books from eroding their more profitable print sales.

The court specifically found that “[t]he Publisher Defendants wanted to shift their industry to higher e-book prices to protect the prices of their physical books and the brick and mortar stores that sold those physical books.”[11] That begs the question: Why would the publishers — the very same entities the DOJ says would not switch to digital—try to raise prices of e-books to protect their print versions if the two were not substitutes? And why would they go so far as to engage in unlawful actions to do so? The actions of these market participants show that the DOJ got it wrong with Quad and LSC.

Common sense also suggests that print and digital can be substitutes. Just consider e-book sales. Certain analyses show that e-books have plateaued at around 20% of overall book sales.[12] But that number does not take into account the growing market for self-published e-books fueled by tech giants like Amazon.com Inc. and its Kindle Digital Press.[13]

Estimates from the founder of Bookstat.com put self-published e-book sales at around $700 million, doubling e-books’ actual share of overall sales to around 40%.[14] This does not take into account audiobooks either, which is the fastest growing segment in digital publishing.[15] To say that these digital formats, which represent nearly half the overall sales of books, are not substitutes for print simply does not make sense. Likewise, the slew of magazines that have shifted to digital format-only clearly demonstrates that digital and print are viable substitutes.[16]

Other sources state what many would deem obvious, that digital channels are competing against traditional printed materials and frequently winning. Indeed, a recent IBISWorld market research report on the printing industry in the United States is entitled “Out of ink: Digital media alternatives and low demand continue to threaten industry revenue.”[17] The title should speak for itself — digital is an alternative to print. But just to emphasize the competitive landscape in the printing industry, the report begins by stating “[t]he Printing industry is in the midst of a decline as digital products and services continue to displace printed materials.”[18] The DOJ’s definition is expressly contradicted by that statement.

Documentation from the parties also shows that the print industry competes with digital alternatives. For example, in Quad’s 2017 annual report, it notes “[t]he Company faces competition due to the increased accessibility and quality of digital alternatives to traditional delivery of printed documents through the online distribution and hosting of media content, and the digital distribution of documents and data.”[19] That statement reflected the competitive landscape in 2017 and still does today. The DOJ’s definition of the relevant market simply does not account for this reality.

Print has been under siege for years from the wide array of digital platforms that have emerged, including those from tech giants like Amazon and Apple. It may be bittersweet for those in the print industry to now see those tech behemoths facing increasing scrutiny from the DOJ and the Federal Trade Commission for possible anti-competitive practices.[20] It will be interesting to see if that scrutiny will reveal the full extent of those tech giants’ influence across various industries, including print, and possibly lead the DOJ to reconsider its flawed view of the print services market when reviewing future mergers.

But that does not help Quad, LSC or the declining print industry in the near term. Instead, the industry is left with the DOJ effectively blocking Quad’s acquisition of LSC based on a fundamentally flawed market definition that is disconnected from the competitive reality in which the industry operates. That is unfortunate. The economic value that could have been realized by the acquisition has been lost without the DOJ even proving its case in a court of law.

[1] https://www.quad.com/
[2] https://www.lsccom.com/
[3] https://www.bloomberg.com/press-releases/2019-07-23/quad-and-lsc-communications-mutually-agree-to-terminate-merger-agreement
[4] https://www.bloomberg.com/press-releases/2019-07-23/lsc-communications-announces-termination-of-merger-agreement-with-quad-graphics
[5] Complaint, available at https://www.justice.gov/atr/case-document/file/1176426/download
[6] 2018 Printing Impressions 400 available at https://piworld.tradepub.com/free/w_prid03/
[7] Complaint at 7, available at https://www.justice.gov/atr/case-document/file/1176426/download
[8] https://www.insidehighered.com/digital-learning/article/2019/05/02/cengage-and-mcgraw-hill-merge
[9] Pearson Annual Report and Accounts 2018, available at https://www.pearson.com/content/dam/one-dot-com/one-dot-com/global/standalone/ar2018/PearsonAR18.pdf
[10] United States v. Apple Inc., 952 F. Supp. 2d 638 (SDNY 2013).
[11] Id. at 665.
[12] https://www.janefriedman.com/the-first-half-of-2018-traditional-publishers/
[13] https://qz.com/1240924/are-ebooks-dying-or-thriving-the-answer-is-yes/
[14] Id.
[15] https://goodereader.com/blog/audiobooks/global-audiobook-trends-and-statistics-for-2018
[16] https://www.magplus.com/blog/top-print-magazines-that-transformed-to-exclusively-digital-magazines/ and https://adage.com/article/media/espn-magazine-abandon-print-go-web-only/2167836
[17] https://www.ibisworld.com/industry-trends/market-research-reports/manufacturing/printing-related-support-activities/printing.html
[18] Id.
[19] http://www.annualreports.com/Company/quadgraphics-inc
[20] https://www.wsj.com/articles/justice-department-to-open-broad-new-antitrust-review-of-big-tech-companies-11563914235?mod=breakingnews

To read the article on Law360's site, please visit:  https://www.law360.com/media/articles/1182205/doj-invokes-flawed-market-definition-to-block-print-deal?copied=1