How the Feds Used Quad's and LSC's Own Words Against Them

The U.S. Justice Department's lawsuit seeking to block Quad's purchase of printing rival LSC Communications relies heavily on comments from the two companies themselves.

"As LSC CEO Tom Quinlan remarked to investors mere months before the current deal was announced, combining LSC and Quad would eliminate ‘battle[s]’ between the two and could help lead to ‘[p]ricing stability,’” Justice’s lawsuit says.

The lawsuit argues that the combined company would indeed have the power to stifle price competition in four markets – the production (and in some cases distribution) of magazines, catalogs, single-color trade books, and textbooks. The deal would “significantly increase concentration in already concentrated markets,” the lawsuit says.

“As Quad executives explained in an internal presentation, ‘we are the only printer other than LSC that can offer the largest [book] Publishers a complete solution,’” according to the lawsuit.

LSC has a similar view of the book business: “When LSC sales staff learned that one of the next largest printers might bid on a major account, they described that competitor as a ‘band of bandits’ and concluded, ‘it’s all about [Q]uad, nobody else.’”

A two-horse race
“Catalog printing services is a ‘two-horse race between LSC and Quad,’ with the two firms holding a combined 69% share of the market according to a Quad Board of Directors deck,” says the lawsuit. It also claims that the two companies “control ‘more than half of all publication printing’ for magazines, with LSC the apparent source of that claim.

“LSC dismissed the next largest catalog printer (behind Quad and LSC itself) as a niche firm that merely ‘lives off our scraps,’” says the lawsuit, without stating who at LSC made the “scraps” comment.

Justice says the two companies dominate the production of medium-run and long-run magazines and catalogs because “they control a particularly high percentage of web offset presses and all rotogravure presses in the United States.” The lawsuit includes an especially dramatic “Magazine & Catalog Presses” chart showing that Quad and LSC have a combined total of more than 270 web offset and rotogravure presses, while the next largest competitor has about 20 offset presses.

(Justice doesn’t define what it means by “publication printing” or “web offset presses.” Based on the context, it seems to include only presses that can print on coated paper and deliver product suitable for binding – excluding presses that produce such products as newspapers, brochures, or direct-mail inserts.)

One thing Justice definitely didn’t claim is that there’s any collusion between the two giant printers. The lawsuit cites several examples of Quad and LSC slashing prices or offering multimillion-dollar signing bonuses to steal or retain major publishing customers from the other printing giant.

"The intensity of competition has concerned many at Quad, including one senior executive who remarked, 'We’ve been in a price war with them for some time. Don’t see that changing.'”

Such price wars have benefited publishers, Justice points out. Allowing Quad and LSC to combine would not only end the price wars, it would enable Quad to raise prices in the four markets where it would have a dominant share, the lawsuit contends.

“We believe the acquisition of LSC will result in time- and cost-saving opportunities for clients while protecting jobs for employees," Quad countered in a press release last week. “The DOJ’s position ignores the dynamic conditions in the U.S. commercial printing industry, which consists of nearly 50,000 companies," it added -- as if every screen print shop and invitations printer competes with Quad and LSC.

On the contrary, Justice's opposition is right on target, ignoring the printing business as a whole and focusing on four print-related markets in which Quad and LSC have virtual duopolies.

Related articles:

• Justice Department Tries to Block Quad-LSC Deal
• There's No Such Thing as a Printing Industry
• Authors Groups Oppose Quad-LSC Merger on Antitrust Grounds

 

Justice Department Tries to Block Quad-LSC Deal

The U.S. Department of Justice asked a federal court late this afternoon to block Quad's proposed acquisition of fellow megaprinter LSC Communications.

JUNE 21 UPDATE: Quad says it will "vigorously defend" the proposed acquisition despite Justice's objections. It also said it won't predict when the court will issue a ruling. LSC, whose stock price started today down 19%, also expressed continued support for the deal.

"The combination of Quad and LSC—the two most significant magazine, catalog, and book printers in the United States—threatens to increase prices, reduce quality, and limit availability of printed material that millions of Americans rely on to receive and disseminate information and ideas," reads the first paragraph of Justice's complaint, filed in the U.S. District Court for the Northern District of Illinois.

The move is counter to Justice's usual laissez faire approach to mergers in the printing industry, which it had previously viewed as highly fragmented and therefore not subject to antitrust regulations. (There's No Such Thing as a Printing Industry explains that, in fact, printing is a collection of disparate marketplaces.)

Justice isn't even suggesting any divestitures or other moves that would make the combination of Quad (AKA Quad/Graphics) and LSC acceptable. Here's the conclusion of its filing:

The United States requests: 
(a) that Quad’s proposed acquisition of LSC be adjudged to violate Section 7 of the Clayton Act, 15 U.S.C. § 18; 
(b) that the Defendants be permanently enjoined and restrained from carrying out the proposed acquisition of LSC by Quad or any other transaction that would combine the two companies; 
(c) that the United States be awarded costs of this action; and 
(d) that the United States be awarded such other relief as the Court may deem just and proper.

Justice issued a press release that nicely summarizes its 40-page filing, including this statement, "The Antitrust Division’s lawsuit alleges that the transaction would combine the only two significant providers of magazine, catalog, and book printing services, denying publishers and retailers throughout the country the benefits of competition that has spurred lower prices, improved quality, and greater printing output."

Related articles:

• The Not-So-Secret Secret Behind the Quad-LSC Deal
• How the Quad-LSC Megadeal Will Affect Publishers 
• Justice Department Open-Minded on Quad-LSC Deal 

Study Refutes Trump's Claim That USPS Loses Money on Amazon

An independent government watchdog today seemingly refuted President Trump’s claims that the U.S. Postal Service loses “a fortune” on a sweetheart deal with Amazon.

The USPS Office of Inspector General released a study indicating that the Postal Service’s growing practice of entering into customized contracts with package shippers is paying off.

“The number of these 'Negotiated Service Agreements' (NSAs) has increased from 66 in fiscal year (FY) 2012 to more than 1,000 in FY 2018,” the report says. “In FY 2017, only five contracts lost money, down from 14 the previous year.”

“The Postal Service’s largest NSAs contribute the most financially.” The few money-losing contracts have been “mostly low-volume NSAs,” the report says, and the USPS and Postal Regulatory Commission typically take action to fix or terminate those deals.

NSAs are “solidly profitable” and “perform strongly for the Postal Service,” the Inspector General’s report states. The watchdog agency has often criticized the Postal Service severely on other matters.

The report was heavily redacted – enough to put even Attorney General William Barr to shame – to avoid any public mention of specific customers or any revelations that would help the USPS’s private-sector competitors.

But it clearly suggests that the Postal Service is making a profit on such major “Parcel Select” customers as Amazon, FedEx, and UPS.

Though there are only 24 Parcel Select NSAs, the report indicates that they have as much volume and generate more revenue and profit than any of the other four types of domestic-shipping NSAs.

“Parcel Select is generally used by consolidators and large shippers who can presort packages and drop them off by the truckload at postal facilities that are close to the final destination, paying a lower rate based on how close they get the packages to their delivery point. The Postal Service takes the packages the ‘last mile’ and delivers them to their ultimate destination,” the report explains.

In other words, because these shippers handle everything except for the last mile, they are profitable for the Postal Service even though they pay less than does someone who drops off packages at her local post office for delivery in another state.

Parts of the report were heavily redacted.

“NSAs are a tool to better meet customer needs when some aspect of the Postal Service’s off-the-shelf offerings does not,” the report says. Private-sector competitors have similar practices:

“Most carriers offer discounts to certain classes of clients, such as new customers or high-volume shippers. As a result, carriers can charge very different prices for delivering the same package to the same destination.”

“Many NSAs bring in new customers that were previously shipping with another carrier,” the report says. “So long as those deals cover their costs, any product-level profits they generate would improve the Postal Service’s bottom line because the profit is based on new volume.”

But when a customer already does most of its shipping with the Postal Service, an NSA may reduce prices in a way that makes the customer less profitable, the report notes.

The report doesn't address whether the Postal Service's cost-accounting practices are keeping pace with the rapid growth in package delivery or are accurately measuring the cost of such deliveries.

Related articles:

• Trump Is Wrong, Mostly, About Amazon and USPS 
• 10 Ways E-Commerce Is Reshaping the USPS 
• USPS Will Continue Dabbling in Grocery Deliveries

Justice Department Seems "Open-Minded" on Quad-LSC Deal

A printing-industry expert believes the federal officials who questioned him about the proposed merger of printing giants Quad and LSC Communications are unlikely to “rubberstamp” the deal.

“They were pretty open-minded,” said the expert, who was recently interviewed by a team from the U.S. Justice’s antitrust division. Although they kept their cards close to the vest, he says, they seemed genuinely interested in understanding claims that the two companies would have several monopolies or near-monopolies in what at first blush looks like a highly fragmented industry.

The printing expert, whom I know to be a reliable and knowledgeable source, spoke to Dead Tree Edition on condition of anonymity.

Silent publishers
Justice’s apparent open-mindedness comes despite no public opposition from publishers or other printing customers.

A publishing company executive tells me that a paper company contacted him in March as part of an effort to get publishers to object to the deal. It found that publishers were reluctant to speak up for fear of angering two key suppliers, he was told. (Also, it’s hard to get senior executives at magazine-media companies these days to even think about printing or anything else that’s not new and shiny.)

The printing expert mentioned to the Justice team the case of Verso and NewPage, two paper giants that Justice allowed to merge in 2015 on condition that NewPage first divest two mills.

At least one member of the Justice team was familiar with that case and indicated the same tactic had not been ruled out in the Quad-LSC case, the expert said.

The expert’s observations are in contrast to recent speculation from Peter Schaefer, a veteran of printing-industry mergers and acquisitions.

“My best estimate is I don’t think there’s going to be an antitrust issue” because the regulators tend to see printing as a single market, he told Printing Impressions last month. “Combined, they [Quad and LSC] are still going to be a small percentage” of the entire U.S. printing industry.

The only formal, public objection to the merger has come from a coalition of two authors’ organizations and an anti-monopoly advocacy group that pointed out how Quad (known until recently as Quad/Graphics) and LSC already dominate the long-run publication market.

The two companies reportedly have 100% share of the U.S. market for the printing of best sellers and certain other types of books. They also own all of the country's rotogravure presses that are typically used to produce catalogs, magazines, and free-standing inserts that have print orders of 1 million or more.

In addition, the two companies dominate the transport of magazines, do the vast majority of co-mailing of magazines and catalogs (to gain hefty postal discounts), and probably own a sizable majority of the large publication presses in the U.S. that are best suited for print orders in the hundreds of thousands.

Related articles:

• There’s No Such Thing as a Printing Industry 
• The Not-So-Secret Secret Behind the Quad-LSC Deal 
• Rival Print Giants Donnelley and Quad Not Looking To Get Hitched