Why the $&#(# is the Department of Justice Worried about Consolidation in the Print Industry?

I am generally a believer in free markets.  However, I understand that sometimes regulations are needed to create “fairness” in certain markets.  “Fair” is my least favorite word in the English language.  Everyone has a different definition of fair.  I use that term purposefully, as the Department of Justice recently indicated it would not be fair to magazine publishers and other long run print customers if Quad/Graphics completed its proposed acquisition of LSC Communications.  Because of the DOJ’s stance, the companies recently called off their proposed merger.  The following link summarizes the DOJ’s lawsuit seeking to block the acquisition.  https://www.justice.gov/opa/pr/justice-department-sues-block-quad-s-acquisition-lsc

I pulled a little financial data and employment data on both companies.  For fun, I decided to compare their financials to Facebook.  I consider Facebook and other online media/social media sites as direct threats to Quad and LSC.  As we spend more time online, less and less magazines, catalogs, and books are printed.  More advertising moves online, reducing demand for print.  My source for all data is Seekingalpha.com.  All data is in millions of US Dollars except percentages.

LSC Communications (LKSD) 2016 2017 2018
Sales 3,654 3,603 3,826
Earnings from Continuing operations 106 (57) (23)
EBITDA 359 319 264
EBITDA Margin 9.8% 8.9% 6.9%
Quad/Graphics (QUAD) 2016 2017 2018
Sales 4,329.5 4,131.4 4,193.7
Earnings from Continuing operations 44.9 107.2 7.9
EBITDA 473.1 452.8 391.4
EBITDA Margin 10.9% 11.0% 9.3%
Facebook (FB) 2016 2017 2018
Sales 27,638 40,653 55,838
Earnings from Continuing operations 10,217 15,934 22,112
EBITDA 14,769 23,228 29,228
EBITDA Margin 53.4% 57.1% 52.3%

After a taking a long moment to ponder my career choice, I snapped back into reality.  From the DOJ press release:

“The magazine, catalog, and book printing services offered by Quad and LSC include the printing, finishing, and distribution of publications to newsstands, retail facilities, or the postal service for delivery to consumers’ homes.  Quad and LSC are by far the largest printers in the United States and are relied upon by many of the largest publishers and retailers to ensure that high-quality products are printed and distributed on time.

According to the Department’s complaint, Quad and LSC view each other as their “#1 competitor,” and intense head-to-head competition between them has directly benefitted their customers through lower prices and better-quality services.”

The DOJ decided to define Quad and LSC’s markets as printed material.  How is that “fair?”  Their customers are continually moving their communications and advertising online.  Not a week doesn’t go by in which a newspaper or magazine does not stop printing physical copies.  ESPN the Magazine is stopping its print edition next month.  Glamour is no longer printed.  (Poor George Costanza!) 

As I’ve written in the past, print is not going away.  Catalogs are coming back, as advertisers have found that physical catalogs help online sales.  But the traditional print market continues to shrink.  Shrinking businesses require consolidation to remove non-productive assets.  The DOJ took a narrow view of Quad and LSC’s markets.  Long run print margins will stay low while online media companies, such as Facebook, will continue to make incredible profits.  Is that fair?  (Full disclosure:  The DOJ has indicated it is “reviewing the practices of market-leading online platforms.”  https://www.justice.gov/opa/pr/justice-department-reviewing-practices-market-leading-online-platforms That Microsoft fine really had an impact on consumers, didn’t it?)     

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