Monday, December 3, 2012

Publishers, eBooks and Libraries: What a Mess!

For months now I've been following the various moves, manoeuvres and initiatives of the big trade publishers as they respond to the demand from public libraries to allow their patrons to borrow ebooks.

I've read just about everything serious that's been written - in journals, reports, surveys and blogs - and from the differing perspectives of the various players: publishers, librarians, suppliers, patrons, commentators.

I've spent a lot of time mulling over the differing points of view and examining whatever data I could get my hands on. I've talked to key people. I've tried to be independent and open-minded. I've tried very hard to unravel the complexities and identify the real nub of the issue.

But I've failed comprehensively! There is no complexity here; there is no depth or significance beyond the shimmering surface. What we have, once again, is another dramatic instance of the same old paralysing fear of the digital that is gripping the publishing community across so many dimensions of the business.

The fear can be simply stated: if library patrons can very easily borrow any ebook, without even physically visiting the library, why on earth would they bother to buy one? Ever! The whole emerging ebook business, the very future of the industry, would collapse overnight.

Thus the large publishers have responded with a great deal of caution and wariness:

HarperCollins introduced a 26-loan limit. Upon expiration, the library must chose to re-purchase the ebook or it disappears from their catalogue.

Random House and Hachette opted for institutional pricing - prices two to three times retail prices.

Penguin is trialling with some major US libraries a 'window' strategy - no sales to libraries in the first six months of publication, and a 12 month limit after that, unless re-purchased.

Macmillan and Simon and Schuster have so far chosen to not make their ebooks available to libraries at all.

Now, the library community, it would not surprise you, is furious! Read this wonderful and funny piece from US librarian and blogger Sarah Houghton.

The American Library Association has condemned the publishers' policies in no uncertain terms. "We are weary of faltering half steps and even more so of publishers that refuse to sell ebook titles to libraries at all....We can no longer stand by and do nothing while some publishers deepen the digital divide.' (Sept 14, 2012). Last week it issued a media kit to help librarians take their case to the public at large.

But you may wonder where is the understanding by librarians of the publishers' concerns? Where is their willingness to entertain the notion that the whole ebook ecology may well be under substantial threat if free ebooks are universally available on a patron's device of choice at the touch of a few key stokes?

But this vision of apocalypse is a fantasy.

The key issue in this debate is that the major ebook suppliers to libraries - OverDrive, 3M, Ingram, Baker and Taylor - all use the same 'one borrower at a time' policy enforced by a DRM-enabled Adobe Content Server. If a library buys only one copy of an ebook (which is nearly always the case) then this operates as a severe constriction on lending behaviour. There is always a queue - frequently weeks or months long if the title is popular. This is a major incentive for a frustrated borrower to purchase the title instead. (Recent research by the Pew Research Centre found that 52% of ebook borrowers at one point or another discovered that there was a waiting list).

Public libraries accept the 'one copy/one loan at a time' policy. There is no push to change it. (In academic and research libraries the situation is vastly different, as such institutions are virtually the entire market for the digital content. Annual subscription deals are done and there is mostly no limit to the number of concurrent users allowed access at any one time).

So why the publisher temerity? What on earth could Penguin be afraid of during the first six months of a title's life? And why the one year license? The demand profile of your standard trade title is well and truly waning by then. Most titles will not be re-purchased - the library budget is hardly generous - so why penalise the potential borrowers who've patiently waited?

And why HarperCollins' 26-loan limit? What real commercial significance does such a miserable constriction have?

And why the massive over-pricing by Hachette and Random? They are offering absolutely no additional features or functionality to the libraries or their patrons for this impost. No additional usage/loan allowances for example. 'Unrestricted perpetuity' and 'simultaneous release' should be part of the standard offer, not charged extra for.

I think a major part of the problem here is that many publishing executives have never really been sympathetic to the library mission in an emotional sense. Individual libraries have never been favoured 'customers' in the same way independent bookstores have been. They've belonged to huge and specialised library suppliers who demand generous trading terms and indulge in peculiar cataloguing and marketing practices few publishers understand. The vital social and cultural role of libraries goes unheralded. Even their role as preservers and enhancers of a healthy reading ecosystem: the critical role they play in bringing new authors to readers, who more often than not subsequently purchase those authors' works. And the very important part they play in fostering literacy, enlightenment and education to the whole of society, particularly the underprivileged and disadvantaged.

In a real sense the library network should be seen by publishers as a major marketing arm for their endeavours. (Here's an interesting tidbit: A recent survey by OverDrive found that 35% of respondents have purchased a book after borrowing it). 

They are partners, not a threat, and their ebook lending programs should be welcomed not feared. 


Saturday, November 10, 2012

Keynote Address, Small Publishers Network Conference, Melbourne, Nov 9, 2012

As someone who’s had no experience whatsoever in owning or managing or even just working in a small, independent Australian publisher, I must say it feels a little odd for me to have been invited by Tim and Zoe to give this keynote address – just a week ago! What on earth could I offer you that would remotely be of interest or help at this very critical time?

I spent my whole publishing career - 36 years in all - working in the large global corporates, McGraw Hill and Wiley. Most of that time in senior executive positions.

But I think I bring a perspective now that may resonate. I’ve been thoroughly liberated from the Man! Thoroughly liberated from the groupthink, from the siege mentality, from the debilitating defensiveness, that plagues all thinking within the large corporate entities that dominate the publishing industry globally as well as, naturally, here in Australia.

The publishing industry, right now, is in a very funny place. We are in the throes of a digital transition that is radically challenging our traditional operations, structures, habits of mind and very identities. This is not news to anybody.

My contention, however, is that we seriously misdiagnosing this challenge, and adopting strategic postures to deal with it that are thoroughly wrong-headed.

I want to start with a few observations about the Penguin Random House merger, as a lead-in to the central thrust of my argument. There’s been a lot of very thoughtful stuff written about this merger, and I don’t want to rehash that. 

I would say firstly though that, contrary to my claim above that we’re wrong-headed about the way we’re dealing with the digital challenge, this merger is absolutely right. It’s the start of something good and necessary.

Let me make the observation however that the experience of bedding down this combined operation is going to be terribly stressful and painful for the entire global staff of both Penguin and Random.  I really feel for them. They are in for a world of pain.  This is what I wrote in a recent blog post:

In my experience it is a far better outcome for everyone involved if companies are acquired rather than 'merged'. An acquisition means there is clarity around who is in charge, i.e. who sets the agenda and who has to give way; whose policies and processes take precedence; whose jobs will likely go. A merger means constant, ongoing political infighting at every level over things large and small.

So many senior staff will be spending most of their time in meetings and conference calls 24/7, that is, internal navel-gazing, that the core objective of the business - competing in the fast changing marketplace - will get far too little attention. The whole entity will suffer. This is so predictable and usually beyond the capability of management to prevent.

As well, morale generally hits rock-bottom. The people who win - who survive or get additional responsibilities - are universally the smooth and political, those who can best game the system.

Overlay onto this process the all-pervasive and negative effects of globalization - the rationalisation of structures, systems, policies, processes and responsibilities across the globe - and you get a real and irreversible leaching of energy and competitive urgency from local, country-based operations like those in Australia. Australian subsidiary companies are very susceptible to this process: they are large enough to be respected, but not large enough to be critically important.

Henry Rosenbloom recently wrote in his blog that the Penguin Random merger was really nothing of the sort. It was a takeover in all but name. I agree. What we’re actually seeing is a slow-motion takeover of Penguin by Random House.

And we will undoubtedly see more, most probably over the next year or so. HarperCollins will acquire Simon and Schuster or possibly Macmillan, and Hachette will acquire the other one. This is a logical and rational process, an inevitable outcome, because of what’s driving it.

Imagine for a moment the enormous advantages these mega-publishers will garner. They can afford to invest in very sophisticated software systems across all areas of the company including editorial, composition, production and distribution; they can contract cheaper printing; and squeeze suppliers of everything until their pips squeak. And they can even say to Amazon: ‘Your ebook discount is now 30%, not 50%. Live with it.’

The industry, worldwide, is undergoing a massive revenue subsidence. Print revenues are shrinking (despite the uptick in the first nine months of 2012 mainly because of the Fifty Shades of Grey and The Hunger Games phenomena). In the US in 2011 hardback revenues were down 17.5% over 2010, and paperback revenues down 15.6%. In the UK total revenues were down 11%. We don’t have such precise figures in Australia but we all know anecdotally how depressing things generally are and how badly the collapse of Borders hurt the industry.

The very welcome strong growth of ebooks has ameliorated this situation – they now represent 26% of total trade sales in the US and a bit less in the UK - but the logic of lower-priced ebooks means more units but less revenues.

Thus the industry has no choice but to cut its traditional overheads by at least 15 - 20% to maintain profitability and continue to attract investor capital. The best way to do this is to radically cut duplication, and the best way to do that is for players to acquire, merge or partner. This is creative destruction at its best, and the book trade has seen it many times over the last 100 or so years.

In the 1920’s heavily discounted bestsellers began to be sold in non-traditional retail outlets like grocery and department stores; In the 30’s and 40’s book clubs subsequently emerged and prospered; by mid-century public libraries were rapidly spreading under new government funding initiatives, bringing free access to books to millions of patrons around the world; then the paperback was invented. Now it’s the ebooks revolution.

What is common to all these major disruptions? The offer of lower prices and vastly improved access, and the enthusiastic reader response.

We have our own rather significant circumstance in Australia – the dramatic strengthening of the Australian dollar over the last decade - which is putting downward pressure on prices. Australian publishers, distributors and others involved in importing have lowered prices by 10-15% over the last few years under competitive pressure, but this is nowhere near enough. Prices should have been lowered by around 30% to meet consumer expectations and to fend off Amazon, but of course this adds considerably to revenue decline unless there’s a far more substantial, i.e. around 50%, increase in volume. And this requires not just a great deal of faith but a great deal of courage, and in our industry that’s in short supply.

I was Managing Director of Wiley Australia in the early 2000s when the dollar start to climb, after five years or so of plumbing the depths, and the exhilaration in the company, shared by all importing businesses, at our increasing margins was palpable (and the executive bonuses bankable). But I soon realized it was wrong. I fought my own divisional managers fiercely to force them to lower prices regularly. We were the only company doing it. To me it was a matter of integrity as much as anything else – keeping faith with our customers, booksellers as well as readers.

I’ve long argued that our booksellers’ obsession with Amazon and its GST-free imports was misplaced. Of course we should welcome any move by the government to lower the $1000 threshold, but we’re missing the real target. And that is massive over-pricing by Australian importing publishers that has gone on for far too long. We allowed Australian consumers to get hooked on Amazon and The Book Depository and the whole industry is now paying the price.

Now let me return to my main point, and as Ellen Degeneres said ‘And I Do Have One’. My contention is that the industry globally, apart from corporate rationalization, is adopting strategic postures in the face of the digital challenge that are entirely misplaced.

I want to talk about Google, then Amazon. And end with some optimism about the future.

You are all familiar with the Google library scanning project. In 2004 Google began scanning, without seeking permission from authors and publishers, entire books that were held by half a dozen major university and public libraries in the US and the UK. The purpose was not to sell the files subsequently but simply to offer snippets (two or three lines) around key terms entered by searchers, and then point them to where the book or file could be purchased or borrowed. About 12 millions titles were eventually scanned before authors and publishers instituted legal action against Google. After a long period of negotiation a complex Settlement Agreement was reached in 2009 and, according to proper legal process, presented to the US Federal Appeals court for approval. It was rejected by the judge, unfortunately, principally because it gave Google a virtual monopoly, and thus the whole project was stopped in its tracks. Just last month the publishers came to a different sort of settlement with Google concerning works still on their lists – one that doesn’t require court approval - but the authors, who are always very bolshie, are sticking to their litigation agenda.

Now here’s the nub of the issue: Google always maintained that their scanning was ‘fair use’ under the terms of the US Copyright Act. After all, they were undertaking a scanning process that their library clients were already free to do under the law for archival purposes; they were not intending to offer the files for sale; and were not impinging on a publisher’s commercial terrain as there was no conceivable market for ‘snippets’ anyway.

This always sounded to me as innocent an activity as cataloguing, shelving or browsing. It encourages discovery and eventual purchase by a consumer.

What is more, the great majority of titles held in these major libraries were what is called ‘orphan works’ – titles in still in copyright but out of print where the original publisher and/or author could not be tracked or contacted. They were to be liberated: made discoverable and accessible to students, researches, hobbyists, readers.

As a result of the litigation, those works are still rotting in the deep recesses of the world’s libraries, unknown and unloved.

Wouldn’t it have been a wiser course for publishers and authors to welcome Google’s scanning initiative and benefit from the sales of the discovered works that eventuated?

Now for another behemoth that’s universally loathed and feared by the industry, to such an extent, it seems to me as to have become quite pathological. I refer to Amazon.

Now I’m not so na├»ve as to defend everything Amazon has done and is still doing. It’s a ruthless, aggressive operation that rides roughshod over its competition and more particularly over its suppliers.

But I do want to lament the way the industry has dealt with Amazon since day one of the ebook take-off five years ago when the Kindle was first released. You all know the story. It’s become the trade’s standard, orthodox narrative:

Once upon a time Amazon invented an ebook reader and in a short space of time garnered nearly 90% of the market for the new, revolutionary ebooks. Amazon demanded 50% discount off the ebook price of around $25.00 yet they priced the bestselling ebooks at $9.99, way below cost.

The publishing community was aghast at this outrageous and cynical manoeuvre. ‘This will lower price expectations across the board’ they lamented. ‘It must be stopped’.

Fortunately a major new entrant appeared, called Apple, with its amazing iPad. It said to publishers ‘Use our app model – you set the price; we take 30% commission as your agent. However you must not allow any other ebook retailer to undercut us on price.’

The publishers rushed on board (whether after a boozy lunch at an upmarket Manhattan establishment is a debatable point), and forced Amazon to adopt the agency model. This would end the discounting, they yelped, and restore order and security to the book world.

Well of course we know how the story then unfolded. The US Department of Justice refused to believe the fairy tale and in April this year condemned Apple and the agency publishers for their collusion to restrict competition. It pronounced that the agency model had to be unwound.

The trade was aghast, and the condemnation of the DOJ has been universal. As recently as last week respected industry consultant Mike Shatzkin opined ‘the legal experts applying their antitrust theories to the industry don’t understand what they’re monkeying with or what the consequences will be of what they see as their progressive thinking.’  Shatzkin demands they respect the ‘specialness’ of the publishing ecosystem. By removing Amazon's ability to aggressively discount, the competitive landscape is enhanced. It allows other retailers to emerge and potentially flourish and not be crushed by a deep-pocket behemoth seeking dominance at all costs by indulging in ‘predatory pricing’.

But I go back to my Economics 101 basics: it is not the prerogative of a producer to so constrict - for whatever reason - a retailer from engaging in the age old dynamics of customer satisfaction. So no matter how large, voracious, aggressive, ugly, or profoundly discourteous any particular retailer is at any time, a producer just has to live with that retailer's consumer satisfaction strategy.

Let's remember that, pre-agency, publishers were pricing their new ebooks at ludicrously high prices - often at the same price as the hardback - and in fact far higher than Apple demanded publishers price at if they wanted to deal with Apple. Ironically the consumer demand profile of recent times is unequivocally demonstrating that the greater volume of ebook sales occurs around the $10 mark, and falls off quite rapidly at price points beyond that.

Now, post the DOJ decision, the fear of many is that Amazon will return not just with renewed vigor but with a good measure of vengeance. Some commentators are indulging in truly awful effusions of doom and apocalypse, booksellers in particular, who for a variety of reasons have no reason to love this online enemy.

But the Agency model, like any price-fixing model, is a dead hand. My view is that if in the end if we all trade in an open, unconstrained, free market then it is not naive to believe that we will all be better off in the long run. New, original, highly innovative business models will have a far higher chance of emerging if the dead hands of tradition, authority, stability and comfort are not privileged. Protective shells need to be broken to allow new life to emerge.

The industry went to war with Google; it’s still at war with Amazon; it’s at war with the US Department of Justice. Publishers are at war with authors over ebook royalties; they are at war with libraries over ebook lending. Even consumers over DRM.

All these wars are shameful. But what really amazes me is how we have sniffily turned our backs on what has clearly been the greatest financial investment in books and reading ever seen.

Billions of dollars have been spent over the last decade alone in building a whole new digital ecosystem to take our content to millions of existing and, particularly, new readers around the world. Think of the enormous investment that Google has made into reaching into the content of virtually every book published since Gutenberg and making it discoverable and accessible to the entire world’s population. This could only be of be of benefit to publishers.

Think of the hundreds of millions of dollars Amazon, Apple, Kobo, Sony, Nook and others have made in bringing eReading technology to the world’s consumers. It’s a massive reach-out to the non-traditional, non-bookshop visiting consumer, particularly the young who can now be distracted from HBO, Showcase and BitTorrent, and can access content we publish on their must-have devices, including their smartphones.

Why haven’t we embraced, in fact, celebrated this? Why have we been struck by a paralyzing timidity? An awful defensiveness? A demobilizing moral panic? A reactionary urge to protect our dated, legacy business models? A tentativeness that borders on the absurd. Why haven’t we begun working positively with these behemoths to secure win-win outcomes of real benefit to consumers, and equal benefit to publishers? Eliminating DRM, closed systems, restrictive licensing arrangements, etc.

Here’s where small and medium independent publishers can and should take the lead. You are a dynamic and vibrant sector. You are the hope of the future.

You don’t have to worry about savagely cutting costs. You don’t have any to begin with. You are not captive to a corporate line, a groupthink. You don’t lack courage. You’ve chosen to be in publishing after all. You don’t have to adopt the conservative, timid, strategic postures of the corporates.

You can have a go. Take risks. Experiment. And your opportunity to thrive will grow stronger as the big publishers turn inwards and, under financial pressure, think only big. Ever more gems will be considered by them small beer and a distraction from core business. But these works are just as necessary to our cultural and social development as they ever were.

Let me be personal for a moment. I’m a literature graduate and an avid reader. I devour just about everything Text publishes; everything Scribe publishes; everything Black Inc publishes; even everything Louise publishes at MUP! At least half of my annual reading diet comes from small and independent Australian publishers. And I would not be unique. (And, by the way, I’m so delighted that Wayne Macauley’s The Cook won last night’s award. It is a brilliant book on so many levels. Just like the food, the evil is exquisite! Simply wonderful.)
I wish there was a way fervent supporters like me could contribute financially to your continued existence other than just buying your books. I wish Australian governments could be convinced that there must be practical ways to support you and your authors beyond the paltry grants from the Literature Board and the lottery of literary awards. 

But in the meantime can I plead with you to continue to grasp the opportunities that will increasingly come your way. Please.

Thank you very much.

Wednesday, October 31, 2012

Welcome to a World of Pain

I feel for the staff of Random House and Penguin, I really do. They are in for a very painful experience over the next few years as the merger of these two large and respected publishers takes place around the globe.

In my experience it is a far better outcome for everyone involved if companies are acquired rather than 'merged'. An acquisition means there is clarity around who is in charge, i.e who sets the agenda and who has to give way; whose policies and processes take precedence; whose jobs will likely go.

A merger means constant, ongoing political infighting at every level over things large and small.

Of course the new management will trumpet the virtues of collaboration, joint decision-making, consensus achieved through committee processes, the adoption of best practice, etc.

But the reality, the lived experience, is one of extreme stress and pain.

In the Penguin/Random case there will be added difficulties. Penguin is a creature of the UK publishing tradition and culture, and Random its mirror image in the US. Although both companies have long been global in reach their deep cultures reflect their countries of origin. It will not be easy to reach consensus on key policies, procedures, structures, reporting lines, responsibilities, etc, let alone sensitive decisions on who goes and who stays, office locations, etc.

Think of the enormous changes that need to be made to reduce costs, eliminate duplication and introduce streamlined systems and processes across the new entity from top to bottom - fundamental things like IT systems, HR policies, editorial/production operations, sales/marketing operations, distribution logistics, trading terms synchronisation, and many others. Agreements on ebook issues - agency, DRM, library supply, etc, will be relatively simple in comparison.

So many senior staff will be spending most of their time in meetings and conference calls 24/7, that is, internal navel-gazing, that the core objective of the business - competing in the fast changing marketplace - will get far too little attention. The whole entity will suffer. This is so predictable and usually beyond the capability of management to prevent.

As well, morale generally hits rock-bottom. The people who win - who survive or get additional responsibilities - are universally the smooth and political, those who can best game the system.

Maybe Rupert was right when he tweeted that this 'faux-merger' will all end badly. I sincerely hope not, but I would be very surprised if it survives beyond the first five years. One or other party will buy out the other, or the whole thing sold.

At least you can be sure that when HarperCollins buys either Simon and Schuster or Macmillan it will be an outright acquisition, and the same with Hachette. Life will be simpler for everybody.

Sunday, September 16, 2012

Zombie Agency

The US Department of Justice's Settlement Agreement that attempted to bring to an end the dismal practice of pricing ebooks on an 'Agency' (or price control) model had one major flaw: it stunned the practice but didn't kill it. 

Because US competition law does not outlaw resale price maintenance, as in Australia, agency pricing of the sort we saw for ebooks is not illegal. Hence the main thrust of the DOJ action focused on publishers' 'collusion' to raise prices, not on the agency model itself.

Thus the Settlement required the participating publishers to back away from the Agency model, and allow retailer discounting, for only two years. And during that time retailers could only discount up to break-even point over the course of a year. Their discounting ability was artificially constrained.

So this has led to a quite extraordinary response from one of the three settling publishers, HarperCollins, and the expectation in the industry is that Hachette and Simon and Shuster will follow. They are actually INCREASING their ebook prices, having been freed from their Apple-led agency agreements, in order to ensure that the resumption of retailer discounting won't actually deliver lower prices to consumers. In other words these publishers are deliberately confounding the DOJ's intent to revitalise pro-consumer competition. 

While tossing aside the 'pricing bands' that Apple demanded (which effectively pushed ebook prices down to around 50% of the hardback price - they were formerly much higher), the publishers are retaining the 30% 'commission' (rather than reverting to the status quo anti which was 50%). Therefore retailers who want to resume discounting only have 30% to play with, and off an aggressively increased price. 

I find this price-hike behaviour utterly reprehensible. It is an arrogant and deeply cynical response to a genuine concern by the DOJ for the wrong being done to consumers. It retains the pro-producer, anti-consumer bias, which is why agency pricing was wrong in the first place.

This piece by industry consultant and commentator Mike Shatzkin summarises, uncritically, the state of publisher thinking. But it is an absence of thinking, a condition which is about as wrong-headed as it is possible to get. By what twisted processes of logic do businesses come up with these sorts of defensive, timid, protectionist postures? Where is the wisdom, the strategic intelligence, the clarity of thought, the conceptual cut-through, in fact the basic integrity? Where's the leadership? 

Why can't publishers price ebooks fairly and professionally - according to the wealth of consumer data and feedback that now abounds in the ebook space - and extend a clean, wholesale, discount of 30% to retailers one and all, and watch what happens? What could they possibly fear?

Well, this is the nub: this is what happens to an industry in the grip of an existential fear - a fear of the new, the emerging, the unknown, commonly called the future.

The simple and finally inescapable fact is that only by embracing the rupture as it slouches towards Bethlehem waiting to born will the publishing industry as we currently know it survive.


Thursday, August 23, 2012

Two Thrilling Legal Reads!

Two legal documents released in the US over the last few weeks provide a thrilling update on the progress of the book industry's transition to the digital future.

The first one is Google's 'Reply Memorandum' that seeks to bring to a close the unresolved Google book scanning saga by seeking to have the court recognise that Google's scanning of millions of books without permission was in fact an exercise of Fair Use under the US copyright act. And the display of snippets that the scanning would allow would in fact facilitate book sales, just as bookshop browsing does now.  

The second one is the Department of Justice's 'Reply Memorandum' that addresses the objections of the ebook publisher defendants in the agency pricing collusion case. The DOJ is relentless in its attack on the agency model which it claims is the result of publisher 'collusion' to lift prices above 'the wretched $9.99 price' established by Amazon.

I use the word 'thrilling' above deliberately, because both documents are full of robust, spirited, take-no-prisoners language, and argue their cases aggressively and persuasively. You don't get lost in a dry-as-dust legal tangle of formality, process and case reference. It's refreshing, enlivening prose, like reading a good legal thriller.

The book industry of course continues to seethe with anger over these challenges to its righteousness and integrity, and is fighting for 'its very survival'.

But it is completely, profoundly wrong. It needs to liberate itself  from this mind-numbing, defensive, energy-sapping, fearful, protectionist, 'we're special' siege mentality and be courageous enough to embrace a digital future with confidence and maturity.

The best thing, in other words, for the industry's survival and prosperity in the radical new digital paradigm that confronts it is for both Google and the DOJ to achieve sweeping victories. 

And the sooner the better. 

Tuesday, August 21, 2012

Copyright and the Digital Economy: Huge Review Underway

A few months ago Federal Attorney-General Nicola Roxon initiated a very comprehensive review of the adequacy of Australia's copyright law in dealing with the serious challenges being wreaked on the creation and usage of content by the digital revolution.

The Australian Law Reform Commission (ALRC) has been given this huge job, and is required to report by 30 November 2013. It has just released the Issues Paper, which is well worth reading if you are at all interested in copyright. 

This review is so comprehensive it has the potential to profoundly jolt the publishing, music and broadcasting industries out of their current comfort zones. The issues paper makes it quite clear that everything is on the table, principally the fair dealing exceptions and the educational statutory licences, around which much of publishing commercial practice revolves.

There is no doubt in my mind that the ALRC will come up with serious reform proposals, and they won't be in the interest of copyright owners. They will enlarge the scope of user rights. Some of these will be welcome. We shouldn't tolerate a legal regime that outlaws the Down Under flute solo or the Optus Now initiative, in my view. 

We should also welcome a broadening of user rights in copying for social, private and domestic purposes. We shouldn't tolerate the criminalisation of downloading behaviour in response to unreasonable commercial availability controls, pricing and geo-restrictions: everyday crap that angers Australians in particular.

However, extending the rights of educational institutions to exploit content by loosening the existing statutory license provisions is something the industry must vigorously resist. There is, of course, room to clean up some inconsistencies and complexities, but to broaden the fair dealing exceptions so far as to allow free use of much that is now paid for would be a mistake, not to mention extremely costly for the industry. 

And it won't be enough for individual publishers to extend their reliance on specific contracts directly with customers, thus avoiding the free-use exceptions built into the copyright law. The relation between what's allowed or disallowed under law and what the publisher allows or otherwise under contract has always been disputed terrain, and the ALRC has signalled that it has that conflict firmly in its sight.

Of course, this review will only present a list of recommendations to the government of the day (by November 2013, guess who?), and it is up to the government to respond in due course. And this could take some time.

But there's no doubt whatsoever that the next three to five years in the world of copyright are going to be fascinating to watch.

Tuesday, August 7, 2012

Speaking of Private Equity...

If McGraw-Hill decides to sell its educational publishing business rather than spin it off into a separately listed corporation, an interesting feature of the global higher education publishing business will no doubt be created: around 60% of it will be in the hands of private equity.

For it seems inevitable that it will be a private equity purchase – or no sale. No other publicly traded publisher (e.g. Pearson) could get a purchase past the Department of Justice. 

Even private equity held Cengage (i.e. Apax) might have some issues, but they would probably get it approved by disposing of a few juicy competing assets. (But then what would they do with McGraw's huge K-12 business in the US? They'd on-sell it surely.) 

I think Apax have shown that PE investment can work if you hire and stand by the right people and have the courage to go the distance. CEO Ron Dunn, a respected industry veteran, has overseen a pretty good period for Cengage (no real growth, especially outside the US) but they haven’t gone backwards or gone broke. They have managed to pay the interest on their $5b debt, and they have just recently secured agreement to extend maturity on some of the senior components of that debt. Apax would still be hoping for a successful IPO in a year or two. They may not get the $7.7b they paid, but they would get a fair portion (if the market returns) and retain a substantial interest in the business as well. So PE has not been a bad ownership model for Cengage and has probably driven a lot of value mainly by carving waste out. There have been negatives, but nothing like the stupidity of the Fulcrum model with Wooldridges.

Other bidders will be PE firms (Apollo, Bain, others) and who knows what operating model they would bring to bear. But you can bet your boots they'll savage costs ferociously. With today's historically low interest rates, they would certainly load the business up with lots of debt, but McGraw with decent, more supportive management could be a much better business than it has been over the past decade. 

So I think we can look forward to seeing McGraw, Cengage and Houghton Mifflin Harcourt all in PE hands within the next 6 months. 

That leaves Pearson and Wiley as the big non-PE players in Higher Ed. And they'll have to take an axe to their costs too. It won't be enough to just have the right 'digital strategy'. They'll need to learn a new level of ruthlessness to compete. The old printed textbook business can't just be allowed to die off. It has to be killed.

It won't be pretty.

Friday, July 27, 2012

Wooldridges Fails to Make the Grade

The last nail was hammered in yesterday as administrators Grant Thornton were called in to pick over the pieces of the once-thriving school bookselling business, Wooldridges.  

Many reasons will be given, many excuses trotted out, but the long and short of it is that the private equity owners, Fulcrum Capital Partners, have botched it completely. They have destroyed value on an impressive scale. By ignoring advice, by stubbornly adhering to the wrong retail strategy, and by failing to grasp the fundamentals of the school resources market, they have not only ruined a business and the jobs of its employees, they have set in train a process that may well lead to the end of the booklist system of supply in WA.

This is a sorry saga but one rich in lessons. As the commentary on what went wrong starts to flow, we will hear about pernicious online bookselling, about the GFC and cautious consumers, about failed partnerships with stationery suppliers, about aggressive direct selling by publishers - the carbon tax might even get a run.  But the real problem, as always, has been the owners and directors, in this case the partners at Fulcrum Capital who acquired the business in 2008.

They should be held fully responsible for the mismanagement of a simple, profitable and durable business. They have ruined a good operation and lost upwards of $50 million.  Some of that loss will be borne by suppliers but most will be written off by the two major investment banks which either invested in or lent to the holding company, ESA Holdings Pty Ltd. More fool them. We can only hope that the individual partners at Fulcrum also get to feel a bit of the pain.

The clear lesson in all of this is that good companies are run by good people. Good businesses need managers who understand the market they are operating in, who listen to advice from experienced industry players, who aren’t afraid to look a bit old-fashioned from time to time, if that’s what the market wants. A school booklist business sells books and stationery and other stuff to schools and to parents. It’s that simple. The business challenge is how to make that supply process as efficient as it can be. 

Of course, there is always the need to think about big operational and strategic issues, about exit plans, about competitor activity and about other threats and opportunities, but if only Wooldridges had kept as their first priority running a great booklist business. If it had, it would still be around to ponder and overcome all the worries of cash flow in a seasonal business, the growth of digital learning, and how to grow the business across state borders. If only Fulcrum had hired good managers, listened to them, and let them get on with their jobs. The arrogance of private equity and investment banking involved in this wreckage is breathtaking. But then, how many examples can you think of where private equity flowing into a book business has turned it around and spawned new life? 

There was a fundamental problem with Fulcrum’s investment strategy, and it is a shortcoming of private equity investment in many traditional businesses: they didn’t care about, or care for, the business they had bought; they were only interested in the business they were going to sell. It had to look smarter, and books are old-fashioned; it had to look diversified, but schools don’t put interactive whiteboards on booklists; it had to look national, regardless of market variances.  

It now looks dead. 

And you can bet your boots it will stay that way. Prospective buyers may well steer clear not just of the Wooldridges corpse but of the entire WA booklist market, because the biggest worry in all of this is what might flow from it. Will schools continue to take the risk of handing over their book supply to a private operator?  Will the WA Government continue to ignore the positive (or at worst neutral) effects of the booklist model having been abolished in most other states? Will parents continue to tolerate the failures of the past couple of back-to-school seasons? Quite possibly not. A class-set or book-hire model would save parents thousands of dollars over the 12 years of schooling, and it would avoid forever the mayhem of recent years. And when WA makes the change without significant pain, what about Victoria? How many millions of dollars could this end up costing the educational publishing industry? 

Well done Fulcrum.