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. 

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.

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.