Pearson's Lapse in Concentration

Large corporations are always on the look out for acquisitions. In mature markets, when organic growth is hard to come by, and cash reserves need to be put to productive use, the attractions of acquiring another business and integrating it into current operations are easy to see and make so much commercial sense. 


There are dangers, however. Acquisitions can be strategic and even brilliant - the right business purchased at precisely the right time and for the right price. 


They can also be dumb. 


Pearson Australia's purchase of REDgroup Retail's online business fits snugly into the latter category. This is precisely the sort of acquisition that seasoned managements usually know to avoid like the plague. They are opportunistic - the businesses have just become available, are crying out to be picked up, and are undoubtedly cheap as chips - but they are foreign to normal and well understood operations, and current management has no experience or appreciation of the subtle dynamics that need to be known and respected for them to be successful.


Executives have to guard against the sort of emotional self-pleasuring that successful acquisitions bring. When announced, the press is quoting you, the industry is abuzz and admiring your cleverness, you've got a jump on the competition. Hard to psychologically resist.  


No doubt Pearson assessed this acquisition carefully. A good Australian-based operation, with an excellent Kobo partnership, growing strongly, a loyal customer base, needed by publishers, etc. It would be a shame if it disappeared just because its parent got into difficulty. Revenues now might be only $25 million or so but could well be $100 million in five years time. Penguin, in fact all Australian publishers, just can't sit by and see this business disappear. There has to be strong, vigorous and well-funded, local competition to the off-shore powerhouse, Amazon.


All superficially plausible, but the negatives are overwhelming. Pearson is a publisher, not a retailer, and no publisher understands, or has the skills to manage, specialist book retail operations. They are totally different beasts. They require careful attention, love and continued investment, all the sorts of things that REDgroup didn't bring to the table. As well, retailers have secrets. They know things about other publishers that no individual publisher should be privy to - things like trading terms, promotional deals, forward publishing plans, strategic intentions, etc. It's no use Pearson vowing to run the business 'as a separate entity'. Other publishers will be deeply suspicious, and seek alternatives. 


No doubt Dymocks and other retailers passed a ruler over this business and walked away. The demise of REDgroup's online outfit would not at all have meant that the local industry would have been  denied this growth opportunity. It would've simply been spread around.

The Future of Publishing

 I was asked to submit a contribution to 'the future of the book' series of short essays, a blog being compiled by if:book Australia. This was published today at http://www.futureofthebook.org.au                                   

Over the last twelve to eighteen months the debate over the future of the book has moved through a number of stages. We initially focused on ebook devices and their features, functionalities and sales volumes, particularly when the iPad first appeared; we then moved onto DRM, ‘windowing’ and ebook pricing; then to agency and other supply models; then, when it became obvious that retailers were suffering, onto the critical role of high street booksellers and whether they’d survive and what impact on an emerging ebook industry their possible demise would have.    

Now we’re at the stage of debating the role of publishers, and not just their role, but whether, in a thoroughly digital future, they’d even exist.  Would they not be exposed as analogue relics, rooted to the legacy business models of print, and soon to be cast aside by the inexorable march of digital progress?

‘The entire publishing industry is going down the drain’ according to an executive from Siemens at the World E-Reading Congress in London in early May.

‘Publishing is not dead. It’s more like Wile E. Coyote in the moment before he notices the cliff has dropped away beneath him’, tweeted Australian author James Bradley on May 11.

The panel discussion on Jennifer Byrne Presents: Future of the Book on the ABC on May 17 was telling because it signalled how thoroughly we’ve all now moved on to a much more mature reflection on the issues. It concerned the future of publishing and whether one should be optimistic or pessimistic about the radical, structural shifts taking place in the industry that could well mean the demise of the familiar behemoths that have ruled the book world since Gutenberg.

And then there are the recent, very meaningful, moves by one of the ‘new’ behemoths – Amazon, Apple and Google. Amazon has thrown a cat amongst the pigeons by setting up a number of publishing imprints and hiring an experienced publishing professional to build its own list. Whether this will be a successful financial venture for Amazon is not the point. The fact that they have chosen to do it is the point.

Literary agents, author associations, and many authors themselves have not been slow to register their frustration over the seemingly inflexible, unresponsive and defensive corporate manoeuvres from the big publishers, and many of them are voting with their feet and striking out on their own to best position themselves for the digital future.

I find it fascinating, if not a little sad, that it’s come to this. But publishers really have no-one to blame but themselves.

Humility is not a virtue usually associated with publishers, particularly the majors (frequently referred to as ‘the big six’). Arrogance, yes, but not its usual opposite. The problem is that today, in the midst of a profound digital transition, with outcomes and endpoints intrinsically unknowable and barely amenable to forecasting, arrogance is a habit of mind that publishers need to quickly shed or they will die. When that arrogance is combined with fear, as it always is, it becomes toxic indeed.

Let’s review some of publishing’s wrong moves over the last few years:

It was wrong to respond to Amazon’s aggressive ebook pricing with the Agency model of supply, thus guaranteeing higher and uncompetitive prices. This was a distinctly pro-producer, anti-consumer move as its effect was to disallow consumer-tested pricing at the very birth of a new and exciting industry product.  

It was wrong to bind the new e-tailer behemoths to geographic, territorial restrictions by contract, thus denying non-US consumers access to tens of thousands of important new titles upon their first release. (There are far better and consumer-friendly ways of dealing with territorial rights sales).

It was wrong to impose on authors a maximum royalty of 25% of net receipts on ebook sales. (35% plus is far more justified).

In Australia, publishers were wrong to oppose the abolition of our parallel importation restrictions which serve to protect publisher over-pricing and under-servicing in our local market. (This issue never had anything to do with territorial copyright, but that was the way publishers framed it – very successfully unfortunately).

Australian publishers are wrong to continue over-pricing when the Australian dollar is so strong against the US dollar and UK pound. And they are wrong to argue that the GST should be foisted on booklovers – their customers – if they chose to order online. (Publishers need to be hyper-responsive to consumer sentiment, and dramatically lower prices accordingly to keep faith).

These are only some of the ways publishers, globally and locally, have and are reacting to new, emerging paradigms – with fear, defensiveness, arrogance and protectionist sentiment. It is not the way into the future.

But the simple fact is that publishers are terrified, as are most businesses, of the digital future – perhaps not visions of that future, but the ugly, messy, transitional process of getting there.  For they are being required to submit themselves and their organisations to a radical process of refinement, akin to jumping head first into a giant threshing machine, and trusting they’ll emerge alive, pared down to their essence, and thoroughly renewed.    

All the analogue baggage of the print business that made them powerful players – marketing and sales machines, distribution might, wholesale/retail connections – all this has to be shed, perhaps slowly, perhaps quickly, but certainly painfully. This amounts to losing 20-30% or more of current overheads, and many staff.

What will remain is the pared down, distilled essence of publishing that most publishers today have long forgone, forgotten, and always outsourced – editorial.  

Over the decades, under the pressure of mergers, acquisitions, restructurings, and downsizings, when Big Retail has squeezed margins to the thinnest imaginable, our standards as publishers have been lowered. Our regard for the quality of the text has too frequently been off our radar screen. Our respect for the old, intense, creative relationships; the old skills and craft of recognising, developing and editing talented authors; the ancient role of challenging, clarifying, re-writing, querying, red-lining and binning. We’ve been absent, cold and unsupportive.

Perhaps I’m naive in thinking that this serious, collaborative, sympathetic profession of editing will be re-born as the core of publishing. But I do know this: people are sick to death of unedited prose – the knotty, clotted, jargon-infested illiterate bilge that clogs our time and space. How refreshing and joyous it is to read clear, lucid, beautifully balanced sentences that sing and instantly communicate. And how powerful it is to be moved and spiritually expanded by stories brilliantly told.

Unless publishers rediscover this essence of what publishing is all about they will have little to offer and will certainly be squeezed out of the value equation.  

But if they do, and if they bring all their design, production, marketing, metadata, administrative and management skills to the ancient process of ‘making public’ the words and ideas of the best of the best amongst us, then they deserve to, and certainly will, flourish. 

Pearson's net pricing move: a lot more than meets the eye..

I've been thinking a little about Pearson Australia's move, scheduled for May 1, and I think it could well be a much larger initiative than one simply involving net pricing. I haven't talked to anyone at Pearson, least of all my good friend David, but I suspect this could be the first roll-out of the American model of textbook supply to Australia. In the US publishers supply campus booksellers on net pricing terms, but the effective discount off their list price (which exists in their systems but is not public) is around 20% to 25%.


There has always been the possibility, but up until now not really a probability, that the US supply model could come to Australia. Tertiary publishers and booksellers have always enjoyed a partnership relationship in Australia, which has been to both parties' advantage. In the US the relationship has always been adversarial, often ferociously so. Decades ago US campus booksellers opted to become willing participants in, and beneficiaries of, the commercially and nationally organised used book business, to the great detriment of new book sales. They effectively declared war on publishers. There has been no love lost ever since.

In Australia the used book situation has always been a fairly piddling business run by student associations on a campus by campus basis.

What has changed in Australia however, like everywhere else around the world, is that educational publishers are having to make huge investments in digital products and infrastructure, and are having to deal directly, and interactively, with students . The traditional textbook is becoming far less central to the educational process, to the point where it doesn't really matter whether it's bought or not. Thus the traditional textbook retail supply model is also becoming more marginal.

So if ever there was a time to change the Australian supply paradigm, and move more margin the publisher's way, it is now.

Pearson is probably thinking - rightly in my view - that they need the support of the Australian campus bookseller less than ever before.

Here's what may well happen May 1: net prices will not change, but Pearson's 'RRPs' may be reduced by 10% or so. Pearson is therefore able to negotiate adoptions with academics more successfully, and answer the charge that their prices haven't come down because of the strong dollar.

But they don't suffer any revenue or profitability decline by doing so. Just a bit of outrage from their legacy intermediaries, which they can fairly effectively steel themselves against.


It's the booksellers who will suffer the financial consequences. Their effective discount will be reduced from 33.3% to 25% or so.


The big problem booksellers will have is that most, if not all, tertiary publishers, particularly the Americans, will follow suit. They couldn't let Pearson take all the advantage alone. This is what happens when the dominant player makes a bold and unpopular move - the rest fold in behind, taking cover accordingly.


Perhaps I'm wrong, but somehow I doubt it. The time is ripe for such a move.

MERCHANTS OF CULTURE: The Publishing Business in the Twenty-First Century

by John B. Thompson, Polity, 2010.
(A Review for LOGOS, December, 2010)


Those of us who’ve been in the publishing game for a good many years tend to approach books on publishing written by academics with a fair measure of cynicism. Even though they’re a step up from the usually tedious feature article fare of the Sunday papers, from which most people get their views on publishing and its issues, they invariably suffer from an absence of any real insight into, or appreciation of, the fundamental commercial dynamics that overwhelmingly govern the field.


To get that sort of perspective you have to go to the memoirs of publishing notables, such as Andre Schiffrin and Jason Epstein, to give just two recent examples, but here you need to contend with the standard, ego-laden biases and obsessions that come with the genre.


What is refreshing about Professor Thompson’s new book is its absolute commitment to objectivity, neutrality, balance and fact in its exploration of publishing’s economic realities. It doesn’t push any barrows, but sets out to explore a critically important part of the industry in depth and with the sort of rigor you would expect from a seasoned, academic observer.


Thompson’s focus is contemporary trade publishing in the US and the UK, particularly ‘mainline adult fiction and non-fiction’ as he calls it. He eschews (wrongly in my view, but more on this later) the more specialised domains of children’s, self-help, travel, romance, and the rest, in order to get some clarity around broad and defining issues – ‘to discern some order in the chaos, some structure in the flux’. His main research method was the semi-structured in-depth interview, of which he conducted 280, all recorded and transcribed. He interviewed publishers, booksellers and literary agents in the main, from all levels in their organisations, large and small. To ensure full and frank revelations and opinions he guaranteed anonymity. Thus the book is full of quotes from ‘Steves’, ‘Janes’ ‘Jims’ and others, but they are invariably honest, intelligent and often surprisingly frank. Players in the book trade, as we know, unlike most other industries, meet and talk to each other a lot – they actually like each other – but they’re rarely honest. If they’re not actually lying, they are colouring, painting, flavouring the stories. They’re in the words business after all! But through a process of sharp questioning and follow-up, which Thompson got better and better at over time, as he admits, he was able to extract nuggets of gold over and over again.


There are also portraits of particular companies, divisions and imprints, again disguised. ‘Star’ is an old imprint that was acquired some time ago by a large house, itself part of a global corporation with interests way beyond publishing. It’s been allowed a fair measure of independence and autonomy, which it jealously guards. Others haven’t been so lucky. The life has been sucked out of them by corporate bureaucracies with their uniform but stifling systems and processes. ‘Sparrow Press’ is a small publisher, struggling financially, but doing it ‘for art’s sake’. Thompson expertly captures the stresses and strains, and the creative and commercial tensions across the full panoply of organisations and players in the field.


What emerges from this intense engagement is a comprehensive description and analysis of ‘the logic of the field’, as the author calls it - a sociological construct that helps define the context in which the actions of each key player are conditioned by the actions of others. But Thompson doesn’t bog the narrative down with dry academic discourse or theory. He remains thoroughly grounded. What he does do, remarkably deftly in fact, is place all the various elements in context, so a coherent picture emerges of a whole, underlying dynamic governing the actions and strategies of industry organisations and individuals.


Thompson’s first three chapters describe the macro-environment of today’s transatlantic trade publishing industry. He isolates the growth of the retail chains, the rise of literary agents, and the emergence of publishing corporations, as the foundational realities that define its principal contours and dynamics. It’s hard to disagree with this analysis, apart from wondering whether these three realities are themselves the result of even larger societal or economic forces playing out across all industries in our late-capitalist phase, such as globalisation, deregulation, population growth, technology, etc. But that’s to quibble. In the book trade Thompson’s three macro factors have changed the industry radically over the last twenty to thirty years.


The rest of the book explores these changes in detail, giving flesh to ‘the logic of the field’. One effect is industry polarisation. The large corporations become more dominant by being financially more able to cough up the far more extravagant author advances that agents are demanding. The logic leads to an obsession with ‘big books’, the popular blockbusters that feed the chains and supermarkets and crowd out much midlist and backlist from high street visibility. ‘Publish fewer books and sell more of the books you publish: this is the mantra that is chanted in nearly all of the large publishing houses, and in many of the medium-sized and small publishing houses too.’


Big books means big returns – unsold copies flooding back, sometimes as high as 60% of initial sell-ins. In a chapter called ‘Shrinking Windows’, Thompson explores the challenges publishers face in driving consumers into stores in the ever shorter time frames that the high street retail logic makes available to them. His analysis of the marketing strategies and activities, and the limited budgets involved, and the many new things today’s publishers are doing, particularly online, is superb.


As someone who has spent their whole publishing career in Australia, but nevertheless in senior roles in global US corporations with strong presences in the UK, I was thoroughly enlightened by Thompson’s analysis of the dynamic of UK trade publishing since the demise of the Net Book Agreement in the mid-90’s. His chapter ‘The Wild West’ tracks the emergence of the supermarkets such as Tesco and Asda as powerful new players in the UK book retailing landscape. At the same time Amazon UK has become a significant force. Astoundingly, according to Thompson, ‘the overall impact has been an upward drift in the average discount that publishers offer to the retail sector: roughly 10 per cent of margin has been transferred from publishers to retailers in a period of ten years’.


Combined with the huge growth in author advances, most unrecovered and therefore having to be written off, the wonder is that US and UK trade publishers are making any money at all! Thompson doesn’t address this critical question. I was hoping for a comparison between a representative company or divisional Profit and Loss statement from twenty years ago to one today, which would have clarified what has generally happened to margins and overheads and thus profitability and return on investment. Reading the industry press one doesn’t get the impression of crisis. Hachette, for example, is doing very nicely indeed, albeit on the back of Stephenie Meyer. The small UK publisher Quercus is doing exceptionally well on the back of Stieg Larsson. Neither of these more recent phenomena are referenced by Thompson. The big book focus may be problematic. But it’s also, seemingly, salvific.


I suspect Thompson underrates the continued vibrancy in the industry, particularly in the niches. By not focussing on the genres, especially the non-fiction genres such as self-help, travel, personal investment, children’s, he misses two or even three traditionally profitable legs to publishing stools. This is hardly a criticism of the book, focussing as it does on the ‘mainline’, but it would have fleshed out the economic picture a little.


As you would expect, given the author’s extremely comprehensive 2005 tome Books in the Digital Age, there is a long and comprehensive chapter on the digital revolution which, although a little out of date – as is the way with this fast-moving field – is an excellent overview of the critical issues that publishers are facing. There is a sanity about it, a balance, that the reader by now (this chapter is towards the end) senses in Thompson’s perspective on the industry generally.


Which is why I regretted he didn’t widen his focus a little to take in the view beyond the US and the UK. A chapter on Canada and Australia, both important markets for US and UK publishers, as is the whole export business generally, would have rounded out the tale.


On the very first page of the book Thompson tells the story of a rather small book called The Last Lecture by an unknown computer science professor, Randy Pausch, who happened to be dying from pancreatic cancer. Through an auction process Pausch’s agent secured an advance of $6.75 million. Yes, $6.75 million! It was bought by Hyperion, a frontlist driven company backed by the Disney Corporation. Thompson leaves the story there and doesn’t revisit it until p. 295, when we find out what happens. We’ve explored enough terrain in the meantime, however, to appreciate how that advance came about, its full rationale, and why the publisher so desperately wanted the title. We also know the risks and how projects like this often go horribly wrong. It’s a fascinating story, and of course I won’t disclose the ending here.


Merchants of Culture is full of these gems. It is also full of statistics, charts, tables and sales figures which add immeasurably to its power.


Professor Thompson has written a seriously good, almost monumental work, one that will quickly become required reading for seasoned practitioners and newcomers alike, whatever segment of the book trade they find themselves in or are about to commit to. It’s a highly readable, absorbing account of a culturally important industry in the throes of transition. We can only hope that the author issues a second edition in five years time, and a third after that. They would be eagerly anticipated.

Besieged, Bothered and Bewildered - Our Book Industry Feels the Pain

Besieged, Bothered and Bewildered - Our Book Industry Feels the Pain



(Article for The Rationalist journal, January 2011)


You cannot open a paper these days without coming across yet another article about the huge increase in purchasing from overseas-based online retailers by Australian consumers in response to the strong dollar. Books are always the prime example. The local book industry is under siege and booksellers and publishers are barely talking about anything else.


Amazon has been doing good business out of Australians for over a decade now, but has been joined in the last twelve months by The Book Depository, the UK operation that matches Amazon’s prices and discounts but also offers free freight, an appealing combination.


It’s virtually impossible to get a handle on just how much business these two do in Australia (Amazon in particular has never felt inclined to part with any information that could be remotely useful to anybody), but anecdotally industry insiders are now estimating that the business could be upwards of $200 million and rapidly rising. The total consumer book market in this country, at retail level, is about $1.6 billion (yet another difficult figure to pin down since the ABS stopped collecting book industry data six years ago). So the local industry is currently losing 12.5% plus of its turnover to offshore suppliers. It could well be 20% in five years time if things continue the way they are (and this is not counting library purchases from overseas library suppliers – another huge chunk).


Our book industry is having its own ‘annus horribilis’, with most independent bookstores experiencing sales declines of between 5-10% compared to last year. REDGroup Retail, the Angus and Robertson and Borders chains, with a share of about 30% of the total Australian consumer book market, had a sales decline of 11% for their fiscal year ending August, 2010. This amounted to $70 million. They also slashed their inventory holding by $50 million, which means they studiously declined to order from publishers and dumped unsold stock back to them where they could. You can imagine the effect on publishers and authors.


The book trade has always been a very emotional one – part art, part commerce, and totally cottage. But the heightened level of emotion and anger coursing through industry veins right now is something to behold. And it’s very typical in any industry in these circumstances to see its players develop a siege mentality, bunker down, lash out at foreigners, and resort to some fairly ordinary thinking and analysis quite typical of victims.


To get some perspective let’s go back two years. In August 2008 the Rudd government decided to hold yet another enquiry into books and parallel importation, the provisions in our Copyright Act that prohibit retail booksellers from ordering direct from overseas any title for which a local publisher holds, under contract, exclusive Australian rights. In the trade this activity is known as ‘buying around’. The government imagined there could be some political gain from overturning this century-old prohibition in the interests of allowing cheaper prices to flow to consumers. The Productivity Commission, for the third time in twenty years, was charged with examining the issue and making recommendations.


Well, as we know, to no-one’s surprise, the reaction from the industry was swift, uniform and very angry. Of the 563 submissions to the enquiry, all but a dozen of them were in favour of retaining the current restrictions. No ifs, no buts, the Visigoths must not be allowed to have their way. Australian literary culture would be decidedly poorer. The Commission’s final report, however, recommended what the commission had always recommended – that the restrictions should be abolished in favour of a better deal for the consumer. Typically, the Rudd government was frightened off, so reform never happened.


So after a highly charged year of fighting and fending off, the book industry relaxed, luxuriated in victory, and resumed business as usual. It was to be a major mistake. What had actually been happening in recent years, and what the Productivity Commission expertly analysed and measured, was a growing uncompetitiveness in the protected, privileged publishing community in response to the ever-stronger Australian dollar, a massive over-pricing that could never be commercially or realistically sustained. The Visigoths already had a foot in the camp and no artificial, protective, legal mechanism could keep them out. They were called Amazon and The Book Depository. And the consumer, whose interests were ignored in the parallel importation decision, had noticed.


The Australian Publishers Association (APA), in their long, furiously angry and sniffily dismissive response to the Productivity Commission’s draft report, denied that their members had ever over-priced, and if they ever did they were certainly not doing it now. They contended that the average A$/US$ exchange rate over the previous ten year period was $0.69, so it was entirely reasonable for local publishers today to use this rate or something close to it in their pricing for the Australian market. This submission was written when the dollar had hit $0.90! As I wrote at the time:


‘Today, as you know, [the dollar] is around $0.90c, and against the pound it’s the highest it’s been for 25 years. Publishers have had five or six years now to adjust to exchange realities but most have chosen not to do so. How long is the Australian consumer supposed to wait? Booksellers, on the other hand, have to compete with Amazon, which uses the exchange rate operative on the very day of invoicing. Not surprisingly, they are finding it hard to compete.’ (1)


Had the government decided to accept the Commission’s recommendations and abolish the provisions, the competitive pressures unleashed in the deregulated market would have been fairly intense. This is basically what would have happened:


1. Booksellers would have radically stepped up their ‘buying around’ behaviour, in order to source product overseas at lower wholesale prices so they could price lower to their customers than local publishers’ recommended prices, and thus compete more effectively with online suppliers.


2. To head this off publishers would have quickly lowered their prices and possibly sweetened their trading terms to regain the business. If they were serious about it, and went far enough, they would have recaptured virtually all the former business they had.


3. Since booksellers much prefer to order locally, all other things being equal, because there’s less risk and hassle involved, things would have got back to a new normal pretty quickly. And territorial rights would have been re-respected.


4. The consumer would have won.


5. In fact everyone would have won because of the new vitality injected into the industry. Intense competition tends to do that. (Even the printers in Maryborough, who thought the end of the world was nigh, would have won).


So the Rudd government – and how typical was this? – stuffed up big time. The only crumb they threw the industry was to set up a Book Industry Strategy Group (BISG) under the auspices of Senator Kim Carr’s industry and innovation department. This group was to recommend to the government how the industry could be helped to survive!


So having dispensed with a real solution that focussed on the real problem, the industry gravitated to familiar ground: campaign for the GST to be applied to purchases from Amazon and their ilk. This would ‘level the playing field’, and presumably solve most if not all of our problems. Under the GST system as it currently operates any purchases from overseas suppliers escape the GST net if they are below a $1000 threshold. The reason for this is to not bog down individuals in customs red tape and delays for minimal net revenue gain. In fact, the government’s advisory body on taxation matters, the Board of Taxation, recommended to the government in February of this year that any lowering of this threshold, despite the clamour from various retail associations to lower it to $250, would be counter-productive (2). The government agreed. (By the way, even this lower threshold would not capture 99% plus of book purchases!)


The Australian Booksellers Association’s (ABA) official position is to continue to advocate for a much lower threshold, or if that were not a goer, for the removal of GST from books altogether.


A few basic things need to be said:


1. There is no chance whatsoever of any government removing the GST on books. It’s really silly to even contemplate that, and it looks silly and ignorant to publicly campaign for it.


2. There is no chance whatsoever of any government lowering the threshold to below $250. The outcry from consumers would be loud and long. The GST is a tax system, not a job creation or protection system.


3. Even if by some remote chance the GST net was widened to capture these online purchases, then – and this is important – it would have minimal effect on book importing behaviour! The GST is still only 10%.


The other big retail chain in Australia, Dymocks, who to their credit did appreciate the main game and campaign for the opening of the market during the parallel importation debate, have recently come out and ‘threatened’ to move their online business offshore if the government did not change the GST rules. According to CEO Don Grover ‘It would actually make more sense for us to send books from an overseas location back to Australia and avoid the GST. To give a competitive advantage to overseas websites of 10% is just unsustainable’ (3).


Here is further evidence, if any were needed, that the current GST obsession of the Australian book trade is becoming deeply farcical. What about Australian books? Are they going to be shipped offshore and then re-shipped to the customer in Whyalla?


It’s only 10%. It’s utterly irrelevant. It’s not the main game. Publisher over-pricing is the main game, and the lack of any vigorous domestic competition to that practice. Here’s a simple test for any book buyer to apply: find out the overseas list price (Amazon’s a good source); convert to Australian dollars at today’s exchange rate (parity as I speak); add 10% (as a currency hedge); add another 10% for the GST; round up to the usual 95c price point. Then compare this to what the publisher is asking you to pay in your bookstore.


So George Bush’s just released Decision Points should be priced in this country at A$42.95, not $59.95 as it is. The US price is US$35.00. Do the math! Or take the Booker winner The Finkler Question: this L13.00 title should be $25.95, not $32.95 as it is. These aren’t isolated examples. They are commonplace. (In fact, be suspicious of any book priced at $32.95. If it’s an Australian original it should be $29.95, but if it’s a UK original, complain).


Screwing your customer is not really a productive and lasting strategy for any industry, but unfortunately it’s precisely what the publishing industry, aided by compliant and dependent booksellers, has long indulged in. Trying to slap a GST on Amazon and The Book Depository is a classic iteration of this - clobbering booklovers and serving to bolster dated, uncompetitive local pricing practices that are doing enormous structural harm to the industry.


We’re seeing precisely the same thing happening in the emerging ebook business. 2010 was the year Apple released the iPad and rolled out the ‘Agency Model’ for ebook pricing. This ‘app’ model may be fine for all sorts of products but not for books. It gave pricing power to the publisher, and prohibited the retailer from selling below the publisher-set price. Up until this time Amazon’s Kindle dominated the global ebook landscape (it still does, but it’s gone from about 90% to 65% in market share over the last two years). Amazon set ebook prices at levels way below what publishers thought they should be, so publishers jumped at the chance to force Amazon onto Agency pricing contracts. The five large US trade publishers, who carry enormous heft in the consumer market, forced Amazon to buckle by refusing supply unless they did. This model was also rolled out in the UK in October/November, 2010, and Hachette, Australia’s largest trade publisher, has just rolled it out here in Australia. Other major publishers are expected to follow. (By the time you read this they probably would all have signed up. Such is the way these things work).


The logic of the Agency model of supply is to keep pricing power in the hands of the publisher and away from retailers. Retailers are expressly forbidden under contract to offer their customers a lower price, even if only for a short time for promotional purposes. Now I keep banging on about this in the industry, but let me repeat it here: in Australia the agency pricing model is clearly and unambiguously AGAINST THE LAW! No doubt Hachette and other publishers have legal advice to the contrary. Well bugger me – legal advice that corroborates with what you want to do anyway! Who would have thought?


Here is what the ACCC says about Australia’s Resale Price Maintenance provisions in our Trade Practices Act. It’s pretty clear:


Any arrangement between a supplier and a reseller that means the reseller will not advertise, display or sell the goods the supplier supplies below a specified price is illegal.


It is also illegal for a supplier to cut off, or threaten to cut off, supply to a reseller (wholesale or retail) because they have been discounting goods or advertising discounts below prices set by the supplier.


A supplier may recommend an appropriate price for particular goods but may not stop retailers from charging or advertising below that price. In most cases, a supplier may specify a maximum price for resale. (4)


This is a succinct summary of what the actual provisions say. And why is this sort of thing illegal? Because it is anti-consumer. It denies the consumer the power to shop around to avoid being ripped off. It structures a producer-controlled market, where the producer is protected from unwelcome retail pressures for better terms that enable retailers to offer more attractive terms to their customer base.


And here is the interesting point: the expressed intentions of the publishers are to create a ‘level playing field, to enable retailers other than the dominant Amazon to be able to enter the market and compete – ensuring a better outcome for all players’. Very noble, but this sort of talk fools no-one. It’s code for smothering competition, not enhancing it. It works to the benefit of the publishers and against the interests of the consumers. Even that venerable old UK trade journal The Bookseller is becoming increasingly worried about what publishers think they’re doing: ‘At an instinctual level, whatever the sophistry employed in its defence, bringing in price fixing online will feel wrong to the only people who ultimately matter in this, the readers’ (5).


Finally, let me say something about territorial copyright, that beast that haunts the Australian trade and poisons so much of our debate. It was never the central issue in the parallel importation fracas, although most industry people, particularly authors, framed it so. It’s always been the source of enormous conceptual confusion, and I must say, with profound regret, continues to be so in the ebook world.


Most Australians who own an ebook reader are drearily familiar with the following message:


        This title is not available for customers from:
                              Australia
          Shop for titles available for Australia


What this means is that publishers have shoehorned Amazon, Apple, Sony, Kobo, Google and other ebook retailers into honouring the territorial rights deal the publisher has made with the author, or more accurately, the author’s agent. If a US publisher has only bought US rights then its ebook contract with etailers will only entitle those etailers to sell to Americans. And here’s the rub: even if no Australian rights (or, more frequently, Commonwealth rights) have yet been sold by the agent, then still no Australian consumer can buy that ebook.


To me this is an offense against logic and fairness, and runs entirely counter to the long and established conventions of the retail trade, and it certainly runs counter to what happens in the analogue book world. If I order from Amazon the US edition of a print book for which Commonwealth or Australian rights have been sold, I will still be supplied it. There is no publisher ‘contract’ that restricts Amazon from supplying it to me. In fact the US, UK and Australian Copyright Acts have long embraced the concept of the ‘first sale doctrine’, which means publisher rights over the product are exhausted after the first sale. The retailer can do what they like with the book – give it away, discount the buggery out of it, sell it to China – without being answerable to the publisher. They are only restricted from making copies of it. This convention enshrines a free space for retailers outside the usual restrictions of copyright law and underpins a vital commercial role in information distribution.


In the e-world, however, it seems we’ve gone backwards. Ironically, when it is so much easier to distribute globally a digital file than a heavy, physical object, we’ve been lumbered with publisher timidity and myopia yet again. There is a simple and practical solution though, which I’ve urged on my publisher colleagues. Make ebooks available from day one to everyone around the globe no matter where they live. The original ebook publisher could do this by not territorially constraining etailers. And when rights to a particular territory end up being acquired by another publisher, then hand over those revenues to them. It would be simple to administer. Thus publishers buy a share of global revenues, not rights to a file.


Ah, much new thinking, much water to go under the bridge yet. Old habits die hard in the book industry. Even when the readers are walking away. If only publishers would reach out to them, befriend them, listen to them, try to satisfy them. They may find they’re not that scary. And they may also find they return the compliment.





NOTES

1. ‘The Parallel Importation Debate – Thank God the End is Nigh!’ Peter Donoughue; p. 61, Copyright Reporter, Journal of the Copyright Society of Australia, June 2010.

2. ‘Review of the Application of the GST to Cross-Border Transactions’, p. 46, The Board of Taxation, February, 2010.

3. ‘Book Battle: Dymocks Considers Offshore Option’, Nicole Chettle, ABC News, November 18, 2010.

4. http://www.accc.gov.au/content/index.phtml/itemId/322982

5. ‘Expensive Model’, p. 3, The Bookseller, London, November 5, 2010.

Dymocks offshore threat... Pleeeze!

Here's the ABC news report:

http://www.abc.net.au/news/video/2010/11/18/3070096.htm

Don Grover's threat to move Dymock's online business offshore to escape the GST net is further evidence, if any were needed, that the current GST obsession of the Australian book trade is becoming deeply farcical!

Firstly, what about Australian books? Would Dymocks have Australian publishers ship them to Hong Kong so Dymocks can re-ship them back to the customer in Whyalla?

Well, perhaps Australian publishers would drop ship to Whyalla and Dymocks simply invoice the customer out of Hong Kong, thus saving on freight? Nope, won't work. Any supply from an Australian company is within the GST system and Dymocks won't get GST credits unless it charges the GST to the ultimate customer.

Well, perhaps Dymocks will only ship imported books from Hong Kong, with Australian titles coming from the Australian operation on a separate invoice? Very clumsy and confusing to customers, and how will the many local printings of overseas titles be handled, and local editions where local rights have been acquired?

I'm afraid whatever way you look at this it's a dud idea. The perfect case of a bad idea leading to a bad business strategy.

Don, it's only 10%. It's utterly irrelevant. It's not the main game. It's far from forming the basis of a radical avoidance strategy, which can only incur innumerable additional costs and bog you down in logistical dead ends. Your online business draws inventory from your main, richly and superbly stocked store in George St, Sydney. Divorce the two and both will surely and immeasurably suffer. I cannot believe otherwise. 

Focus on the main game - publisher over-pricing. And revisit the prohibition on parallel importing. That's still the elephant in the room.

Pricing in an Age of Parity

Old habits die hard in the book trade in Australia, but some habits to do with the way publishers have long priced imported titles are going to have to radically change if customers are going to be lured back into buying from Australian booksellers rather than Amazon or The Book Depository.

There are three issues:

1. Pricing way out of kilter with TODAY'S exchange rates.
2. Price points that lock in uncompetitive markups.
3. Infrequent price changes.

Bookbuyers are aggressively responding to the current parity paradigm by buying from overseas-based online retailers, and this is one of the principal reasons retail booksellers are really struggling at the moment. Conditions have rarely been worse. Consumers have gone way beyond the ROBO phenomenon (research online, buy offline) that's been with us for the last decade or so. Now it's just BO - buy online. There's no need to even research it, just do it. The ingrained expectation is that, even if the local bookseller has it in stock, the price will be way over the top.

This mindset can be broken, but only if publishers take radical action along the following lines:

- Price to current FX realities, not some dated average over the previous year or, god help us, decade. That means using parity for US titles and around 62p for UK titles, not just for forthcoming titles, but all titles currently being sold.

- Abolish pricing up to the closest traditional price point - $26.95; $29.95; $32.95; $35.00; $49.95; etc. There is too wide a gap between these points, and too many customers are dropping off on the way up. This was not much of an issue in times past, but it is today.

- Change prices frequently according to FX movements up or down. It's time to let go of the traditional three month's advance notice to retailers, and rarely, if ever, changing the backlist. Systems and protocols have to change. Monthly adjustments across the board should be the norm.

The golden rule on pricing should be: Today's exchange rate plus 10% plus GST. Thus a 13.00 pound UK title becomes A$25.37. Rounded up to the nearest 95c point, it becomes $25.95. A US$26.95 book becomes A$32.61, which becomes $32.95.

The reason for the 10% markup prior to the addition of the 10% GST? To build in a hedge for exchange volatility. Pricing at one rate and actually paying your overseas supplier at a possibly disadvantageous rate three or more months later can be a real problem for importers. Hence the hedge. The Australian dollar climbs via the stairs and falls via the lift well, as they say!

And what about freight? Here's another golden rule: booksellers pay freight when they import directly, not publishers. Publishers have it built into their intercompany or agency trading arrangements. In other words longer discounts or their equivalent are built in to recognise the additional impost of shipping to Australia.

So George Bush's just released Decision Points should be available in Australia for A$42.95, not $59.95 as advertised! The US price is US$35.00. Do the math!

And all those 13.00 pound UK titles, such as Philip Kerr's new one, Field Grey, should be $25.95, not $32.95 as it is. And Howard Jacobson's The Finkler Question (TPB edition) should be $25.95, not $32.99 as it is.

Pressure needs to be put on publishers to be far more responsive to today's competitive realities. And here is precisely where the ABA needs to step up. Real leadership is called for.

Don't hold your breath!