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.

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.

The Book Trade Declares the PIRs Dead

The real meaning of the new 14/14 importation protocol agreed to this week by Australian publishers and booksellers is not the significant reduction in the time period granted rights holders to gain exclusivity, but the fact that the trade as a whole has so explicitly walked away from the 30/90 day legal provisions in the Copyright Act.


It's been less than three years since the trade universally declared its religious adherence to these Parallel Importation Restrictions. They were aggressively touted as the very foundation of Australia's vigorous, successful, culturally important book industry. Had the government adopted the Productivity Commission's recommendation to abolish them Australian publishing would collapse. The market would be swamped by cheap imports; our local stories would cease to be told.


Now the trade has admitted these loud proclamations of doom were a complete nonsense. And it's no defence to say that the 14/14 agreement will act in exactly the same way. No-one will be counting. No-one has ever counted. The walk-away from the PIRs embedded formally in the Act means that, finally, the trade has moved beyond any notion of binding PIRs full stop. The long and tedious debate that has bedevilled the industry for so long is finally over.


It should now be easier for all players to recognise what have been the real facts of importation and rights-acquisition all along: that exclusivity is granted by contract and contract alone. And it is maintained by operational and competitive excellence. The fiction that the PIRs formally granted territorial copyright, rather than simply prevented booksellers from buying around, has finally been blown away.


Australia has now become, for all intents and purposes, an 'open market'. But an open market with a clear Australian definition: exclusive by contract but not by legislation. It will not be, as too many UK publishers and their colonial sympathisers have long assumed, a non-exclusive market for 'competing editions'. By virtue of our distance, population size and book trade infrastructure, there will always be one Australian rights holder, and that publisher will protect its exclusivity by reasonable  pricing, professional servicing, and fair trading terms. Booksellers will order from them as a matter of course and default. 


The 14/14 day push by the ABA has been far more successful than anybody could have anticipated. The booksellers have ended the PIR regime by stealth, not by aggressive lobbying for legal abolition, which they were loathe to do anyway, and which has proved to be unsuccessful for so long. They deserve to be congratulated.

Book Pricing in Australia: a personal story

Nobel prize winning economist Paul Krugman has been published by Norton in the US for eons now. When I saw that his latest book was to be published on 30 April in the US I immediately placed a backorder for it on Amazon, knowing I'd get it within a few days of release, and knowing also that Norton invariably sells Commonwealth rights to every Krugman title, and the Commonwealth edition comes to Australia weeks or even months later with far lower production standards but at an inflated price.


I did get the handsome US edition three days later, at a total cost of $60.00 including $35.00 for freight.


However, as it happened, I went to Readings in Carlton that same day to buy something else, and whoa...there on the new release shelf was the new Krugman! The US edition.


Wiley, who represents Norton in Australia, had secured the Australian rights and released it on the same day as the US edition, and priced it at the exactly right price of $32.95. The US price (it's a hardback) is $24.95. 


Do the math: multiply $24.95 by 1.10 (to cover currency volatility); then by 1.10 again for the GST: that comes to $30.19. Round up to the nearest traditional price point and you get $32.95.


Well done Wiley! The old firm has obviously held onto some fundamental values I introduced years ago! 


So I was dudded by ordering from Amazon.

But then again, another hardback I bought yesterday was the new Robert Levine book on the copyright wars called Free Ride, published by Random House. The Commonwealth edition was released recently in Australia at a price of $49.95. Using the same pricing logic as above it should have been no more than $36.95. Here's the math on a UK title: £18.99 divided by 65 (average exchange rate over the last few months); multiplied by 1.10; multiplied by 1.10 again. This comes to $35.35, so rounded up to the nearest price point is $36.95.


Soooo...Random, why are you pricing this book at an outrageous $49.95? 


The answer is obvious: to send people to Amazon!

Another Wooldridges Closure

This announcement was sent to suppliers today:

 Dear valued supplier,

I am writing to advise you of the final stage of the east-coast restructure of the Education Works distribution business. Along with the closure of stores in Moorabbin and Magill, we have this week announced the closure the Jacaranda store in Canberra.

With this decision, the Education Works staff and product distribution will be based in Western Australia. We feel this is the best structure for our business to renew our focus on providing the best possible customer service for our customers throughout 2012 and ahead of the 2013 back-to-school program. We will retain a sales force in the eastern states but will no longer maintain a full-time retail shop presence.

Many of you will now have met with our new National Product and Marketing Manager – Tim Bradstreet. Tim will be spending more time with you in the coming months.

From May 2012 all deliveries should be made to our West Coast distribution centre at 426 Scarborough Beach Road, Osborne Park, Perth.

If you have any queries relating to specific shipments, please contact Glenn Gaudion, EWA National Procurement Manager at ggaudion@educationworks.com.au.

Thank you for your support during this period of transition for our business. We look forward to on ongoing partnership with you throughout 2012 and beyond.

Kind regards,

Kevin Healey

Executive General Manager

Education Works