March 11, 2014

The Canadian version of the DOJ publisher lawsuit is unfolding politely right now

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Kobo is the Apple of Canada. By which I mean they make electronics while wearing full goalie kit.

Kobo is the Apple of Canada. By which I mean they make electronics while wearing full goalie kit.

By now the ebook lawsuit by the U.S. Department of Justice against Apple over the Agency model of pricing has begun to blur at its edges into a Mandelbrotian haze of Appeals filings and contested moderation. But up in Canada, where legal briefs must be tattooed onto seal carcasses and delivered by ice floe, the shockwave has just begun to hit.

On February 7th, the Canadian Commissioner of Competition—essentially an anti-monopoly watchdog—sent a Consent Agreement to four of the Big Five publishers. As with the DoJ suit, only Random (now Penguin Random) was exempt. That agreement was basically an order to those publishers that their contracts with Kobo for ebook sales were void and needed to be renegotiated, without Agency pricing, within forty days.

As reported by Publishers Lunch and Good Ereader, Kobo filed an application on February 21st  to the Competition Tribunal seeking to have all or most of that Consent Agreement struck down.

The Kobo brief is an interesting read (relatively speaking of course—it is still a legal filing, it’s not so heavy on action or plot or believable characters) and lays out that company’s perception of the Agency pricing wars as they played out up North. The main gist of that history, however, is that Kobo has wholesale agreements with some publishers and Agency pricing with others, the latter put in place at the behest of Kobo itself. Agency pricing, remember, is the model whereby retailers are ‘agents’ of the publisher in selling ebooks, and may only sell books at a price range set by the publishers. The main benefit of Agency pricing is as a tool to disallow Amazon’s cutthroat practice of losing money on ebook sales in order to win market share and undercut competitors like Kobo itself which cannot mark books down so aggressively. Indeed, Kobo strikes a plaintive note in their application, writing:

Earning margin on E-book sales is necessary for Kobo, as it uses the money it earns through E-book sales to offset the enormous costs it incurs to develop, manufacture and sell high-quality, award-winning E-Readers and devices. Without making sufficient margin on the sale of E-books, Kobo is challenged to compete in the broader market to service E-book customers.

The whole application is actually rather wistful throughout, like the dusky wail of a single loon; a loon that manufactures ereaders. A loon in a bit of corporate turmoil at the moment, as we’ve noted recently.

More than just background detail, the history of how Agency pricing was put in place is central to the Kobo claim. The Commissioner of Competition’s filing to strike down the agreements seems in large part predicated on the successful (though still under appeal by Apple) DoJ suit against publishers. But that suit was in turn based on evidence of horizontal collusion by those publishers. Kobo is claiming that Agency pricing in Canada was their effort, and enacted with great reticence by publishers there in the summer of 2011, after the model had lead to vicious resistance by Amazon in the U.S. but before the DoJ brought suit. For that and a host of other reasons, they argue, the contracts are not subject to the jurisdiction of the Commissioner.

Kobo is opposing the Commisioner’s Agreement in the first place because, according to the Toronto based company, after the Commisioner’s order to the Big 4/5, the publishers came to Kobo arguing for more favorable wholesale pricing rates for ebooks. Kobo argues that such pricing was uncompetetive for them before, and is surely more so in a marketplace dominated by Amazon. Which, yes. Exactly. Amazon is a monopoly and can undercut any and all price margins until you drop and, indeed, long long after the point where they begin to lose money, because ebooks are not their product: market share and refrigerators are.

If the tribunal rejects Kobo’s application, the way forward for them is unclear. Certainly they’ve not overstated the dire situation they’re in in Canada and, even with the support of the ABA, in the U.S. as well. Perhaps if Agency pricing is denied them, Kobo will steal a trick from Amazon’s book and refocus on shipping toilet paper or it’s Canadian equivalent. Fistfuls of pine needles or something. Canada!

 

 

 

Dustin Kurtz is former marketing manager of Melville House.

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