March 21, 2014

Kobo prepares to challenge ebook case


chessIn February, the Commissioner of Competition in Canada told Kobo it had forty days to abandon the agency model. Those forty days were supposed to expire on Wednesday… but on Tuesday, Kobo was granted a Stay while the company puts together its challenge.

Whew. Kobo was desperate for that Stay. In a memo circulated March 10, the company said, “Without a stay, Kobo will be irreparably harmed. Its contracts with four of the largest e-book publishers in Canada will be terminated or fundamentally altered. Kobo — not the Consenting Publishers — will bear the financial losses arising from these changes.”

Hachette Book Group, HarperCollins, Macmillan, and Simon and Schuster signed the contract on February 7 which was supposed to lower ebooks prices by up to 20%, cutting the clauses in their contracts that prohibited discounting.

There’s no accusation of collusion here. Kobo says it “insisted” on the shift to an agency model with one-on-one meetings with publishers. It signed wholesale agreements with publishers, too.

It boils down to this: with ebooks that cheap, Kobo can’t make enough money to keep manufacturing ereaders. With the demise of the Nook, Barnes & Noble is slowly choosing to be a bookstore rather than an ereader store. Without Kobo in the market in Canada, the ebook game left belongs to Amazon.

The terms of the agreement from February 7 dictate that a person who is directed by a consent agreement — i.e. Kobo — can apply to the Competition Tribunal for rescission or variation of the consent agreement. So it has.

On Tuesday, Kobo said it would “suffer significant unrecoverable losses” from the ruling, and Amazon would be allowed to hold “a monopoly or near-monopoly on the supply of ebooks in Canada.” Do they have any chance?

Right now, ebooks comprise about 10% of the publishing business in Canada. Almost all — 93% — of Canadian publishers reported that they do business with Kobo, and 83% of publishers work with Amazon, too. Apple works with 76% of publishers in Canada, while B&N and Sony have less than 50%.

The online ebooks store Indigo, Kobo’s first investor, is doing its best to intervene: chief executive Heather Reisman said, “Impairing this aspect of Kobo’s business may ultimately result in Kobo exiting from the Canadian market or significantly reducing its Canadian operations.”

Kobo is allowed to take a little time to build its case, as long as it builds it fast. As a  MobyLives post explained last week,

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.

After the Deparrtment of Justice case in the U.S., Sony dropped out of the ebook market and the Nook hit rough waters. Publishers were out $166 million, and Apple lost, too.

When the U.S. shifted to the Agency Lite model, Kobo “saw its net revenues steadily decline. Kobo has since stopped investing in marketing in the U.S., closed its office in Chicago and is focusing on other markets. Its market share and revenues are now negligible there.”

But the Commissioner of Competition thinks the case was a success story: “Similar settlements reached in the United States in 2012 and 2013 resulted in lower prices for e-books,” a bureau spokesperson told the Financial Post last week.

Uh huh. Because anyone who couldn’t afford to operate at a loss on ebooks is being knocked out of the market. The commissioner of competition voting in favor of a monopoly sounds like something Orwell would make up.

Now Kobo has to rush to put together a case only months after our disastrous case in the U.S. Good luck, Canada.


Kirsten Reach is an editor at Melville House.