Kobo is beginning to feel the pinch of prospective lower profit margins in Canada. The Canadian Government is forcing them to renegotiate contracts with all of their major publishing partners. Kobo sees this as being “Devastating for the company” and will relegate them to “an ineffective competitor.”
Two weeks ago, the Commissioner of Competition in Canada mandated to Kobo that it had 40 days to re-negotiate contracts with Simon & Schuster, Macmillan, HarperCollins, and Hachette. Immediately the publishers starting mailing letters to Kobo, demanding their existing contracts be augmented or cancelled completely. Complex contract negotiations take time, and Kobo may find themselves being unable to sell thousands of titles to customers in Canada. In contrast each publisher in the United States DOJ settlement took 16 months each.
The US Justice Department has been running a very high profile case with Apple and the top 5 major publishers. All of the publishers settled out of court with specific agreements. Most of the exact proclivities of the publishers settlements were varied and not consistent, none were publicly available. Kobo is contending that the DOJ lacks jurisdiction in Canada and any settlement in the US, is not binding, because no one knows exactly what they were.
Kobo first started implementing agency pricing with publishers in 2011. The essence of agency was to have eBooks sold at a common value. Normally, the publisher sets the price and Kobo gets 30% of each book sale. If the publisher price matches the book against another site, Kobo would still get the same commission, but at a reduced rate. Each publishing contract is negotiated separately, some adhering to the wholesale model and others agencies, or a combination of both.
A new term most people have not heard of before is called “Agency-Lite.” These agreements arose after the settlement agreements and final judgements that transpired in the US. The essence of Agency-Lite is that allows the publishers to set the price, but allows Kobo to diverge from the sale price. One of the conditions entail the discount cannot exceed the total margin that the retailer earns from annual book sales, this is called the “discount pool.”
When Kobo first formed their company, they abided by the wholesale model, which was tremendously unprofitable. They had lost millions in their first few years trying to compete against Amazon, Sony, Apple and Barnes and Noble. Kobo contends that the Wholesale model is not indicative to an online environment of price matching algorithms.
The Canadian government is now forcing Kobo to iron out new contracts with Hachette, Macmillan, Harper Collins and others. If they can’t do it in 40 days the existing ones will be void and Kobo will be forced to remove thousands of books from their bookstore. Without a full catalog of eBooks from all of the Canadian publishers “Kobo would be an ineffective competitor. Customers choose eBooks and e-Readers based on the breadth of their catalogs”. If Kobo lost any of these “they would cease to be a credible player in the market place.” Conversely, if Kobo accepts the amendments and shifts it operations to Agency-Lite, it will suffer unrecoverable losses.
If you live in the USA, you will likely know that you would find it difficult to find a Kobo e-Reader available. This is primarily due to when the USA adopted Agency-Lite, Kobo saw its net revenues decline and stopped investing in that market. It closed down its office in Chicago and decided to focus aggressively on international expansion. In a legal filing Kobo said that the reason Barnes and Noble and Sony’s business collapsed in the US was directly attributed to the abolishment of agency pricing. Now, we might see Kobo abandon the Canadian market, just like they did in the USA.
The only play Kobo has in a legal battle against the Canadian Government is to play the jurisdiction card. The publisher settlements and the abandoning of Agency pricing was purely based in the United States. The Justice Department and the settlements have no legal jurisdiction in Canada. If Kobo fails to make a case and have to absorb profit loses by switching to a hybrid of wholesale and agency-lite it looks likely Kobo will kill their Canadian ebook business. They certainly won’t be able to compete against Amazon and Apple. I mean they could, but it wouldn’t be worth it anymore.